-----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, Pdej2SweiJDJB0uJsCIza/HtqytNMeyPvUgE+4sHYY2bTFY2X0tz6wjwuT/e49Mq mxZhLIe/6n9LjYYzmb+ysQ== 0000072423-97-000002.txt : 19970223 0000072423-97-000002.hdr.sgml : 19970223 ACCESSION NUMBER: 0000072423-97-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970221 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTEK INC CENTRAL INDEX KEY: 0000072423 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 050314991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06112 FILM NUMBER: 97540702 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 1996 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, 1996 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 7, 1997 was $220,096,432. See Item 12. The number of shares of Common Stock outstanding as of February 7, 1997 was 9,141,503. The number of shares of Special Common Stock outstanding as of February 7, 1997 was 499,824. Documents Incorporated by Reference Portions of the registrant's Proxy Statement for use at its 1997 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" refer to Nortek, Inc., together with its subsidiaries, unless the context indicates otherwise. Such terms as "Company" and "Nortek" are used for convenience only and are not intended as a precise description of any of the separate corporations, each of which manages its own affairs.) As a result of acquisitions primarily in Europe and Canada in 1995 the Company has considerably expanded its foreign sales and earnings. 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 1996 the Company's operations were affected by an increase in housing starts throughout the United States and Canada. In addition, 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. 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, while in 1996, cost increases subsided and the Company experienced decreases in certain costs and expenses including raw materials, as compared to prices in effect 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 14 through 23) 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 and the Middle East 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). Customers for the Group's products include residential and electrical contractors, professional remodelers and do-it-yourself homeowners. 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, paddle fans, central vacuum systems and fluorescent lighting fixtures. The Company's sales of kitchen range hoods accounted for approximately 16.4% of the Company's consolidated net sales in 1996. 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, Sensaire and Solitare Ultra Silent fans and fan lights, 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 1996, approximately 24% 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 PLC. 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 22 manufacturing plants and employed 2,697 full-time people as of December 31, 1996, 927 of whom are covered by collective bargaining agreements which expire in 1999, 2000 and 2002. 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), Softheat(R), Miller(R), Elect-Air(R) and Powermiser(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 mechanical equipment rooms, individual floor by 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, and 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 slightly less than half of the Group's commercial sales in 1996 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 equipment rooms maximize a building's rentable floor space because they are located outside the building. In addition, factors relating to the manner of construction and timing of installation of commercial HVAC equipment can often favor custom-designed rather than standard systems. As compared with site-built and standard 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 109 persons as of December 31, 1996. 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 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 more than half of the Group's residential site-built sales of HVAC products in 1996 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 retailers and owners of such housing. The majority of sales to builders of manufactured housing consist of furnaces designed and engineered to meet or exceed certain standards mandated by federal agencies, including HUD. These standards differ in several important respects from the standards for furnaces used in site-built residential homes. The after market channel of distribution includes sales of both new and replacement air conditioning units and heat pumps and replacement furnaces. The Company believes that the 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 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, Rheem Manufacturing Company, 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 2,192 full-time people as of December 31, 1996, 256 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), gelcoat and acrylic bathtubs, shower stalls and whirlpools, brass and die cast faucets 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, pressure balance tub-shower fittings 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 or buy-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, 1996. 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, a subsidiary of Zurn 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 1,355 full-time people as of December 31, 1996, approximately 910 of whom are covered by collective bargaining agreements which expire in 1997 and 1999. The Company believes that the Group's relationships with its employees are satisfactory. GENERAL CONSIDERATIONS Employees The Company employed approximately 6,497 persons at December 31, 1996. Backlog Backlog expected to be filled during 1997 was approximately $113,638,000 at December 31, 1996 ($116,679,000 at December 31, 1995). Backlog is not regarded as a significant factor for operations where orders are generally for prompt delivery. While backlog stated for December 31, 1996 is believed to be firm, the possibility of cancellations makes it difficult to assess the firmness of backlog with certainty. Research and Development The Company's research and development activities are principally new product development and represent approximately 1% of net sales. 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 20 of this report, incorporated herein by reference. Executive Officers of the Registrant Name Age Position - ---- --- -------- Richard L. Bready 52 Chairman, President and Chief Executive Officer Almon C. Hall 50 Vice President, Controller and Chief Accounting Officer Richard J. Harris 60 Vice President and Treasurer Siegfried Molnar 56 Senior Vice President - Group Operations Kenneth J. Ortman 61 Senior Vice President - Group Operations Kevin W. Donnelly 42 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's subsidiaries perform policy-making functions and have managerial responsibilities for the subsidiary or division by which they are employed, although not for the Company overall. Certain of these individuals could, depending on earnings of such unit, be more highly compensated than some executive officers of the Company. 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 180,000 Hartford, WI Manufacturing/Warehouse/Administrative 462,000 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* Cerreto d'Esi, Italy Manufacturing/Administrative 135,000 Montefano, Italy Manufacturing/Administrative 74,000 Cleburne, TX Manufacturing/Administrative 210,000 Drummondville, QUE Manufacturing/Administrative 66,000* St. Leonard d'Aston, QUE Manufacturing/Administrative 88,000 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 127,000 Okarche, OK Manufacturing/Administrative 135,000 Los Angeles, CA Manufacturing/Administrative 177,000 New Castle, PA Manufacturing/Administrative 424,000 Hondo, TX Manufacturing/Administrative 460,000 Monroe, GA Manufacturing/Administrative 416,000 Union Point, GA Manufacturing/Administrative 191,000 Ottumwa, IA Manufacturing/Administrative 135,000 Grand Prairie, TX Manufacturing/Warehouse/Administrative 64,800* Rensselaer, IN Manufacturing/Administrative 125,000 Chicago, IL Manufacturing/Warehouse/Administrative 126,000 Providence, RI Administrative 20,400* Item 3. Legal Proceedings The Company and its subsidiaries are subject to numerous federal, state and local laws and regulations, including environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with the material laws and regulations applicable to it. The Company 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 1995 and 1996 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 October 25, 1996, the following directors were elected by the following votes: By the holders of Common Stock voting separately as a class. NAME FOR WITHHELD ---- --- -------- Class I (for a term expiring at the 1999 Annual Meeting) J. Peter Lyons 6,991,754 510,293 By the holders of Common Stock and Special Common Stock voting together as a class. NAME FOR WITHHELD ---- --- -------- Class I (for a term expiring at the 1999 Annual Meeting) William I. Kelly 10,819,681 501,366 Members of the Board of Directors continuing in office after the meeting: Class II (for a term expiring Richard J. Harris at the 1997 Annual Meeting) Class III (for a term expiring Richard L. Bready at the 1998 Annual Meeting) Philip B. Brooks The other matter voted upon at the meeting and the vote was as follows: Shareholder Proposal - Amendment to Strike Section 3.4 of the Company's By-laws. FOR AGAINST ABSTAIN BROKER NON-VOTE --- ------- ------- --------------- 1,242,974 7,288,310 85,484 2,704,279 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 7, 1997, numbered 3,423 and 2,682, respectively. There were no dividends declared on the Common and Special Common Stock in 1995 or 1996. The high and low sales prices of Nortek's Common Stock traded on the New York Stock Exchange in each quarter of 1996 and 1995 were: 1996 Quarter High Low - ------- ---- --- First 12 1/4 9 3/4 Second 16 1/8 11 5/8 Third 14 1/4 11 Fourth 20 5/8 13 1/2 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 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, 1996 ------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In Thousands Except Per Share Amounts) Consolidated Summary of Operations: Net sales $969,798 $776,210 $737,160 $744,113 $799,979 Operating earnings 60,052 41,084 50,017 30,346 20,436 Loss on businesses sold --- --- (1,750) (20,300) (14,500) Earnings (loss) from continuing operations 22,000 15,000 17,200 (12,600) (21,000) Loss from discontinued operations --- --- --- --- (3,300) Extraordinary gain (loss) from debt retirements --- --- 200 (6,100) 100 Cumulative effect of accounting changes --- --- 400 (2,100) --- Net earnings (loss) 22,000 15,000 17,800 (20,800) (24,200) Financial Position: Unrestricted cash, invest- ments and marketable securities $ 92,093 $103,313 $105,080 $ 82,498 $ 73,748 Working capital 143,474 160,753 173,459 117,926 132,587 Total assets 609,116 625,479 519,217 509,209 515,373 Total debt-- Current 36,564 42,050 4,629 37,539 6,810 Long-term 243,961 240,396 219,951 178,210 201,863 Current ratio 1.7:1 1.7:1 2.1:1 1.6:1 1.9:1 Debt to equity ratio 2.4:1 2.2:1 1.9:1 2.1:1 1.6:1 Depreciation and amorti- zation 23,726 18,977 17,960 20,726 23,644 Capital expenditures 22,184 17,321 19,424 10,809 8,804 Stockholders' investment 118,795 131,291 117,790 104,007 126,906 Common and special common shares outstanding 9,873 12,074 12,550 12,542 12,526 Per Share: Earnings (loss) from continuing operations-- Primary $2.07 $1.19 $1.35 $(1.00) $(1.67) Fully diluted 2.05 1.19 1.34 (1.00) (1.67) Net earnings (loss)-- Primary 2.07 1.19 1.40 (1.66) (1.92) Fully diluted 2.05 1.19 1.39 (1.66) (1.92) Stockholders' investment 12.03 10.87 9.39 8.29 10.13 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, below, 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. 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, 1996, (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, 1995 1994 ----------------------- to to 1996 1995 1994 1996 1995 ---- ---- ---- ---- ---- (Amounts in Millions) Net sales $969.8 $776.2 $737.2 24.9% 5.3% Cost of products sold 709.9 574.9 520.4 (23.5) (10.5) Selling, general and admini- strative expense 199.8 160.2 166.8 (24.7) 4.0 Operating earnings 60.1 41.1 50.0 46.2 (17.8) Interest expense (30.1) (24.9) (26.2) (20.9) 5.0 Interest income 5.3 6.1 5.3 (13.1) 15.1 Net gain on investment and marketable securities .7 2.0 --- (65.0) --- Loss on business sold --- --- (1.7) --- 100.0 Earnings before provision for income taxes 36.0 24.3 27.4 48.1 (11.3) Provision for income taxes 14.0 9.3 10.2 (50.5) 8.8 Earnings before extra- ordinary gain 22.0 15.0 17.2 46.7 (12.8) Extraordinary gain from debt retirements --- --- .2 --- (100.0) Cumulative effect of an accounting change --- --- .4 --- (100.0) Net earnings 22.0 15.0 17.8 46.7 (15.7) Percentage Percentage of Net Sales Change ------------- Year Ended December 31, 1995 1994 ----------------------- to to 1996 1995 1994 1996 1995 ---- ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% ---% ---% Cost of products sold 73.2 74.1 70.6 .9 (3.5) Selling, general and admini- strative expense 20.6 20.6 22.6 --- 2.0 Operating earnings 6.2 5.3 6.8 .9 (1.5) Interest expense (3.1) (3.2) (3.6) .1 .4 Interest income .6 .8 .7 (.2) .1 Net gain on investment and marketable securities --- .2 --- (.2) .2 Loss on business sold --- --- (.2) --- .2 Earnings before provision for income taxes 3.7 3.1 3.7 .6 (.6) Provision for income taxes 1.4 1.2 1.4 (.2) .2 Earnings before extra- ordinary gain 2.3 1.9 2.3 .4 (.4) Extraordinary gain from debt retirements --- --- --- --- --- Cumulative effect of an accounting change --- --- .1 --- (.1) Net earnings 2.3 1.9 2.4 .4 (.5) The following table presents the net sales for the Company's principal product groups for the three years ended December 31, 1996, and the percentage change of such results as compared to the prior year: Percentage Change ------ Year Ended December 31, 1995 1994 ----------------------- to to 1996 1995 1994 1996 1995 ---- ---- ---- ---- ---- Net Sales: (Amounts in Millions) Residential Building Products $418.6 $281.2 $265.2 48.9% 6.0% Air Conditioning and Heating Products 411.9 363.4 338.0 13.4 7.5 Plumbing Products 139.3 131.6 134.0 5.9 (1.8) ----- ----- ----- ---- ---- Total $969.8 $776.2 $737.2 24.9% 5.3% ===== ===== ===== ==== ==== Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995 Net sales increased approximately $193,600,000, or approximately 24.9%, as compared to 1995. The Residential Building Products Group net sales increased principally as a result of fourth quarter 1995 acquisitions, which contributed approximately $140,400,000 in 1996 as compared to approximately $24,600,000 in 1995. Shipments of new and replacement air conditioning and heating ("HVAC") products to manufactured housing customers and increased sales levels of commercial and industrial HVAC products were the primary reasons for increased sales in the Air Conditioning and Heating Products Group. Modest sales price increases in certain product lines of the Residential Building Products Group, were also a factor, and were partially offset by lower sales prices of certain products in the Plumbing Products Group and certain residential HVAC products in the Air Conditioning and Heating Products Group. Cost of products sold as a percentage of net sales decreased from approximately 74.1% in 1995 to approximately 73.2% in 1996. The decrease in the percentage principally resulted from a reduction in cost in 1996 of certain raw materials and components compared to 1995 and decreased overhead costs as a percentage of sales in the Residential Building Products and Air Conditioning and Heating Products Groups due to increased volume and improved efficiency. These decreases were partially offset by the 1995 acquisitions, which have a higher level of cost of sales to net sales than the overall group of businesses owned prior to the acquisitions, the effect of the development and introduction of new products and the effect of an extended shut-down period in the third quarter in Europe and by increased direct labor costs in the Plumbing Products Group. Had all year-end inventory values been stated on a FIFO basis, year-end inventory would have been approximately $8,482,000 higher in 1996, approximately $10,550,000 higher in 1995 and approximately $6,710,000 higher in 1994. Overall, changes in cost of products sold as a percentage of net sales for one period as compared to another period may reflect the effect of a number of factors, including among others changes in the relative mix of products sold, the effect of changes in sales prices, the unit cost of products sold and changes in productivity levels. Selling, general and administrative expense as a percentage of net sales was approximately 20.6% in 1995 and 1996. The fourth quarter 1995 acquisitions, which have a lower level of selling, general and administrative expense to net sales than the overall group of businesses owned prior to the acquisitions, and increased sales levels without a proportionate increase in expense in the Company's Plumbing Products Group in 1996 contributed to a decrease in the percentage which was offset by the effect of limited sales activity during an extended shutdown period in the third quarter by the Company's European subsidiaries without a proportionate reduction in expense and higher net unallocated expense. Segment earnings were approximately $73,900,000 for 1996, as compared to approximately $48,700,000 for 1995. Segment earnings are operating earnings before corporate and other expenses that are not directly attributable to the Company's product groups. Fourth quarter 1995 acquisitions, included in the Residential Building Products Group, contributed approximately $8,400,000 to segment earnings in 1996 as compared to $1,050,000 in 1995. Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995 (Continued) Segment earnings have been reduced by depreciation and amortization expense of approximately $22,200,000 and approximately $17,600,000 for 1996 and 1995, respectively. Acquisitions accounted for approximately $5,100,000 of the depreciation and amortization expense in 1996 as compared to $750,000 in 1995. The overall increase in segment earnings was due principally to increased sales volume in each of the Company's operating groups, particularly increased sales volume of residential and commercial HVAC products and residential building products, the effect of increased sales from the fourth quarter 1995 acquisitions, and a reduction in the price paid for certain materials in each of the Company's operating groups and was affected by the factors noted above. Foreign segment earnings, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries, which manufacture built-in ventilating products, increased to approximately 11.4% of segment earnings in 1996 from approximately 6.1% of such earnings in 1995. The increase in 1996 was primarily attributable to an approximate 184.2% increase in foreign segment earnings in 1996, as compared to a 43.2% increase in domestic earnings. The increase in 1996 was primarily attributable to earnings of the Company's 1995 Canadian and European acquisitions. Sales and earnings derived from the international market are subject to the risks of currency fluctuations. Operating earnings in 1996 increased approximately $19,000,000, or approximately 46.2%, as compared to 1995, primarily due to the factors previously discussed. Interest expense in 1996 increased approximately $5,200,000, or approximately 20.9%, as compared to 1995, primarily as a result of higher borrowings resulting from the 1995 acquisitions including existing short-term working capital borrowings of the acquired subsidiaries. Interest income in 1996 decreased approximately $800,000, or approximately 13.1%, as compared to 1995, principally due to lower average invested balances of short-term investments and marketable securities, principally resulting from the 1995 acquisitions and from purchases of the Company's capital stock, partially offset by increased cash from operating results. The provision for income taxes was approximately $14,000,000 for 1996, as compared to approximately $9,300,000 for 1995. The provision for income taxes has been reduced by approximately $481,000 in 1996 and approximately $1,100,000 in 1995, respectively, reflecting the reversal of tax valuation reserves no longer required, of which approximately $263,000 in 1996 and $670,000 in 1995 are as a result of the gain on the sale of certain investments and marketable securities. The income tax rates principally differed from the United States Federal statutory rate of 35%, as a result of state income tax provisions, nondeductible amortization expense (for tax purposes), the changes in tax valuation reserves, the effect of foreign income tax on foreign source income, and in 1996 from the effect of product development tax credits from foreign operations. (See Note 4 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994 Net sales increased approximately $39,000,000, or approximately 5.3%, as compared to 1994, principally as a result of increased shipments of new and replacement 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 as a percentage of net sales 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 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 were 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 as a percentage of net sales 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 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. Acquisitions in 1995, included in the Residential Building Products Group, contributed approximately $1,050,000 to segment earnings in 1995. Segment earnings 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 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. Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994 (Continued) 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 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 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. 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 a business previously sold, which resulted in a pre-tax gain of $2,200,000. (See Note 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 investments 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.) Liquidity and Capital Resources The Company's primary sources of liquidity in 1996 and 1995 have been funds provided by subsidiary operations and unrestricted short-term investments and marketable securities. Unrestricted cash, investments and marketable securities were approximately $92,093,000 at December 31, 1996 as compared to $103,313,000 at December 31, 1995. The Company's investment in marketable securities at December 31, 1996 consisted primarily of investments in United States Treasury Notes and bank issued money market instruments and at December 31, 1996, approximately $5,681,000 of the Company's investments and marketable securities 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. During 1995 and 1996, the Company's Board of Directors authorized a number of programs to purchase shares of the Company's Common and Special Common Stock, subject to market conditions and cash availability. The programs included the purchase of 1,189,809 shares of its common stock, or approximately 10.6% of its outstanding shares on April 26, 1996 for approximately $20,200,000 from three of its directors, who also resigned from the Company's Board of Directors, and the most recent program which was announced on October 28, 1996, to purchase up to 500,000 shares of the Company's Common and Special Common Stock in open- market or negotiated transactions subject to market conditions and cash availability. From November 16, 1995 to February 7, 1997, the Company purchased approximately 2,757,000 shares of its Common and Special Common Stock for approximately $42,849,000 and accounted for such share purchases as Treasury Stock. (See below and Note 6 of the Notes to the Consolidated Financial Statements included elsewhere herein.) At February 7, 1997, approximately $683,607 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 decreased from approximately $160,753,000 to approximately $143,474,000 between December 31, 1995 and December 31, 1996 while its current ratio was 1.7:1 at both dates, principally as a result of purchases of the Company's common stock described above and the factors described below. Working capital included approximately $103,313,000 at December 31, 1995 and approximately $92,093,000 at December 31, 1996 of unrestricted cash, investments and marketable securities. Liquidity and Capital Resources (Continued) Accounts receivable increased approximately $4,159,000, or approximately 3.5%, between December 31, 1995 and December 31, 1996, while net sales increased approximately 18.0% in the fourth quarter of 1996 as compared to the fourth quarter of 1995. 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 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, 1996 as compared to December 31, 1995. The Company has not experienced any significant changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in 1995 or 1996. Inventories decreased approximately $12,394,000 or approximately 11.3%, between December 31, 1995 and December 31, 1996 and reflect, in part, the positive effect of changes in inventory control systems and other initiatives implemented during the past several years to reduce inventories in certain of the Company's businesses. Accounts payable increased approximately $1,898,000 or approximately 2.6% between December 31, 1995 and December 31, 1996. Unrestricted cash and cash equivalents increased approximately $3,831,000 from December 31, 1995 to December 31, 1996, principally as a result of the following: Condensed Consolidated Cash Flows ---------- Operating Activities-- Cash flow from operations, net $43,176,000 Increase in accounts receivable, net (3,626,000) Decrease in inventories 12,196,000 Decrease in prepaids and other current assets 4,620,000 Increase in trade accounts payable 2,090,000 Decrease in accrued expenses and taxes (8,840,000) Investing Activities-- Purchase of marketable securities (66,901,000) Proceeds from the sale of marketable securities 82,435,000 Capital expenditures (21,683,000) Financing Activities-- Increase in borrowings 9,609,000 Payment of borrowings (13,701,000) Purchase of Nortek Common and Special Common Stock (34,822,000) Other, net (722,000) ---------- $ 3,831,000 ========== The Company's debt-to-equity ratio increased from approximately 2.2:1 at December 31, 1995 to 2.4:1 at December 31, 1996, primarily as a result of the effect of the purchase of the Company's Common and Special Common Stock (see Note 6 of the Notes to the Consolidated Financial Statements) partially offset by a slight net decrease in borrowings, and by net earnings for 1996. (See the Company's Consolidated Statement of Stockholders' Investment included elsewhere herein.) On April 1, 1996, the Company extended and amended its shareholder rights plan to March 31, 2006. Under the amended plan, each right previously issued under the plan in effect to date, or subsequently issued under the amended and restated plan, entitles shareholders to buy 1/100 of a share of a new series of preferred stock of Nortek at an exercise price of $72 per share, subject to adjustments for stock dividends, splits and similar events. (See Note 6 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 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, declined approximately 8.5% in 1995, and increased approximately 8.8% in 1996. New residential construction housing starts, however, remain below the levels experienced in the mid-l980s. The Company's operations have been affected by past 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. In 1996, cost increases subsided and the Company experienced decreases in certain costs and expenses, including raw materials, as compared to prices in effect in 1995. Forward Looking Statements When used in this discussion, the words "believes," "anticipates," and "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, over which the Company has no control, which could cause actual results to differ materially from those projected. These risks and uncertainties include increases in raw material costs (including, among others, steel, copper, packaging material, plastics, resins and aluminum) and purchased component costs, the level of domestic and foreign construction and remodeling activity affecting residential and commercial markets, interest rates, inflation, consumer spending levels, operating in international economies, the rate of sales growth, price and product competition, new product introduction, material shortages and product liability claims. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward- looking statements to reflect events or circumstances after the date thereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company, in this report, as well as the Company's periodic reports on Forms 10-Q and 8-K filed with the Securities and Exchange Commission. 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 1997 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 1997 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 1997 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 1997 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, 1996 27 Consolidated Balance Sheet as of December 31, 1996 and 1995 28 Consolidated Statement of Cash Flows for the three years ended December 31, 1996 30 Consolidated Statement of Stockholders' Investment for the three years ended December 31, 1996 31 Notes to Consolidated Financial Statements 33 Report of Independent Public Accountants 52 2. Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts 53 3. The exhibits are listed in the Exhibit Index, which is incorporated herein by reference. (b) Reports on Form 8-K The following report on Form 8-K was filed by the Registrant during the last quarter of the period covered by this report: October 25, 1996, Item 5, Other Events. 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 February 18, 1997. 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 February 18, 1997. /s/Richard L. Bready /s/J.Peter Lyons - --------------------------------- ------------------------------- Richard L. Bready, Chairman J. Peter Lyons, Director of the Board and President (principal executive officer) /s/Richard J. Harris /s/William I. Kelly - ---------------------------------- ------------------------------- Richard J. Harris, Vice President William I. Kelly, Director and Treasurer (principal financial officer) and Director /s/Almon C. Hall /s/Phillip L. Cohen - --------------------------------- ------------------------------- Almon C. Hall, Vice President Phillip L. Cohen, Director and Controller (principal accounting officer) Nortek, Inc. and Subsidiaries Consolidated Statement of Operations For the Years Ended December 31, -------------------------------- 1996 1995 1994 ---- ---- ---- (In Thousands Except Per Share Amounts) Net Sales $969,798 $776,210 $737,160 ------- ------- ------- Costs and Expenses: Cost of products sold 709,875 574,929 520,328 Selling, general and administrative expense 199,871 160,197 166,815 ------- ------- ------- 909,746 735,126 687,143 ------- ------- ------- Operating earnings 60,052 41,084 50,017 Interest expense (30,113) (24,918) (26,162) Interest income 5,311 6,134 5,295 Net gain on investment and marketable securities 750 2,000 --- Loss on business sold --- --- (1,750) ------- ------- ------- Earnings before provision for income taxes 36,000 24,300 27,400 Provision for income taxes 14,000 9,300 10,200 ------- ------- ------- Earnings before extraordinary gain 22,000 15,000 17,200 Extraordinary gain from debt retirements --- --- 200 ------- ------- ------- Earnings before the cumulative effect of an accounting change 22,000 15,000 17,400 Cumulative effect of an accounting change --- --- 400 ------- ------- ------- Net Earnings $ 22,000 $ 15,000 $ 17,800 ======= ======= ======= Net Earnings Per Share: Earnings before extraordinary gain Primary $ 2.07 $ 1.19 $ 1.35 Fully diluted $ 2.05 $ 1.19 $ 1.34 Extraordinary gain Primary --- --- .02 Fully diluted --- --- .02 Cumulative effect of an accounting change Primary --- --- .03 ---- ---- ---- Fully diluted --- --- .03 ---- ---- ---- Net Earnings Primary $ 2.07 $ 1.19 $ 1.40 ==== ==== ==== Fully diluted $ 2.05 $ 1.19 $ 1.39 ==== ==== ==== Weighted Average Number of Shares: Primary 10,641 12,569 12,707 ====== ====== ====== Fully diluted 10,722 12,620 13,144 ====== ====== ====== The accompanying notes are an integral part of these financial statements. Nortek, Inc. and Subsidiaries Consolidated Balance Sheet December 31, ------------------ Assets 1996 1995 ---- ---- (Amounts in Thousands) Current Assets: Unrestricted Cash and cash equivalents $ 41,042 $ 37,211 Marketable securities available for sale 51,051 66,102 Restricted Investments and marketable securities at cost, which approximates market 5,681 9,411 Accounts receivable, less allowances of $4,356,000 and $4,546,000 122,176 118,017 Inventories Raw materials 36,765 42,601 Work in process 12,717 14,319 Finished goods 48,176 53,132 ------- ------- 97,658 110,052 ------- ------- Prepaid expenses and other current assets 14,940 16,927 Prepaid income taxes 20,000 19,100 ------- ------- Total current assets 352,548 376,820 ------- ------- Property and Equipment, at Cost: Land 7,046 6,508 Buildings and improvements 72,954 69,125 Machinery and equipment 174,064 157,884 ------- ------- 254,064 233,517 Less accumulated depreciation 112,645 97,255 ------- ------- Total property and equipment, net 141,419 136,262 ------- ------- Other Assets: Goodwill, less accumulated amortization of $26,948,000 and $23,978,000 91,578 91,347 Deferred debt expense 6,647 7,574 Other 16,924 13,476 ------- ------- 115,149 112,397 ------- ------- $609,116 $625,479 ======= ======= The accompanying notes are an integral part of these financial statements. Nortek, Inc. and Subsidiaries Consolidated Balance Sheet (Continued) December 31, ------------------ 1996 1995 ---- ---- (Amounts in Thousands) Liabilities and Stockholders' Investment Current Liabilities: Notes payable and other short-term obligations $ 25,334 $ 30,226 Current maturities of long-term debt 11,230 11,824 Accounts payable 74,945 73,047 Accrued expenses and taxes, net 97,565 100,970 ------- ------- Total current liabilities 209,074 216,067 ------- ------- Other Liabilities: Deferred income taxes 22,588 27,780 Other 14,698 9,945 ------- ------- 37,286 37,725 ------- ------- Notes, Mortgage Notes and Obligations Payable, Less Current Maturities 243,961 240,396 ------- ------- 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; 15,965,585 and 15,883,427 shares issued 15,966 15,883 Special common stock, $1 par value; authorized 5,000,000 shares; 784,169 and 774,366 shares issued 784 774 Additional paid-in capital 135,028 134,690 Retained earnings 37,766 15,766 Cumulative translation, pension and other adjustments (3,212) (2,742) Less --treasury common stock at cost, 6,599,645 and 4,306,706 shares (65,805) (31,351) --treasury special common stock at cost, 276,910 and 276,784 shares (1,732) (1,729) ------- ------- Total stockholders' investment 118,795 131,291 ------- ------- $609,116 $625,479 ======= ======= 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, ------------------------ 1996 1995 1994 ---- ---- ---- (Amounts in Thousands) Cash Flows from operating activities: Net earnings $22,000 $15,000 $17,800 ------ ------ ------ Adjustments to reconcile net earnings to cash: Depreciation and amortization 23,726 18,977 17,960 Net gain on investments and marketable securities (750) (2,000) --- Extraordinary gain from debt retirements --- --- (250) Loss on business sold --- --- 1,750 Cumulative effect of an accounting change --- --- (400) Deferred federal income tax (benefit) provision before extraordinary items (1,800) 1,300 300 Deferred federal income tax provision on discontinued operations --- --- 2,200 Deferred federal income tax provision on extraordinary items --- --- 1,350 Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (3,626) 4,496 (5,501) Prepaids and other current assets 4,620 (289) (4,361) Inventories 12,196 5,820 (12,593) Accounts payable 2,090 (5,614) 6,364 Accrued expenses and taxes (8,840) (4,894) 4,242 Long-term assets, liabilities and other, net (312) 1,051 (2,682) ------ ------ ------ Total adjustments to net earnings 27,304 18,847 8,379 ------ ------ ------ Net cash provided by operating activities 49,304 33,847 26,179 ------ ------ ------ Cash Flows from investing activities: Capital expenditures (21,683) (16,091) (19,424) Net cash paid for businesses acquired --- (27,543) --- Proceeds from the sale of property and equipment 1,325 1,831 114 Purchase of investments and marketable securities (66,901) (104,762) (110,231) Proceeds from the sale of investments and marketable securities 82,435 112,173 62,929 Net cash proceeds relating to businesses sold or discontinued --- 1,129 12,465 Change in restricted investments and marketable securities --- (331) (2,475) Other, net (2,214) (1,499) 51 ------- ------- ------- Net cash used in investing activities (7,038) (35,093) (56,571) ------- ------- ------- Cash Flows from financing activities: Sale of Notes, net --- --- 209,195 Purchase of debentures and notes payable --- --- (191,582) Increase in borrowings 9,609 10,763 --- Payment of borrowings (13,701) (1,656) (8,962) Purchase of Nortek Common and Special Common Stock (34,822) (4,664) --- Other, net 479 (822) (29) ------- ------- ------- Net cash (used in) provided by financing activities (38,435) 3,621 8,622 ------- ------- ------- Net increase (decrease) in unrestricted cash and cash equivalents 3,831 2,375 (21,770) Unrestricted cash and cash equivalents at the beginning of the year 37,211 34,836 56,606 ------- ------- ------- Unrestricted cash and cash equivalents at the end of the year $ 41,042 $ 37,211 $ 34,836 ======= ======= ======= 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, 1996 ------------------------------------------------------- Cumulative Translation, Addi- Retained Pension Special tional Earnings and Other Common Common Paid-in (Accumulat- Adjust- Treasury Stock Stock Capital ed Deficit) ments Stock ----- ----- ------- ----------- ----- ----- (Amounts in Thousands) 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) 27,697 shares of special common stock converted into 27,697 shares of common stock 28 (28) --- --- --- --- 54,461 shares of common stock and 37,500 shares of special common stock issued upon exercise of stock options 55 38 338 --- --- --- 2,293,065 shares of treasury stock acquired --- --- --- --- --- (34,457) Translation adjustment --- --- --- --- 138 --- Pension adjustment --- --- --- --- (127) --- Unrealized decline in marketable securities --- --- --- --- (481) --- Net earnings --- --- --- 22,000 --- --- ------ --- ------- ------ ------ ------ Balance, December 31, 1996 $15,966 $784 $135,028 $37,766 $(3,212) $(67,537) ====== === ======= ====== ====== ======= 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 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. 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, 1996. Risks and Uncertainties The preparation of financial statements in conformity with generally accepted accounting principles involves estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expense during the reporting periods. Operating results in the future could vary from the amounts derived from such estimates and assumptions. Cash, Investments and Marketable Securities Cash equivalents consist of short-term highly liquid investments with original maturities of three months or less which are readily convertible into cash. The Company has classified as restricted (in current assets in the accompanying consolidated balance sheet) certain investments and marketable securities that are not fully available for use in its operations. At December 31, 1996, approximately $5,681,000 of 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 Cash Equivalents-- 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, 1996, the fair value of marketable securities approximated the amount on the Company's consolidated balance sheet. Long-Term Debt-- At December 31, 1996, the fair value of long-term indebtedness approximated the amount, before original issue discount, on the Company's consolidated balance sheet. (See Note 5.) Inventories Inventories in the accompanying consolidated balance sheet are valued at the lower of cost or market. At December 31, 1996 and 1995, approximately $61,641,000 and $69,967,000 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 $8,482,000 and $10,550,000 greater at December 31, 1996 and 1995, 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 financial statements of subsidiaries outside the United States are generally measured using the local currency as the functional currency. The Company translates the assets and liabilities of its foreign subsidiaries at the exchange rates in effect at year-end. Net sales and expenses are translated using average exchange rates in effect during the year. Gains and losses from foreign currency translation are credited or charged to 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 are provided on a straight-line basis over the estimated useful lives, which are generally as follows: Buildings and improvements 10-35 years Machinery and equipment, including leases 3-15 years Leasehold improvements term of lease Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized. When assets are sold, or otherwise disposed of, the cost and accumulated depreciation are eliminated and the resulting gain or loss is recognized. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 operations amounted to $2,970,000, $2,519,000 and $2,407,000 for 1996, 1995 and 1994, 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 analysis, the Company believes that no material impairment of goodwill exists at December 31, 1996. Recent Accounting Pronouncements On January 1, 1996, the Company adopted the accounting requirements of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." 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 application of SFAS No. 121 did not have a significant impact on the Company's results of operations or financial condition. On January 1, 1996, the Company adopted the accounting requirements of SFAS No. 123, "Stock-Based Compensation." SFAS No. 123 requires that employee stock- based compensation be either recorded or disclosed at its fair value. The Company will continue to account for stock-based compensation under Accounting Principles Board ("APB") No. 25 and will not adopt the new accounting provisions for stock-based compensation under SFAS No. 123, but will include the additional required disclosures. (See Note 6.) Net Earnings Per Share Net earnings per share amounts have been computed using the weighted average number of common and common equivalent shares outstanding during each year. Special Common Stock is treated as the equivalent of Common Stock in determining earnings per share results. 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. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 ("Rangaire"), all the capital stock of Best S.p.A. and related entities ("Best") and all the capital stock of Venmar Ventilation inc. ("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 $2,000,000, depending on subsequent operating results of such acquisitions. On March 31, 1994, the Company sold all the capital stock of one of its businesses for approximately $18,800,000 in cash and $6,000,000 in preferred stock of the purchaser. In the third quarter of 1995, the Company sold its investment in the preferred stock, 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 approximate unaudited pro forma net sales, operating earnings, earnings before extraordinary gain, and fully diluted earnings per share of the Company for the year ended December 31, 1995, as adjusted for the pro forma effect of acquisitions discussed above, assuming that these transactions occurred on January 1, 1995 was approximately $886,210,000, $47,355,000, $15,100,000, and $1.20, respectively. 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. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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, 1995, or which may be reported in the future. 3. Cash Flows Interest paid was $30,581,000, $23,228,000 and $22,119,000 in 1996, 1995 and 1994, 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 ---- ---- (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 preferred stock 2,874 --- Cash payments relating to businesses sold or discontinued, net (1,745) (4,831) ------ ------ Net cash proceeds relating to businesses sold or discontinued $ 1,129 $12,465 ====== ====== Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Significant non-cash financing and investing activities excluded from the accompanying consolidated statement of cash flows include capitalized lease additions of approximately $500,000 in 1996 and a decline of approximately $481,000, 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 1996, 1995 and 1994, respectively. 4. Income Taxes The following is a summary of the components of earnings before provision for income taxes and extraordinary gain: Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- (Amounts in Thousands) Domestic $32,500 $21,600 $23,100 Foreign 3,500 2,700 4,300 ------ ------ ------ $36,000 $24,300 $27,400 ====== ====== ====== The following is a summary of the provision (benefit) for income taxes before extraordinary gain included in the accompanying consolidated statement of operations: Year Ended December 31, ------------------------- 1996 1995 1994 ---- ---- ---- (Amounts in Thousands) Federal income taxes-- Current $12,950 $5,700 $ 7,125 Deferred (1,800) 1,300 300 ------ ----- ------ 11,150 7,000 7,425 Foreign 1,300 1,300 1,500 State 1,550 1,000 1,275 ------ ----- ------ $14,000 $9,300 $10,200 ====== ===== ====== Income tax payments, net of refunds, were approximately $18,611,000, $3,739,000 and $10,895,000 in 1996, 1995 and 1994, respectively. The following reconciles the federal statutory income tax rate to the effective tax rate for earnings before extraordinary gain of approximately 38.9%, 38.3% and 37.2% in 1996, 1995 and 1994, respectively. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- (Amounts in Thousands) Income tax provision before extraordinary gain at the Federal statutory rate $12,600 $8,505 $ 9,590 Net change from statutory rate: Change in valuation reserve, net (481) (1,100) (1,625) State taxes, net of federal tax effect 1,008 650 829 Amortization not deductible for tax purposes 1,040 868 737 Business sold --- --- 613 Product development tax credit from foreign operations (478) --- --- Tax effect on foreign income 56 79 164 Other, net 255 298 (108) ------ ----- ------ $14,000 $9,300 $10,200 ====== ===== ====== The tax effect of temporary differences which gave rise to significant portions of deferred income tax assets and liabilities as of December 31, 1996 and December 31, 1995 are as follows: December 31, --------------- 1996 1995 ---- ---- (Amounts in Thousands) Prepaid (Deferred) Income Tax Assets Arising From: Accounts receivable $ 1,246 $ 1,425 Inventory (610) (577) Insurance reserves 2,972 6,036 Other reserves, liabilities and assets, net 16,392 12,216 ------ ------ $20,000 $19,100 ====== ====== Deferred (Prepaid) Income Tax Liabilities Arising From: Property and equipment, net $15,400 $15,233 Prepaid pension assets (593) 1,323 Insurance reserves (10) (273) Other reserves, liabilities and assets, net 5,787 8,797 Capital loss carryforward (6,462) (7,260) Other tax assets (1,772) (1,658) Valuation allowances 10,238 11,618 ------ ------ $22,588 $27,780 ====== ====== Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) At December 31, 1996, the Company has U.S. Federal capital loss carryforwards of approximately $18,500,000, of which approximately $16,600,000 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. 5. Notes, Mortgage Notes and Obligations Payable Short-term obligations at December 31, 1996 and 1995 consist of the following: December 31, ------------ 1996 1995 ---- ---- (Amounts in Thousands) Secured revolving lines of credit of a Canadian subsidiary $ 2,472 $ 4,173 Secured lines of credit and bank advances of the Company's European subsidiaries 22,118 21,972 Other secured revolving lines of credit of one of the Company's U. S. subsidiaries 742 3,830 Other obligations 2 251 ------ ------ $25,334 $30,226 ====== ====== These short-term obligations principally relate to subsidiaries acquired in 1995 and at December 31, 1996 are secured by approximately $56,900,000 of accounts receivable and inventory. These borrowings have an average weighted interest rate of approximately 10.925%. Notes, mortgage notes and obligations payable in the accompanying consolidated balance sheet at December 31, 1996 and 1995 consist of the following: December 31, ------------ 1996 1995 ---- ---- (Amounts in Thousands) Mortgage notes payable, net of $316,000 of unamortized discount in 1996 $ 20,878 $ 17,055 Other, net of $548,000 and $750,000 of unamortized discount 17,209 18,185 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes"), net of unamortized original issue discount of $1,396,000 and $1,520,000 217,104 216,980 ------- ------- 255,191 252,220 Less amounts included in current liabilities 11,230 11,824 ------- ------- $243,961 $240,396 ======= ======= Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 February 7, 1997, approximately $683,607 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.) Mortgage notes payable of approximately $20,879,000 outstanding at December 31, 1996 include various mortgage notes and other related indebtedness payable in installments through 2006 and bearing interest at rates ranging from 6.25% to 11.5% and is collateralized by property and equipment with an aggregate net book value of approximately $42,900,000 at December 31, 1996. Other obligations of approximately $17,209,000 outstanding at December 31, 1996 include borrowings relating to equipment purchases and other borrowings bearing interest at rates primarily ranging between 5.6% to 14% and maturing at various dates through 2002. Approximately $12,599,000 of such indebtedness is collateralized by property and equipment with an aggregate net book value of approximately $29,072,000 at December 31, 1996. The following is a summary of maturities of all of the Company's debt obligations, excluding unamortized debt discount, due after December 31, 1997: (Amounts in Thousands) 1998 $ 7,277 1999 5,056 2000 4,789 2001 3,245 Thereafter 225,854 ------- $246,221 ======= Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Amortization of discount and deferred costs, net of amortization of discount on marketable securities in 1996, was approximately $1,200,000, $1,100,000 and $1,400,000 in 1996, 1995 and 1994, respectively. 6. Common Stock, Special Common Stock and Stock Options 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. On April 1, 1996, the Company extended and amended its shareholder rights plan to March 31, 2006. Under the amended plan, each right previously issued under the plan in effect to date, or subsequently issued under the amended and restated plan, entitles shareholders to buy 1/100 of a share of a new series of preference stock of Nortek at an exercise price of $72 per share, subject to adjustments for stock dividends, splits and similar events. The rights, that are not currently exercisable, are attached to each share of Common Stock and may be redeemed by the Directors at $.01 per share at any time. After a shareholder acquires beneficial ownership of 17% or more of the Company's Common Stock and Special Common Stock, the rights will trade separately and become exercisable entitling a rights holder to acquire additional shares of the Company's Common Stock having a market value equal to twice the amount of the exercise price of the right. In addition, after a person or group ("Acquiring Company") commences a tender offer or announces an intention to acquire 30% or more of the Company's Common Stock and Special Common Stock, the rights will trade separately and, under certain circumstances, will permit each rights 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, 1996, a total of 1,428,869 shares of Common Stock was reserved as follows: Stock option plans 644,700 Conversion of Special Common Stock 784,169 --------- 1,428,869 ========= At December 31, 1996, 281,000 shares of Special Common Stock were reserved for stock option plans. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The Company has several stock option plans which provide for the granting of options to certain officers, employees and non-employee directors of the Company. Options granted under the plans vest over periods ranging up to five years and expire ten years from the date of grant. At December 31, 1996, 15,900 additional options are available for grant under these plans. Options for 27,500 and 200,100 shares of Common and Special Common Stock became exercisable during 1996 and 1995, respectively. The following summarizes the Common and Special Common Stock option transactions for the three years ended December 31, 1996: Weighted Average Number Option Price Exercise of Shares Per Share Price --------- --------- ----- Options outstanding at December 31, 1993 503,900 $2.25-$15.69 $ 6.89 Exercised (9,800) 2.875 2.88 ------- ----------- ----- Options outstanding at December 31, 1994 494,100 $2.25-$15.69 $ 6.97 Exercised (42,600) 2.25-2.875 2.81 ------- ----------- ----- Options outstanding at December 31, 1995 451,500 $2.25-$15.69 $ 7.36 Granted 275,000 14.75 14.75 Exercised (95,200) 2.25-7.9375 5.07 Canceled (2,500) 8.75 8.75 ------- ------------ ----- Options outstanding at December 31, 1996 628,800 $2.875-$15.69 $10.93 ======= ============ ===== 51,800 of the 628,800 options outstanding at December 31, 1996 have an exercise price of $2.875, with a weighted average contractual life of 2.8 years. All of these options are exercisable. 296,000 options have exercise prices between $6.125 and $9.38 with a weighted average exercise price of $8.69 and a weighted average remaining contractual life of 6.5 years. All of these options are exercisable. The remaining 281,000 options, 6,000 of which are exercisable, have exercise prices between $14.75 and $15.69, with a weighted average exercise price of $14.77 and a remaining contractual life of 9.8 years. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The Company accounts for stock option plans under APB Opinion No. 25, under which no compensation cost has been recognized since options are granted with exercise prices equal to the fair market value of the Common Stock at the date of grant. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's unaudited pro forma net earnings and fully diluted earnings per share for the year ended December 31, 1996 would have been approximately $21,634,000 and $2.02, respectively. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1996: risk-free interest rate of 7%; expected life of 5 years; expected volatility of 33%; dividend yield of 0%. During 1995 and 1996, the Company's Board of Directors authorized a number of programs to purchase shares of the Company's Common and Special Common Stock, subject to market conditions and cash availability. The programs included the purchase of 1,189,809 shares of its common stock, or approximately 10.6% of its outstanding shares on April 26, 1996 for approximately $20,200,000 from three of its directors who also resigned from the Company's Board of Directors, and the most recent program which was announced on October 28, 1996, to purchase up to 500,000 shares of the Company's Common and Special Common Stock in open- market or negotiated transactions subject to market conditions and cash availability. From November 16, 1995 to December 31, 1996, the Company purchased 2,476,719 shares of its Common and Special Common Stock for approximately $36,319,000 and accounted for such share purchases as Treasury Stock. Had these shares been purchased as of January 1, 1995, unaudited pro forma net earnings and fully diluted net earnings per share would have been: Year Year Ended Ended Dec. 31, Dec. 31, 1996 1995 ---- ---- (Amounts in Thousands except per share amounts) Net Earnings $21,600 $13,800 ====== ====== Fully diluted net earnings per share $ 2.14 $ 1.37 ====== ====== As of February 7, 1997, the Company purchased during the first quarter, approximately 280,700 shares of its Common and Special Common Stock for approximately $6,530,000 in cash, in negotiated and open market transactions. 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 $4,420,000 in 1996, $1,377,000 in 1995 and $2,883,000 in 1994. 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. On January 1, 1996, the Company adopted a supplemental retirement plan for certain officers. The actuarial present value of the unfunded accumulated benefit obligation and the pension costs of this plan have been included in the tables below. The Company's net expense for its defined benefit plans for 1996, 1995 and 1994 consists of the following components: Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- (Amounts in Thousands) Service costs $ 453 $1,273 $1,647 Interest cost 2,543 2,364 2,261 Actual net income on plan assets (4,345) (3,204) (2,155) Net amortization and deferred items 2,341 790 10 Net gain from freezing plan benefits --- (581) --- ----- ----- ----- Total expense $ 992 $ 642 $1,763 ===== ===== ===== The following sets forth the funded status of the Company's defined benefit plans and amounts recognized in the Company's consolidated balance sheet at December 31, 1996 and 1995: Plan Assets Exceeding Benefit Obligations ------------------- 1996 1995 ---- ---- (Amounts in Thousands) Actuarial present value of benefit obligations at September 30: Vested benefits and accumulated benefit obligation $23,945 $22,259 ------ ------ Plan assets at fair value at September 30 28,040 25,673 Plan assets in excess of the accumulated benefit obligation 4,095 3,414 Unrecognized net gain (452) --- ------ ------ $ 3,643 $ 3,414 ====== ====== Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Benefit Obligations Exceeding Plan Assets --------------------- 1996 1995 ---- ---- (Amounts in Thousands) Actuarial present value of benefit obligations at September 30: Vested benefits $ 9,707 $5,069 Non-vested benefits 520 --- ------ ----- Accumulated benefit obligation 10,227 5,069 Effect of projected future compensation levels 2,439 --- ------ ----- Projected benefit obligation 12,666 5,069 ------ ----- Plan assets at fair value at September 30 4,813 4,407 Projected obligation in excess of plan assets (7,853) (662) Unrecognized net loss 1,043 916 Unrecognized prior service costs 6,335 --- Additional minimum liability (4,939) (916) ------ ----- $(5,414) $ (662) ====== ===== 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 1996 and 1995 and 8 percent and 5 1/2 percent, respectively, in 1994. The expected long-term rate of return on assets was 8 1/2 percent in 1996, 1995 and 1994. Recognition of a minimum pension liability and an intangible asset for certain plans resulted in a reduction in the Company's stockholders' investment of approximately $1,043,000, $916,000 and $672,000 in 1996, 1995 and 1994, respectively. 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. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) At December 31, 1996, 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 $26,761,000 at December 31, 1996. The obligations are payable as follows: 1997 $ 4,916,000 1998 4,173,000 1999 3,104,000 2000 1,953,000 2001 1,319,000 Thereafter 11,296,000 Certain of these lease agreements provide for increased payments based on changes in the consumer price index. Rental expense charged to operations in the accompanying consolidated statement of operations was approximately $6,725,000, $6,900,000, and $7,000,000, for the years ended December 31, 1996, 1995 and 1994, respectively. Under certain of these lease agreements, the Company and its subsidiaries are also obligated to pay insurance and taxes. The Company is subject to other contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, product liability, warranty and modification, adjustment or replacement of component parts of units sold, which may include product recalls. The Company has used various substances in its products and manufacturing operations which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers' compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts provided, will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 9. 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 1996 and 1995: For the year ended December 31, 1996: Net Pre-Tax Identifiable Sales Earnings Assets ----- -------- ------------ (Amounts in Thousands) Geographic areas: Domestic operations $834,789 $65,538 $334,927 European operations 82,363 3,520 73,285 Other foreign operations 67,503 4,886 64,609 Eliminations (14,857) --- (5,663) ------- ------ ------- 969,798 73,944 467,158 Unallocated --- (13,892) 141,958 Interest expense --- (30,113) --- Interest income --- 5,311 --- Net gain on investment and marketable securities --- 750 --- ------- ------ ------- Consolidated Totals $969,798 $36,000 $609,116 ======= ====== ======= For the year ended December 31, 1995: Net Pre-Tax Identifiable Sales Earnings Assets ----- -------- ------------ (Amounts in Thousands) 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. The Company operates internationally and is exposed to market risks from changes in foreign exchange rates. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different geographical regions. At December 31, 1996, the Company had no significant concentrations of credit risk. Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 10. Net Gain or 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. At December 31, 1996 and 1995, the reduction in the Company's stockholders' investment under the new accounting method for gross unrealized losses was approximately $891,000 and $410,000, respectively. At December 31, 1996, there were no gross unrealized gains on the Company's marketable securities. The Company's marketable securities at December 31, 1996 consist primarily of U. S. Government Treasury Notes and bank issued money market instruments due as follows: Fair Principal Amortized Market Amount Cost Value ------ ---- ----- (Amounts in Thousands) U. S. Government Notes: Due in 1-5 years $11,000 $11,207 $10,806 Due in 5-10 years 4,000 4,123 3,880 ------ ------ ------ 15,000 15,330 14,686 Bank issued Money Market Instruments: Due within 1 year 35,900 36,612 36,365 ------ ------ ------ $50,900 $51,942 $51,051 ====== ====== ====== 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) 12. Accrued Expenses and Taxes, Net Accrued expenses and taxes, net, consist of the following at December 31, 1996 and 1995: December 31, ------------- 1996 1995 ---- ---- (Amounts in Thousands) Insurance $12,084 $ 22,496 Payroll, management incentive and accrued employee benefits 25,939 17,463 Interest 7,749 8,077 Accrued product warranty expense 8,134 6,850 Other, net 43,659 46,084 ------ ------- $97,565 $100,970 ====== ======= 13. Summarized Quarterly Financial Data (Unaudited) The following summarizes unaudited quarterly financial data for the years ended December 31, 1996 and December 31, 1995: For the Quarters Ended ---------------------- March 30 June 29 Sept. 28 Dec. 31 -------- ------- -------- ------- (In Thousands Except Per Share Amounts) 1996 Net sales $220,985 $260,235 $248,227 $240,351 Gross profit 55,398 68,612 66,419 69,494 Net earnings 2,400 5,800 6,500 7,300 Net earnings per share: Primary .20 .55 .64 .72 Fully diluted .20 .55 .64 .72 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 Net earnings 2,500 3,200 5,200 4,100 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) See Notes 2 and 11 regarding certain other quarterly transactions included in the operating results in the above table. Increased net sales in 1996 as compared to 1995 reflect the effect of businesses acquired in the fourth quarter of 1995. Operating results in the third quarter of 1996 were adversely affected by an extended shutdown period and other factors by the Company's European subsidiaries. Net sales and gross profit margins increased in the fourth quarter of 1996 from the fourth quarter of 1995. Overall, these increases are due in part to the effect of continued strong shipments (on a seasonal basis) in several of the Company's businesses, especially ventilation and HVAC products and the positive effect of the relative mix of products sold and changes in productivity levels. (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 balance sheets of Nortek, Inc. (a Delaware corporation) and subsidiaries listed in Item 14(a)(1) of this Form 10- K as of December 31, 1996 and 1995, and the related statements of operations, shareholders' investment and cash flows for each of the three years in the period ended December 31, 1996. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nortek, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The 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 ---------------------- ARTHUR ANDERSEN LLP Boston, Massachusetts, February 12, 1997 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, 1994: Allowances for doubtful accounts and sales allowances $4,198 $ --- $ 762 $ 147(b) $(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(b) $(1,661)(a) $4,546 ===== ===== ===== ===== ====== ===== For the year ended December 31, 1996: Allowances for doubtful accounts and sales allowances $4,546 $ --- $1,701 $ 119 $(2,010) $4,356 ===== ===== ===== ===== ====== ===== (a) Amounts written off, net of recoveries. (b) 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 September 19, 1996) (Exhibit 3.3 to Form 10-Q filed November 5, 1996, File No. 1-6112). 4.1 Second Amended and Restated Rights Agreement dated as of April 1, 1996 between the Company and State Street Bank and Trust Company, as Rights Agent (Exhibit 1 to Form 8-K filed April 2, 1996, File No. 1-6112). 4.2 Indenture dated as of February 14, 1994 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 9 7/8% Senior Subordinated Notes due 2004 (Exhibit 4.5 to Form 10-K filed March 25, 1994, File No. 1-6112). **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). *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 1996 1995 1994 ---- ---- ---- 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 16,666,825 16,625,166 16,609,828 Less average common and special common shares held in the Treasury (6,181,480) (4,180,560) (4,066,611) ---------- ---------- ---------- Weighted average number of common and special common shares outstanding during the period 10,485,345 12,444,606 12,543,217 Dilutive effect of stock options considered common stock equivalents 155,513 124,686 163,894 ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period 10,640,858 12,569,292 12,707,111 ========== ========== ========== 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 10,485,345 12,444,606 12,543,217 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 236,813 175,153 206,305 Dilutive effect of assuming conversion of the Company's 7-1/2% convertible debentures --- --- 394,792 ---------- ---------- ---------- 10,722,158 12,619,759 13,144,314 ========== ========== ========== 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, 1996 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 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 Best S.p.A. Italy Best Deutschland GmbH Germany Elektromec S.p.A. 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 12, 1997, 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 ---------------------- ARTHUR ANDERSEN LLP Boston, Massachusetts, February 18, 1996 EX-27 5
5 1000 YEAR DEC-31-1996 DEC-31-1996 41,042 56,732 126,532 4,356 97,658 352,548 254,064 112,645 609,116 209,074 243,961 0 0 16,750 102,045 609,116 969,798 969,798 709,875 709,875 0 0 30,113 36,000 14,000 22,000 0 0 0 22,000 2.07 2.05
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