-----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, UDc6wjAcWORpV6a1zf4TVhlMpOvKSr9g/ongnr+zgRELaBnLl/f77k1KTpPxefnC 7GIIcJ1HJF7K2FXxmsxhEg== 0000072423-96-000003.txt : 19960308 0000072423-96-000003.hdr.sgml : 19960308 ACCESSION NUMBER: 0000072423-96-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960307 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTEK INC CENTRAL INDEX KEY: 0000072423 STANDARD INDUSTRIAL CLASSIFICATION: SHEET METAL WORK [3444] IRS NUMBER: 050314991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06112 FILM NUMBER: 96532313 BUSINESS ADDRESS: STREET 1: 50 KENNEDY PLZ CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4017511600 MAIL ADDRESS: STREET 1: 50 KENNEDY PLAZA CITY: PROVIDENCE STATE: RI ZIP: 02903 10-K405 1 NORTEK 1995 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- Form 10-K (Mark One) ------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number: 1-6112 ------------------------ Nortek, Inc. (exact name of Registrant as specified in its charter) Delaware 05-0314991 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 50 Kennedy Plaza Providence, Rhode Island 02903-2360 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (401) 751-1600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, $1.00 par value New York Stock Exchange Preference Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of Class Special Common Stock, $1.00 par value Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 15, 1996 was $111,594,438. See Item 12. The number of shares of Common Stock outstanding as of February 15, 1996 was 11,117,228. The number of shares of Special Common Stock outstanding as of February 15, 1996 was 494,449. Documents Incorporated by Reference Portions of the registrant's Proxy Statement for use at its 1996 Annual Meeting of Shareholders are incorporated by reference into Part III. PART I Item 1. Business 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 ("HVAC") Products Group; and the Plumbing Products Group. Through these product groups, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. (As used in this report, the terms "Company" and "Nortek" refers 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.) In 1995 the Company expanded through acquisitions (see Recent Developments page 15). The operating results of the acquisitions are included in the accompanying financial statements for only a portion of the fourth quarter under the purchase method of accounting. As a result annual foreign sales and earnings in the future are expected to become a larger portion of the Company's totals. See Note 9, Notes to Consolidated Financial Statements, Item 8 of Part II of this report, incorporated herein by reference for information on foreign and domestic operations. The Company's domestic performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, which are affected by such factors as interest rates, inflation, consumer spending habits and unemployment. In 1995 the Company's operations were affected by a decline in housing starts throughout the United States and Canada. However, the actions taken to reduce production costs and overhead levels and improve the efficiency and profitability of the Company's operations have enabled it to be positioned for growth. In the near term, the Company expects to operate in an environment of relatively stable levels of construction and remodeling activity. Inflation did not have a material effect on the Company's results of operations and financial condition until mid-1994, when the Company experienced significant increases in certain costs and expenses including raw material costs. These material costs continued to increase in 1995. Additional information concerning the Company's business is set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, Item 7, Part II of this report (pages 22 through 32) and incorporated herein by reference. Residential Building Products Group The Residential Building Products Group manufactures and distributes built- in products primarily for the residential new construction, do-it- yourself and professional remodeling and renovation markets. The principal products sold by the Group are kitchen range hoods, bath fans, combination units (fan, heater and light combinations) and bath cabinets. The Group is the largest supplier in the United States and Canada of range hoods, bath fans and combination units, indoor air quality products such as continuous-ventilation systems and energy-recovery ventilators and one of the leading suppliers in Western Europe, South America, the Middle East, Australia, New Zealand and the Orient of luxury "Eurostyle" range hoods. Products are sold under the Broan(R), Nautilus(R), Venmar (R), Flair, vanEE (R), Rangaire(R) and Best(R) brand names, among others, to distributors and dealers of electrical and lighting products, kitchen and bath dealers, retail home centers and OEMs (original equipment manufacturers). Other products sold by this Group include, among others, wireless security products, garage door openers, built-in home intercoms and entertainment systems, home automation systems, door chimes, central vacuum systems and fluorescent lighting fixtures. Customers for the Group's products include residential and electrical contractors, professional remodelers and do-it-yourself homeowners. The Group's products are sold on a wholesale basis through distributors and dealers of electrical and lighting products, on a retail basis through building supply centers and to OEMs for inclusion in their product lines. A key component of the Group's operating strategy is the introduction of new products which capitalize on the strong Broan (R), Nautilus(R), Venmar(R), Flair, vanEE(R), Rangaire(R) and Best(R) brand names and the extensive distribution system of the Group's businesses. Recent product introductions under these brand names include the Finesse (TM) contoured style range hood, the Flair and vanEE(R) Super Compact Line of heat recovery cores and the Broan(R) stainless steel trash compactor. Consumer preferences are important in developing new products and establishing marketing strategies, and the Company believes that the Group's ability to develop new and improved product styles and features provides a significant competitive advantage. With respect to certain product lines, several private label customers account for a substantial portion of revenues. In 1995, approximately 16% of the total sales of the Group were made to private label customers. Production generally consists of fabrication from coil and sheet steel and formed metal utilizing stamping, pressing and welding methods, assembly with components and subassemblies purchased from outside sources (motors, fan blades, heating elements, wiring harnesses, controlling devices, glass mirrors, lighting fixtures, lumber, wood and polyethylene components, speakers, grilles and similar electronic components, and compact disc and tape player mechanisms) and painting, finishing and packaging. The Group offers a broad array of products with various features and styles across a range of price points. The Company believes that the Group's variety of product offerings helps the Group maintain and improve its market position for its principal products. At the same time, the Company believes that the Group's status as a low-cost producer, in large part as a result of cost reduction initiatives, provides the Group with a competitive advantage. With respect to range hoods, bath fans, combination units and radio intercoms, the Company believes that the Group's primary competitor is NuTone, a subsidiary of Williams Holdings Companies. The market for bath cabinets is highly fragmented with no single dominant supplier. The Group's other products compete with many domestic and international suppliers in their various markets. The Group competes with suppliers of competitive products primarily on the basis of quality, distribution, delivery and price. Although the Group believes it competes favorably with respect to each of these factors, competition among suppliers of the Group's products is intense and certain of these suppliers have greater financial and marketing resources than the Group. The Group has 18 manufacturing plants and employed 2,763 full-time people as of December 31, 1995, 341 of whom are covered by collective bargaining agreements which expire in 1996, 2000 and 2001. The Company believes that the Group's relationships with its employees are satisfactory. Air Conditioning and Heating Products Group The Air Conditioning and Heating Products Group manufactures and sells HVAC systems for custom-designed commercial applications and for manufactured and site-built residential housing. The Group's commercial products consist of HVAC systems which are custom-designed to meet customer specifications for commercial offices, manufacturing and educational facilities, hospitals, retail stores and governmental buildings. Such systems are primarily designed to operate on building rooftops (including large self-contained walk-in-units) or on individual floors within a building, and range from 40 to 600 tons of cooling capacity. The Group markets its commercial products under the Governair(R), Mammoth(R) and Temtrol(TM) brand names. For manufactured and site-built residential housing, the Group's products include central air conditioners, heat pumps, furnaces and a wide range of accessories marketed under the Intertherm(R) and Miller(R) brand names. Residential central air conditioning products range from 1.5 to 5 tons of cooling capacity and furnaces range from 45,000 BTU's to 144,000 BTU's of heating capacity. The Group's residential products also include portable and permanent electric baseboard heating products. Commercial Products. The Group's commercial products include packaged rooftop units and air handlers, custom walk-in units, individual floor units and heat pumps. The market for commercial HVAC equipment is segmented between standard and custom-designed equipment. Standard equipment can be manufactured at a lower cost and therefore offered at substantially lower initial prices than custom-designed equipment. As a result, suppliers of standard equipment generally have a larger share of the overall commercial HVAC market than suppliers of custom-designed equipment, including the Group. However, because of certain building designs, shapes or other characteristics, the Company believes there are many applications for which custom-designed equipment is required or is more cost effective over the life of the building. Unlike standard equipment, the Group's commercial HVAC equipment can be designed to match the exact space, capacity and performance requirements of the customer. The Group sells its commercial products primarily to contractors, owners and developers of commercial office buildings, manufacturing and educational facilities, hospitals, retail stores and governmental buildings. The Group seeks to maintain strong relationships nationwide with design engineers, owners and developers, the persons who are most likely to value the benefits and long- term cost efficiencies of the Group's custom-designed equipment. The Company estimates that more than half of the Group's commercial sales in 1995 were attributable to replacement and retrofit activity, which typically is less cyclical than new construction activity and generally commands higher margins. The Group continues to develop product and marketing programs to increase penetration in the growing replacement and retrofit market. For many commercial applications, the ability to provide a custom-designed system is the principal concern of the customer. The Group's packaged rooftop and self-contained walk-in units maximize a building's rentable floor space because they are located outside the building. In addition, factors relating to the manner of construction and timing of installation of commercial HVAC equipment can often favor custom-designed rather than standard systems. As compared with site-built HVAC systems, the Group's systems are factory assembled and then installed, rather than assembled on site, permitting extensive testing prior to shipment. As a result, the Group's commercial systems can be installed later in the construction process than site-built systems, thereby saving the owner or developer construction and labor costs. The Group's individual floor units offer flexibility in metering and billing, a substantial advantage if a building is to be occupied in stages or where HVAC usage varies significantly from floor to floor. The Group's commercial products are marketed through independently owned manufacturers' representatives and an in-house sales, marketing and engineering group of 106 persons as of December 31, 1995. The independent representatives are typically HVAC engineers, a factor which is significant in marketing the Group's commercial products because of the design intensive nature of the market segment in which the Group competes. The Company believes that the Group is among the largest suppliers of custom-designed commercial HVAC products in the United States. The Group's four largest competitors in the commercial HVAC market are Brod & McClung, Inc. (which sells under the "Pace" tradename), McQuay (a division of Snyder-General Corporation), Miller-Picking (a division of York International Corporation) and The Trane Company (a subsidiary of American Standard Inc.). The Group competes primarily on the basis of engineering support, quality, flexibility in design and construction and total installed system cost. Although the Company believes that the Group competes favorably with respect to certain of these factors, most of the Group's competitors have greater financial and marketing resources than the Group and enjoy greater brand awareness. However, the Company believes that the Group's ability to produce equipment that meets the performance characteristics required by the particular product application provides it with advantages not enjoyed by certain of these competitors. Residential Products. The Group is one of the largest suppliers of air conditioners, heat pumps and furnaces to the manufactured housing market in the United States. In addition, the Group manufactures and markets HVAC products for site-built homes, a business it entered in 1987. The Company's sales of split system air conditioners for use in site-built and manufactured housing accounted for approximately 10% of the Company's consolidated net sales for 1995. The principal factors affecting the market for the Group's residential HVAC products are the levels of manufactured housing shipments and housing starts and the demand for replacement and modernization of existing equipment. The Company anticipates that the replacement market will continue to expand as a large number of previously installed heating and cooling products become outdated or reach the end of their useful lives during the 1990s. This growth may be accelerated by a tendency among consumers to replace older heating and cooling products with higher efficiency models prior to the end of such equipment's useful life. The Company estimates that slightly less than half of the Group's net sales of residential HVAC products in 1995 were attributable to the replacement market, which tends to be less cyclical than the new construction market. The market for residential cooling products, including those sold by the Group, is affected by spring and summer temperatures. The Group does not sell window air conditioners, a segment of the market which is highly seasonal and especially affected by spring and summer temperatures. The Company believes that the Group's ability to offer both heating and cooling products helps offset the effects of seasonality of the Group's sales. The Group sells its manufactured housing products to builders of manufactured housing and, through distributors, to manufactured housing dealers and owners of such housing. The majority of sales to builders of manufactured housing consist of furnaces designed and engineered to meet or exceed certain standards mandated by federal agencies. These standards differ in several important respects from the standards for furnaces used in site-built residential homes. The after market channel of distribution includes sales of both new and replacement air conditioning units and heat pumps and replacement furnaces. The Company believes that the Group has one major competitor in this market, Evcon Industries, a subsidiary of York International Corporation, which markets its products under the "Evcon/Coleman" name. A substantial portion of site-built residential products have been introduced in the past several years, including a new line of furnaces and a reengineered line of high efficiency air conditioners and heat pumps. Residential HVAC products for use in site-built homes are sold through independently-owned distributors who sell to HVAC dealers and contractors. Competition in the site-built residential HVAC market is intense, and many suppliers of such equipment have substantially greater financial and marketing resources than the Group and enjoy greater brand awareness. In these markets, the Group competes with, among others, Carrier Corporation, Lennox Industries, The Trane Company and York International Corporation. The Group competes in both the manufactured housing and site-built markets on the basis of breadth and quality of its product line, distribution, product availability and price. The Company believes that the Group competes favorably with respect to these factors. The Group has six manufacturing plants and employed 2,054 full-time people as of December 31, 1995, 222 of whom are covered under a collective bargaining agreement which expires in 1998. The Company believes that the Group's relationships with its employees are satisfactory. Plumbing Products Group The Plumbing Products Group manufactures and sells vitreous china bathroom fixtures (including lavatories, toilet bowls, flush tanks, bidets and urinals), fiberglass and acrylic bathtubs, shower stalls and whirlpools, brass and die cast faucets, bath cabinets and vanities and shower doors, and also markets stainless steel and enameled steel tubs and sinks. In addition to its standard product offerings, the Group also sells designer bathroom fixtures, 1.6 gallon water-efficient toilets and a variety of products that are accessible to physically challenged individuals. Products are sold under the URC(TM) and Universal-Rundle(R) brand names principally to wholesale plumbing distributors and retail home centers. End customers of the Group's products are generally home builders, do-it-yourself homeowners, remodeling contractors and commercial builders. The Group sells its products to distributors and home centers primarily through independently owned manufacturer's representatives supported by 50 sales and marketing personnel employed by the Group as of December 31, 1995. The Group competes with many suppliers of plumbing and related products, several of which have greater financial and marketing resources than the Group and greater brand awareness. The Group's competitors include American Standard Inc., Eljer Industries, Kohler Company and Mansfield, a subsidiary of Falcon Building Products, Inc. The Group competes primarily on the basis of service, quality, price, and breadth of product line offerings. The Group believes it competes favorably by offering quality products and customer service at a reasonable price and by developing products using new technologies. The Plumbing Products Group has eight manufacturing facilities and employed 1,325 full-time people as of December 31, 1995, approximately 916 of whom are covered by collective bargaining agreements which expire in 1996 and 1997. The Company believes that the Group's relationships with its employees are satisfactory. RECENT DEVELOPMENTS Acquisitions On October 6, 1995, the Company acquired the assets of Rangaire Company of Cleburne, Texas (range hoods and lighting fixtures). On October 31, 1995 the Company acquired the capital stock of Best S.p.A. of Fabriano, Italy and related entities (range hoods). On November 1, 1995, the Company acquired the stock of Venmar Ventilation inc. of Drummondville, Quebec, Canada (continuous ventilation-systems and energy-recovery ventilators). (See Note 2, Notes to Consolidated Financial Statements, incorporated herein by reference.) GENERAL CONSIDERATIONS Employees The Company employed approximately 6,423 persons at December 31, 1995. Backlog Backlog expected to be filled during 1996 was approximately $116,679,000 at December 31, 1995 ($111,705,000 at December 31, 1994). Backlog is not regarded as a significant factor for operations where orders are generally for prompt delivery. While backlog stated for December 31, 1995 is believed to be firm, the possibility of cancellations makes it difficult to assess the firmness of backlog with certainty. Research and Development The Company's research and development activities are principally new product development and do not involve significant expenditures. Patents and Trademarks The Company holds numerous design and process patents that it considers important, but no single patent is material to the overall conduct of its business. It is the Company's policy to obtain and protect patents whenever such action would be beneficial to the Company. The Company owns several trademarks that it considers material to the marketing of its products, including Broan(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R), Best(R), Governair(R), Mammoth(R), Temtrol(TM), Miller(R), Intertherm(R), Softheat(R), Powermiser(R), URC(TM) and Universal-Rundle(R). The Company believes that its rights in these trademarks are adequately protected. Raw Materials The Company purchases raw materials and most components used in its various manufacturing processes. The principal raw materials purchased by the Company are rolled sheet, formed and galvanized steel, copper, aluminum, plate mirror glass, silica, lumber, plywood, paints, chemicals, resins and plastics. The materials, molds and dies, subassemblies and components purchased from other manufacturers, and other materials and supplies used in manufacturing processes have generally been available from a variety of sources. Whenever practical, the Company establishes multiple sources for the purchase of raw materials and components to achieve competitive pricing, ensure flexibility and protect against supply disruption. From time to time increases in raw material costs can affect future supply availability due in part to raw material demands by other industries. Working Capital The carrying of inventories to support distributors and to permit prompt delivery of finished goods requires substantial working capital. Substantial working capital is also required to carry receivables. The acquisitions made by the Company in 1995 have historically financed a substantial portion of their demands for working capital through various short term financing arrangements and are expected to do so in the future. See "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations, beginning on page 29 of this report, incorporated herein by reference. Executive Officers of the Registrant Name Age Position Richard L. Bready 51 Chairman, President and Chief Executive Officer Almon C. Hall 49 Vice President, Controller and Chief Accounting Officer Richard J. Harris 59 Vice President and Treasurer Siegfried Molnar 55 Senior Vice President - Group Operations Kenneth J. Ortman 60 Senior Vice President - Group Operations Kevin W. Donnelly 41 Vice President, General Counsel and Secretary The executive officers have served in the same or substantially similar executive positions with the Company for at least the past five years. Executive Officers are elected annually by the Board of Directors of the Company and serve until their successors are chosen and qualified. Mr. Bready has an employment agreement with the Company providing for his employment as Chief Executive Officer through 1998. The Company's executive officers include only those officers of the Company who perform policy-making functions for the Company as a whole and have managerial responsibility for major aspects of the Company's overall operations. A number of other individuals who serve as officers of the Company or its subsidiaries perform policy-making functions and have managerial responsibilities for the subsidiary or division by which they are employed, although not for the Company overall. Certain of these individuals could, depending on earnings of such unit, be more highly compensated than some executive officers of the Company. Item 2. Properties Set forth below is a brief description of the location and general character of the principal administrative and manufacturing facilities and other material real properties of the Company, all of which the Company considers to be in satisfactory repair. All properties are owned, except for those indicated by an asterisk, which are leased. Approximate Location Description Square Feet Union, IL Manufacturing/Warehouse/Administrative 174,000* Hartford, WI Manufacturing/Warehouse/Administrative 402,000 Old Forge, PA Warehouse/Administrative 40,000 Bensenville, IL Warehouse/Administrative 69,000* Mississauga, ONT Manufacturing/Administrative 108,000 Dallas, TX Manufacturing/Administrative 71,000 Carlsbad, CA Administrative 30,000 Hong Kong Manufacturing 20,000* Waupaca, WI Manufacturing 35,000 Fabriano, Italy Manufacturing/Administrative 97,500* Cerrento d'Esi, Italy Manufacturing/Administrative 135,000 Cleburne, TX Manufacturing/Administrative 210,000 Drummondville, QUE Manufacturing/Administrative 62,000* St. Peters, MO Warehouse/Administrative 250,000* St. Louis, MO Manufacturing 214,000 Boonville, MO Manufacturing 250,000* Chaska, MN Manufacturing/Administrative 230,000* Oklahoma City, OK Manufacturing/Administrative 122,000 Okarche, OK Manufacturing/Administrative 135,000 Los Angeles, CA Manufacturing/Administrative 177,000 New Castle, PA Manufacturing/Administrative 420,000 Hondo, TX Manufacturing/Administrative 404,000 Monroe, GA Manufacturing/Administrative 416,000 Union Point, GA Manufacturing/Administrative 191,000 Ottumwa, IA Manufacturing/Administrative 133,000 Grand Prairie, TX Manufacturing/Warehouse/Administrative 64,800* Rensselaer, IN Manufacturing/Administrative 165,000 Chicago, IL Manufacturing/Administrative 100,000 Providence, RI Administrative 31,000* Item 3. Legal Proceedings The Company and its operating units are subject to numerous federal, state and local laws and regulations, including environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with the material laws and regulations applicable to it. The Company and its subsidiaries or former subsidiaries are involved in current, and may become involved in future, remedial actions under federal and state environmental laws and regulations which impose liability on companies to clean up, or contribute to the cost of cleaning up, sites at which their hazardous wastes or materials were disposed of or released. Such claims may relate to properties or business lines acquired by the Company after a release has occurred. In other instances, the Company may be partially liable under law or contract to other parties that have acquired businesses or assets from the Company for past practices relating to hazardous substances management. The Company believes that all such claims asserted against it, or such obligations incurred by it, will not have a material adverse effect upon the Company's financial condition or results of operations. Expenditures in 1994 and 1995 to evaluate and remediate such sites were not material. However, the Company is presently unable to estimate accurately its ultimate financial exposure in connection with identified or yet to be identified remedial actions due among other reasons to: (i) uncertainties surrounding the nature and application of environmental regulations, (ii) the Company's lack of information about additional sites at which it may be listed as a potentially responsible party ("PRP"), (iii) the level of clean-up that may be required at specific sites and choices concerning the technologies to be applied in corrective actions and (iv) the time periods over which remediation may occur. Furthermore, since liability for site remediation is joint and several, each PRP is potentially wholly liable for other PRPs that become insolvent or bankrupt. Thus, the solvency of other PRPs could directly affect the Company's ultimate aggregate clean-up costs. In certain circumstances, the Company's liability for clean-up costs may be covered in whole or in part by insurance or indemnification obligations of third parties. In addition to the legal matters described above, the Company and its subsidiaries are parties to various legal proceedings incident to the conduct of their businesses. None of these proceedings is expected to have a material adverse effect, either individually or in the aggregate, on the Company's financial position or results of operations. See Note 8, Notes to Consolidated Financial Statements, Item 8 of Part II of this report, incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders held on November 16, 1995, the following directors were elected by the following votes: By the holders of Common Stock voting separately as a class. NAME FOR WITHHELD Class III (for a term expiring at the 1998 Annual Meeting) J. Peter Lyons 9,464,715 514,090 By the holders of Common Stock and Special Common Stock voting together as a class. NAME FOR WITHHELD Class III (for a term expiring at the 1998 Annual Meeting) Philip B. Brooks 13,302,482 560,383 Richard J. Harris 13,310,507 552,358 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters Stockholders of record of Nortek Common and Special Common Stock at February 15, 1996, numbered approximately 3,811 and 2,914, respectively. There were no dividends declared on the Common and Special Common in 1994 or 1995. The high and low sales prices of Nortek's Common Stock traded on the New York Stock Exchange in each quarter of 1994 and 1995 were: 1995 Quarter High Low - ------- ---- --- First 11 7/8 9 3/8 Second 10 3/4 8 1/8 Third 9 1/2 7 3/8 Fourth 12 1/4 7 7/8 1994 Quarter High Low - ------- ---- --- First 13 1/2 7 7/8 Second 9 7/8 7 7/8 Third 12 5/8 9 1/8 Fourth 12 5/8 10 1/4 See Note 6, Notes to Consolidated Financial Statements. Item 6. Consolidated Selected Financial Data Nortek, Inc. and Subsidiaries For the Five Years Ended December 31, 1995 ----------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In Thousands Except Per Share Amounts) Consolidated Summary of Operations: Net sales $776,210 $737,160 $744,113 $799,979 $917,049 Operating earnings 41,084 50,017 30,346 20,436 11,015 Loss on businesses sold --- (1,750) (20,300) (14,500) (15,200) Earnings (loss) from continuing operations 15,000 17,200 (12,600) (21,000) (34,700) Loss from discontinued operations --- --- --- (3,300) --- Extraordinary gain (loss) from debt retirements --- 200 (6,100) 100 7,600 Cumulative effect of accounting changes --- 400 (2,100) --- --- Net earnings (loss) 15,000 17,800 (20,800) (24,200) (27,100) Financial Position: Unrestricted cash, invest- ments and marketable securities $103,313 $105,080 $ 82,498 $ 73,748 $ 42,919 Working capital 160,753 173,459 117,926 132,587 139,657 Total assets 625,479 519,217 509,209 515,373 582,372 Total debt-- Current 42,050 4,629 37,539 6,810 4,875 Long-term 240,396 219,951 178,210 201,863 232,581 Current ratio 1.7:1 2.1:1 1.6:1 1.9:1 1.9:1 Debt to equity ratio 2.2:1 1.9:1 2.1:1 1.6:1 1.6:1 Depreciation and amorti- zation 18,977 17,960 20,726 23,644 28,373 Capital expenditures 17,321 19,424 10,809 8,804 16,015 Stockholders' investment 131,291 117,790 104,007 126,906 152,929 Common and special common shares outstanding 12,074 12,550 12,542 12,526 13,079 Per Share: Earnings (loss) from continuing operations-- Primary $1.19 $1.35 $(1.00) $(1.67) $(2.57) Fully diluted 1.19 1.34 (1.00) (1.67) (2.57) Net earnings (loss)-- Primary 1.19 1.40 (1.66) (1.92) (2.01) Fully diluted 1.19 1.39 (1.66) (1.92) (2.01) Stockholders' investment 10.87 9.39 8.29 10.13 11.69 See Notes 2, 9 to 11 and Note 13 of the Notes to Consolidated Financial Statements, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Page 22, regarding the effect on operating results of acquisitions, businesses sold and other matters. There have not been any cash dividends declared or paid on the Company's Common or Special Common Stock during the past five years. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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, Canada and Europe, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. In March 1994, the Company sold its Retail Home Center Operations ("Dixieline") and 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 reported as 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 through October 2, 1993, the date that such business was accounted for as a business held for sale. During the fourth quarter of 1995, the Company acquired three businesses, which are included in the Residential Building Products Group, and accounted for these acquisitions under the purchase method of accounting. Accordingly, the results of such acquisitions are included in the Company's consolidated results since the date of acquisition. (See Liquidity and Capital Resources and Notes 1 and 2 of the Notes to Consolidated Financial Statements included elsewhere herein.) Results of Operations The following tables set forth, for the three years ended December 31, 1995, (a) certain consolidated operating results, (b) the percentage change of such results as compared to the prior year, (c) the percentage which such results bears to net sales and (d) the change of such percentages as compared to the prior year: Percentage Change ------------- Year Ended December 31, 1994 1993 ----------------------- to to 1995 1994 1993 1995 1994 ---- ---- ---- ---- ---- (Amounts in Millions) Net sales $776.2 $737.2 $744.1 5.3% (.9)% Cost of products sold 574.9 520.4 532.5 (10.5) 2.3 Selling, general and admini- strative expense 160.2 166.8 181.3 4.0 8.0 Operating earnings 41.1 50.0 30.3 (17.8) 65.0 Interest expense (24.9) (26.2) (26.5) 5.0 1.1 Interest income 6.1 5.3 3.2 15.1 65.6 Net gain on investment and marketable securities 2.0 --- 1.7 --- (100.0) Loss on businesses sold --- (1.7) (20.3) 100.0 91.6 Earnings (loss) before provision for income taxes 24.3 27.4 (11.6) (11.3) --- Provision for income taxes 9.3 10.2 1.0 8.8 (920.0) Earnings (loss)before extra- ordinary gain (loss) 15.0 17.2 (12.6) (12.8) --- Extraordinary gain (loss) from debt retirements --- .2 (6.1)(100.0) --- Cumulative effect of accounting changes --- .4 (2.1)(100.0) --- Net earnings (loss) 15.0 17.8 (20.8) (15.7) --- Percentage Percentage of Net Sales Change ------------- Year Ended December 31, 1994 1993 ----------------------- to to 1995 1994 1993 1995 1994 ---- ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% ---% ---% Cost of products sold 74.1 70.6 71.5 (3.5) .9 Selling, general and admini- strative expense 20.6 22.6 24.4 2.0 1.8 Operating earnings 5.3 6.8 4.1 (1.5) 2.7 Interest expense (3.2) (3.6) (3.6) .4 --- Interest income .8 .7 .4 .1 .3 Net gain on investment and marketable securities .2 --- .2 .2 (.2) Loss on businesses sold --- (.2) (2.7) .2 2.5 Earnings (loss)before provision for income taxes 3.1 3.7 (1.6) (.6) 5.3 Provision for income taxes 1.2 1.4 .1 .2 (1.3) Earnings (loss)before extra- ordinary gain (loss) 1.9 2.3 (1.7) (.4) 4.0 Extraordinary gain (loss) from debt retirements --- --- (.8) --- .8 Cumulative effect of accounting changes --- .1 (.3) (.1) .4 Net earnings (loss) 1.9 2.4 (2.8) (.5) 5.2 The following table presents the net sales for the Company's principal product groups for the three years ended December 31, 1995, and the percentage change of such results as compared to the prior year: Percentage Change ------ 1994 1993 Year Ended December 31, to to ----------------------- 1995 1994 1993 1995 1994 ---- ---- ---- ---- ---- (Amounts in Millions) Net sales: Residential Building Products $281.2 $265.2 $257.2 6.0% 3.1% Air Conditioning and Heating Products 363.4 338.0 275.6 7.5 22.6 Plumbing Products 131.6 134.0 128.1 (1.8) 4.6 ----- ----- ----- ----- ----- Net sales from ongoing operations 776.2 737.2 660.9 5.3 11.5 Businesses sold --- --- 83.2 --- (100.0) ----- ----- ----- ---- ----- $776.2 $737.2 $744.1 5.3% (.9)% ===== ===== ===== ==== ====== Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994 Net sales from ongoing operations increased approximately $39,000,000, or approximately 5.3%, as compared to 1994. Net sales from ongoing operations increased principally as a result of increased shipments of new and replacement air conditioning and heating ("HVAC") products to manufactured housing customers, increased sales levels of commercial and industrial HVAC products by the Air Conditioning and Heating Products Group and acquisitions which contributed approximately $24,600,000 to net sales in 1995. These increases were partially offset by lower sales volume and prices of vitreous china products in the Plumbing Products Group. Cost of products sold from ongoing operations as a percentage of net sales from ongoing operations increased from approximately 70.6% in 1994 to approximately 74.1% in 1995, primarily as a result of higher material costs in each of the Company's operating groups. Had all year end inventory values of ongoing operations been stated on a FIFO basis, year end inventory would have been approximately $10,550,000 higher in 1995, approximately $6,710,000 higher in 1994, and approximately $4,982,000 higher in 1993. Increased direct labor and overhead costs in the Air Conditioning and Heating Products Group also contributed to the increased percentage. To a lesser extent, decreased sales levels without a proportionate decrease in overhead costs in Plumbing Products was also a factor. The increase in the percentage was partially offset by lower direct labor and overhead costs in the Residential Building Products Group. Selling, general and administrative expense from ongoing operations as a percentage of net sales from ongoing operations decreased from approximately 22.6% in 1994 to approximately 20.6% in 1995, principally due to lower expense on increased HVAC product net sales, primarily to residential and manufactured housing customers and lower non-segment expense both as a result of the Company's cost containment measures. To a lesser extent, decreased expenses in the Plumbing Products Group was also a factor. The decrease in the percentage was partially offset by the effect of approximately $3,200,000 of income in 1994 from the settlement of insurance claims and disputes. Segment earnings from ongoing operations were approximately $48,700,000 for 1995, as compared to approximately $61,300,000 for 1994, as a result of the effect of the factors discussed below. Segment earnings are operating earnings before corporate and other expenses that are not directly attributable to the Company's product groups. Acquisitions in 1995, included in the Residential Building Products Group, contributed approximately $1,050,000 to segment earnings in 1995. Segment earnings from ongoing operations have been reduced by depreciation and amortization expense of approximately $17,600,000 and $15,700,000 for 1995 and 1994, respectively. Acquisitions contributed approximately $750,000 of the increase in depreciation and amortization expense in 1995. The overall decline in segment earnings from ongoing operations was due principally to increased material costs in each of the Company's operating groups, partially offset by higher earnings from increased sales volume of HVAC products, without a proportionate increase in expense, and lower selling, general and administrative expense (as a percentage of net sales) in the Air Conditioning and Heating Products and Plumbing Products Groups. Approximately $1,600,000 of the decline in segment earnings resulted from the effect of income in the second quarter of 1994 from the settlement of insurance claims and disputes. Foreign segment earnings in 1995, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries, which manufacture built-in ventilating products, decreased to approximately 6.1% of segment earnings from ongoing operations in 1995 from approximately 6.2% of such earnings in 1994. This decrease was primarily due to a decline in earnings in Canada due to the continued weakness in residential construction, partially offset by acquisitions and the effect of an approximate 21% decline in domestic segment earnings from ongoing operations in 1995. Operating earnings in 1995 decreased approximately $8,900,000, or approximately 17.8%, as compared to 1994, primarily as a result of the factors discussed above, including the effect of lower non-segment expense, net and approximately $3,200,000 (including $1,600,000 relating to the Company's operating segments) of income in the second quarter of 1994 from the settlement of insurance claims and disputes. Interest expense decreased approximately $1,300,000, or approximately 5.0% in 1995, as compared to 1994. In February 1994, the Company sold in a public offering $218,500,000 of its 9 7/8% Notes and used a portion of 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) for 1994 was approximately $1,300,000 greater than it would have been had the debt redemption occurred on the same day as the financing. The effect of the redemption of certain other outstanding indebtedness in 1994 was also a factor. (See Note 2 of the Notes to Consolidated Financial Statement included elsewhere herein.) The decrease in interest expense was partially offset by increased interest expense as a result of acquisitions. Interest income increased approximately $800,000, or approximately 15.1% in 1995, as compared to 1994, principally due to higher yields earned on short- term investments and marketable securities, partially offset by lower average invested balances of short-term investments and marketable securities. In the third quarter of 1995, the Company sold its investment in the preferred stock of Dixieline, which resulted in a pre-tax gain of $2,200,000. (See Notes 1 and 2 of the Notes to Consolidated Financial Statements included elsewhere herein.) The provision for income taxes was approximately $9,300,000 in 1995, as compared to approximately $10,200,000 in 1994. The provision for income taxes as a percentage of pre-tax earnings was approximately 38.3% in 1995 and 37.2% in 1994. The provision for income taxes in 1995 has been reduced by approximately $1,100,000, reflecting the reversal of tax valuation reserves no longer required, of which $670,000 is as a result of the sale of certain investment and marketable securities. The provision for income taxes in 1994 has been reduced by approximately $1,600,000, principally reflecting the reversal of tax valuation reserves as a result of the realization of certain tax assets. The income tax rates also differ from the United States federal statutory rate of 35% 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. (See Note 4 of the Notes to Consolidated Financial Statements included elsewhere herein.) Year Ended December 31, 1994 as Compared to the Year Ended December 31, 1993 Net sales from ongoing operations increased approximately $76,300,000, or 11.5%, as compared to 1993. Total net sales decreased approximately $6,900,000, or approximately .9%, in 1994 as compared to 1993, as a result of the sale 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 and replacement HVAC products to manufactured housing customers and increased sales levels of commercial and industrial HVAC products. Increased sales of the Plumbing Products Group are principally due to increased shipments of water efficient toilets, partially offset by decreased sales levels (approximately $7,100,000) of bathroom fixtures as a result of the restructure 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 71.1% in 1993 to approximately 70.6% in 1994. Total cost of products sold as a percentage of total net sales decreased from approximately 71.5% in 1993 to approximately 70.6% in 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. Had all year end inventory values of ongoing operations been stated on a FIFO basis, year end inventory would have been approximately $6,710,000 higher in 1994, approximately $4,982,000 higher in 1993 and approximately $6,388,000 higher in 1992. The decrease in cost of products sold as a percentage of net sales from ongoing operations was 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 the effect of increased competition and the impact of consolidating certain 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 24.3% in 1993 to approximately 22.6% in 1994. Total selling, general and administrative expense as a percentage of total net sales decreased from approximately 24.4% in 1993 to approximately 22.6% in 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 decrease in selling, general and administrative expense from ongoing operations as a percentage of net sales from ongoing operations in 1994 was principally due to lower non-segment expense, the effect of 1993 pre-tax losses of approximately $2,800,000 from the restructure of certain product lines in the Plumbing Products Group, 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 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 1994, combined with the effect of increased net sales from ongoing operations in 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 overall decrease in the percentage of 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 partially offset by the effect of approximately $11,300,000 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 $2,600,000 of expenses relating to certain cost reduction activities and manufacturing process improvements were incurred in 1993. Segment earnings from ongoing operations were approximately $61,300,000 for 1994, as compared to approximately $47,200,000 for 1993. Total segment earnings were approximately $61,300,000 for 1994, as compared to approximately $46,900,000 for 1993 as a result of the effect of Dixieline and the following factors. Segment earnings from ongoing operations have been reduced by depreciation and amortization expense of approximately $15,700,000 and $16,200,000 for 1994 and 1993, respectively. 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 and from the effect of 1993 pre-tax losses of approximately $2,800,000, $1,600,000 and $700,000 described above. Approximately $1,500,000 of the increase in segment earnings in 1994 related to income from the settlement of insurance claims. The increase in segment earnings was partially offset by the effect of approximately $10,000,000 in 1994, 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 1993 were approximately $2,600,000. Foreign segment earnings in 1994 and 1993, consisting primarily of the results of operations of the Company's Canadian subsidiary which manufactures built-in ventilating products, declined to approximately 6.2% of segment earnings from ongoing operations in 1994 from approximately 10.5% of such earnings in 1993. This decline was primarily due to an approximate 36% increase in domestic segment earnings from ongoing operations in 1994, as well as an approximate 20% decrease in foreign segment earnings in 1994. The decrease in foreign segment earnings was primarily the result of the continued weakness in the residential construction market in Canada. Operating earnings in 1994 increased approximately $19,700,000, or approximately 65%, 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 1994 of insurance claims and disputes, partially offset by approximately $1,300,000 of non-segment expense of certain litigation and other matters in dispute in 1994. Dixieline's loss included in the Company's consolidated operating results was approximately $300,000 in 1993. Dixieline's operating results were no longer included in the Company's consolidated operating results in 1994. (See Notes 1 and 2 of the Notes to Consolidated Financial Statements included elsewhere herein.) Interest expense decreased approximately $300,000, or approximately 1.1% in 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 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 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 was primarily due to the redemption and financing discussed above. (See Note 5 of the Notes to Consolidated Financial Statements included elsewhere herein.) Interest income in 1994 increased approximately $2,100,000, or approximately 65.6%, as compared to 1993. The increases were principally due to higher average invested balances of short-term investments, marketable securities and other investments, and the effect of slightly higher yields earned on investment and marketable securities. The net gain on investment and marketable securities was approximately $1,650,000 for 1993, a portion of which was unrealized gains recorded in the Company's Statement of Operations in 1993. Due to the adoption in 1994 of Statement of Financial Accounting Standards ("SFAS") No. 115, such unrealized gains and losses are now recorded as adjustments to stockholders' investment. (See Note 10 of the Notes to Consolidated Financial Statements included elsewhere herein.) The pre-tax loss on businesses sold of approximately $1,750,000 in 1994 was significantly lower than the approximate $20,300,000 loss in 1993, which was related to Dixieline. (See Note 2 of Notes to Consolidated Financial Statements included elsewhere herein.) The provision for income taxes was approximately $10,200,000 for 1994 as compared to approximately $1,000,000 for 1993. The provision for income taxes as a percentage of the pre-tax earnings from continuing operations was approximately 37.2% in 1994 and approximately 8.6% of the pre-tax loss from continuing operations in 1993. The provision for income taxes in 1994 has been reduced by approximately $1,600,000, principally reflecting the reversal of tax valuation reserves as a result of the realization of certain tax assets. The effect of nondeductible losses on businesses sold in both years and an increase in income tax valuation reserves in 1993 were significant factors in the percentages. The income tax rates also differ from the United States federal statutory rate of 35% as a result of the effect of foreign income tax on foreign source income, state income taxes and nondeductible amortization expense (for tax purposes). (See Note 4 of the Notes to Consolidated Financial Statements included elsewhere herein.) The Company recorded an extraordinary gain of approximately $200,000 in 1994 resulting from the call for redemption and purchases in the open market of the Company's 7 1/2% Convertible Debentures compared to an approximate $6,100,000 loss in 1993. The loss in 1993 resulted primarily from the call for redemption on February 22, 1994 of certain of the Company's various Notes and Debentures in connection with the refinancing described in Note 5 of Notes to Consolidated Financial Statements. The cumulative effect of accounting changes resulted in earnings of approximately $400,000 in 1994 and a loss of approximately $2,100,000 in 1993 from the adoption of SFAS No. 115 and No. 106, respectively. (See Note 10 of the Notes to Consolidated Financial Statements included elsewhere herein.) Liquidity and Capital Resources The Company's primary sources of liquidity in 1995 and 1994 have been funds provided by subsidiary operations, unrestricted short-term investments and marketable securities and in 1994 included funds from the sale of 9 7/8% Notes (See Note 5 of the Notes to the Consolidated Financial Statements included elsewhere herein) and proceeds from a business sold. Unrestricted cash, investments and marketable securities were approximately $103,313,000 at December 31, 1995 as compared to $105,080,000 at December 31, 1994. On October 6, 1995, the Company completed the purchase of the assets, subject to certain liabilities, of Rangaire Company of Cleburne, Texas ("Rangaire"). Rangaire manufactures and sells kitchen range hoods and lighting fixtures to appliance and original equipment manufacturing customers and electrical distributors. Rangaire also manufactures lighting fixtures for distribution primarily in the southeastern United States. On October 31, 1995, certain wholly owned subsidiaries of the Company completed the acquisition of the capital stock of Best S.p.A. and related entities ("Best"). Best is a manufacturer of Eurostyle kitchen range hoods headquartered in Fabriano, Italy. Best manufactures range hoods which are distributed to Eastern and Western Europe, North and South America, the Middle East, Australia, New Zealand and the Orient. On November 1, 1995, Broan Ltd., a wholly owned subsidiary of the Company, acquired the capital stock of Venmar Ventilation inc. of Canada, along with related entities ("Venmar"). Venmar, a leader in the indoor air quality market in Canada, manufactures continuous ventilation systems and energy recovery ventilators for distribution primarily to Canadian and United States markets. Venmar is headquartered in Drummondville, Quebec, Canada. The aggregate purchase price for these acquisitions was approximately $36,500,000, consisting of cash of approximately $33,400,000 and future payments of approximately $3,100,000. The selling shareholders of certain of these acquisitions are entitled to additional purchase price payments of up to approximately $7,800,000, depending on subsequent operating results of such acquisitions. Approximately $9,600,000 of the cash was borrowed under the terms of a line of credit of one of the Company's subsidiaries. (See Note 2 of the Notes to Consolidated Financial Statements included elsewhere herein.) The Company's investment in marketable securities at December 31, 1995 consisted primarily of investments in United States Treasury securities. (See Note 10 of Notes to Consolidated Financial Statements included elsewhere herein.) At December 31, 1995, approximately $9,411,000 of the Company's cash and investments were pledged as collateral for insurance and other requirements and were classified as restricted in current assets in the Company's accompanying consolidated balance sheet. The indenture governing the 9 7/8% Notes restricts, among other things, the payment of cash dividends, repurchase of the Company's capital stock and the making of certain other restricted payments, the incurrence of additional indebtedness, the making of certain investments, mergers, consolidations and sale of assets (all as defined in the indenture). Upon certain asset sales (as defined in the indenture), the Company will be required to offer to purchase, at 100% principal amount plus accrued interest to the date of purchase, 9 7/8% Notes in a principal amount equal to any net cash proceeds (as defined in the indenture) that are not invested in properties and assets used primarily in the same or related business to those owned and operated by the Company at the issue date of the 9 7/8% Notes or at the date of such asset sale and such net cash proceeds were not applied to permanently reduce Senior Indebtedness (as defined in the indenture). On November 16, 1995, the Company's Board of Directors authorized a program to purchase up to 1,000,000 shares of the Company's Common Stock, subject to market conditions and cash availability. The Company has purchased approximately 615,500 shares of its Common Stock through February 13, 1996 under this program. (See below and Note 6 of the Notes to Consolidated Financial Statements included elsewhere herein.) At December 31, 1995, approximately $30,200,000 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. The Company's working capital and current ratio changed from approximately $173,459,000 and approximately 2.1:1, respectively, at December 31, 1994 to approximately $160,753,000 and approximately 1.7:1, respectively, at December 31, 1995, principally as a result of the factors described below. Working capital included approximately $103,313,000 in 1995 and approximately $105,080,000 in 1994 of unrestricted cash, investments and marketable securities. The increase in current assets in 1995 includes approximately $65,400,000 while the increase in current liabilities includes approximately $71,400,000 from acquisitions. Acquisitions accounted for approximately $35,900,000 of the increase in short-term indebtedness and current maturities of long-term debt. Accounts receivable increased approximately $26,330,000, or approximately 28.7%, between December 31, 1994 and December 31, 1995, while net sales increased approximately 14.8% in the fourth quarter of 1995 as compared to the fourth quarter of 1994. The increase in accounts receivable is principally due to approximately $29,745,000 from acquisitions that occurred during the fourth quarter of 1995 and 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 increases or decreases in net sales near the end of any period generally result in significant changes in the amount of accounts receivable on the date of the balance sheet at the end of such period, as was the situation on December 31, 1995 as compared to December 31, 1994. The Company has not experienced any significant changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in 1995. Liquidity and Capital Resources (Continued) Inventories increased approximately $14,704,000, or approximately 15.4%, between December 31, 1994 and December 31, 1995, including approximately $22,034,000 from acquisitions. Accounts payable increased approximately $20,350,000, or approximately 38.6%, between December 31, 1994 and December 31, 1995, including approximately $22,975,000 from acquisitions. Unrestricted cash and investments increased approximately $5,650,000 from December 31, 1994 to December 31, 1995, principally as a result of the following: Condensed Consolidated Cash Flows ---------- Operating activities-- Cash flow from operations, net $33,277,000 Decrease in accounts receivable, net 4,496,000 Decrease in inventories 5,820,000 Decrease in trade accounts payable (5,614,000) Change in accrued expenses, taxes, prepaids, other assets, liabilities, and other, net (4,132,000) Investing activities-- Net cash paid for businesses acquired (27,543,000) Net cash proceeds relating to businesses sold 1,129,000 Proceeds from the sale of property and equipment 1,831,000 Purchase of marketable securities (10,086,000) Proceeds from the sale of marketable securities 20,772,000 Capital expenditures (16,091,000) Financing activities-- Increase in borrowings, net of payments 9,107,000 Purchase of Nortek Common and Special Common Stock (4,664,000) All other, net (2,652,000) ---------- $ 5,650,000 ========== The Company's debt-to-equity ratio increased from approximately 1.9:1 at December 31, 1994 to 2.2:1 at December 31, 1995, primarily as a result of the effect of increased indebtedness as a result of acquisitions and the purchase of the Company's Common and Special Common Stock, partially offset by increased stockholders' investment as a result of net earnings and changes in the cumulative translation and marketable securities adjustments. (See Note 2 of Notes to Consolidated Financial Statements and the Company's Consolidated Statement of Stockholders' Investment included elsewhere herein.) At December 31, 1995, the Company has approximately $1,800,000 of net U. S. Federal prepaid income tax assets which are expected to be realized through future operating earnings. (See Note 4 of Notes to the 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 evaluates potential acquisitions which would increase or expand the market penetration of, or otherwise complement, its current product lines. Inflation, Trends and General Considerations 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 recent periods, the Company's product groups have operated in an environment of increasing levels of construction and remodeling activity, including new housing starts which increased approximately 20% between 1990 and 1994, but declined approximately 8.5% in 1995. New residential construction housing starts, however, remain below the levels experienced in the mid-1980s. The Company's operations have been affected by the difficult economic conditions in the northeastern United States, California and Canada. However, the actions taken to reduce production costs and overhead levels and improve the efficiency and profitability of the Company's operations have enabled it to significantly increase operating earnings, as well as to position the Company for growth. 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. Inflation did not have a material effect on the Company's results of operations and financial condition until mid-1994, when the Company experienced increases in certain costs and expenses including raw material costs. In 1995, material costs as a percentage of net sales increased by approximately 3.0%, as compared to 1994. The Company has not been able to and there can be no assurance that the Company will be able to sufficiently increase its sales prices in the future. Item 8. Financial Statements and Supplementary Data Financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) included elsewhere herein. Item 9. Disagreements on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant See Election of Directors in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Stockholders, incorporated herein by reference. See also Part I, Item 1, Business-General Considerations-Executive Officers of the Registrant. Item 11. Executive Compensation See Executive Compensation in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Stockholders, incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management See Security Ownership of Certain Beneficial Owners and Management in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Stockholders, incorporated herein by reference. Item 13. Certain Relationships and Related Transactions See Election of Directors in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Stockholders, incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements and Schedules The following documents are filed as part of this report: 1. Financial Statements: Page No. Consolidated Statement of Operations for the three years ended December 31, 1995 36 Consolidated Balance Sheet as of December 31, 1995 and 1994 37 Consolidated Statement of Cash Flows for the three years ended December 31, 1995 39 Consolidated Statement of Stockholders' Investment for the three years ended December 31, 1995 40 Notes to Consolidated Financial Statements 41 Report of Independent Public Accountants 59 2. Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts 60 Schedules I, III, IV and V, are omitted as not applicable or not required under the rules of Regulation S-X. 3.The exhibits are listed in the Exhibit Index, which is incorporated herein by reference. (b) Reports on Form 8-K The following reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report: October 12, 1995, Item 5 Other Events; Item 7 Financial Statements and Exhibits. November 9, 1995, Item 2, Acquisition or Disposition of Assets; Item 7, Financial Statements and Exhibits. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 7, 1996. NORTEK, INC. By:/s/Richard L. Bready ------------------------ Richard L. Bready Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, as of March 7, 1996. /s/Richard L, Bready /s/D. Stevens Mcvoy - --------------------------------- ------------------------------ Richard L. Bready, Chairman D. Stevens McVoy, Director of the Board and President (principal executive officer) /s/Richard J. Harris /s/J. Peter Lyons - ---------------------------------- ------------------------------- Richard J. Harris, Vice President J. Peter Lyons, Director and Treasurer (principal financial officer) and Director /s/Almon C. Hall /s/ Dennis J. Mcgillicuddy - --------------------------------- ------------------------------- Almon C. Hall, Vice President Dennis J. McGillicuddy, Director and Controller (principal accounting officer) /s/ Philip B. Brooks /s/ Barry Silverstein - --------------------------------- ------------------------------- Philip B. Brooks, Director Barry Silverstein, Director Nortek, Inc. and Subsidiaries Consolidated Statement of Operations For the Years Ended December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- (In Thousands Except Per Share Amounts) Net Sales $776,210 $737,160 $744,113 ------- ------- ------- Costs and Expenses: Cost of products sold 574,929 520,328 532,488 Selling, general and administrative expense 160,197 166,815 181,279 ------- ------- ------- 735,126 687,143 713,767 ------- ------- ------- Operating earnings 41,084 50,017 30,346 Interest expense (24,918) (26,162) (26,519) Interest income 6,134 5,295 3,223 Net gain on investment and marketable securities 2,000 --- 1,650 Loss on businesses sold --- (1,750) (20,300) ------- ------- ------- Earnings (loss) before provision for income taxes 24,300 27,400 (11,600) Provision for income taxes 9,300 10,200 1,000 ------- ------- ------- Earnings (loss) before extraordinary gain (loss) 15,000 17,200 (12,600) Extraordinary gain (loss) from debt retirements --- 200 (6,100) ------- ------- ------ Earnings (loss) before the cumulative effect of accounting changes 15,000 17,400 (18,700) Cumulative effect of accounting changes --- 400 (2,100) ------- ------- ------- Net Earnings (Loss) $ 15,000 $ 17,800 $(20,800) ======= ======= ======= Net Earnings (Loss) Per Share: Earnings before extraordinary gain (loss) Primary $1.19 $1.35 $(1.00) Fully diluted $1.19 $1.34 $(1.00) Extraordinary gain (loss) Primary --- .02 (.49) Fully diluted --- .02 (.49) Cumulative effect of accounting changes Primary --- .03 (.17) ---- ---- ----- Fully diluted --- .03 (.17) ---- ---- ----- Net Earnings (Loss) Primary $1.19 $1.40 $(1.66) ==== ==== ===== Fully diluted $1.19 $1.39 $(1.66) ==== ==== ===== Weighted Average Number of Shares: Primary 12,569 12,707 12,622 ====== ====== ====== Fully diluted 12,620 13,144 13,362 ====== ====== ====== The accompanying notes are an integral part of these financial statements. Nortek, Inc. and Subsidiaries Consolidated Balance Sheet December 31, ------------------ Assets 1995 1994 ---- ---- (Amounts in Thousands) Current Assets: Unrestricted Cash and investments at cost, which approximates market $ 82,756 $ 77,106 Marketable securities available for sale 20,557 27,974 Restricted Cash, investments and marketable securities at cost, which approximates market 9,411 9,337 Accounts receivable, less allowances of $4,546,000 and $4,030,000 118,017 91,687 Inventories Raw materials 42,601 32,660 Work in process 14,319 9,497 Finished goods 53,132 53,191 ------- ------- 110,052 95,348 ------- ------- Prepaid expenses and other current assets 16,927 7,542 U.S. Federal prepaid income taxes 19,100 19,800 ------- ------- Total current assets 376,820 328,794 ------- ------- Property and Equipment, at Cost: Land 6,508 6,069 Buildings and improvements 69,125 55,639 Machinery and equipment 157,884 123,848 ------- ------- 233,517 185,556 Less accumulated depreciation 97,255 87,475 ------- ------- Total property and equipment, net 136,262 98,081 ------- ------- Other Assets: Goodwill, less accumulated amortization of $23,978,000 and $21,459,000 91,347 72,682 Deferred debt expense 7,574 8,502 Other 13,476 11,158 ------- ------- 112,397 92,342 ------- ------- $625,479 $519,217 ======= ======= The accompanying notes are an integral part of these financial statements. Nortek, Inc. and Subsidiaries Consolidated Balance Sheet December 31, ------------------ 1995 1994 ---- ---- (Amounts in Thousands) Liabilities and Stockholders' Investment Current Liabilities: Notes payable and other short-term obligations $ 30,226 $ 51 Current maturities of long-term debt 11,824 4,578 Accounts payable 73,047 52,697 Accrued expenses and taxes, net 100,970 98,009 ------- ------- Total current liabilities 216,067 155,335 ------- ------- Other Liabilities: Deferred income taxes 27,780 18,232 Other 9,945 7,909 ------- ------- 37,725 26,141 ------- ------- Notes, Mortgage Notes and Obligations Payable, Less Current Maturities 240,396 219,951 ------- ------- Commitments and Contingencies (Note 8) Stockholders' Investment: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common stock, $1 par value; authorized 40,000,000 shares 15,883,427 and 15,814,246 shares issued 15,883 15,814 Special common stock, $1 par value; authorized 5,000,000 shares 774,366 and 802,097 shares issued 774 802 Additional paid-in capital 134,690 134,627 Retained earnings 15,766 766 Cumulative translation, pension and other adjustments (2,742) (6,168) Less --treasury common stock at cost, 4,306,706 and 3,795,028 shares (31,351) (26,371) --treasury special common stock at cost, 276,784 and 271,574 shares (1,729) (1,680) ------- ------- Total stockholders' investment 131,291 117,790 ------- ------- $625,479 $519,217 ======= ======= The accompanying notes are an integral part of these financial statements. Nortek, Inc. and Subsidiaries Consolidated Statement of Cash Flows For the Years Ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- (Amounts in Thousands) Cash Flows from operating activities: Net earnings (loss) $15,000 $17,800 $(20,800) ------ ------- ------- Adjustments to reconcile net earnings (loss) to cash: Depreciation and amortization 18,977 17,960 20,726 Net gain on investment and marketable securities (2,000) --- (1,650) Extraordinary (gain) loss from debt retirements --- (250) 9,275 Loss on businesses sold --- 1,750 20,300 Cumulative effect of accounting changes --- (400) 3,100 Deferred federal income tax provision (credit) before extraordinary items 1,300 300 (6,300) Deferred federal income tax provision on discontinued operations --- 2,200 --- Deferred federal income tax provision (credit) on extraordinary items --- 1,350 (3,175) Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net 4,496 (5,501) (11,033) Prepaids and other current assets (289) (4,361) (937) Inventories 5,820 (12,593) (2,854) Accounts payable (5,614) 6,364 4,360 Accrued expenses and taxes (4,894) 4,242 (3,913) Long-term assets, liabilities and other, net 1,051 (2,682) 5,326 ------ ------ ------ Total adjustments to net earnings (loss) 18,847 8,379 33,225 ------ ------ ------ Net cash provided by operating activities 33,847 26,179 12,425 ------ ------ ------ Cash Flows from investing activities: Capital expenditures (16,091) (19,424) (10,436) Net cash paid for businesses acquired (27,543) --- --- Proceeds from the sale of property and equipment 1,831 114 5,242 Purchase of investments and marketable securities (10,086) (5,032) (87,922) Proceeds from the sale of investments and marketable securities 20,772 --- 113,961 Net cash proceeds (payments) relating to businesses sold or discontinued 1,129 12,465 (2,420) Change in restricted cash and investments (331) (2,475) 2,552 Other, net (1,499) 51 (777) ------- ------- ------ Net cash provided by (used in) investing activities (31,818) (14,301) 20,200 ------- ------- ------ Cash Flows from financing activities: Sale of Notes, net --- 209,195 --- Purchase of debentures and notes payable --- (191,582) (1,383) Increase in borrowings 10,763 --- 7,348 Payment of borrowings (1,656) (8,962) (4,124) Purchase of Nortek Common and Special Common Stock (4,664) --- --- Other, net (822) (29) (1,327) ------- ------- ------ Net cash provided by financing activities 3,621 8,622 514 ------- ------- ------ Net increase in unrestricted cash and investments 5,650 20,500 33,139 Unrestricted cash and investments at the beginning of the year 77,106 56,606 23,467 ------- ------- ------ Unrestricted cash and investments at the end of the year $ 82,756 $ 77,106 $56,606 ======= ======= ====== The accompanying notes are an integral part of these financial statements. Nortek, Inc. and Subsidiaries Consolidated Statement of Stockholders' Investment For the Three Years Ended December 31, 1995 Cumulative Translation, Addi- Retained Pension Special tional Earnings and Other Common Common Paid-in (Accumulat- Adjust-Treasury Stock Stock Capital ed Deficit) ments Stock ------ ------ ------- ---------- -------- ------- Balance, December 31, (Amounts in Thousands) 1992 $15,602 $ 990 $134,599 $ 3,766 $ ---$(28,051) 140,432 shares of special common stock converted into 140,432 shares of common stock 141 (141) --- --- --- --- 16,400 shares of common stock issued upon exercise of stock options 16 --- 28 --- --- --- Translation adjustment --- --- --- --- (1,337) --- Pension adjustment --- --- --- --- (806) --- Net loss --- --- --- (20,800) --- --- ------ ---- ------- ------- ------ ------- Balance, December 31, 1993 15,759 849 134,627 (17,034) (2,143) (28,051) 47,478 shares of special common stock converted into 47,478 shares of common stock 47 (47) --- --- --- --- 7,794 shares of common stock issued upon exercise of stock options 8 --- --- --- --- --- Translation adjustment --- --- --- --- (780) --- Pension adjustment --- --- --- --- 134 --- Cumulative effect of an accounting change --- --- --- --- (400) --- Unrealized decline in marketable securities --- --- --- --- (2,979) --- Net earnings --- --- --- 17,800 --- --- ------ ---- ------- ------- ------ ------- Balance, December 31, 1994 15,814 802 134,627 766 (6,168) (28,051) 27,731 shares of special common stock converted into 27,731 shares of common stock 28 (28) --- --- --- --- 41,450 shares of common stock issued upon exercise of stock options 41 --- 63 --- --- --- 511,671 shares of treasury stock acquired --- --- --- --- --- (5,029) Translation adjustment --- --- --- --- 701 --- Pension adjustment --- --- --- --- (244) --- Unrealized appreciation in marketable securities --- --- --- --- 2,969 --- Net earnings --- --- --- 15,000 --- --- Balance, December 31, 1995 $15,883 $ 774 $134,690 $15,766 $(2,742)$(33,080) ====== ==== ======= ====== ====== ======= The accompanying notes are an integral part of these financial statements. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Nortek, Inc. and all of its significant wholly-owned subsidiaries (the "Company" or "Nortek") after elimination of intercompany accounts and transactions. Certain amounts in the prior years' financial statements have been reclassified to conform to the presentation at December 31, 1995. On October 2, 1993, the Company began to account for its Dixieline Lumber Company, Inc. subsidiary ("Dixieline") as a business held for sale. As a result, Dixieline's operating results were no longer included in the Company's consolidated operating results subsequent to October 2, 1993. The Company sold this business on March 31, 1994.(See Note 2.) Cash, Investments and Marketable Securities Investments consist of short-term highly liquid investments which are readily convertible into cash. Investments and marketable securities are carried at approximate market price. The Company has classified as restricted (in current assets in the accompanying consolidated balance sheet) certain cash, investments and marketable securities that are not fully available for use in its operations. At December 31, 1995, approximately $9,411,000 of cash, investments and marketable securities has been pledged as collateral for insurance and other requirements. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Investments-- The carrying amount approximates fair value because of the short maturity of those instruments. Marketable Securities-- The fair value of marketable securities is based on quoted market prices. At December 31, 1995, the fair value of marketable securities approximated the amount on the Company's consolidated balance sheet. Long-Term Debt-- At December 31, 1995, the fair value of long-term indebtedness was approximately $7,200,000 lower than the amount on the Company's consolidated balance sheet, based on quoted market prices. (See Note 5.) Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Inventories Inventories in the accompanying consolidated balance sheet are valued at the lower of cost or market. At December 31, 1995 and 1994, approximately $56,221,000 and $64,589,000 of total inventories, respectively, were valued on the last-in, first-out method (LIFO). Under the first-in, first-out method (FIFO) of accounting, such inventories would have been approximately $10,550,000 and $6,710,000 greater at December 31, 1995 and 1994, respectively. All other inventories were valued under the FIFO method. Sales Recognition The Company recognizes sales upon the shipment of its products net of applicable provisions for discounts and allowances. The Company also provides for its estimate of warranty and bad debts at the time of shipment as selling, general and administrative expense. Foreign Currency Translation The Company translates the assets and liabilities of its foreign subsidiaries at the exchange rates in effect at year-end. Net sales and expenses are translated using exchange rates in effect during the year. Gains and losses from foreign currency translation are credited or charged to cumulative translation adjustment included in stockholders' investment in the accompanying consolidated balance sheet. Transaction gains or losses are recorded in selling, general and administrative expense and have not been material. Depreciation and Amortization Depreciation and amortization of property and equipment is provided on a straight-line basis over the estimated useful lives, which are generally as follows: Buildings and improvements 10-35 years Machinery and equipment, including leases 3-15 years Leasehold improvements term of lease Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized. When assets are sold, or otherwise disposed of, the cost and accumulated depreciation are eliminated and the resulting gain or loss is recognized. Goodwill The Company has classified as goodwill the cost in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. Goodwill is being amortized on a straight-line method over 40 years. Amortization charged to continuing operations amounted to $2,519,000, $2,407,000 and $2,418,000 for 1995, 1994 and 1993, respectively. At each balance sheet date, the Company evaluates the realizability of goodwill based on expectations of non-discounted cash flows and operating income for each subsidiary having a material goodwill balance. Based on its most recent Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) analysis, the Company believes that no material impairment of goodwill exists at December 31, 1995. Recent Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is to become effective for the Company in 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement also requires that certain long-lived assets and identifiable intangibles that are to be disposed, be reported at the lower of the carrying amount or fair value less cost to sell. The Company has not completed its analysis with respect to the provisions of SFAS No. 121 and accordingly has not determined the effect on the Company's consolidated financial condition or results of operations. Net Earnings (Loss) Per Share Net earnings (loss) per share amounts have been computed using the weighted average number of common and common equivalent shares outstanding during each year. Earnings (loss) per share calculations for 1993 do not include the effect of common stock equivalents or convertible debentures (and the reduction in related interest expense) because the assumed exercise of stock options and conversion of debentures is anti-dilutive for the net loss per share amounts. Special Common Stock is treated as the equivalent of Common Stock in determining earnings per share results. 2. Acquisitions and Businesses Sold Acquisitions are accounted for as purchases and, accordingly, have been included in the Company's consolidated results of operations since the acquisition date. Purchase price allocations are subject to refinement until all pertinent information regarding the acquisitions is obtained. In the fourth quarter of 1995, several of the Company's wholly owned subsidiaries completed the acquisition of the assets, subject to certain liabilities, of Rangaire Company of Cleburne, Texas ("Rangaire"), all the capital stock of Best S.p.A. of Fabriano, Italy and related entities ("Best") and all the capital stock of Venmar Ventilation inc. of Drummondville, Quebec, Canada ("Venmar"). The aggregate purchase price for these acquisitions was approximately $36,500,000, consisting of cash of approximately $33,400,000 and future payments of approximately $3,100,000. The selling shareholders of certain of these acquisitions are entitled to additional purchase price payments of up to approximately $7,800,000, depending on subsequent operating results of such acquisitions. Approximately $9,600,000 of the cash was borrowed under the terms of a line of credit of one of the Company's subsidiaries. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) On March 31, 1994, the Company sold all the capital stock of Dixieline 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 this sale (see Note 1). The combined unaudited net sales and pre-tax loss for businesses sold in 1993 included in the consolidated statement of operations of the Company was approximately $83,205,000 and $600,000, respectively, for the year ended December 31, 1993. In the third quarter of 1995, the Company sold its investment in the preferred stock of Dixieline, which resulted in a pre- tax gain of approximately $2,200,000 ($.17 per share, net of tax), and is included in net gain on investment and marketable securities in the Company's accompanying consolidated statement of operations. In January 1995, the Company paid approximately $1,750,000 ($.14 per share, net of tax) as a final purchase price adjustment related to one of its businesses sold and recorded a charge to earnings in the fourth quarter of 1994. The following table presents the approximate unaudited pro forma operating results of the Company for the year ended December 31, 1995 and December 31, 1994, as adjusted for the pro forma effect of acquisitions discussed above and the debt financing and the debt redemptions discussed in Note 5, assuming that these transactions occurred on January 1, 1994: Year Ended December 31, ----------------------- 1995 1994 ---- ---- (Amounts in Thousands except per share amounts) Net sales $886,210 $851,249 Operating earnings 47,355 59,965 Earnings before extraordinary gain 15,100 20,900 Fully diluted earnings per share $1.20 $1.62 In computing the pro forma earnings before extraordinary gain, earnings have been reduced by net interest income on the aggregate cash portion of the purchase price of such acquisitions at the historical rates earned by the Company and by interest expense on indebtedness incurred in connection with the acquisitions, net of the tax effect. Earnings before extraordinary gain have also been reduced by amortization of goodwill and reflect net adjustments to depreciation expense, as a result of an increase to estimated fair market value of property and equipment. With respect to the effect of the debt financing and debt redemptions discussed in Note 5, 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 the periods presented, net of the tax effect. Interest expense was included on the 9 7/8% Notes at a rate of approximately 9 7/8, plus Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) amortization of deferred debt expense and debt discount, for the periods presented, net of tax effect. Investment income was assumed earned on the remaining cash proceeds from the debt financing at a rate of 3.5%. The pro forma information presented does not purport to be indicative of the results which would have been reported if these transactions had occurred on January 1, 1994, or which may be reported in the future. 3. Cash Flows Interest paid was $23,228,000, $22,119,000 and $26,981,000 in 1995, 1994 and 1993, respectively. The following table summarizes the activity of businesses acquired in purchase transactions included in the accompanying consolidated statement of cash flows for the year ended December 31, 1995: 1995 ---- (Amounts in Thousands) Fair value of assets acquired $129,652 Liabilities assumed or created (96,224) Cash paid for acquisitions 33,428 Less cash acquired (5,885) ------- Net cash paid for acquisitions $ 27,543 ======= The following table summarizes the activity of businesses sold or discontinued included in the accompanying consolidated statement of cash flows: Year Ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- (Amounts in Thousands) Fair value of assets sold $ --- $39,439 $ --- Liabilities assumed by the purchaser --- (16,143) --- Notes receivable and other non-cash proceeds received as part of the proceeds --- (6,000) --- Cash proceeds from the sale of Dixieline preferred stock 2,874 --- --- Cash payments relating to businesses sold or discontinued, net (1,745) (4,831) (2,420) ------ ------ ------ Net cash proceeds (payments) relating to businesses sold or discontinued $ 1,129 $12,465 $(2,420) ======= ====== ====== Significant non-cash financing and investing activities excluded from the accompanying consolidated statement of cash flows include capitalized lease additions of approximately $806,000 in 1995 and an increase of approximately $2,969,000 and a decline of approximately $2,979,000 in the fair market value of marketable securities available for sale for 1995 and 1994, respectively. Non-cash financing and investing activities were not significant for the year ended December 31, 1993. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 4. Income Taxes The following is a summary of the components of earnings (loss) before provision (credit) for income taxes and extraordinary gain or loss: Year Ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- (Amounts in Thousands) Domestic $21,600 $23,100 $(17,000) Foreign 2,700 4,300 5,400 ------ ------ ------- $24,300 $27,400 $(11,600) ====== ====== ======= The following is a summary of the provision (credit) for income taxes before extraordinary gain or loss included in the accompanying consolidated statement of operations: Year Ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- (Amounts in Thousands) Federal income taxes-- Current $5,700 $ 7,125 $ 2,800 Deferred 1,300 300 (6,300) ----- ------ ------ 7,000 7,425 (3,500) Foreign 1,300 1,500 2,600 State 1,000 1,275 1,900 ----- ------ ------ $9,300 $10,200 $ 1,000 ===== ====== ====== Income tax payments, net of refunds, were approximately $3,739,000, $10,895,000 and $11,950,000 in 1995, 1994 and 1993, respectively. The table below reconciles the federal statutory income tax rate to the effective tax rate for earnings before extraordinary gain or loss of approximately 38.3%, 37.2% and 8.6% in 1995, 1994 and 1993, respectively. Year Ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- (Amounts in Thousands) Income tax provision (credit) before extraordinary gain or loss at the Federal statutory rate $8,505 $ 9,590 $(4,060) Net change from statutory rate: Change in valuation reserve, net (1,100) (1,625) 2,618 State taxes, net of federal tax effect 650 829 1,235 Amortization not deductible for tax purposes 868 737 746 Businesses sold --- 613 (172) Foreign source deemed income --- --- 700 Tax effect on foreign income 79 164 196 Other, net 298 (108) (263) ----- ------ ------ $9,300 $10,200 $ 1,000 ===== ====== ====== Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The Company recorded a $1,000,000 income tax credit (principally deferred) in the first quarter of 1993 relating to the cumulative effect of an accounting change for certain post-retirement benefits. In the fourth quarter of 1993, the Company recorded a $3,175,000 deferred income tax credit relating to the extraordinary loss, arising from indebtedness called for redemption. (See Note 5.) The tax effect of temporary differences which gave rise to significant portions of deferred income tax assets and liabilities as of December 31, 1995 and December 31, 1994 are as follows: December 31, --------------- 1995 1994 ---- ---- (Amounts in Thousands) Prepaid (Deferred) Income Tax Assets Arising From: Accounts receivable $ 1,425 $ 1,399 Inventory (577) (468) Insurance reserves 6,036 7,688 Other reserves, liabilities and assets, net 12,216 11,181 ------ ------ $19,100 $19,800 ====== ====== Deferred (Prepaid) Income Tax Liabilities Arising From: Property and equipment, net $15,233 $12,406 Prepaid pension assets 1,323 1,230 Insurance reserves (273) (643) Other reserves, liabilities and assets, net 8,797 2,476 Capital loss carryforward (7,260) (6,217) Unrealized loss on business sold --- (604) Other tax assets (1,658) (3,642) Valuation allowances 11,618 13,226 ------ ------ $27,780 $18,232 ====== ====== At December 31, 1995, the Company has U.S. Federal capital loss carryforwards of approximately $19,600,000, of which $17,700,000 expires in the year 1997. The Company has provided a valuation allowance equal to the tax effect of capital loss carryforwards and certain other tax assets, since realization of these tax assets cannot be reasonably assured. At December 31, 1995, the Company has approximately $1,800,000 of net U.S. Federal prepaid income tax assets which are expected to be realized through future operating earnings. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 5. Notes, Mortgage Notes and Obligations Payable Short-term obligations at December 31, 1995 and 1994 consist of the following: December 31, ------------ 1995 1994 ---- ---- (Amounts in Thousands) Secured revolving lines of credit of a Canadian subsidiary $ 4,173 $ 51 Secured lines of credit and bank advances of the Company's European subsidiaries 21,972 --- Other secured revolving lines of credit of one of the Company's U. S. subsidiaries 3,830 --- Other obligations 251 --- ------ --- $30,226 $ 51 ====== === These short-term obligations principally relate to subsidiaries acquired in 1995 and are secured by approximately $38,000,000 of accounts receivable and inventory. These borrowings had an average weighted interest rate of approximately 11.1% since the date of acquisition. Notes, mortgage notes and debentures payable in the accompanying consolidated balance sheet at December 31, 1995 and 1994 consist of the following: December 31, ------------ 1995 1994 ---- ---- (Amounts in Thousands) Mortgage notes payable $ 17,055 $ 6,774 Other, net of $750,000 unamortized discount in 1995 18,185 887 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes"), net of unamortized original issue discount of $1,520,000 and $1,632,000 216,980 216,868 ------- ------- 252,220 224,529 Less amounts included in current liabilities 11,824 4,578 ------- ------- $240,396 $219,951 ======= ======= In February 1994, the Company sold in a public offering $218,500,000 of its 9 7/8% Senior Subordinated Notes due 2004 at a discount of approximately $1,717,000, which is being amortized over the life of the issue. Net proceeds from the sale of the 9 7/8% Notes, after deducting underwriting commissions and expenses, amounted to approximately $207,695,000, and on March 24, 1994, a portion of such proceeds was used to redeem approximately $153,000,000 of certain of the Company's outstanding principal amount of indebtedness and to pay accrued interest. Interest expense, net of interest income, in the first quarter 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. The call for these debt redemptions resulted in an extraordinary loss of Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) approximately $6,100,000 ($.49 per share) net of an income tax credit of approximately $3,175,000, which was recorded in the fourth quarter of 1993. See Note 2 with respect to the pro forma effect of the debt redemptions. The indenture governing the 9 7/8% Notes restricts, among other things, the payment of cash dividends, repurchase of the Company's capital stock and the making of certain other restricted payments, the incurrence of additional indebtedness, the making of certain investments, mergers, consolidations and sale of assets (all as defined in the indenture). Upon certain asset sales (as defined in the indenture), the Company will be required to offer to purchase, at 100% principal amount plus accrued interest to the date of purchase, 9 7/8% Notes in a principal amount equal to any net cash proceeds (as defined in the indenture) that are not invested in properties and assets used primarily in the same or related business to those owned and operated by the Company at the issue date of the 9 7/8% Notes or at the date of such asset sale and such net cash proceeds were not applied to permanently reduce Senior Indebtedness (as defined in the indenture). The 9 7/8% Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at 104.214% on March 1, 1999, declining to 100% on March 1, 2002 and thereafter. At December 31, 1995, approximately $30,200,000 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. (See Note 6.) In the first half of 1994, the Company purchased $9,121,000 principal amount of 7 1/2% Convertible Debentures, which resulted in an extraordinary gain of approximately $300,000, net of income taxes of approximately $150,000. On October 24, 1994, the Company redeemed its remaining outstanding $6,373,000 principal amount of 7 1/2% Convertible Debentures, plus paid accrued interest and a slight redemption premium. This redemption resulted in an extraordinary loss of approximately $100,000, net of income taxes of $100,000 in the third quarter of 1994. These purchases and redemptions resulted in a net extraordinary gain of $200,000 ($.02 per share) for the year ended December 31, 1994. In the fourth quarter of 1993, as a result of the call for redemption of certain of the Company's indebtedness described above, the Company wrote off approximately $8,100,000 of unamortized deferred debt expense and debt discount and provided for a redemption premium of approximately $1,175,000, both of which were recorded as an extraordinary loss. Mortgage notes payable of approximately $17,055,000 outstanding at December 31, 1995 include various mortgage notes and other related indebtedness payable in installments through 2009 and bearing interest at rates ranging from 7.5% to 13.5% and is collateralized by property and equipment with an aggregate net book value of approximately $19,920,000 at December 31, 1995. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Other obligations of $18,185,000 outstanding at December 31, 1995 include borrowings relating to equipment purchases and other borrowings bearing interest at rates primarily ranging between 9% to 14% and maturing at various dates through 2002. Approximately $12,881,000 of such indebtedness is collateralized by property and equipment with an aggregate net book value of approximately $25,305,000 at December 31, 1995. The following is a summary of maturities of all of the Company's debt obligations, excluding unamortized debt discount, due after December 31, 1996: (Amounts in Thousands) 1997 $ 5,406 1998 5,566 1999 4,926 2000 3,449 Thereafter 223,319 ------- $242,666 ======= Amortization of discount and deferred costs was approximately $1,100,000, $1,400,000 and $2,100,000 in 1995, 1994 and 1993, respectively. 6. Common Stock, Special Common Stock, Stock Options and Deferred Compensation Each share of Special Common Stock has 10 votes on all matters submitted to a stockholder vote, except that the holders of Common Stock, voting separately as a class, have the right to elect 25% of the directors to be elected at a meeting, with the remaining 75% being elected by the combined vote of both classes. Shares of Special Common Stock are generally non-transferable, but are freely convertible on a share-for-share basis into shares of Common Stock. The Company has a rights plan, which expires on April 11, 1996, and provides for the right to purchase for $75, one one-hundredth of a share of $1.00 par value Series A Participating Preference Stock for each right held. The rights that are not currently exercisable are attached to each share of Common Stock and may be redeemed by the Directors at $.01 per share at any time. After a shareholder acquires beneficial ownership of 17% or more of the Company's Common Stock and Special Common Stock, the rights will trade separately and become exercisable entitling a rights holder to acquire additional shares of the Company's Common Stock having a market value equal to twice the amount of the exercise price of the right. In addition, after a person or group ("Acquiring Company") commences a tender offer or announces an intention to acquire 30% or more of the Company's Common Stock and Special Common Stock, the Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) rights will trade separately and, under certain circumstances, will permit each rights holder to acquire common stock of the Acquiring Company, having a market value equal to twice the amount of the exercise price of the right. At December 31, 1995, a total of 1,514,266 shares of Common Stock was reserved as follows: Stock option plans 739,900 Conversion of Special Common Stock 774,366 --------- 1,514,266 ========= At December 31, 1995, 43,500 shares of Special Common Stock were reserved for stock option plans. The Company has several stock option plans which provide for the granting of options to certain officers, employees and non-employee directors of the Company. Options granted under the plans vest over periods ranging up to five years and expire from eight to ten years from the date of grant. At December 31, 1995, 419,000 options are currently exercisable and 288,400 of additional options are available for grant under these plans. Options for 200,100 and 50,100 shares of Common and Special Common Stock became exercisable during 1995 and 1994, respectively. Proceeds from options exercised are credited to common stock and additional paid-in capital. The following table summarizes the Common and Special Common Stock option transactions for the three years ended December 31, 1995: Number Option Price of Shares Per Share Total --------- --------- ----- Options outstanding at December 31, 1992 240,300 $2.25-$15.69 $1,064,838 Granted 280,000 8.75 2,450,000 Exercised (16,400) 2.25-2.875 (44,000) ------- ----------- --------- Options outstanding at December 31, 1993 503,900 $2.25-$15.69 $3,470,838 Exercised (9,800) 2.875 (28,175) ------- ----------- --------- Options outstanding at December 31, 1994 494,100 $2.25-$15.69 $3,442,663 Exercised (42,600) 2.25-2.875 (119,850) ------- ----------- --------- Options outstanding at December 31, 1995 451,500 $2.25-$15.69 $3,322,813 ======= =========== ========= As of February 13, 1996, the Company purchased during the first quarter, approximately 428,800 shares of its Common Stock for approximately $4,898,771 in cash in negotiated and open market transactions and will account for such shares as Treasury Stock. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 7. Pension, Retirement and Profit Sharing Plans The Company and its subsidiaries have various pension, retirement and profit sharing plans requiring contributions to qualified trusts and union administered funds. Pension and profit sharing expense charged to operations aggregated approximately $1,377,000 in 1995, $2,883,000 in 1994 and $1,683,000 in 1993. The Company's policy is to fund currently the actuarially determined annual contribution. In the fourth quarter of 1995, benefits related to the Company's existing defined benefit plans were frozen. The Company's net pension expense for its defined benefit plans for 1995, 1994 and 1993 consists of the following components: Year Ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- (Amounts in Thousands) Service costs $1,273 $ 1,647 $ 1,685 Interest cost 2,364 2,261 1,989 Actual net income on plan assets (3,204) (2,155) (3,295) Net amortization and deferred items 790 10 822 Net gain from freezing plan benefits (581) --- --- ----- ------ ------ Total expense $ 642 $ 1,763 $ 1,201 ===== ====== ====== The following tables set forth the funded status of the Company's defined benefit plans and amounts recognized in the Company's consolidated balance sheet at December 31, 1995 and 1994: Plan Assets Exceeding Benefit Obligation ------------------ 1995 1994 Actuarial present value of benefit ---- ---- (Amounts in Thousands) obligations at September 30: Vested benefits $22,259 $18,149 Non-vested benefits --- 630 ------ ------ Accumulated benefit obligation 22,259 18,779 Effect of projected future compensation levels --- 5,373 ------ ------ Projected benefit obligation 22,259 24,152 Plan assets at fair value at September 30 25,673 24,486 ------ ------ Plan assets in excess of the projected benefit obligation 3,414 334 Unrecognized net loss --- 5,401 Unrecognized net assets --- (2,412) Unrecognized prior service costs --- (129) ------ ------ $ 3,414 $ 3,194 ====== ====== Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Accumulated Benefit Obligation Exceeding Plan Assets --------------------- 1995 1994 ==== ==== (Amounts in Thousands) Actuarial present value of benefit obligations at September 30: Vested benefits $5,069 $ 4,199 Non-vested benefits --- 232 ----- ------ Accumulated benefit obligation 5,069 4,431 Plan assets at fair value at September 30 4,407 3,691 ----- ------ Plan assets less than the accumulated benefit obligation (662) (740) Unrecognized net loss 916 807 Unrecognized prior service costs --- 602 Additional minimum liability (916) (1,409) ----- ------ $ (662) $ (740) ===== ====== Plan assets include commingled funds, marketable securities, insurance contracts and cash and short-term investments. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of benefit obligations were 7 1/2 percent and 5 percent, respectively, in 1995, 8 percent and 5 1/2 percent, respectively, in 1994 and 7 1/8 percent and 5 1/2 percent, respectively, in 1993. The expected long-term rate of return on assets was 8 1/2 percent in 1995, 1994 and 1993. In 1995, a minimum pension liability resulted in a reduction in stockholders' investment of approximately $916,000. In 1994 and 1993, a minimum pension liability and an intangible asset for certain plans were recognized, resulting in a reduction in the Company's stockholders' investment of approximately $672,000 and $806,000, respectively. In late 1995, the Company adopted a supplemental retirement plan for certain employees, which was effective as of January 1, 1996. The actuarial present value of the unfunded accumulated benefit obligation of this plan is approximately $3,500,000 and will result in an additional minimum pension liability and an intangible asset being recorded in 1996. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 8. Commitments and Contingencies The Company provides accruals for all direct and indirect costs associated with the estimated resolution of contingencies at the earliest date at which the incurrence of a liability is deemed probable and the amount of such liability can be reasonably estimated. At December 31, 1995, the Company and its subsidiaries are obligated under lease agreements for the rental of certain real estate and machinery and equipment used in its operations. Minimum annual rental expense aggregates approximately $29,992,000 at December 31, 1995. The obligations are payable as follows: 1996 $ 5,047,000 1997 4,429,000 1998 3,802,000 1999 2,824,000 2000 1,713,000 Thereafter 12,177,000 Certain of these lease agreements provide for increased payments based on changes in the consumer price index. Rental expense, from continuing operations in the accompanying consolidated statement of operations, excluding Dixieline, for the years ended December 31, 1995, 1994 and 1993 was approximately $6,900,000, $7,000,000, and $6,600,000, respectively. Under certain of these lease agreements, the Company and its subsidiaries are also obligated to pay insurance and taxes. The Company is subject to other contingencies, including additional legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, product liability, warranty and modification, adjustment or replacement of component parts of units sold, which may include product recalls. The Company has used various substances in its products and manufacturing operations which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers' compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts provided, will not have a material adverse effect on the consolidated financial position or results of operations of the Company. The preparation of financial statements in conformity with generally accepted accounting principles involves estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Operating results in the future could vary from the amounts derived from such estimates and assumptions. 9. Operating and Geographic Segment Information and Concentration of Credit Risk The Company operates in one industry segment, Residential and Commercial Building Products. No single customer accounts for 10% or more of consolidated net sales. Prior to 1995, more than 90% of net sales and identifiable assets were related to the Company's domestic operations. As a result of acquisitions in 1995, the following information by geographic area is presented for 1995: Net Identifiable Sales Earnings Assets Geographic areas: ----- -------- ------------ Domestic operations $733,264 $45,742 $341,555 European operations 13,298 769 71,180 Other foreign operations 42,432 2,189 68,056 Eliminations (12,784) --- (8,258) ------- ------ ------- 776,210 48,700 472,533 Unallocated --- (7,616) 152,946 Interest expense --- (24,918) --- Interest income --- 6,134 --- Net gain on investment and marketable securities --- 2,000 --- ------- ------- ------- Consolidated Totals $776,210 $ 24,300 $625,479 ======= ======= ======= Unallocated assets consist primarily of cash, investments and marketable securities and U. S. Federal prepaid income taxes. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different geographical regions. At December 31, 1995, the Company had no significant concentrations of credit risk. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 10. Net Gain (Loss) on Marketable Securities On January 1, 1994, the Company adopted the accounting requirements of 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 records unrealized gains or losses on such investment securities as adjustments to stockholders' investment. Previously, such gains or losses were recorded in the Company's consolidated statement of operations. During the second quarter of 1995, the Company recorded a pre-tax loss of approximately $200,000 ($.02 per share, net of tax) on the sale of marketable securities. At December 31, 1995 and 1994, the reduction in the Company's stockholders' investment under the new accounting method for gross unrealized losses was approximately $410,000 and $3,379,000, respectively. At December 31, 1995, there were no gross unrealized gains on the Company's marketable securities. Prior periods have not been restated. The Company's marketable securities at December 31, 1995 consist primarily of U. S. Government Treasury Notes due as follows: Fair Principal Market Due Amount Cost Value ------ ---- ----- (Amounts in Thousands) 1-5 years $16,000 $16,295 $15,969 5-10 years 4,537 4,672 4,588 ------ ------ ------ $20,537 $20,967 $20,557 ====== ====== ====== During 1993, the Company recorded a pre-tax gain on investment and marketable securities of $1,000,000 ($.05 per share, net of tax) in the first quarter, a pre-tax gain of $450,000 ($.02 per share, net of tax) in the second quarter, a $900,000 pre-tax gain ($.05 per share, net of tax) in the third quarter and a pre-tax loss of $700,000 ($.04 per share, net of tax) in the fourth quarter. 11. Selling, General and Administrative Expense In the second quarter of 1994, the Company recorded net pre-tax income of approximately $3,200,000 ($.14 per share, net of tax) resulting from the settlement of certain insurance claims and disputes. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) In the fourth quarter of 1993, the Company's Plumbing Products Group recorded a pre-tax loss of approximately $2,800,000 ($.15 per share, net of tax) in connection with the restructure of certain product lines. 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. 12. Accrued Expenses and Taxes, Net Accrued expenses and taxes, net, consist of the following at December 31, 1995 and 1994: December 31, ------------- 1995 1994 ---- ---- (Amounts in Thousands) Insurance $ 22,496 $23,483 Payroll, management incentive and accrued employee benefits 17,463 14,609 Interest 8,077 7,446 Accrued product warranty expense 6,850 6,968 Businesses sold or discontinued --- 1,750 Other, net 46,084 43,753 ------- ------ $100,970 $98,009 ======= ====== 13. Summarized Quarterly Financial Data (Unaudited) The following summarizes unaudited quarterly financial data for the years ended December 31, 1995 and December 31, 1994: For the Quarters Ended ---------------------- April 1 July 1 Sept. 30 Dec. 31 ------- ------ ------ ------- (In Thousands Except Per Share Amounts) 1995 Net sales $184,809 $194,206 $193,567 $203,628 Gross profit 49,369 49,505 49,676 52,731 Earnings before extraordinary gain or loss 2,500 3,200 5,200 4,100 Net earnings 2,500 3,200 5,200 4,100 Earnings per share before extraordinary gain or loss: Primary .20 .25 .41 .33 Fully diluted .20 .25 .41 .33 Net earnings per share: Primary .20 .25 .41 .33 Fully diluted .20 .25 .41 .33 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) For the Quarters Ended ---------------------- April 2 July 2 Oct. 1 Dec. 31 ------- ------ ------ ------- (In Thousands Except Per Share Amounts) 1994 Net sales $169,020 $193,722 $197,012 $177,406 Gross profit 49,718 57,678 58,075 51,361 Earnings before extraordinary gain or loss 700 5,500 6,400 4,600 Net earnings 1,500 5,400 6,300 4,600 Earnings per share before extraordinary gain or loss: Primary .06 .44 .50 .36 Fully diluted .06 .43 .50 .36 Net earnings per share: Primary .12 .43 .49 .36 Fully diluted .12 .42 .49 .36 See Notes 2, 5, 10 and 11 regarding certain other quarterly transactions included in the operating results in the above table. Increased net sales in the fourth quarter of 1995 as compared to the fourth quarter of 1994 reflect the effect of businesses acquired in 1995. (See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2). Report of Independent Public Accountants To Nortek, Inc.: We have audited the accompanying consolidated financial statements of Nortek, Inc. (a Delaware corporation) and subsidiaries listed in Item 14(a)(1) of this Form 10-K. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nortek, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As explained in Note 10 to the consolidated financial statements, effective January 1, 1994, the Company changed its method of accounting for marketable securities. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts, February 20, 1996 SCHEDULE II NORTEK, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS BALANCE CHARGED AT TO COSTS CHARGED DEDUCTIONS BALANCE BEGINNING ACQUI- AND TO OTHER FROM AT END CLASSIFICATION OF YEAR SITIONS EXPENSES ACCOUNTS RESERVES OF YEAR - -------------- ------- ------- -------- -------- ---------- ------- (Amounts in Thousands) For the year ended December 31, 1993: Allowances for doubtful accounts and sales allowances $4,068 $ --- $1,832$ (125)(b) $(1,577)(a) $4,198 ===== ===== ===== ====== ====== ===== For the year ended December 31, 1994: Allowances for doubtful accounts and sales allowances $4,198 $ --- $ 762$ 147 (c) $(1,077)(a) $4,030 ===== ===== ===== ====== ===== ===== For the year ended December 31, 1995: Allowances for doubtful accounts and sales allowances $4,030 $ 719 $1,069$ 389 (c) $(1,661)(a) $4,546 ===== ===== ===== ===== ====== ===== (a) Amounts written off, net of recoveries. (b) Transfer of allowances for doubtful accounts of Dixieline to current assets of business held for sale. (c) Other EXHIBIT INDEX ------------- Exhibits marked with an asterisk are filed herewith. The remainder of the exhibits have heretofore been filed with the Commission and are incorporated herein by reference. Exhibits marked with a double asterisk identify each management contract or compensatory plan or arrangement. 3.1 Restated Certificate of Incorporation of Nortek, Inc. (Exhibit 2 to Form 8-K filed April 23, 1987, File No. 1-6112). 3.2 Amendment to Restated Certificate of Incorporation of Nortek, Inc. effective May 10, 1989 (Exhibit 3.2 to Form 10-K filed March 30, 1990, File No. 1-6112). 3.3 By-laws of Nortek, Inc. (as amended through November 30, 1993) (Exhibit 3.3 to Form 10-K filed March 25, 1994, File No. 1-6112). 4.1 Rights Agreement dated as of March 31, 1986 as amended and restated as of March 18, 1991 between the Company and State Street Bank and Trust Company, as Rights Agent (Exhibit 1 to Form 8-K filed March 26, 1991, File No. 1-6112). 4.2 Amendment No. 1 dated as of October 6, 1993 to Amended and Restated Rights Agreement dated as of March 18, 1991 (Exhibit 1 to Form 8-K filed October 12, 1993, File No. 1-6112). 4.3 Amendment No. 2 dated as of September 27, 1995 to Amended and Restated Rights Agreement dated as of March 18, 1991 (Exhibit 1 to Form 8-K filed October 12, 1995, File No. 1-6112). 4.4 Indenture dated as of February 14, 1994 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 9 7/8% Senior Subordinated Notes due 2004 (Exhibit 4.5 to Form 10-K filed March 25, 1994, File No. 1-6112). **10.1 Employment Agreement between Richard L. Bready and the Company, dated as of January 1, 1984 (Exhibit 10.2 to Form 10-K filed March 31, 1986, File No. 1-6112). **10.2 Amendment dated as of March 3, 1988 to Employment Agreement between Richard L. Bready and the Company dated as of January 1, 1984 (Exhibit 19.2 to Form 10-Q filed May 17, 1988, File No. 1-6112). **10.3 Second Amendment dated as of November 1, 1990 to Employment Agreement between Richard L. Bready and the Company dated as of January 1, 1984 (Exhibit 10.3 to Form 10-K filed April 1, 1991, File No. 1-6112). **10.4 Deferred Compensation Agreement dated March 7, 1983 between Richard L. Bready and the Company (Exhibit 10.4 to Registration Statement No. 33-69778 filed February 9, 1994). **10.5 Deferred Compensation Agreement dated March 7, 1983 between Almon C. Hall and the Company (Exhibit 10.5 to Registration Statement No. 33-69778 filed February 9, 1994). **10.6 Deferred Compensation Agreement dated March 7, 1983 between Richard J. Harris and the Company (Exhibit 10.6 to Registration Statement No. 33-69778 filed February 9, 1994). **10.7 1984 Stock Option Plan, as amended through May 27, 1987 (Exhibit 28.2 to Registration Statement No. 33-22527 filed June 15, 1988). **10.8 Change in Control Severance Benefit Plan for Key Employees adopted February 10, 1986, and form of agreement with employees (Exhibit 10.19 to Form 10-K filed March 31, 1986, File No. 1-6112). **10.9 1987 Stock Option Plan (Exhibit 28.3 to Registration Statement No. 33-22527 filed June 15, 1988). **10.10 Form of Indemnification Agreement between the Company and its directors and certain officers (Appendix C to Proxy Statement dated March 23, 1987 for Annual Meeting of Nortek Stockholders, File No. 1-6112). **10.11 1988 General Stock Option Plan (Appendix A to Proxy Statement dated April 1, 1988 for Annual Meeting of Nortek Stockholders, File No. 1-6112). **10.12 1988 General Stock Option Plan III (Appendix C to Proxy Statement dated April 12, 1989 for Annual Meeting of Nortek Stockholders, File No. 1-6112). 10.13 Registration Rights Agreement dated as of October 31, 1990 between the Company and Bready Associates (Exhibit 4 to Schedule 13D filed November 13, 1990 by Bready Associates relating to the Common Stock, par value $1.00 per share, of the Company). **10.14 1990 General Stock Option Plan (Appendix A to Proxy Statement dated April 17, 1991 for Annual Meeting of Nortek Stockholders, File No. 1-6112). *11.1 Calculation of Shares Used in Determining Earnings Per Share. *21.1 List of subsidiaries. *23.1 Consent of Independent Public Accountants *27.1 Financial Data Schedule. EX-11 2 EXHIBIT 11.1 NORTEK, INC. AND SUBSIDIARIES CALCULATION OF SHARES USED IN DETERMINING EARNINGS PER SHARE 1995 1994 1993 ---- ---- ---- Calculation of the number of shares to be used in computing earnings per share: Weighted average common and special common shares issued during the period 16,625,166 16,609,828 16,598,819 Less average common and special common shares held in the Treasury (4,180,560) (4,066,611) (4,066,602) ---------- ---------- ---------- Weighted average number of common and special common shares outstanding during the period 12,444,606 12,543,217 12,532,217 Dilutive effect of stock options considered common stock equivalents 124,686 163,894 90,215 ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period 12,569,292 12,707,111 12,622,432 ========== ========== ========== 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 12,444,606 12,543,217 12,532,217 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 175,153 206,305 109,571 Dilutive effect of assuming conversion of the Company's 7-1/2% convertible debentures --- 394,792 720,507 ---------- ---------- ---------- 12,619,759 13,144,314 13,362,295 ========== ========== ========== Note: The loss per share calculation for the year ended December 31, 1993 does not include the effect of common stock equivalents or convertible debentures (and the reduction in related expense) because the assumed exercise of stock options and the conversion of debentures is anti- dilutive for the loss per share amounts. EX-21 3 Exhibit 21.1 LIST OF SUBSIDIARIES -------------------- Set forth below is a list of all subsidiaries of the Company as of December 31, 1995 the assets and operations of which are included in the Consolidated Financial Statements of Nortek, Inc., except subsidiaries that, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary: STATE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ------------- Broan Limited Ontario 9025-7205 Quebec Inc. Quebec Venmar Ventilation inc. Quebec Conservation Energy Systems, Inc. Quebec Broan Mfg. Co., Inc. Wisconsin Aubrey Manufacturing, Inc. Delaware Monarch Metal Products Corporation Illinois Jensen Industries, Inc. Delaware Linear Corporation California Linear H.K. Manufacturing Limited Hong Kong We Monitor America Incorporated Colorado Moore-O-Matic, Inc. Wisconsin M & S Systems, Inc. Delaware Nordyne Inc. Delaware Commercial Environmental Systems Group, Inc. Delaware Mammoth, Inc. Delaware Governair Corporation Oklahoma Temtrol, Inc. Oklahoma Nortek (UK) Limited United Kingdom Nortek S.r.l. Italy Best S.p.A. Italy Best Deutschland GmbH Germany Broan S.r.l. Italy Maninvest S.r.l. Italy Interglass S.r.l. Italy Elektromec S.p.A. Italy Elektra S.r.l. Italy Rangaire, Inc. Delaware Universal-Rundle Corporation Delaware EX-23 4 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Nortek, Inc.: As independent public accountants, we hereby consent to the incorporation of our report dated February 20, 1996, included in this Form 10- K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-22527 and 33-47897). /s/ARTHUR ANDERSEN LLP Boston, Massachusetts, March 7, 1996 EX-27 5
5 1000 YEAR DEC-31-1995 DEC-31-1995 90,167 20,557 122,563 4,546 110,052 376,820 233,517 97,255 625,479 216,067 240,396 0 0 16,657 114,634 625,479 776,210 776,210 574,929 574,929 0 0 24,918 24,300 9,300 15,000 0 0 0 15,000 1.19 1.19
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