-----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, EGfMQydtHr0HpGWCpgxMLU4aR2RfLNo8kN8AvsDgVPkC+SoCZvBOqi6GwaGeFaX1 w4HFHF5Sk5hP2lKVU4PIVw== 0000072423-97-000008.txt : 19970513 0000072423-97-000008.hdr.sgml : 19970513 ACCESSION NUMBER: 0000072423-97-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970512 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06112 FILM NUMBER: 97600946 BUSINESS ADDRESS: STREET 1: 50 KENNEDY PLZ CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4017511600 MAIL ADDRESS: STREET 1: 50 KENNEDY PLAZA CITY: PROVIDENCE STATE: RI ZIP: 02903 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 29, 1997 --------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- --------------------- Commission File No. 1-6112 -------------------------------------------------------- NORTEK, INC. - --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 05-0314991 - --------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 50 Kennedy Plaza, Providence, RI 02903-2360 - --------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (401) 751-1600 - --------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - --------------------------------------------------------------------------- (Former name, former address and former fiscal year if changed since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ----------- The number of shares of Common Stock outstanding as of April 25, 1997 was 9,102,133. The number of shares of Special Common Stock outstanding as of April 25, 1997 was 491,846. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollar Amounts in Thousands) March 29, Dec. 31, 1997 1996 ---- ---- (Unaudited) ASSETS ------ Current Assets: Unrestricted-- Cash and cash equivalents $ 85,520 $ 41,042 Marketable securities available for sale 137,894 51,051 Restricted-- Cash and marketable securities at cost which approximates market 5,756 5,681 Accounts receivable, less allowances of $5,004 and $4,356 134,116 122,176 Inventories: Raw materials 34,219 36,765 Work in process 12,093 12,717 Finished goods 59,674 48,176 ------- ------- 105,986 97,658 ------- ------- Prepaid expenses 5,802 5,031 Other current assets 15,204 9,909 Prepaid income taxes 20,000 20,000 ------- ------- Total Current Assets 510,278 352,548 ------- ------- Property and Equipment, at cost: Land 7,039 7,046 Buildings and improvements 72,199 72,954 Machinery and equipment 176,120 174,064 ------- ------- 255,358 254,064 Less--Accumulated depreciation 115,602 112,645 ------- ------- Total Property and Equipment, net 139,756 141,419 ------- ------- Other Assets: Goodwill, less accumulated amortiza- tion of $27,622 and $26,948 89,501 91,578 Deferred debt expense 11,308 6,647 Other 20,224 16,924 ------- ------- 121,033 115,149 ------- ------- $771,067 $609,116 ======= ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Continued) (Dollar Amounts in Thousands) March 29, Dec. 31, 1997 1996 LIABILITIES AND STOCKHOLDERS' INVESTMENT ---- ---- - ---------------------------------------- (Unaudited) Current Liabilities: Notes payable and other short- term obligations $ 24,219 $ 25,334 Current maturities of long-term debt 19,316 11,230 Accounts payable 83,299 74,945 Accrued expenses and taxes, net 89,426 97,565 ------- ------- Total Current Liabilities 216,260 209,074 ------- ------- Other Liabilities: Deferred income taxes 17,821 17,637 Other 19,882 19,649 ------- ------- 37,703 37,286 ------- ------- Notes, Mortgage Notes and Obligations Payable, less current maturities 402,134 243,961 ------- ------- Stockholders' Investment: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common Stock, $1 par value; authorized 40,000,000 shares, 16,020,570 shares and 15,965,585 shares issued 16,021 15,966 Special Common Stock, $1 par value; authorized 5,000,000 shares, 779,311 shares and 784,169 shares issued 779 784 Additional paid-in capital 135,311 135,028 Retained earnings 41,466 37,766 Cumulative translation, pension and other adjustments (4,536) (3,212) Less - treasury common stock at cost, 6,872,470 shares and 6,599,645 shares (72,142) (65,805) - treasury special common stock at cost, 284,985 shares and 276,910 shares (1,929) (1,732) ------- ------- Total Stockholders' Investment 114,970 118,795 ------- ------- $771,067 $609,116 ======= ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands Except Per Share Amounts) For The Three Months Ended ------------------ March 29, March 30, 1997 1996 ---- ---- (Unaudited) Net Sales $219,627 $220,985 ------- ------- Costs and Expenses: Cost of products sold 160,070 165,587 Selling, general and administrative expense 47,218 45,410 ------- ------- 207,288 210,997 ------- ------- Operating earnings 12,339 9,988 Interest expense (7,800) (7,809) Interest income 1,286 1,921 Net gain on investments and marketable securities 175 --- ------- ------- Earnings before provision for income taxes 6,000 4,100 Provision for income taxes 2,300 1,700 ------- ------- Net Earnings $ 3,700 $ 2,400 ======= ======= Net Earnings Per Share: Primary $ 0.37 $ .20 ======= ======= Fully diluted $ 0.37 $ .20 ======= ======= Weighted Average Number of Shares: Primary 9,964 11,841 ====== ======= Fully diluted 9,964 11,867 ====== ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) For the Three Months Ended ------------------ March 29, March 30, 1997 1996 ---- ---- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 3,700 $ 2,400 ------- ------- Adjustments to reconcile net earnings to cash: Depreciation and amortization 5,537 5,596 Non-cash interest expense, net 320 325 Net gain on investments and marketable securities (175) --- Deferred federal income tax provision 400 600 Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (12,662) (15,529) Prepaids and other current assets (2,507) 308 Inventories (8,850) (6,127) Accounts payable 10,243 11,026 Accrued expenses and taxes (9,809) (14,086) Long-term assets, liabilities and other, net (1,575) (436) ------- ------- Total adjustments to net earnings (19,078) (18,323) ------- ------- Net Cash Used in Operating Activities (15,378) (15,923) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,774) (2,877) Purchase of investments and marketable securities (111,401) (10,173) Proceeds from sale of investments and marketable securities 20,940 22,677 Other, net (967) (303) ------- ------- Net Cash (Used in) Provided by Investing Activities (96,202) 9,324 ------- ------- The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) (Continued) For the Three Months Ended ------------------ March 29, March 30, 1997 1996 ---- ---- (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Sale of Notes $169,395 $ --- Increase in borrowings 3,862 11,632 Payment of borrowings (11,035) (6,530) Purchase of Nortek Common and Special Common Stock (6,534) (8,235) Other, net 370 7 ------- ------- Net Cash Provided by (Used in) Financing Activities 156,058 (3,126) ------- ------- Net increase (decrease) in unrestricted cash and investments 44,478 (9,725) Unrestricted cash and investments at the beginning of the period 41,042 60,079 ------- ------- Unrestricted cash and investments at the end of the period $ 85,520 $ 50,354 ======= ======= Interest paid $ 12,024 $ 13,316 ======= ======= Income taxes paid, net $ 835 $ 3,211 ======= ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Nortek, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Investment For the Three Months Ended March 29, 1997 and March 30, 1996 (Dollar Amounts in Thousands) Cumulative Addi- Translation, Special tional Pension Common Common Paid-in Retained and Other Treasury Stock Stock Capital Earnings Adjustments Stock ----- ----- ------- --------- ---------- ----- (Unaudited) Balance, December 31, 1995 $15,883 $774 $134,690 $15,766 $(2,742) $(33,080) 11,039 shares of special common stock converted into 11,039 shares of common stock 11 (11) --- --- --- --- 3,000 shares of common stock issued upon exercise of stock options 3 --- 4 --- --- --- 716,831 shares of treasury stock acquired --- --- --- --- --- (8,046) Translation adjustment --- --- --- --- 75 --- Unrealized decline in the value of marketable securities --- --- --- --- (403) --- Net earnings --- --- --- 2,400 --- --- ------ --- ------- ------ ------ ------- Balance, March 30, 1996 $15,897 $763 $134,694 $18,166 $(3,070) $(41,126) ====== === ======= ====== ====== ======= Balance, December 31, 1996 $15,966 $784 $135,028 $37,766 $(3,212) $(67,537) 10,666 shares of special common stock converted into 10,666 shares of common stock 11 (11) --- --- --- --- 44,319 shares of common stock and 5,808 shares of special common stock issued upon exercise of stock options 44 6 283 --- --- --- 280,900 shares of treasury stock acquired --- --- --- --- --- (6,534) Translation adjustment --- --- --- --- (1,386) --- Unrealized increase in the value of market able securities --- --- --- --- 62 --- Net earnings --- --- --- 3,700 --- --- Balance, March 29, ------- ---- -------- ------- ------- -------- 1997 $16,021 $779 $135,311 $41,466 $(4,536) $(74,071) ======= ==== ======= ====== ====== ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 29, 1997 AND MARCH 30, 1996 (A) The unaudited condensed consolidated financial statements presented ("Unaudited Financial Statements") have been prepared by Nortek, Inc. and include all of its wholly-owned subsidiaries (the "Company") after elimination of intercompany accounts and transactions, without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, although, the Company believes that the disclosures included are adequate to make the information presented not misleading. Certain amounts in the Unaudited Financial Statements for the prior periods have been reclassified to conform to the presentation at March 29, 1997. It is suggested that these Unaudited Financial Statements be read in conjunction with the financial statements and the notes included in the Company's latest Annual Report on Form 10-K. (B) In March 1997, the Company sold, in a private offering (under an exemption pursuant to Securities and Exchange Commission ("SEC") Rule 144A) to qualified institutional investors $175,000,000 principal amount of 9.25% Series A Senior Notes due March 2007 ("9.25% Series A Notes") at a slight discount. The net proceeds will be used to refinance approximately $47,200,000 of outstanding indebtedness of the Company's subsidiaries and for acquisitions and other general corporate purposes, including investment in plant and equipment. In connection with the sale of the 9.25% Series A Notes, such qualified investors received registration rights. On April 30, 1997, the Company filed a registration statement with the SEC, which was declared effective on May 2, 1997, and the Company has commenced an offer to exchange the 9.25% Series A Notes for an equal principal amount of 9.25% Series B Senior Notes due March 2007 ("9.25% Series B Notes"). The terms of the 9.25% Series B Notes are similar to the terms of the 9.25% Series A Notes, except that the 9.25% Series B Notes have been registered with the SEC. The Company's Board of Directors has authorized a number of programs to purchase shares of the Company's Common and Special Common Stock since November 16, 1995. The most recent of these programs was announced on April 30, 1997, to purchase up to 500,000 shares of the Company's Common and Special Common Stock in open market or negotiated transactions, subject to market conditions, cash availability and provisions of the Company's outstanding debt instruments. As of May 5, 1997, no purchases have been made under this latest program. For the period from November 16, 1995 to April 25, 1997, the Company purchased approximately 2,800,000 shares of its Common and Special Common Stock for approximately $43,831,000 and accounted for such share purchases as Treasury Stock. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 29, 1997 AND MARCH 30, 1996 (Continued) At April 25, 1997, approximately $1,518,900 was available for the payment of cash dividends or stock purchases under the terms of the Company's most restrictive Indenture. The following presents the approximate unaudited pro forma net earnings and fully diluted earnings per share of the Company for the three months ended March 29, 1997 and March 30, 1996, and the year ended December 31, 1996, as adjusted for the pro forma effect of the Treasury Stock purchases, the debt offering and the debt refinancing, assuming these transactions occurred at January 1, 1996: Three Months Ended Year Ended March 29, March 30, Dec. 31, 1997 1996 1996 ------------- ---------- --------- (Amounts in Thousands except per share amounts) Net earnings $2,900 $1,100 $17,500 ===== ===== ====== Fully diluted net earnings per share $ .29 $ .11 $ 1.78 ===== ===== ====== In computing the pro forma net earnings, interest expense on the indebtedness refinanced with funds from the debt offering was excluded at an average interest rate of approximately 9.6% for all periods presented, net of the tax effect. Interest expense was included on the 9.25% Series A Notes at a rate of approximately 9.25%, plus amortization of deferred debt expense and debt discount for all periods presented, net of the tax effect. Interest income on the excess cash from the offering was included at a rate of 5.5%. (C) At March 29, 1997 and December 31, 1996, the reduction in the Company's stockholders' investment for gross unrealized losses on marketable securities was approximately $829,000 and $891,000, respectively. (D) The tax effect of temporary differences which gave rise to significant portions of deferred income tax assets and liabilities as of March 29, 1997 and December 31, 1996 is as follows: NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 29, 1997 AND MARCH 30, 1996 (Continued) March 29, Dec. 31, 1997 1996 ---- ---- (Amounts in Thousands) U. S. Federal Prepaid (Deferred) Income Tax Assets Arising From: Accounts receivable $ 1,507 $ 1,246 Inventory (301) (610) Insurance reserves 4,985 4,985 Other reserves, liabilities and assets, net 13,809 14,379 ------ ------ $20,000 $20,000 ====== ====== Deferred (Prepaid) Income Tax Liabilities Arising From: Property and equipment, net $15,435 $15,400 Prepaid pension assets 735 841 Other reserves, liabilities and assets, net (357) (608) Capital loss carryforward (6,400) (6,462) Other, net (1,795) (1,772) Valuation allowances 10,203 10,238 ------ ------ $17,821 $17,637 ====== ====== At March 29, 1997, the Company has a capital loss carryforward of approximately $18,300,000, of which approximately $16,400,000 expires in 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. The following reconciles the federal statutory income tax rate to the effective tax rate from continuing operations of approximately 38.3% and 41.5% in 1997 and 1996, respectively. Three Months Ended ------------------ March 29, March 30, 1997 1996 ---- ---- (Amounts in Thousands) Income tax provision at the Federal statutory rate $2,100 $1,435 Net Change from Statutory Rate: Change in valuation reserve, net (126) (171) State taxes, net of federal tax effect 65 162 Amortization not deductible for tax purposes 267 246 Other nondeductible items 135 68 Product development tax credit from foreign operations (82) (115) Tax effect on foreign income (59) 75 ----- ----- $2,300 $1,700 ===== ===== NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 29, 1997 AND MARCH 30, 1996 (Continued) (E) Net earnings per share ("EPS") 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. In March 1997, the FASB released SFAS No. 128, "Earnings Per Share," which will become effective December 31, 1997. As a result, the Company's reported earnings per share for 1996 and 1997 will be restated in the Company's annual report on Form 10-K for the year ended December 31, 1997. The unaudited pro forma effect of this accounting change on reported earnings per share is as follows: Year For the Three Months Ended Ended ----------------------------------------- March 29, March 30, Dec. 31, Per Share Amounts 1997 1996 1996 ---- ---- ---- Primary EPS as reported $ .37 $ .20 $2.07 Effect of SFAS No. 128 .01 .01 .03 ----- --------- ------ Basic EPS as restated $ .38 $ .21 $2.10 ===== ========= ====== Fully diluted EPS as reported $ .37 $ .20 $2.05 Effect of SFAS No. 128 --- --- .02 ----- ----- ---- Diluted EPS as restated $ .37 $ .20 $2.07 ===== ===== ==== NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED MARCH 29, 1997 AND THE FIRST QUARTER ENDED MARCH 30, 1996 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. Results of Operations The tables below and on the next page set forth, for the periods presented, (a) certain consolidated operating results, (b) the change in the amount and the percentage change of such results as compared to the prior comparable period, (c) the percentage which such results bear to net sales and (d) the change of such percentages as compared to the prior comparable period. The results of operations for the first quarter ended March 29, 1997 are not necessarily indicative of the results of operations to be expected for any other interim period or the full year. Change in First Quarter Ended First Quarter 1997 ------------------- as Compared to 1996 March 29, March 30, ------------------ 1997 1996 $ % ---- ---- ----- ------ (Dollar amounts in millions) Net sales $219.6 $221.0 $(1.4) (.6)% Cost of products sold 160.1 165.6 5.5 3.3 Selling, general and administrative expense 47.2 45.4 (1.8) (4.0) Operating earnings 12.3 10.0 2.3 23.0 Interest expense (7.8) (7.8) --- Interest income 1.3 1.9 (.6) (31.6) Net gain on investments and marketable securities .2 --- .2 --- Earnings before provision for income taxes 6.0 4.1 1.9 46.3 Provision for income taxes 2.3 1.7 (.6) (35.3) ----- ----- ---- ----- Net earnings $ 3.7 $ 2.4 $ 1.3 54.2% ===== ===== ==== ===== NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED MARCH 29, 1997 AND THE FIRST QUARTER ENDED MARCH 30, 1996 (Continued) Percentage of Net Sales Change in First Quarter Ended Percentage ------------------- for the First March 29, March 30, Quarter 1997 1997 1996 as compared to 1996 ---- ---- ------------------- Net sales 100.0% 100.0% --- Cost of products sold 72.9 74.9 2.0 Selling, general and administrative expense 21.5 20.5 (1.0) Operating earnings 5.6 4.6 1.0 Interest expense (3.6) (3.5) (.1) Interest income .6 .8 (.2) Net gain on investments and marketable securities .1 --- .1 Earnings before provision for income taxes 2.7 1.9 .8 Provision for income taxes 1.0 .8 (.2) ----- ---- ---- Net earnings 1.7% 1.1% .6 ===== ==== ==== The following presents the net sales for the Company's principal product groups for the first quarter ended March 29, 1997 as compared to the first quarter ended March 30, 1996 and the amount and the percentage change of such results as compared to the prior comparable period. First Quarter Ended ------------------- March 29, March 30, Increase/(Decrease) l997 1996 $ % ---- ---- ----- ----- (000's omitted) Net Sales: Residential Building Products $100,386 $ 98,643 $ 1,743 1.8% Air Conditioning and Heating Products 91,079 88,354 2,725 3.1 Plumbing Products 28,162 33,988 (5,826) (17.1) ------- ------- ------ ----- Total $219,627 $220,985 $(1,358) (.6)% ======== ======== ======== ====== Certain amounts in the table for the prior period have been reclassified to conform to the classifications for the first quarter ended March 29, 1997. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED MARCH 29, 1997 AND THE FIRST QUARTER ENDED MARCH 30, 1996 (Continued) Operating Results - ----------------- Net sales decreased approximately $1,358,000, or approximately .6%, in the first quarter of 1997 as compared to the first quarter of 1996, principally as a result of lower sales volume of certain products including the reduction of certain product line offerings (approximately $1,604,000 of the decrease) in the Plumbing Products Group and by a one-week shorter shipping period in the first quarter of 1997. This decrease was partially offset by increased sales volume of residential air conditioning and heating ("HVAC") products and residential building products and increased shipments of new and replacement HVAC products to manufactured housing customers. Cost of products sold as a percentage of net sales decreased from approximately 74.9% in the first quarter of 1996 to approximately 72.9% in the first quarter of 1997. This decrease in the percentage principally resulted from a reduction in cost in the first quarter of 1997 of certain raw materials and components compared to the first quarter of 1996 and decreased labor and overhead costs as a percentage of net sales in the Air Conditioning and Heating Products Group due to the increased volume and improved efficiency. These decreases were partially offset by increased overhead costs in the Plumbing Products Group, in part, reflecting lower sales levels. Overall, changes in cost of products sold as a percentage of net sales for one period as compared to another period may reflect a number of factors, including changes in the relative mix of products sold, the effect of changes in sales prices, the unit cost of products sold and changes in productivity levels. Selling, general and administrative expense as a percentage of net sales increased from approximately 20.5% in the first quarter of 1996 to approximately 21.5% in the first quarter of 1997. The increase in the percentage was primarily due to a one-week shorter shipping period, without a proportionate decrease in expense, partially offset by higher sales levels of residential HVAC products. Segment earnings were approximately $15,500,000 for the first quarter of 1997 as compared to approximately $12,400,000 for the first quarter of 1996. Segment earnings have been reduced by depreciation and amortization expense of approximately $5,500,000 for 1997 and 1996. The overall increase in segment earnings was due principally to increased sales volume of residential HVAC products and a reduction in the prices paid for certain materials in each of the Company's operating groups and was affected by the factors noted above. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED MARCH 29, 1997 AND THE FIRST QUARTER ENDED MARCH 30, 1996 (Continued) Foreign segment earnings, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries, which manufacture built-in ventilating products, decreased to approximately 10.5% of segment earnings in the first quarter of 1997 from approximately 11.4% of such earnings in the first quarter of 1996. Sales and earnings derived from the international market are subject to the risk of currency fluctuations. Operating earnings in the first quarter of 1997 increased approximately $2,300,000, or approximately 23.0%, as compared to the first quarter of 1996, primarily as a result of the factors discussed above. Interest expense in the first quarter of 1997 remained unchanged at $7,800,000, or approximately 3.6% of net sales, as compared to the first quarter of 1996. Interest income in the first quarter of 1997 decreased approximately $600,000, or approximately 31.6%, as compared to the first quarter of 1996, principally due to lower average invested balances of short-term investments and marketable securities. The provision for income taxes was approximately $2,300,000 for the first quarter of 1997, as compared to approximately $1,700,000 for the first quarter of 1996. 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), changes in valuation reserves, the effect of foreign income tax on foreign source income and the effect of product development tax credits from foreign operations. (See Note D of the Notes to the Unaudited Financial Statements included elsewhere herein.) Liquidity and Capital Resources - ------------------------------- In March 1997, the Company sold $175,000,000 principal amount of 9.25% Series A Notes due 2007 for approximately $169,395,000, net of a discount of approximately $1,011,000 and approximately $4,594,000 of expenses incurred in connection with the sale. The net proceeds of this offering will be used to refinance approximately $47,200,000 of outstanding indebtedness of the Company's subsidiaries and for acquisitions and other general corporate purposes, including investment in plant and equipment (see Note B of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein). As of March 29, 1997, approximately NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED MARCH 29, 1997 AND THE FIRST QUARTER ENDED MARCH 30, 1996 (Continued) $11,000,000 of the net proceeds has been utilized to pay certain outstanding subsidiary indebtedness, and the remaining $36,200,000 principal amount of indebtedness is included in current liabilities in the Company's accompanying unaudited condensed consolidated balance sheet at March 29, 1997. As of April 25, 1997, an additional $12,000,000 of indebtedness has been paid. Unrestricted cash, investments and marketable securities were approximately $223,414,000 at March 29, 1997 as compared to $92,093,000 at December 31, 1996, primarily as the result of the investment of the proceeds from the sale of the 9.25% Series A Notes. The Company's investment in marketable securities at March 29, 1997 consisted primarily of investments in bank issued money market instruments, commercial paper and United States Treasury securities. At March 29, 1997, approximately $5,756,000 of the Company's cash and investments were pledged as collateral for insurance and other requirements and were classified as restricted in current assets in the Company's accompanying unaudited condensed consolidated balance sheet. The Company's Board of Directors has authorized a number of programs to purchase shares of the Company's Common and Special Common Stock since November 16, 1995. The most recent program which was announced on April 30, 1997, to purchase up to 500,000 shares of the Company's Common and Special Common Stock in open-market or negotiated transactions subject to market conditions, cash availability and provisions of the Company's outstanding debt instruments. As of May 5, 1997, no purchases have been made under this latest program. From November 16, 1995 to April 25, 1997, the Company purchased approximately 2,800,000 shares of its Common and Special Common Stock for approximately $43,831,000 and accounted for such share purchases as Treasury Stock. (See below and Note B of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) At April 25, 1997, approximately $1,518,900 was available for the payment of cash dividends or stock payments under the terms of the Company's most restrictive Indenture. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED MARCH 29, 1997 AND THE FIRST QUARTER ENDED MARCH 30, 1996 (Continued) The Company's working capital and current ratio increased from approximately $143,474,000 and 1.7:1, respectively, to approximately $294,018,000 and 2.4:1, respectively, between December 31, 1996 and March 29, 1997, principally as a result of the investment of the proceeds received from the sale of the 9.25% Series A Notes and the factors described below. Working capital included approximately $92,093,000 at December 31, 1996 and approximately $223,414,000 at March 29, 1997 of unrestricted cash, investments and marketable securities. Accounts receivable increased approximately $11,940,000, or approximately 9.8%, between December 31, 1996 and March 29, 1997, while net sales decreased approximately 8.6% in the first quarter of 1997 as compared to the fourth quarter of 1996. The rate of change in accounts receivable in certain periods may be different than the rate of change in sales in such periods principally due to the timing of net sales. Significant increases or decreases in net sales near the end of any period generally result in significant changes in the amount of accounts receivable on the date of the balance sheet at the end of such period, as was the situation on March 29, 1997 as compared to December 31, 1996. The Company has not experienced any significant changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in 1996 or 1997. Inventories increased approximately $8,328,000 or approximately 8.5%, between December 31, 1996 and March 29, 1997. Accounts payable increased approximately $8,354,000 or approximately 11.1% between December 31, 1996 and March 29, 1997. Unrestricted cash and cash equivalents increased approximately $44,478,000 from December 31, 1996 to March 29, 1997, principally as a result of the following: Condensed Consolidated Cash Flows Operating Activities-- -------------- Cash flow from operations, net $ 9,782,000 Increase in accounts receivable, net (12,662,000) Increase in inventories (8,850,000) Increase in prepaids and other current assets (2,507,000) Increase in trade accounts payable 10,243,000 Decrease in accrued expenses and taxes (9,809,000) Investing Activities-- Purchase of marketable securities (111,401,000) Proceeds from the sale of marketable securities 20,940,000 Capital expenditures (4,774,000) Financing Activities-- Sale of notes 169,395,000 Increase in borrowings 3,862,000 Payment of borrowings (11,035,000) Purchase of Nortek Common and Special Common Stock (6,534,000) Other, net (2,172,000) ----------- $ 44,478,000 =========== The net non-cash impact of changes in foreign currency exchange rates was not material and has been included in other, net. The Company's debt-to-equity ratio increased from approximately 2.4:1 at December 31, 1996 to 3.9:1 at March 29, 1997, primarily as a result of the sale of the 9.25% Series A Notes and the effect of the purchase of the Company's Common and Special Common Stock (see Note B of the Notes to Unaudited Condensed Consolidated Financial Statements), partially offset by the payment of certain subsidiary indebtedness and by net earnings for the first quarter of 1997. (See the Company's Unaudited Condensed Consolidated Statement of Stockholders' Investment 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. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED MARCH 29, 1997 AND THE FIRST QUARTER ENDED MARCH 30, 1996 (Continued) 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 presented. 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-K, 10-Q and 8-K filed with the Securities and Exchange Commission. PART II. OTHER INFORMATION Item 4. Submission of Matters to a vote of Security Holders. ---------------------------------------------------- At the Annual Meeting of Stockholders held on March 27, 1997, the following director was elected by the holders of Common Stock voting separately as a class. Name For Withheld - ---- --- -------- Class II (for a term expiring at the 2000 Annual Meeting) Richard J. Harris 7,886,469 300,996 The other matters voted upon and the votes were as follows: Proposal 2: Approval of 1997 Equity and Cash Incentive Plan Broker For Against Abstain Non-Vote --- ------- ------- -------- 10,525,104 1,462,811 69,682 96,908 Proposal 3: Approval of 1997 Stock Option Plan for Directors For Against Abstain --- ------- ------- 11,318,053 756,908 79,544 Proposal 4: Approval of Employment Agreement between Richard L. Bready and the Company Broker For Against Abstain Non-Vote --- ------- ------- -------- 10,856,264 1,221,475 76,566 200 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 4.1 Indenture dated as of March 17, 1997 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 9.25% Series A and Series B Senior Notes due March 15, 2007 (Exhibit 4.2 to Registration Statement No. 333-25505 filed April 18, 1997). PART II. OTHER INFORMATION (Continued) 4.2 Registration Rights Agreement dated as of March 17, 1997 between the Company and the Initial Purchasers (Exhibit 4.3 to Registration Statement No. 333-25505 filed April 18, 1997). 10.1 1997 Equity and Cash Incentive Plan (filed herewith). 10.2 1997 Stock Option Plan for Directors (filed herewith). 10.3 Employment Agreement between Richard L. Bready and the Company dated February 26, 1997 (filed herewith). 11.1 Calculation of shares used in determining earnings per share (filed herewith). 27 Financial Data Schedule (filed herewith). (b) Reports on Form 8-K. The following reports on Form 8-K were filed by the registrant during the period: March 5, 1997, Item 5, Other Events and Item 7 Financial Statements Pro Forma Financial Information and Exhibits. March 12, 1997, Item 5, Other Events and Item 7 Financial Statements, Pro Forma Financial Information and Exhibits. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTEK, INC. (Registrant) /s/Almon C. Hall --------------------------------- Almon C. Hall, Vice President and Controller and Chief Accounting Officer May 12, 1997 - ------------------------- (Date) EX-11 2 EXHIBIT 11.1 NORTEK, INC. AND SUBSIDIARIES CALCULATION OF SHARES USED IN DETERMINING EARNINGS PER SHARE For the Three Months Ended -------------------------- March 29, March 30, 1997 1996 ---- ---- Calculation of the number of shares to be used in computing primary earnings per share: Weighted average common and special common shares issued during the period 16,784,991 16,987,686 Less average common and special common shares held in the Treasury (7,062,171) (5,300,321) ---------- ---------- Weighted average number of common and special common shares outstanding during the period 9,722,820 11,687,365 Dilutive effect of stock options computed under the treasury stock method using the average price during the period 241,322 153,381 ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period 9,964,142 11,840,746 ========== ========== 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 9,722,820 11,687,365 Dilutive effect of stock options 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 241,322 179,666 ---------- ---------- 9,964,142 11,867,031 ========== ========== EX-27 3
5 1000 3-MOS DEC-31-1997 MAR-29-1997 85,520 143,650 139,120 5,004 105,986 510,278 255,358 115,602 771,067 216,260 402,134 0 0 16,800 98,170 771,067 219,627 219,627 160,070 160,070 0 0 7,800 6,000 2,300 3,700 0 0 0 3,700 .37 .37
EX-10 4 Exhibit 10.1 NORTEK, INC. 1997 EQUITY AND CASH INCENTIVE PLAN 1. Purpose The purpose of this Equity and Cash Incentive Plan (the "Plan") is to advance the interests of Nortek, Inc. (the "Company") and its subsidiaries by enhancing their ability to attract and retain employees and other persons or entities who are in a position to make significant contributions to the success of the Company and its subsidiaries through ownership of shares of the Company's Common Stock and Special Common Stock and cash incentives. The Plan is intended to accomplish these goals by enabling the Company to grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock or Unrestricted Stock Awards, Deferred Stock Awards or Performance Awards, or combinations thereof, all as more fully described below. 2. Administration Unless otherwise determined by the Board of Directors of the Company (the "Board"), the Plan will be administered by a Committee of the Board designated for such purpose (the "Committee"). The Committee shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. During such times as the Company's Common Stock is registered under the Securities Exchange Act of 1934 (the "1934 Act"), all members of the Committee shall be "non- employee directors" within the meaning of Rule 16b-3 promulgated under the 1934 Act and "outside directors" within the meaning of Section 162(m)(4)(C)(i) of the Internal Revenue Code of 1986, as amended (the "Code"). The Committee will have authority, not inconsistent with the express provisions of the Plan and in addition to other authority granted under the Plan, to (a) grant Awards at such time or times as it may choose; (b) determine whether the Award is with respect to the Company's Common Stock, $1.00 par value, or its Special Common Stock, $1.00 par value (together, the "Stock"), or a combination thereof and the size of each Award, including the number of shares of Stock subject to the Award; (c) determine the type or types of each Award; (d) determine the terms and conditions of each Award; (e) waive compliance by a holder of an Award with any obligations to be performed by such holder under an Award and waive any terms or conditions of an Award; (f) amend or cancel an existing Award in whole or in part (and if an award is canceled, grant another Award in its place on such terms and conditions as the Committee shall specify), except that the Committee may not, without the consent of the holder of an Award, take any action under this clause with respect to such Award if such action would adversely affect the rights of such holder; (g) prescribe the form or forms of instruments that are required or deemed appropriate under the Plan, including any written notices and elections required of Participants (as defined below), and change such forms from time to time; (h) adopt, amend and rescind rules and regulations for the administration of the Plan; and (i) interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations and actions of the Committee, and all other determinations and actions of the Committee made or taken under authority granted by any provision of the Plan, will be conclusive and will bind all parties. Nothing in this paragraph shall be construed as limiting the power of the Committee to make adjustments under Section 7.3 or Section 8.6. 3. Effective Date and Term of Plan The Plan will become effective on the date on which it is approved by the stockholders of the Company. Awards may be made prior to such stockholder approval if made subject thereto. No Award may be granted under the Plan after March 27, 2007, but Awards previously granted may extend beyond that date. 4. Shares Subject to the Plan Subject to adjustment as provided in Section 8.6, the aggregate number of shares of Stock that may be delivered under the Plan will be 450,000. If any Award requiring exercise by the Participant for delivery of Stock terminates without having been exercised in full, or if any Award payable in Stock or cash is satisfied in cash rather than Stock, the number of shares of Stock as to which such Award was not exercised or for which cash was substituted will be available for future grants. Subject to Section 8.6(a), the maximum number of shares of Stock as to which Options or Stock Appreciation Rights may be granted to any Participant in any one calendar year is 250,000, which limitation shall be construed and applied consistently with the rules under Section 162(m) of the Code. Stock delivered under the Plan may be either authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan. 5. Eligibility and Participation Each key employee of the Company or any of its subsidiaries (an "Employee") and each other person or entity (including without limitation non-Employee directors of the Company or a subsidiary of the Company) who, in the opinion of the Committee, is in a position to make a significant contribution to the success of the Company or its subsidiaries will be eligible to receive Awards under the Plan (each such Employee, person or entity receiving an Award, "a Participant"). A "subsidiary" for purposes of the Plan will be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. 6. Types of Awards 6.1. Options (a) Nature of Options. An Option is an Award giving the recipient the right on exercise thereof to purchase Stock. Both "incentive stock options," as defined in Section 422(b) of the Code (any Option intended to qualify as an incentive stock option being hereinafter referred to as an "ISO"), and Options that are not ISOs, may be granted under the Plan. ISOs shall be awarded only to Employees. An Option awarded under the Plan shall be a non-ISO unless it is expressly designated as an ISO at time of grant. (b) Exercise Price. The exercise price of an Option will be determined by the Committee subject to the following: (1) The exercise price of an ISO or an Option intended to qualify as performance based compensation under Section 162(m) of the Code shall not be less than 100% of the fair market value of the Stock subject to the Option, determined as of the time the Option is granted. (2) In no case may the exercise price paid for Stock which is part of an original issue of authorized Stock be less than the par value per share of the Stock. (c) Duration of Options. The latest date on which an Option may be exercised will be the tenth anniversary of the day immediately preceding the date the Option was granted, or such earlier date as may have been specified by the Committee at the time the Option was granted. (d) Exercise of Options. An Option will become exercisable at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time and from time to time accelerate the time at which all or any part of the Option may be exercised. Any exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any documents required by the Committee and (2) payment in full in accordance with paragraph (e) below for the number of shares for which the Option is exercised. (e) Payment for Stock. Stock purchased on exercise of an Option must be paid for as follows: (1) in cash or by check (acceptable to the Company in accordance with guidelines established for this purpose), bank draft or money order payable to the order of the Company or (2) if so permitted by the Committee at or after the grant of the Option or by the instrument evidencing the Option, (i) through the delivery of shares of Stock which have been held for at least six months (unless the Committee approves a shorter period) and which have a fair market value equal to the exercise price, (ii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, or (iii) by any combination of the foregoing permissible forms of payment. (f) Discretionary Payments. If (i) the market price of shares of Stock subject to an Option (other than an Option which is in tandem with a Stock Appreciation Right as described in Section 6.2) exceeds the exercise price of the Option at the time of its exercise, and (ii) the person exercising the Option so requests the Committee in writing, the Committee may in its sole discretion cancel the Option and cause the Company to pay in cash or in shares of Common Stock (at a price per share equal to the fair market value per share) to the person exercising the Option an amount equal to the difference between the fair market value of the Stock which would have been purchased pursuant to the exercise (determined on the date the Option is canceled) and the aggregate exercise price which would have been paid. 6.2. Stock Appreciation Rights. (a) Nature of Stock Appreciation Rights. A Stock Appreciation Right (or "SAR") is an Award entitling the holder on exercise to receive an amount in cash or Stock or a combination thereof (such form to be determined by the Committee) determined in whole in part by reference to appreciation, from and after the date of grant, in the fair market value of a share of Stock. SARs may be based solely on appreciation in the fair market value of Stock or on a comparison of such appreciation with some other measure of market growth such as (but not limited) to appreciation in a recognized market index. The date as of which such appreciation or other measure is determined shall be the exercise date unless another date is specified by the Committee. (b) Grant of Stock Appreciation Rights. Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan. (1) Rules Applicable to Tandem Awards. When Stock Appreciation Rights are granted in tandem with Options, (a) the Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable and will be exercisable in accordance with the procedure required for exercise of the related Option; (b) the Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right; (c) the Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right; and (d) the Stock Appreciation Right will be transferable only with the related Option. (2) Exercise of Independent Stock Appreciation Rights. A Stock Appreciation Right not granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which all or any part of the Right may be exercised. Any exercise of an independent Stock Appreciation Right must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by any other documents required by the Committee. 6.3. Restricted and Unrestricted Stock. (a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Committee may grant shares of Restricted Stock in such amounts and upon such terms and conditions as the Committee shall determine subject to the restrictions described below. (b) Restricted Stock Agreement. The Committee may require, as a condition to an Award, that a recipient of a Restricted Stock Award enter into a Restricted Stock Award Agreement, setting forth the terms and conditions of the Award. In lieu of a Restricted Stock Award Agreement, the Committee may provide the terms and conditions of an Award in a notice to the Participant of the Award, on the Stock certificate representing the Restricted Stock, in the resolution approving the Award, or in such other manner as it deems appropriate. (c) Transferability and Other Restrictions. Except as otherwise provided in this Section 6.3, the shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable period or periods established by the Committee and the satisfaction of any other conditions or restrictions established by the Committee (such period during which a share of Restricted Stock is subject to such restrictions and conditions is referred to as the "Restricted Period"). Except as the Committee may otherwise determine under Section 7.1 or Section 7.2, if a Participant dies or suffers a Status Change (as defined at Section 7.2(a)) for any reason during the Restricted Period, the Company may purchase the shares of Restricted Stock subject to such restrictions and conditions for the amount of cash paid by the Participant for such shares; provided, that if no cash was paid by the Participant such shares of Restricted Stock shall be automatically forfeited to the Company. During the Restricted Period with respect to any shares of Restricted Stock, the Company shall have the right to retain in the Company's possession the certificate or certificates representing such shares. (d) Removal of Restrictions. Except as otherwise provided in this Section 6.3, a share of Restricted Stock covered by a Restricted Stock grant shall become freely transferable by the Participant upon completion of the Restricted Period, including the passage of any applicable period of time and satisfaction of any conditions to vesting. The Committee, in its sole discretion, shall have the right at any time immediately to waive all or any part of the restrictions and conditions with regard to all or any part of the shares held by any Participant. (e) Voting Rights, Dividends and Other Distributions. During the Restricted Period, Participants holding shares of Restricted Stock granted hereunder may exercise full voting rights and shall receive all regular cash dividends paid with respect to such shares. Except as the Committee shall otherwise determine, any other cash dividends and other distributions paid to Participants with respect to shares of Restricted Stock including any dividends and distributions paid in shares shall be subject to the same restrictions and conditions as the shares of Restricted Stock with respect to which they were paid. (f) Other Awards Settled with Restricted Stock. The Committee may, at the time any Award described in this Section 6 is granted, provide that any or all the Stock delivered pursuant to the Award will be Restricted Stock. (g) Unrestricted Stock. Subject to the terms and provisions of the Plan, the Committee may grant shares of Stock free of restrictions under the Plan in such amounts and upon such terms and conditions as the Committee shall determine. (h) Notice of Section 83(b) Election. Any Participant making an election under Section 83(b) of the Code with respect to Restricted Stock must provide a copy thereof to the Company within 10 days of filing such election with the Internal Revenue Service. 6.4. Deferred Stock. A Deferred Stock Award entitles the recipient to receive shares of Stock to be delivered in the future. Delivery of the Stock will take place at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which delivery of all or any part of the Stock will take place. At the time any Award described in this Section 6.4 is granted, the Committee may provide that, at the time Stock would otherwise be delivered pursuant to the Award, the Participant will instead receive an instrument evidencing the Participant's right to future delivery of Deferred Stock. 6.5. Performance Awards; Performance Goals. (a) Nature of Performance Awards. A Performance Award entitles the recipient to receive, without payment, an amount in cash or Stock or a combination thereof (such form to be determined by the Committee) following the attainment of Performance Goals (as hereinafter defined). Performance Goals may be related to personal performance, corporate performance, departmental performance or any other category of performance established by the Committee. The Committee will determine the Performance Goals, the period or periods during which performance is to be measured and all other terms and conditions applicable to the Award. (b) Other Awards Subject to Performance Condition. The Committee may, at the time any Award described in this Section 6.5 is granted, impose the condition (in addition to any conditions specified or authorized in this Section 6 or any other provision of the Plan) that Performance Goals be met prior to the Participant's realization of any payment or benefit under the Award. Any such Award made subject to the achievement of Performance Goals (other than an Option or SAR) shall be treated as a Performance Award for purposes of Section 6.5(c) below. (c) Limitations and Special Rules. In the case of any Performance Award intended to qualify for the performance-based remuneration exception described in Section 162(m)(4)(C) of the Code and the regulations thereunder (an "Exempt Award"), the Committee shall in writing preestablish specific Performance Goals. A Performance Goal must be established prior to passage of 25% of the period of time over which attainment of such goal is to be measured. "Performance Goal" means criteria based upon any one or more of the following (on a consolidated, divisional, subsidiary, line of business or geographical basis or in combinations thereof): (i) sales; revenues; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation or amortization, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital or assets; inventory level or turns; one or more operating ratios; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; or any combination of the foregoing; or (ii) acquisitions and divestitures (in whole or in part); joint ventures and strategic alliances; spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity) and refinancings; transactions that would constitute a Change of Control; or any combination of the foregoing. A Performance Goal and targets with respect thereto determined by the Committee need not be based upon an increase, a positive or improved result or avoidance of loss. The maximum Exempt Award payable to any Participant in respect of any such Performance Goal for any year shall not exceed $2,500,000. Payment of Exempt Awards based upon a Performance Goal for calendar years 2003 and thereafter is conditioned upon reapproval by Employer's shareholders no later than Employer's first meeting of shareholders in 2002. 7. Events Affecting Outstanding Awards 7.1. Death. If a Participant dies, the following will apply: (a) All Options and Stock Appreciation Rights held by the Participant immediately prior to death, to the extent then exercisable, may be exercised by the Participant's executor or administrator or the person or persons to whom the Option or Right is transferred by will or the applicable laws of descent and distribution, at any time within the one year period ending with the first anniversary of the Participant's death (or such shorter or longer period as the Committee may determine), and shall thereupon terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. Except as otherwise determined by the Committee, all Options and Stock Appreciation Rights held by a Participant immediately prior to death that are not then exercisable shall terminate at death. (b) Except as otherwise determined by the Committee, all Restricted Stock held by the Participant must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3(c). (c) Any payment or benefit under a Deferred Stock Award or Performance Award to which the Participant was not irrevocably entitled prior to death will be forfeited and the Award canceled as of the time of death, except as otherwise determined the Committee. 7.2. Termination of Service (Other Than By Death). If a Participant who is an Employee ceases to be an Employee for any reason other than death or retirement with consent of the Company after attainment of age 65, or if there is a termination (other than by reason of death) of the consulting, service or similar relationship in respect of which a non-Employee Participant was granted an Award hereunder (such termination of the employment or other relationship being hereinafter referred to as a "Status Change"), the following will apply: (a) Except as otherwise determined by the Committee, all Options and Stock Appreciation Rights held by the Participant that were not exercisable immediately prior to the Status Change shall terminate at the time of the Status Change. Any Options or Rights that were exercisable immediately prior to the Status Change will continue to be exercisable for a period of three months (or such longer period as the Committee may determine), and shall thereupon terminate, unless the Award provides by its terms for immediate termination in the event of a Status Change (unless otherwise determined by the Committee) or unless the Status Change results from a discharge for cause which in the opinion of the Committee casts such discredit on the Participant as to justify immediate termination of the Award. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. For purposes of this paragraph, in the case of a Participant who is an Employee, a Status Change shall not be deemed to have resulted by reason of (i) a sick leave or other bona fide leave of absence approved for purposes of the Plan by the Committee, so long as the Employee's right to reemployment is guaranteed either by statute or by contract, or (ii) a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which Section 424(a) of the Code applies. (b) Except as otherwise determined by the Committee, all Restricted Stock held by the Participant at the time of the Status Change must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3(c) above. (c) Any payment or benefit under a Deferred Stock Award or Performance Award to which the Participant was not irrevocably entitled prior to the Status Change will be forfeited and the Award cancelled as of the date of such Status Change unless otherwise determined by the Committee. 7.3. Certain Corporate Transactions. Except as otherwise provided by the Committee at the time of grant, in the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of substantially all the Company's assets or a dissolution or liquidation of the Company (a "covered transaction"), the following rules shall apply: (a) Subject to paragraph (b) below, all outstanding Awards requiring exercise will cease to be exercisable, and all other Awards to the extent not fully vested (including Awards subject to conditions not yet satisfied or determined) will be forfeited, as of the effective time of the covered transaction, provided that the Committee may in its sole discretion (but subject to Section 7.4), on or prior to the effective date of the covered transaction, (1) make any outstanding Option and Stock Appreciation Right exercisable in full, (2) remove the restrictions from any Restricted Stock, (3) cause the Company to make any payment and provide any benefit under any Deferred Stock Award or Performance Award, and (4) remove any performance or other conditions or restrictions on any Award; or (b) With respect to an outstanding Award held by a participant who, following the covered transaction, will be employed by or otherwise providing services to an entity which is a surviving or acquiring entity in the covered transaction or an affiliate of such an entity, the Committee may at or prior to the effective time of the covered transaction, in its sole discretion and in lieu of the action described in paragraph (a) above, arrange to have such surviving or acquiring entity or affiliate assume any Award held by such participant outstanding hereunder or grant a replacement award which, in the judgment of the Committee, is substantially equivalent to any Award being replaced. 7.4. Change of Control Provisions. (a) Impact of Event. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control: (1) Acceleration of Options and SARs. Any Options and SARs outstanding as of the date such Change of Control is determined to have occurred and which are not then exercisable shall become exercisable to the full extent of the original grant, and all shares of Restricted Stock which are not otherwise vested shall vest. Holders of Performance Awards granted hereunder as to which the relevant performance period has not ended as of the date such Change of Control is determined to have occurred shall be entitled at the time of such Change of Control to receive a cash payment per Performance Award equal to the full value of the cash component of such Award (if any) plus the fair market value of shares of Stock included in such Award. (2) Restriction on Application of Plan Provisions Applicable in the Event of Termination of Employment. After a Change of Control, Options and SARs shall remain exercisable following a termination of employment other than by reason of death, disability (as determined by the Company) or retirement for seven months following such termination or until expiration of the original terms of the Option or SAR, whichever period is shorter. (3) Restriction on Amendment. In connection with or following a Change of Control, neither the Committee nor the Board may impose additional conditions upon exercise or otherwise amend or restrict an Option, SAR, share of Restricted Stock or Performance Award, or amend the terms of the Plan in any manner adverse to the holder thereof, without the written consent of such holder. Notwithstanding the foregoing, if any right granted pursuant to this Section 7.4 would make a Change of Control transaction ineligible for pooling of interests accounting under applicable accounting principles that but for this Section 7.4 would otherwise be eligible for such accounting treatment, the Committee shall have the authority to substitute stock for the cash which would otherwise be payable pursuant to this Section 7.4 having a fair market value equal to such cash. (b) Definition of Change of Control. A "Change of Control" shall be deemed to have occurred if (i) any corporation, person or other entity (other than the Company, a majority-owned subsidiary of the Company or any employee benefit plan maintained by the Company or any of its subsidiaries or members of the Board on the date the Plan is approved by the stockholders of the Company), including a "group" as defined in Section 13(d) (3) of the 1934 Act, becomes the beneficial owner of Stock representing more than twenty-five percent of the voting power of the Company; (ii) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation other than a majority-owned subsidiary of the Company, to sell or otherwise dispose of all or substantially all of the Company's assets or to liquidate the Company, or (iii) within any 24 consecutive month period, persons who were members of the Board immediately prior to such 24-month period, together with any persons who were first elected as directors (other than as a result of any settlement of a proxy or consent solicitation contest or any action taken to avoid such a contest) during such 24-month period by or upon the recommendation of persons who were members of the Board immediately prior to such 24-month period and who constituted a majority of the Board at the time of such election, cease to constitute a majority of the Board. 8. General Provisions 8.1. Documentation of Awards. Awards will be evidenced by such written instruments, if any, as may be prescribed by the Committee from time to time. Such instruments may be in the form of agreements to be executed by both the Participant and the Company, or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which will evidence agreement to the terms thereof. 8.2. Rights as a Stockholder, Dividend Equivalents. Except as specifically provided by the Plan, the receipt of an Award will not give a Participant rights as a stockholder; the Participant will obtain such rights, subject to any limitations imposed by the Plan or the instrument evidencing the Award, only upon the issuance of Stock. However, the Committee may, on such conditions as it deems appropriate, provide that a Participant will receive a benefit in lieu of cash dividends that would have been payable on any or all Stock subject to the Participant's Award had such Stock been outstanding. Without limitation, the Committee may provide for payment to the Participant of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the Participant. 8.3. Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove restriction from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulation have been complied with, (c) if the outstanding Stock is at the time listed on any stock exchange or The Nasdaq National Market, until the shares to be delivered have been listed or authorized to be listed on such exchange or market upon official notice of notice of issuance, and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. If an Award is exercised by the Participant's legal representative, the Company will be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative. 8.4. Tax Withholding. The Company will withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant to which Stock may be delivered, the Committee will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Committee with regard to such requirements, prior to the delivery of any Stock or removal of restrictions thereon. If and to the extent that such withholding is required, the Committee may permit the Participant or such other person to elect at such time and in such manner as the Committee provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Stock having a value calculated to satisfy the withholding requirement. The Committee may make such share withholding mandatory with respect to any Award at the time such Award is made to a Participant. If at the time an ISO is exercised the Committee determines that the Company could be liable for withholding requirements with respect to the exercise or with respect to a disposition of the Stock received upon exercise, the Committee may require as a condition of exercise that the person exercising the ISO agree (a) to provide for withholding under the preceding paragraph of this Section 8.4, if the Committee determines that a withholding responsibility may arise in connection with tax exercise, (b) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code) of Stock received upon exercise, and (c) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. 8.5. Transferability of Awards. Unless otherwise permitted by the Committee, no Award (other than an Award in the form of an outright transfer of cash or Unrestricted Stock) may be transferred other than by will or by the laws of descent and distribution. 8.6. Adjustments in the Event of Certain Transactions. (a) In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capitalization, or other distribution to holders of Stock other than normal cash dividends, after the effective date of the Plan, the Committee will make any appropriate adjustments to the maximum number of shares that may be delivered under the Plan under the first paragraph of Section 4 above and to the limits described in the second paragraph of Section 4 and in Section 6.5(c). (b) In any event referred to in paragraph (a), the Committee will also make any appropriate adjustments to the number and kind of shares of Stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provision of Awards affected by such change. The Committee may also make such adjustments to take into account material changes in law or in accounting practices or principles, mergers, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, if it is determined by the Committee that adjustments are appropriate to avoid distortion in the operation of the Plan; provided, that adjustments pursuant to this sentence shall not be made to the extent it would cause any Award intended to be exempt under Section 162(m)(4)(c) of the Code to fail to be so exempt. (c) In the case of ISOs, the adjustments described in (a) and (b) will be made only to the extent consistent with continued qualification of the Option under Section 422 of the Code (in the case of an ISO) or Section 162(m) of the Code. 8.7. Employment Rights, Etc. Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued retention by the Company or any subsidiary as an Employee or otherwise, or affect in any way the right of the Company or subsidiary to terminate an employment, service or similar relationship at any time. Except as specifically provided by the Committee in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment, service or similar relationship even if the termination is in violation of an obligation of the Company to the Participant. 8.8. Deferral of Payments. The Committee may agree at any time, upon request of the Participant, to defer the date on which any payment under an Award will be made. 8.9. Past Services as Consideration. Where a Participant purchases Stock under an Award for a price equal to the par value of the Stock the Committee may determine that such price has been satisfied by past services rendered by the Participant. 9. Effect, Amendment and Termination Neither adoption of the Plan nor the grant of Awards to a Participant will affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue to such Participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued to Employees. The Committee may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards, provided that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify for the award of ISOs under Section 422 of the Code or for the award of performance- based compensation under Section 162(m) of the Code. EX-10 5 Exhibit 10.2 NORTEK, INC. 1997 STOCK OPTION PLAN FOR DIRECTORS 1. Purpose The purpose of this 1997 Stock Option Plan for Directors (the "Plan") is to advance the interests of Nortek, Inc. (the "Company") by enhancing the ability of the Company to attract and retain directors who are in a position to make significant contributions to the success of the Company and to reward directors for such contributions through ownership of shares of the Company's Common Stock, $1.00 par value, or Special Common Stock, $1.00 par value. 2. Administration The Plan shall be administered by the Stock Option Committee (the "Committee") of the Board of Directors (the "Board") of the Company. The Committee shall have authority, not inconsistent with the express provisions of the Plan, (a) to grant options in accordance with the Plan to such directors as are eligible to receive options; (b) to prescribe the form or forms of instruments evidencing options and any other instruments required under the Plan and to change such forms from time to time; (c) to adopt, amend and rescind rules and regulations for the administration of the Plan; and (d) to interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Committee shall be conclusive and shall bind all parties. Subject to Section 7, the Committee shall also have the authority, both generally and in particular instances, to waive compliance by a director with any obligation to be performed by him or her under an option and to waive any condition or provision of an option. 3. Effective Date and Term of Plan The Plan shall become effective on the date on which the Plan is approved by the stockholders of the Company. No option shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but options granted may extend beyond that date. 4. Shares Subject to the Plan (a) Number of Shares. Subject to adjustment as provided in Section 4(c), the aggregate number of shares of Stock that may be delivered upon the exercise of options granted under the Plan shall be 30,000. If any option granted under the Plan terminates without having been exercised in full, the number of shares of Stock as to which such option was not exercised shall be available for future grants within the limits set forth in this Section 4(a). (b) Shares to Be Delivered. Shares delivered under the Plan shall be authorized but unissued Stock or, if the Board so determines, previously issued Stock acquired by the Company and held in treasury. Stock shall be Common Stock or Special Common Stock as determined by the Committee. No fractional shares of Stock shall be delivered under the Plan. (c) Changes in Stock. In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Stock, the number and kind of shares of stock or securities of the Company to be subject to options then outstanding or to be granted under the Plan, and the option price, and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. 5. Eligibility for Options Directors eligible to receive options under the Plan ("Eligible Directors") shall be those directors who are not employees of the Company or its subsidiaries. 6. Terms and Conditions of Options (a) Formula Options. Eligible Directors who are directors on the date of stockholder approval of the Plan shall be awarded options to purchase up to 200 shares of Stock. Following stockholder approval of the Plan, each newly elected Eligible Director shall be awarded options to purchase up to 200 shares of Stock on the date of his or her first election. In addition, as of the close of business on the day of the final adjournment of each annual meeting of stockholders commencing with the 1998 annual meeting, each Eligible Director (other than an Eligible Director first elected as a director at such meeting) shall be awarded an option covering 200 shares of Stock. (b) Discretionary Options. The Committee may also award options to purchase shares of Stock to Eligible Directors on such terms as it may determine not inconsistent with this Plan. (c) Exercise Price. The exercise price of each formula option shall be not less than the fair market value per share of the Stock at the time of the grant. For this purpose "fair market value" shall mean the last sale price of the shares of the Company's Common Stock as reported on the New York Stock Exchange on the date of the grant (based on The Wall Street Journal report of composite transactions), or if such stock is no longer listed on such Exchange, it shall have the same meaning as it does in the provisions of the Internal Revenue Code of 1986 (the "Code") and the regulations thereunder applicable to incentive options. The exercise price of each discretionary option shall be as determined by the Committee. (d) Duration of options. The latest date on which an option may be exercised (the "Final Exercise Date") shall be the date which is ten years from the date the option was granted. (e) Exercise of Options. (1) Each formula option shall become exercisable in increments of one half of the shares covered thereby on each of the first and second anniversaries of the grant. Each discretionary option shall become exercisable at such time or times as the Committee shall determine. (2) Any exercise of an option shall be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (i) an option exercise notice and any other documents required by the Committee; and (ii) payment in full in accordance with paragraph (f) below for the number of shares for which the option is exercised. (3) If any option is exercised by the executor or administrator of a deceased director, or by the person or persons to whom the option has been transferred by the director's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of the person or persons exercising the option. (4) The Company shall have the right to settle any option, and to terminate the rights of the holder thereof, by paying to the option holder the excess (if any) of the fair market value of the Stock at the time of settlement over the purchase price. (f) Payment for and Delivery of Stock. Stock purchased under the Plan shall be paid for as follows: (i) in cash (which payment may be made by personal check payable to the order of the Company); (ii) through the delivery of shares of Stock having a fair market value on the last business day preceding the date of exercise equal to the purchase price; or (ii) by a combination of cash and Stock as provided in clauses (i) an (ii) above. An option holder shall not have the rights of a stockholder with regard to awards under the Plan except as to Stock actually received by him or her under the Plan. The Company shall not be obligated to deliver any shares of Stock (i) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with; (ii) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance; and (iii) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the option, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (g) Transferability of Options. Unless otherwise determined by the Committee, options are transferable at any time by a director. (h) Death. If a director dies at a time he or she is entitled to exercise an option, then the portion formerly exercisable by the director may be exercised by the director's executor or administrator, or by the person to whom the option is transferred under the applicable laws of descent and distribution, within three years of the death of the director, subject to earlier termination upon the Final Exercise Date. (i) Other Termination of Status of Director. All options that are not then exercisable terminate and are forfeited automatically upon the termination of the director's service with the Company, unless the Committee or the Board of Directors specifies otherwise. Options that are exercisable on the date of termination shall continue to be exercisable until the earlier of (i) the 18Oth day following the date of termination (or such later date as is determined by the Committee or the Board) or (ii) the Final Exercise Date. 7. Effect, Discontinuance, Cancellation, Amendment and Termination Neither adoption of the Plan nor the grant of options to a director shall affect the Company's right to grant to such director or any director options that are not subject to the Plan, to issue to such directors Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued, or payments made, to directors. The Committee may at any time discontinue granting options under the Plan. The Committee may at any time, or times, amend the Plan for the purpose of satisfying any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of options, provided that (except to the extent expressly required or permitted herein above) no such amendment shall, without the approval of the stockholders of the Company, (a) increase the maximum number of shares available under the Plan; (b) increase the number of options to be granted to Eligible Directors; (c) amend the definition of Eligible Directors so as to enlarge the group of director eligible to receive options under the Plan; (d) reduce the price at which options may be granted other than as permitted in the Plan; or (e) amend the provisions of this Section 7. EX-10 6 Exhibit 10.3 NORTEK, INC. and RICHARD L. BREADY EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, effective as of the dates provided below, between NORTEK, INC., a Delaware corporation ("hereinafter called "Employer"), and RICHARD L. BREADY, a resident of Rhode Island (hereinafter called "Employee"). Employer desires to assure that it will have the benefit of the continued service and experience of Employee who is the chief executive officer of the Employer and an integral part of its management for a period of time and also seeks to assure itself and Employee of the continuity of management of Employer in the event of any actual or threatened change of control of Employer, and Employee is willing to enter into an agreement to such ends upon the terms and conditions set forth in this Agreement. In consideration of the foregoing and the mutual agreements herein contained, the parties mutually agree as follows: 1. Employment Period and Duties (a) Commencing from January 1, 1998 and ending, unless sooner terminated pursuant to the provisions hereof, five years from said date or on the expiration date of any extension as provided for herein ("hereinafter called the "Employment Period"), Employer shall employ Employee, and Employee shall serve as an employee of Employer. (b) During the Employment Period, Employee shall serve as chairman and chief executive officer of Employer, or in such other executive capacity at a similar level of responsibility and with such other duties as the board of directors of Employer and Employee may from time to time mutually determine, and Employee accepts employment on the terms and conditions contained herein and agrees to devote a substantial part of his working time and energies to the business of Employer and to faithfully and diligently perform the customary duties of his office and such other duties, reasonable vacations (of not less than four weeks per year) and time devoted to charitable and community service, and absences due to illness and holidays excepted. Such other duties may include the performance of services for any of Employer's subsidiaries and, without further remuneration (except as otherwise agreed), may also include service as an officer or director of one or more of Employer's subsidiaries. Nothing herein shall prohibit Employee from managing or supervising his personal investments or from devoting attention to his other business interests that do not materially interfere with his obligations to Employer hereunder or compete with Employer or its subsidiaries. In the event that any person ("Person"), as that term is defined or used in Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act"), begins a tender or exchange offer, solicits proxies from Employer's security holders or takes other actions to effect a "Change of Control" (as defined in Section 6 hereof), Employee agrees not to voluntarily terminate the Employment Period until such Person has abandoned or terminated such efforts to effect a Change of Control or until a Change of Control has occurred. During the Employment Period, Employer shall maintain an appropriately appointed executive office for Employee in Providence, Rhode Island (or at such other location as Employee shall approve) of not less than the size of Employee's current office and associated administrative space from which Employee shall perform his duties and shall provide Employee with executive secretarial and other administrative staff and services suitable to his offices and duties, staffed by persons approved by Employee and with such staff members' salaries and benefits as Employee shall approve. (c) The Employment Period shall be extended for an additional year at the end of each year of the Employment Period until such time as Employee or Employer has given written notice to the other that the Employment Period is not to be further extended; such that the Employment Period as so extended shall expire five years after January 1 of the year in which such notice is given. 2. Compensation (a) During the Employment Period, Employee shall receive a basic annual salary of not less than $825,000 subject to increase as hereinafter provided (hereinafter called the "Basic Salary"), payable in equal monthly installments on the 15th day of each month. (b) During the Employment Period, Basic Salary shall be increased as of the first day of each calendar year commencing January 1, 1999 based upon percentage increases in the Consumer Price Index (the "CPI") as first published in each year by the Bureau of Labor Statistics of the United States Department of Labor for all items for the nation as a whole as compared with the CPI first published for calendar year 1998. In the event that the CPI for any year shall be lower than the CPI for any prior year, there shall be no reduction in Basic Salary. (c) In addition to Basic Salary Employee shall be entitled to receive the following incentive compensation ("Incentive Compensation"): (i) A payment in cash, stock or a combination thereof, as determined by Employee, based upon the performance goal denominated "Earnings Before Taxes" (as hereinafter defined) for each calendar year during the Employment Period determined as follows: Earnings Before Taxes Incentive Realized in a Calendar Year Compensation Payable Up to $10,000,000 1% of such amount, plus $10,000,000 up to $15,000,000 2% of such amount, plus $15,000,000 up to $20,000,000 3% of such amount, plus $20,000,000 or more 4% of such amount subject to such maximum for any year of two and one-half times Basic Salary for such year. For purposes of this subsection (c), "Earnings Before Taxes" shall mean the consolidated net earnings of Employer and its subsidiary companies before provision for income taxes, domestic (federal, state and municipal) and foreign. Incentive Compensation payable in respect of such goal for a calendar year shall be paid by the 15th day of March of the next year. Payments of Incentive Compensation in stock shall be in shares of Employer's common stock or special common stock as determined by the compensation committee of the board of directors of Employer (the "Committee") with such shares valued at fair market value as determined by the Committee. (ii) As soon as practicable after the date hereof, Employer shall make a ten-year loan to Employee in the original principal amount of $3,000,000 bearing interest at the applicable federal long-term rate (determined in accordance with Section 1274 of the Internal Revenue Code of 1986, as amended (the "Code")) payable annually in arrears, and repayable annually as of each anniversary of the making of such loan in equal installments of principal of $300,000 plus accrued interest. If this Agreement is approved by Employer's shareholders as contemplated by Section 16 hereof, payment of each installment of principal and interest will be deferred until determination of Employer's Operating Earnings for the prior fiscal year. If this Agreement is so approved, and if Employee remains in the employ of Employer on the date an installment is due and if Employer has met the goal of Operating Earnings of $35,000,000 or more for the prior year, such installment and accrued interest shall be forgiven; and all remaining installments and accrued interest shall be forgiven in the event of termination of the Employment Period pursuant to Sections 5, 7 or 8 hereof. Such loan shall be evidenced by a promissory note of Employee in the form of Exhibit 1 hereto, with appropriate insertions. For purposes of this subsection (c), "Operating Earnings" shall mean Earnings Before Taxes before provisions for interest income and expense, gain or loss on investments (and marketable securities), gain or loss on businesses sold and before write-up or write-down of assets. (iii) Prior to payment of Incentive Compensation, the Committee must certify in writing that either the performance goal Earnings Before Taxes or the Operating Earnings goal has been met. (d) Employee shall be eligible to participate in any deferred compensation, supplemental executive retirement, pension or other benefit plan in which executive personnel of Employer are eligible to participate and shall be eligible for discretionary bonuses. In addition, Employee shall be entitled to receive all other benefits or participate in any employee benefit plans generally available to executive personnel of Employer, including without limitation, any hospital, medical, accident, disability, life insurance, and dental coverages, any stock option or savings plans (including, without limitation, the 1997 Equity and Cash Incentive Plan), or any pension or other retirement benefit plans. (e) Employer shall promptly reimburse Employee for all business expenses incurred by Employee during the Employment Period; shall promptly pay or reimburse Employee for club and professional association dues, assessments and fees for at least such clubs and associations as Employee was a member of and Employer was making such payments or reimbursements on the date of this Agreement; and shall provide to Employee for his exclusive business and personal use an automobile of his selection, pay all expenses of ownership, operation, repair and maintenance of such vehicle, provide suitable substitute vehicle in the event such automobile is not available for use by Employee for any reason and replace such automobile not less often than biannually with a new vehicle at the option of Employee. 3. Termination (a) if Employee dies, the Employment Period or the "Noncompete Period" (as hereinafter defined) shall end and his employment hereunder shall be deemed to cease as of the date of his death. (b) If Employee is incapacitated by accident, sickness, or otherwise so as to render him, for a period of 365 consecutive days, mentally or physically incapable of performing the services required of him under this Agreement and, if requested by Employee, the basis for such incapacity is certified by a licensed physician, Employer, acting through its board of directors, may terminate the Employment Period. (c) Employee shall have the right to terminate the Employment Period at any time by written notice to the board of directors of Employer. (d) Employer, acting through its board of directors, shall have the right to terminate the Employment Period for "cause" (as hereinafter defined), without further obligation hereunder on the part of Employer or Employee except payment to Employee of amounts earned or accrued hereunder to the date of termination, pursuant to the procedures specified in this Section 3(d); provided that the Employment Period shall not be terminated for cause after a Change of Control or if prior to the finding of the board of directors with respect thereto, the Employment Period shall have terminated for any other reason. For purposes of this Agreement, "cause" shall mean: (i) the willful and continued failure of Employee to perform substantially Employee's material duties pursuant to Section 1(b) hereof (other than any such failure resulting from, or contributed to by, incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to Employee by the board of directors which notice is adopted at an in-person meeting of the board of directors called and held for such purpose (after reasonable notice is provided to Employee and Employee is given an opportunity, together with counsel, to be heard before the board of directors) and which notice specifically identifies the manner in which Employee has not substantially performed his material duties, or (ii) because of conviction of Employee of a crime involving theft, embezzlement or fraud against Employer or a civil judgment in which Employer is awarded damages from Employee in respect of a claim of loss of funds through fraud or misappropriation by Employee, which in either case has become final and is not subject to further appeal, continued employment of Employee would be demonstrably injurious to Employer. Performance by Employee of his duties under Section 1(b) hereof shall be presumed to be substantially performed, and any act, or failure or act, based upon authority given pursuant to a resolution duly adopted by the board of directors or any committee of the board of directors or based upon the advice of counsel for Employer (including members of its legal staff) or which has been acquiesced in by the board of directors shall be conclusively presumed to be done, or omitted to be done, by Employee consistent with his obligations under Section 1(b) hereof. Termination of the Employment Period for cause shall not occur unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of all of the members of the board of directors excluding Employee at an in-person meeting of the board of directors called and held for such purpose (after notice of not less than 20 business days is provided to Employee and Employee is given an opportunity, together with counsel, to be heard before the board of directors), finding that, in the good faith opinion of the board of directors, termination for cause is justified based solely on information presented at such meeting. (e) Employer, acting through its board of directors, shall have the right to terminate Employee without cause, by written notice to Employee, not less than 20 business days in advance of such termination (f) Any amounts due Employee hereunder in the event of termination of the Employment Period shall be considered severance pay in consideration of his past services and in consideration of his continued services from the date hereof, are considered reasonable by Employer and not in the nature of a penalty, shall not be reduced by compensation or income received by Employee from any other employment or other source and shall not be offset by any claims Employer may have against Employee; timely payment of such amounts is further agreed by the parties hereto to be in full satisfaction and compromise of any claims arising out of the performance or nonperformance of this Agreement that either party might have against the other, other than any claims Employee may have under the provisions of Section 11 hereof. 4. Noncompetition and Confidentiality (a) If the Employment Period is terminated by reason of voluntary termination by Employee pursuant to Section 3(c) hereof or by reason of disability of Employee pursuant to Section 3(b) hereof, then Employee agrees that he shall not for a period of five years (the "Noncompete Period") compete with Employer as hereinafter provided, and in consideration of Employee's agreement not to compete during the Noncompete Period, Employer shall pay to Employee a fee, payable in the manner set forth in Section 2 hereof, at the annual rate of (i) 60 percent of the Basic Salary at the date of such termination, plus (ii) 60 percent of the greater of (a) the average of the Incentive Compensation earned pursuant to Section 2(c)(i) (irrespective of any decision to defer any payment with respect thereto) for the preceding three calendar years under this Agreement (or incentive compensation earned under any prior agreement between Employee and Employer relating to employment of Employee by Employer), or (b) Incentive Compensation pursuant to Section 2(c)(i) which would have been payable to Employee for the year in which the Noncompete Period begins as if the Employment Period had not terminated. In the event of a Change of Control occurring during the period beginning 12 months prior to the commencement of the Noncompete Period or at any time during the Noncompete Period, Employee may elect to be paid in cash, within ten days after giving notice of such election to Employer, an amount equal to the balance of the fee payable under this Section 4 for the five- year term of the Noncompete Period, with Incentive Compensation for the purpose of such payment to be calculated on the basis of the average of Incentive Compensation earned for the preceding three calendar years under this Agreement (or any such prior agreement). In addition, during the Noncompete Period, Employee shall be entitled to participate at the expense of Employer in all employee benefits generally available to executive personnel of Employer or available to him alone immediately prior to termination of the Employment Period, including without limitation, any hospital, accident, disability, life insurance or dental coverages, provided that participation by Employee in any such plan is not prohibited by the terms of any contract with any provider of services under any such plan or prohibited by the Code or the regulations thereunder or by any other applicable legal requirements governing the qualification or administration of such plans. Employer shall maintain an executive office for Employee within Providence, Rhode Island for Employee's use during the term of the Noncompete Period and shall provide Employee with secretarial and other administrative services, all reasonably suitable to his then current needs and consistent with his former offices and duties during the Employment Period. Employee's agreement not to compete with Employer during the Noncompete Period shall be limited to prohibiting Employee from owning a greater than 5% equity interest in, serving as a director, officer, employee or partner of, or being a consultant to or co-venturer with any business enterprise or activity that competes in North America with any line of business conducted by Employer or any of its subsidiaries at the termination of the Employment Period and accounting for more than 5% of Employer's gross revenues for its fiscal year ending immediately prior to the year in which the Employment Period ends. During the Noncompete Period, Employee agrees that he will not hire or attempt to hire any person employed by Employer or any of its subsidiaries during the 24 month period prior to the termination of the Employment Period, assist such a hiring by any other person or entity, encourage any such employee to terminate his relationship with Employer (or any such subsidiary) or solicit or encourage any customer or vendor of Employer to terminate its relationship with Employer. (b) Employee shall hold in a fiduciary capacity for the benefit of Employer all secret or confidential information, knowledge or data relating to Employer or any of its subsidiaries, and their respective businesses, which shall have been obtained by Employee during Employee's employment by Employer and which shall not be or become public knowledge (other than by acts by Employee or representatives of Employee in violation of this Agreement). After termination of Employee's employment with Employer, Employee shall not, without the prior written consent of Employer or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than Employer and those designated by it. 5. Severance Pay-Termination by Employer If the Employment Period shall terminate by reason of Employer's exercise of its right under Section 3(e) to terminate without cause or in the event Employee elects to terminate the Employment Period for "good reason" (as hereinafter defined), Employer shall thereafter be obligated to pay and Employee shall be entitled to receive as severance pay hereunder, for a period of five years beginning as of the first day following such termination, an amount for each year, payable in the manner set forth in Section 2 hereof, equal to (i) 70 percent of the Basic Salary as of the date of such termination, plus (ii) 70 percent of the greater of (a) the average of the Incentive Compensation earned pursuant to Section 2(c)(i) (irrespective of any decision to defer any payment with respect thereto) for the preceding three calendar years under this Agreement (or incentive compensation earned under any prior agreement between Employee and Employer relating to employment of Employee by Employer), or (b) Incentive Compensation pursuant to Section 2(c)(i) which would have been payable to Employee for the year in which termination occurs as if the Employment Period had not terminated. If there shall have occurred a Change of Control within the 24 months preceding such a termination of the Employment Period or during the 12 months following such a termination of the Employment Period, Employee may elect to be paid in cash, within ten days after giving notice of such election to Employer, an amount equal to the balance of severance pay to Employee under this Section 5 with Incentive Compensation for the purpose of such payment to be calculated on the basis of the average of the Incentive Compensation earned pursuant to Section 2(c)(i) for the preceding three calendar years under this Agreement as if the Employment Period had not terminated (or incentive compensation earned under any such prior agreement). For purposes of this Agreement, "good reason" shall mean: (i) any reduction of, or failure to pay, Employee's Basic Salary or Incentive Compensation as described in Section 2(a), (b) and (c) hereof; (ii) any failure to provide the benefits or payments required by Sections 2(d) and (e), 9, 10, 11 and 12 hereof; (iii) assignment to Employee of any duties inconsistent in any respect with his position (including status, offices and tides), authority, duties or responsibilities as contemplated by Section 1(b) above or any other action by Employer which results in a diminution of such position, authority, duties or responsibilities; (iv) failure after a Change of Control to comply with and satisfy Section 6(b) hereof; (v) relocation of Employer's principal executive offices, or any event that causes Employee to have his principal place of work changed, to any location outside Providence, Rhode Island; (vi) any requirement by Employer that Employee travel away from his office in the course of his duties significantly more than the number of consecutive days or aggregate days in any calendar year than was required of him prior to the date of this Agreement; and (vii) without limiting the generality or effect of the foregoing, any other material breach of this Agreement by Employer or any successor thereto or transferee of substantially all the assets thereof. For purposes of this agreement, any good faith determination of good reason made by Employee shall be conclusive. In the event of such a termination of the Employment Period, Employee shall continue for a period of 60 months after termination of the Employment Period to be covered at the expense of Employer by the same or equivalent hospital, medical, accident, disability and life insurance coverages as he was covered immediately prior to termination of the Employment Period; provided, however, that Employee may elect to be paid in cash, within 15 days after termination of the Employment Period, an amount equal to Employer's cost of providing such coverages during such period. 6. Change of Control (a) For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if and when: (i) Employer ceases to be a publicly owned corporation having at least 500 stockholders; or (ii)There occurs any event or series of events that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, in a Form 8-K filed under the Exchange Act or in any other filing by Employer with the Securities and Exchange Commission; or (iii) Employer executes an agreement of acquisition, merger, or consolidation which contemplates that after the effective date provided for in the agreement, all or substantially all of the business and/or assets of Employer shall be controlled by another Person; provided, however, for purposes of this clause (iii) that (x) if such an agreement requires as a condition precedent approval by Employer's shareholders of the agreement or transaction, a Change of Control shall not be deemed to have taken place unless and until such approval is secured and, (y) if the voting shareholders of such other Person shall, immediately after such effective date, be substantially the same as the voting shareholders of Employer immediately prior to such effective date, the execution of such agreement shall not, by itself, constitute a "Change of Control"; or (iv) Any Person which does not include Employee becomes the beneficial owner, directly or indirectly (either as a result of the acquisition of securities or as the result of an arrangement or understanding, including the holding of proxies, with or among security holders), of securities of Employer representing 25% or more of the votes that could then be cast in an election for members of Employer's board of directors unless within 15 days of being advised that such ownership level has been reached, Employer's board of directors adopts a resolution approving the acquisition of that level of securities ownership by such Person; or (v) During any period of 24 consecutive months, commencing after the effective date of this Agreement, individuals who at the beginning of such 24-month period were directors of Employer shall cease to constitute at least a majority of Employer's board of directors, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two thirds of (x) the directors then in office who were directors at the beginning of the 24-month period, or (y) the directors specified in clause (x) plus directors whose election has been so approved by directors specified in clause (x). (b) If Employer is at any time before or after a Change of Control merged with or consolidated into or with any other Person (whether or not Employer is the surviving entity), or if substantially all of the assets of Employer are transferred to another Person, the Person resulting from such merger or consolidation, or the acquirer of such assets, shall (by agreement in form and substance satisfactory to Employee) expressly assume the obligations of Employer under this Agreement. In any event, however, the provisions of this Agreement shall be binding upon and inure to the benefit of the Person resulting from such merger or consolidation or the acquirer of such assets, and this Section 6(b) will apply in the event of any subsequent merger or consolidation or transfer of assets. In the event of any such merger, consolidation or sale of assets, nothing contained in this Agreement will detract from or otherwise limit Employee's right to or privilege of participation in any stock option or purchase plan or any bonus, profit sharing, pension, group insurance, hospitalization or other incentive or benefit plan or arrangement which may be or become applicable to executives of the Person from such merger or consolidation or acquiring such assets of Employer. In the event of any such merger, consolidation or sale of assets, references to Employer in this Agreement shall unless the context suggests otherwise be deemed to include the Person resulting from such merger or consolidation or acquiring of such assets of Employer. 7. Death Benefit If the Employment Period or the Noncompete Period shall terminate by reason of Employee's death, his estate or designated beneficiary shall thereafter be entitled to receive from Employer a death benefit (i) in the case of such a termination of the Employment Period, for a period of five years beginning as of the first day following his death, in an amount equal to 60 percent of the Basic Salary as of the date of his death, plus 60 percent of the greater of (a) the average of the Incentive Compensation earned pursuant to Section 2(c)(i) (irrespective of any decision to defer any payment with respect thereto) for the preceding three calendar years under this Agreement (or incentive compensation earned under any prior agreement between Employee and Employer relating to employment of Employee by Employer), or (b) Incentive Compensation pursuant to Section 2(c)(i) which would be payable to Employee if the Employment Period had not terminated, such death benefit shall be payable in the manner set forth in Section 2 hereof; or (ii) in the case of such a termination of the Noncompete Period, for the remainder of the Noncompete Period, an amount equal to the annual rate of the fee payable to Employee at the date of such termination; such death benefit shall be payable in the manner set forth in Section 2 hereof. 8. Disability Benefit If the Employment Period shall terminate by reason of Employee's physical or mental disability, Employee, or in the event of his death, his estate, shall thereafter be entitled to receive from Employer: (i) for a period of five years commencing from the date of such termination, a disability benefit in an amount equal to 60 percent of the Basic Salary as of the date of such termination, plus 60 percent of the greater of (a) the average of the Incentive Compensation earned pursuant to Section 2(c)(i) (irrespective of any decision to defer any payment with respect thereto) for preceding three calendar years under this Agreement (or incentive compensation earned under any prior agreement between Employee and Employer relating to employment of Employee by Employer), or (b) Incentive Compensation pursuant to Section 2(c)(i) which would be payable to Employee if the Employment Period had not terminated, payable in the manner set forth in Section 2 hereof; and (ii) for what would have been the duration of the Employment Period without such termination unless Employee should earlier die, Employer will not terminate the Insurance Agreements (as defined in Section 10 hereof). 9. Deferred Compensation Employee may defer receipt of all or any part of the Incentive Compensation pursuant to Section 2(c)(i) otherwise due him under this Agreement in respect of any year of the Employment Period, provided that prior to the end of such year for which such Incentive Compensation would otherwise be payable, Employee notifies Employer of his irrevocable election to so defer such receipt, stating in such notice the period during which such receipt is to be deferred and the period over which such Incentive Compensation is to be paid once such deferral has terminated. Any such deferred Incentive Compensation shall be a general unsecured obligation of Employer to Employee and shall bear interest at the interest rate per annum announced and made effective from time to time by Fleet National Bank (or its successor) as its prime rate (the "Rate") which shall accrue and be paid in equal monthly increments over the period the Incentive Compensation to which it relates is to be paid with the unpaid amount of such Incentive Compensation and unpaid interest to bear interest at the Rate which shall be paid in arrears as each such installment of deferred Incentive Compensation is payable. 10. Split Dollar Life Insurance. Employer and Employee or a trust established by him have entered into the split dollar life insurance agreements listed on Schedule 1 hereto (the "Insurance Agreements"). In the event of a Change of Control during the Employment Period or the Noncompete Period, Employer agrees not to terminate any of the Insurance Agreements until the Employment Period or the Noncompete Period, as the case may be, would have terminated, provided that in such event Employer's obligation to pay premiums pursuant to the Insurance Agreements shall be limited to applying the cash value of the policies (including accumulated dividends and the value of any paid-up additions) to premium payments. If in such event such cash value is insufficient to pay all required premiums, Employer shall consult with Employee and apply cash value to payment of premiums as directed by Employee. As to policies where such premiums are not to be paid by the application of cash value, at the election of Employee Employer will either permit Employee to pay premiums to the extent not paid from the application of cash value or transfer such policies to Employee, conditioned upon Employee's executing any additional instruments reasonably necessary to preserve Employer's rights under the Insurance Agreements. 11. Gross-up Payment In the event that it is determined that any payment or benefit provided by Employer to or for the benefit of Employee, either under this Agreement or otherwise, will be subject to the excise tax imposed by section 4999 of the Code or any successor provision ("section 4999"), Employer will, prior to the date on which any amount of the excise tax must be paid or withheld, make an additional lump-sum payment (the "gross-up payment") to Employee. The gross-up payment will be sufficient, after giving effect to all federal, state and other taxes and charges (including interest and penalties, if any) with respect to the gross-up payment, to make Employee whole for all taxes (including withholding taxes) and any associated interest and penalties, imposed under or as a result of section 4999. Determinations under this Section 11 will be made by Arthur Anderson LLP unless Employee has reasonable objections to the use of that firm, in which case the determinations will be made by a comparable firm chosen by Employee after consultation with Employer (the firm making the determinations to be referred to as the "Firm"). The determinations of the Firm will be binding upon Employer and Employee except as the determinations are established in resolution (including by settlement) of a controversy with the Internal Revenue Service to have been incorrect. All fees and expenses of the Firm will be paid by Employer. If the Internal Revenue Service asserts a claim that, if successful, would require Employer to make a gross-up payment or an additional gross-up payment, Employer and Employee will cooperate fully in resolving the controversy with the Internal Revenue Service. Employer will make or advance such gross-up payments as are necessary to prevent Employee from having to bear the cost of payments made to the Internal Revenue Service in the course of, or as a result of, the controversy. The Firm will determine the amount of such gross-up payments or advances and will determine after resolution of the controversy whether any advances must be returned by Employee to Employer. Employer will bear all expenses of the controversy and will gross Employee up for any additional taxes that may be imposed upon Employee as a result of its payment of such expenses. 12. Indemnification Anything in this Agreement to the contrary notwithstanding, Employer agrees to pay all costs and expenses incurred by Employee in connection with the enforcement of this Agreement and will indemnify and hold harmless Employee from and against any damages, liabilities and expenses (including without limitation fees and expenses of counsel) incurred by Employee in connection with any litigation or threatened litigation, including any regulatory proceedings, arising out of the making, performance or enforcement of this Agreement or termination of the Employment Period. 13. Notices All notices or other Communications given hereunder shall be in writing and shall be deemed to have been duly given if mailed by certified mail or hand delivered, if to Employer, at 50 Kennedy Plaza, Providence, Rhode Island 02903-2360, or at such other address as Employer shall have furnished to Employee in writing, or if to Employee, at 166 President Avenue, Providence, Rhode Island 02906, or at such other address as Employee shall have furnished to Employer in writing. 14. Governing Law This Agreement shall be governed by the laws of the State of Rhode Island and Providence Plantations. 15. Severability The provisions of this Agreement are severable, and in the event that any one or more paragraphs are deemed illegal or unenforceable, the remaining paragraphs shall remain in full force and effect. 16. Shareholder Approval/Prior Agreements This Agreement shall be submitted to Employer's shareholders for approval at Employer's next annual meeting of shareholders occurring after the date hereof. In the event this Agreement is so approved by Employer's shareholders, this Agreement together with the employment agreement dated as of January 1, 1984 between Employer and Employee, as amended (the "1984 Agreement), will constitute the entire agreement between Employee and Employer, and as of January 1, 1998 this Agreement will supersede all prior negotiations and written or oral agreements with respect to the full time employment of Employee by Employer, except that no rights arising under the 1984 Agreement prior to January 1, 1998, including without limitation the right of Employee to incentive compensation or other compensation or benefits under the 1984 Agreement, shall be affected hereby. In the event this Agreement is not so approved, the 1984 Agreement shall continue in effect. No changes, alterations or modifications hereof may be made, except by a writing signed by each of the parties hereto. 17. Assignment This agreement is personal to Employee and without the prior written consent of Employer shall not be assignable by Employee otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Employer's legal representative. This Agreement shall inure to the benefit of and be binding upon Employer and its successors and assigns. 18. Counterparts This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of February 26, 1997. ATTEST: NORTEK, INC. /s/Kevin W. Donnelly /s/Richard J. Harris - -------------------- -------------------- Secretary Richard J. Harris Vice President and Treasurer WITNESS: /s/William I. Kelly /s/Richard L. Bready - ------------------- -------------------- Richard L. Bready, Employee Exhibit 1 NOTE February __, 1997 FOR VALUE RECEIVED, the undersigned Richard L. Bready ("Bready"), hereby promises to pay Nortek, Inc., a Delaware corporation (the "Lender"), on or before February __ 2007, THREE MILLION DOLLARS ($3,000,000), with interest accruing daily from the date hereof on the aggregate principal amount of such loan from time to time unpaid at the applicable federal long-term rate (determined in accordance with Section 1274 of the Internal Revenue Code of 1986) in effect on such day (the "Rate"), such interest to be payable annually in arrears on the date provided below for prepayments of principal or upon maturity or prepayment in full hereof. Bready also promises to pay interest at the Rate on overdue principal and, to the extent permitted by applicable law, on overdue installments of interest. Interest shall be computed on the basis of a 365-day year. On the last business day of February in each year from 1998 through 2007 inclusive, Bready shall prepay, without premium, the lesser of $300,000 of principal of this Note or the aggregate amount of principal of this Note then outstanding; provided, however, that the aggregate unpaid principal of the loan represented by this Note, plus accrued interest thereon, shall, without the requirement of any action on the part of the Lender, become immediately due and payable if Bready shall: (i) commence a voluntary case under Title 11 of the United States Code or any successor statute (the "Bankruptcy Code") or authorize the commencement of such a voluntary case; (ii) have filed against him a petition commencing an involuntary case under the Bankruptcy Code which shall not have been dismissed within 60 days after the date on which such petition is filed; (iii) file an answer or other pleading in an involuntary case under the Bankruptcy Code admitting or failing to deny the material allegations of the petition commencing such involuntary case, or seeking, consenting to or acquiescing in the relief requested by such petition; (iv) have entered against him an order for relief in any involuntary case commenced under the Bankruptcy Code; (v) seek relief as a debtor under any applicable law, other than the Bankruptcy Code, of any jurisdiction relating to the modification or alteration of the rights of creditors, or consent to or acquiesce in such relief; (vi) have entered against him an order by a court of competent jurisdiction (a) finding him to be bankrupt or insolvent, (b) ordering or approving any modification or alteration of the rights of his creditors or (c) assuming custody of, or appointing a receiver or other custodian for, all or a substantial portion of his property; or (vii) make an assignment for the benefit of, or enter into a composition with, his creditors, or appoint, or consent to the appointment of, or suffer to exist a receiver or other custodian for, all of his property. The principal of this Note may be prepaid in whole or in part without premium. Payments hereunder shall be made to the Lender at its principal offices at 50 Kennedy Plaza, Providence, Rhode Island 02903, or at such other location as the Lender shall have from time to time designated to Bready in writing. The parties hereto, including Bready and all guarantors and endorsers, hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note and assent to extensions of time of payment, forbearance or other indulgence without notice. Bready agrees to pay all costs and expenses incurred by Lender in connection with the enforcement of this Note and will indemnify and hold harmless Lender from and against any damages, liabilities and expenses (including without limitation fees and expenses of counsel) incurred by Lender in connection with any litigation or threatened litigation, including any regulatory proceedings, arising out of the making, performance or enforcement of this Note. This Note shall be governed by and construed in accordance with the laws of the State of Rhode Island and Providence Plantations. WITNESS: _____________________________ ______________________________ Richard L. Bready Schedule 1 SPLIT DOLLAR AGREEMENTS BENEFITING RICHARD L. BREADY Agreement Policies Covered by Agreement New York Life Policy No. Face Amount ------------- ----------- Split Dollar Agreement dated as of 45 954 985} $15,000,000 December 20, 1996 between Nortek 45 954 942} Combined and Douglass N. Ellis, Jr., as trustee of The Richard L. Bready 1996 Irrevocable Trust Confirmatory Split Dollar Agreement 37 324 765 $ 150,000 No. 1 dated as of December 31, 1996 37 367 086 $ 97,000 between Nortek and Richard L. 37 679 014 $ 2,000,000 Bready Confirmatory Split Dollar Agreement 38 977 829 $ 1,200,000 No. 2 dated as of December 31, 1996 between Nortek and Richard L. Bready -----END PRIVACY-ENHANCED MESSAGE-----