-----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, AnUHrXO8G8K/tQfjcQgs5VPOJVkibD0A/KqxeQ4oYHIMMxcdUg9I0M9mlPw7r6tE u1SC+OE2FIzoYXxI8FalWA== 0000072423-97-000018.txt : 20030213 0000072423-97-000018.hdr.sgml : 20030213 19970910173805 ACCESSION NUMBER: 0000072423-97-000018 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970826 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970910 DATE AS OF CHANGE: 19970915 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06112 FILM NUMBER: 97678638 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 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): August 26, 1997 ---------------------- NORTEK, INC. - ---------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 1-6112 05-0314991 - ---------------------------------------------------------------------- (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) 50 Kennedy Plaza, Providence, RI 02903-2360 - ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number: (401) 751-1600 ---------------------------------------- N/A (Former name or former address, if changed since last report) Item 2. Acquisition or Disposition of Assets On July 24, 1997, Nortek, Inc. ("Nortek"), its wholly-owned subsidiary, NTK Sub, Inc. ("NTK Sub") and Ply Gem Industries, Inc. ("Ply Gem") entered into an Agreement and Plan of Merger (the "Merger Agreement"). In connection with the Merger Agreement, on July 29, 1997, NTK Sub commenced a tender offer to purchase all outstanding shares of Common Stock of Ply Gem, at a price of $19.50 per share, net to the seller in cash. Upon entering into the Merger Agreement, Nortek and Ply Gem simultaneously entered into a Stock Purchase Agreement whereby, among other things, Nortek agreed to purchase 640,000 shares for an aggregate purchase price of $12.0 million, and entered into agreements to terminate employment with certain officers of Ply Gem. On August 26, 1997, NTK Sub accepted for payment all shares of common stock, par value $.25 per share (the "Shares") of Ply Gem tendered pursuant to the offer for the Ply Gem Shares. On August 26, 1997, an aggregate of approximately 12,979,496 Shares were tendered and not withdrawn, which when added to the Shares owned by Nortek, constituted approximately 93.1 percent of Ply Gem's Shares outstanding. Prior to accepting for payment tendered Shares of Ply Gem on August 26, 1997, Nortek sold $310.0 million aggregate principal amount of 9 1/8% Senior Notes due 2007 ("9 1/8% Notes") in a private offering (under an exemption pursuant to Securities and Exchange Commission ("SEC") Rule 144A) to qualified institutional investors at a slight discount. Nortek used a portion of these net proceeds, together with available cash, to purchase the Shares of Ply Gem, fund a $50.0 million payment to terminate Ply Gem's existing accounts receivable securitization program and pay certain fees and expenses. Also on August 26, 1997, prior to the acquisition, Ply Gem refinanced approximately $108.9 million of Ply Gem existing indebtedness. NTK Sub paid or will pay consideration of approximately $282.7 million (which includes $12.0 million for the 640,000 shares discussed above) for Ply Gem Shares, which consideration it has and will obtain from Nortek. Ply Gem also canceled stock options for 6,233,191 shares for consideration in the approximate amount of $37.4 million and has canceled unvested stock for consideration in the approximate amount of $1.95 million. The merger of NTK Sub into Ply Gem (the "Merger"), pursuant to the Merger Agreement occurred on September 4, 1997. As part of the Merger, NTK Sub was merged with and into Ply Gem, resulting in Ply Gem becoming a wholly-owned subsidiary of Nortek. Because NTK Sub was the beneficial owner of more than 90% of the outstanding Shares, the Merger was effected without a meeting of stockholders of Ply Gem. In the Merger, each issued and outstanding Share (other than dissenting Shares) not owned directly or indirectly by Nortek or Ply Gem was converted into the right to receive $19.50 in cash, without interest. Ply Gem is a leading manufacturer and distributor of building products used in the remodeling or new construction of residential and light commercial properties. Ply Gem's operations are located throughout the United States and in Canada. Item 7. Financial Statements, Pro Forma Financial Information and --------------------------------------------------------- Exhibits. -------- (a) Financial Statements of Business Acquired The consolidated financial statements of Ply Gem Industries, Inc. and subsidiaries as of December 31, 1996 and 1995 and for the three year period ended December 31, 1996, together with the notes thereto. Unaudited consolidated condensed balance sheet of Ply Gem Industries, Inc. and subsidiaries as of June 30, 1997, together with unaudited consolidated condensed statements of earnings and cash flows for the second quarter and six months ended June 30, 1996 and 1997, together with the notes thereto. (b) Pro Forma Information Unaudited Nortek, Inc. and Subsidiaries and Ply Gem Pro Forma Combined Condensed Balance Sheet as of June 28, 1997, together with unaudited Nortek, Inc. and Subsidiaries and Ply Gem Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 1996 and the six months and twelve months ended June 28, 1997. (c) Exhibits 2.1 Agreement and Plan of Merger dated as of July 24, 1997 among Nortek, Inc., NTK Sub, Inc. and Ply Gem Industries, Inc. (incorporated by reference to Exhibit 2.1 to the form 8-K filed by Nortek, Inc. on July 29, 1997, File No. 1-6112). 2.2 Amendment No. 1 dated as of September 2, 1997 to the Agreement and Plan of Merger dated as of July 24, 1997 among Nortek, Inc., NTK Sub, Inc. and Ply Gem Industries, Inc. 23.1 Consent of Independent Certified Public Accountants 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 hereunto duly authorized. NORTEK, INC. Date: September 10, 1997 By: /s/ Almon C. Hall ------------------ Almon C. Hall Vice President-Controller Item 7(a) Financial Statements of Business Acquired Consolidated Balance Sheets - --------------------------- Ply Gem Industries, Inc. and Subsidiaries December 31, 1996 1995 ASSETS Cash and cash equivalents $ 9,924,000 $ 8,107,000 Accounts receivable, net of allowance of $3,039,000; $4,511,000 in 1995 28,003,000 31,736,000 Inventories 92,983,000 96,228,000 Prepaid and deferred income taxes 10,905,000 15,714,000 Other current assets 12,975,000 10,478,000 ------------ ------------ Total current assets 154,790,000 162,263,000 Property, plant and equipment-at cost, net 90,681,000 81,832,000 Patents and trademarks, net of accumulated amortization of $9,776,000; $8,971,000 in 1995 13,793,000 15,334,000 Intangible assets, net 14,794,000 15,507,000 Cost in excess of net assets acquired, net 21,618,000 23,081,000 Other assets 17,771,000 26,973,000 ------------ ------------ Total assets $ 313,447,000 $ 324,990,000 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 50,937,000 $ 40,455,000 Accrued restructuring 1,138,000 4,480,000 Accrued payroll and commissions 10,408,000 7,790,000 Accrued insurance 4,285,000 4,400,000 Current maturities of long-term debt and capital leases 1,380,000 458,000 ---------- ---------- Total current liabilities 68,148,000 57,583,000 Long-term debt 73,166,000 93,135,000 Capital leases 9,231,000 7,106,000 Other liabilities 17,119,000 22,681,000 Stockholders' equity Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued ___ ___ Common stock, $.25 par value; authorized 60,000,000 shares; issued 17,676,540 shares; 17,463,072 shares in 1995 4,419,000 4,366,000 Additional paid-in capital 149,226,000 148,618,000 Retained earnings 61,993,000 53,246,000 ----------- ----------- 215,638,000 206,230,000 Less: Treasury stock-at cost (3,687,954 shares; 3,015,311 shares in 1995) 63,936,000 55,676,000 Unamortized restricted stock and note receivable 5,919,000 6,069,000 ----------- ----------- Total stockholders' equity 145,783,000 144,485,000 ----------- ----------- Total liabilities and stockholders' equity $ 313,447,000 $ 324,990,000 ============= ============= The accompanying notes are an integral part of these statements. Consolidated Statements of Operations - ------------------------------------- Ply Gem Industries, Inc. and Subsidiaries Years ended December 31, 1996 1995 1994 ----------- ------------ ---------- Net sales $774,928,000 $755,198,000 $808,874,000 Cost of goods sold 626,424,000 630,552,000 653,270,000 ------------ ------------ ------------- Gross profit 148,504,000 124,646,000 155,604,000 Selling, general and administrative expenses 119,494,000 114,171,000 118,726,000 Write-down of long-lived assets --- 11,950,000 --- Nonrecurring charges --- --- 40,962,000 ----------- ----------- ------------ Income (loss) from operations 29,010,000 (1,475,000) (4,084,000) Interest expense (6,773,000) (6,649,000) (7,479,000) Other expense (2,658,000) (2,138,000) (386,000) ------------ ------------ -------------- Income (loss) before income taxes 19,579,000 (10,262,000) (11,949,000) Income tax provision (benefit) 9,125,000 (2,860,000) (3,418,000) ------------ ------------ -------------- NET INCOME (LOSS) $10,454,000 $ (7,402,000) $ (8,531,000) ============ ============ ============== Earnings (loss) per share $ .74 $ (.51) $ (.62) ============ ============ ============== Weighted average number of shares outstanding 14,065,000 14,445,000 13,870,000 The accompanying notes are an integral part of these statements. Consolidated Statements of Stockholders' Equity - ----------------------------------------------- Ply Gem Industries, Inc. and Subsidiaries Three years ended December 31, 1996, 1995 and 1994 Common stock ------------------ Number Additional of paid-in Shares Amount capital ------- ------ ------- Balance at January 1, 1994 11,872,509 $2,968,000 $64,006,000 Cash dividends on common stock ($.12 per share) Exercise of employee stock options 2,672,318 668,000 23,423,000 Tax benefit arising from exercise of stock options 9,962,000 Conversion of debentures 2,751,328 688,000 48,379,000 Purchase of stock for treasury Other 40 - 1,197,000 Net loss Balance at December 31, 1994 17,296,195 4,324,000 146,967,000 Cash dividends on common stock ($.12 per share) - - - Exercise of employee stock options 166,872 42,000 1,494,000 Tax benefit arising from exercise of stock options 174,000 Shares held for distribution to employee profit sharing trust - - - Purchase of stock for treasury - - - Other 5 - (17,000) Net loss - - - Balance at December 31, 1995 17,463,072 4,366,000 148,618,000 Cash dividends on common stock ($.12 per share) - - - Exercise of employee stock options 213,468 53,000 1,916,000 Tax benefit arising from exercise of stock options 367,000 Contribution of treasury stock to employee profit sharing trusts (1,039,000) Purchase of stock for treasury Other (636,000) Net income ----------- ---------- ------------ Balance at December 31, 1996 17,676,540 $4,419,000 $149,226,000 The accompanying notes are an integral part of these statements. Number Retained of earnings shares Amount -------- ------ ------ Balance at January 1, 1994 $72,601,000 910,073 9,362,000 Cash dividends on common stock ($.12 per share) (1,673,000) Exercise of employee stock options 1,197,241 29,465,000 Tax benefit arising from exercise of stock options Conversion of debentures Purchase of stock for treasury 640,700 12,175,000 Other (2,695) (48,000) Net loss (8,531,000) Balance at December 31, 1994 62,397,000 1,745,319 50l,954,000 Cash dividends on common stock ($.12 per share) (1,749,000) Exercise of employee stock options 30,580 573,000 Tax benefit arising from exercise of stock options Shares held for distribution to employee profit sharing trust (52,500) (819,000) Purchase of stock for treasury 292,000 4,955,000 Other (88) 13,000 Net loss (7,402,000) Balance at December 31, 1995 53,246,000 3,015,311 55,676,000 Cash dividends on common stock ($.12 per share) (1,707,000) Exercise of employee stock options 63,612 915,000 Tax benefit arising from exercise of stock options Contribution of treasury stock to employee profit sharing trusts (140,700) (2,608,000) Purchase of stock for treasury Other 752,200 9,998,000 Net income 10,454,000 ----------- -------- ---------- Balance at December 31, 1996 $61,993,000 3,687,954 $63,936,000 Consolidated Statements of Cash Flows Ply Gem Industries, Inc. and Subsidiaries Years ended December 31, 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $10,454,000 $(7,402,000) $(8,531,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation $11,359,000 $10,521,000 $ 8,733,000 Amortization 3,594,000 3,650,000 4,652,000 Non-cash profit sharing expense 2,243,000 Write-down of long-lived assets 11,950,000 Nonrecurring charges net of cash payments of $5,223,000 35,739,000 Deferred taxes 3,339,000 3,644,000 (8,067,000) Provision for doubtful account s1,982,000 1,505,000 874,000 Changes in assets and liabilities Accounts receivable 1,751,000 9,617,000 10,515,000 Inventories 3,245,000 6,861,000 5,575,000 Prepaid expenses and other current assets 2,135,000 (5,129,000) 1,459,000 Accounts payable and accrued expenses 12,985,000 (8,195,000) 3,860,000 Income taxes payable (4,902,000) Accrued restructuring (5,574,000) (10,608,000) Other assets 3,141,000 (5,305,000) (1,061,000) ---------- ------------ ------------ 40,200,000 18,511,000 57,377,000 Net cash provided by operating activities 50,654,000 11,109,000 48,846,000 ----------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (17,583,000) (27,827,000) (23,046,000) Funds used for construction 1,327,000 Proceeds from property, plant and equipment disposals 473,000 799,000 1,681,000 Proceeds from sales of marketable securities, net 788,000 Other (17,000) 25,000 129,000 ----------- ------- --------- Net cash used in investing activities (17,127,000) (26,215,000) (19,909,000) ------------ ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Short-term debt repayments, net (2,330,000) Repayment of long-term debt (533,000) (481,000) (881,000) Net increase (decrease) in revolving note borrowings with original maturity of 90 days or less (19,540,000) 14,040,000 (14,884,000) Purchase of stock for treasury (9,998,000) (4,955,000) (12,175,000) Cash dividends (1,707,000) (1,749,000) (1,673,000) Proceeds from exercise of employee stock options 1,500,000 1,499,000 6,491,000 Other (1,432,000) 456,000 (1,581,000) ------------ --------- ----------- Net cash provided by (used in) financing activities (31,710,000) 8,810,000 (27,033,000) Net increase (decrease) in cash and cash equivalents 1,817,000 (6,296,000) 1,904,000 Cash and cash equivalents at beginning of year 8,107,000 14,403,000 12,499,000 Cash and cash equivalents at end of year $ 9,924,000 $ 8,107,000 $14,403,000 The accompanying notes are an integral part of these statements. Notes to Consolidated Financial Statements Ply Gem Industries, Inc. and Subsidiaries NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ply Gem Industries, Inc. ("Ply Gem") through its subsidiaries (the "Company") operates predominantly in one industry segment, which consists of the manufacture and sale of vinyl siding, wood and vinyl- framed windows, doors, skylights, prefinished decorative plywood and decorator wall and floor coverings, furniture components, pressure- treated wood products and the distribution of other products for the building products and home improvement markets. Principles of Consolidation The consolidated financial statements include the accounts of Ply Gem Industries, Inc. and its wholly-owned subsidiaries after eliminating all significant intercompany accounts and transactions. Certain prior year items have been reclassified to conform to 1996 presentation. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and temporary investments having an original maturity of three months or less. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. Long-Lived Assets (a) Property, Plant and Equipment Owned property, plant and equipment are depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Service lives for principal assets are 5 to 35 years for buildings and improvements and 3 to 12 years for machinery and equipment. Leasehold improvements are amortized on a straight-line basis over their respective lives or the terms of the applicable leases, including expected renewal options, whichever is shorter. Capitalized leases are amortized on a straight-line basis over the terms of the leases or their economic useful lives. (b)Patents and Trademarks Purchased patents and trademarks are recorded at appraised value at time of the business acquisition and are being amortized on a straight-line basis over their estimated remaining economic lives; thirteen to seventeen years for patents and thirty years for trademarks. (c)Cost in Excess of Net Assets Acquired and Other Intangibles Cost in excess of net assets acquired is being amortized from twenty to thirty years on a straight-line basis. Other intangibles, which arose primarily from the allocation of purchase prices of businesses acquired, are being amortized on a straight-line basis over thirty-nine years. The Company annually evaluates the carrying value of its long-lived assets to evaluate whether changes have occurred that would suggest that the carrying amount of such assets may not be recoverable based on the estimated future undiscounted cash flows of the businesses to which the assets relate. Any impairment loss would be equal to the amount by which the carrying value of the assets exceed its fair value. Income Taxes Deferred income tax liabilities and assets reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss and credit carryforwards. These differences are classified as current or noncurrent based upon the classification of the related asset or liability. Deferred income tax assets, such as benefits related to net operating loss and credit carryforwards, are recognized to the extent that such benefits are more likely than not to be realized. Financial Instruments The Company utilizes various financial instruments to manage interest rate risk associated with its borrowings. Interest rate swap agreements modify the interest characteristics of a portion of the Company's debt. Amounts to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to interest expense. Interest rate caps are used to lock in a maximum interest rate if rates rise, but enables the Company to otherwise pay lower market rates. The cost of interest rate cap agreements are amortized to interest expense over the life of the cap. Payments received as a result of the cap agreements reduce interest expense. The unamortized costs of the cap agreements are included in other assets. The fair value for cash, receivables, accounts payable, and accrued liabilities approximate carrying amount because of the short maturity of these instruments. The fair value of long-term debt approximates its carrying amount, as the debt carries variable interest rates. Earnings (Loss) Per Share Earnings (loss) per share of common stock is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Stock options have been excluded from the calculations as their effect would be anti-dilutive. Stock Based Compensation The Company grants stock options for a fixed number of shares to employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company recognizes no compensation expense for the stock option grants. Customers The Company's products are distributed through an extensive network that includes major retail home center chains, specialty home remodeling distributors, lumber and building products wholesalers, professional contractors and Company operated distribution centers. The products are marketed predominately in the United States through Company sales personnel and independent representatives. One customer accounted for approximately 19% of the Company's net sales for the years ended December 31, 1996 and 1995 and approximately 14% in 1994. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 ACCOUNTS RECEIVABLE The Company has a program which currently allows for the sale of up to $50 million of undivided fractional interests in a designated pool of eligible accounts receivable to a financial institution with limited recourse. The program expires in April 1998. At December 31, 1996 and 1995 respectively, the Company sold $45 and $42 million of receivables under this program. Program costs of $3,540,000, $3,205,000, and $1,892,000 are included in "other expense" for 1996, 1995 and 1994, respectively. $5,000,000, due from officer, was repaid subsequent to year end. NOTE 3 INVENTORIES The classification of inventories at the end of each year was as follows: 1996 1995 Finished goods $53,833,000 $54,530,000 Work in progress 9,724,000 12,508,000 Raw materials 29,426,000 29,190,000 $92,983,000 $96,228,000 NOTE 4 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at the end of each year consisted of the following: 1996 1995 Land $ 2,668,000 $ 2,704,000 Buildings and improvements 27,044,000 24,853,000 Machinery and equipment 94,912,000 78,830,000 Transportation equipment 2,156,000 2,428,000 Furniture and fixtures 10,378,000 11,312,000 Capital leases 10,705,000 7,501,000 Construction in progress 5,575,000 5,777,000 153,438,000 133,405,000 Accumulated depreciation and amortization (62,757,000) (51,573,000) $90,681,000 $81,832,000 During the fourth quarter of 1995, the Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and recorded a non cash pretax charge of $12.0 million ($7.6 million after tax) related to the write-down of certain long-lived assets. The charge consisted of a write-down of approximately $9.5 million related to the Company's information system and $2.5 million related primarily to certain machinery and equipment. NOTE 5 INTANGIBLE AND OTHER ASSETS Accumulated amortization of cost in excess of net assets acquired and other intangible assets is $22,357,000 at December 31, 1996 and $19,917,000 at December 31, 1995. The balance sheet at December 31, 1996 includes notes receivable from an officer. The 1992 Note ($5,400,000 principal amount at December 31, 1996 including current maturities), has an average interest rate of 7.1% and is due in approximately equal annual installments through 2003. Under the terms of the note, principal and interest are forgiven upon the attainment of at least a 20% improvement in net income, as defined, compared to the prior year or at the discretion of the Board of Directors. Accordingly, the annual installments for 1996 and 1994 were forgiven. The 1994 Note ($3,000,000 principal amount at December 31, 1996 including current maturities) and the 1995 Note ($5,000,000 principal amount at December 31, 1996) have interest rates which are the higher of the Company's average bank borrowing rate or the applicable Federal rate in effect for such period. They are payable in annual installments of $250,000 each with the final payments due December 31, 1998 and April 30, 2001, respectively. Furthermore, under the terms of the officer's employment agreement, the notes are forgiven upon the occurrence of a change in control of the Company or the permanent disability of the officer. The long-term portion of the 1992 and 1994 Notes are included in other assets. The 1995 Note has been reflected as a reduction of stockholders' equity since the officer may reduce the indebtedness through the Company's redemption of its shares which are owned by the officer. NOTE 6 STOCKHOLDERS' EQUITY In addition to treasury stock, deductions from stockholders' equity consists of unamortized restricted stock of $919,000 and $1,069,000 at December 31, 1996 and 1995, respectively and notes receivable due from officer of $5,000,000 at December 31, 1996 and 1995. See Note 5. NOTE 7 SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the years ended December 31 is as follows: 1996 1995 1994 Interest paid (net of $453,000 capitalized in 1996, $746,000 in 1995 and $323,000 in 1994)$6,609,000$5,887,000$5,546,000 Income taxes paid $6,939,000 $ 872,000 $2,819,000 Noncash financing activities involve the issuance of common stock upon conversion of $49,963,000 of the Company's Debentures in 1994 and in 1996 the Company acquired approximately $3.2 million of equipment under capital leases. NOTE 8 LONG-TERM DEBT The composition of long-term debt at the end of each year was as follows: 1996 1995 Revolving credit facility expiring in 1999 $66,000,000 $ 85,540,000 Industrial Development Revenue Bonds maturing at various dates to 2012, generally at floating interest rates which are reset periodically (6.0 % weighted average interest rate for 1996) 7,561,000 7,955,000 Other 34,000 45,000 73,595,000 93,540,000 Less current maturities 429,000 405,000 $73,166,000 $ 93,135,000 The Company has a revolving credit facility with a syndicate of banks, which provides financing of up to $200 million through February 1999. Interest on borrowings are at varying rates based, at the Company's option, on the London Interbank Offered Rate (LIBOR) plus a spread or the bank's prime rate. The Company pays a facility fee quarterly which, based on a formula, averaged .42% of the committed amount during 1996. The average weighted interest rate on the credit facility for the year 1996 and 1995 was 6.7% and 6.9%, respectively (6.3% and 7.0% at December 31, 1996 and 1995, respectively). The credit facility includes customary covenants, including covenants limiting the Company's ability to pledge assets or incur liens on assets and financial covenants requiring among other things, the Company to maintain a specified leverage ratio, fixed charge ratio and tangible net worth levels. In addition, the amount of annual dividends the Company can pay is limited based on a formula. At December 31, 1996 $2,800,000 was available for payments of dividends in 1997. Borrowings under this credit facility are collateralized by the common stock of the Company's principal subsidiaries. The Company periodically enters into interest rate swap and cap agreements as a hedge against interest rate exposure of its floating rate bank debt. In 1996, the Company entered into $75 million of interest rate swap agreements, whereby the Company will pay the counterparties interest at a fixed rate of 5.53% and the counterparties will pay the Company interest at a floating rate equal to one month LIBOR for a two year period ending December 3, 1998. At the option of the counterparties, the termination date may be extended to December 3, 1999 upon notice to the Company. The Company also entered into $75 million of interest rate cap agreements which entitles the Company to receive from the counterparties on a monthly basis an amount by which the Company's interest payments on $75 million of its floating rate debt exceed 7% during the period December 5, 1998 to December 5, 1999. Future maturities of long-term debt, for the years 1997 through 2001, are: 1997-$429,000; 1998-$446,000; 1999-$66,476,000; 2000-$495,000 and 2001-$525,000. The net book value of property, plant and equipment pledged as collateral under industrial revenue bonds was approximately $6,751,000 at December 31, 1996. NOTE 9 INCOME TAXES The income tax provision (benefit) for the years ended December 31 consisted of the following: 1996 1995 1994 Federal Current $ 4,163,000 $ (7,485,000)$ (6,195,000) Deferred 3,075,000 4,172,000 (7,353,000) Foreign 13,000 7,000 (21,000) State and local Current 1,243,000 800,000 903,000 Deferred 264,000 (528,000) (714,000) 8,758,000 (3,034,000) (13,380,000) Tax benefit from exercise of stock options 367,000 174,000 9,962,000 Actual tax provision (benefit)$9,125,000$ (2,860,000) $ (3,418,000) The significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1995 are as follows: 1996 1995 Net deferred tax assets(liabilities) - current: Nonrecurring charge $ 397,000 $1,917,000 Allowance for bad debts 1,765,000 1,567,000 Accrued expenses deductible for tax purposes when paid 3,682,000 2,775,000 State and local net operating loss and tax credit carryforwards2,465 ,000 1,747,000 Other (227,000) 47,000 Total deferred tax assets 8,082,000 8,053,000 Valuation allowance for deferred tax assets(1,104,000) (897,000) Net deferred tax current assets $6,978,000 $7,156,000 Net deferred tax liabilities (assets) - noncurrent: Write-down of long-lived assets $(2,242,000) (4,107,000) Nonrecurring charge (395,000) (1,073,000) Accelerated depreciation 7,500,000 6,557,000 State net operating loss and credit carryforwards(916,000) - Accrued expenses deductible for tax purposes when paid (2,254,000) (2,318,000) Income not recognized for book purposes (595,000) (671,000) Other 1,522,000 1,070,000 Net deferred tax noncurrent liabilities (assets)$2,620,000$ (542,000) As of December 31, 1996, the Company has deferred tax assets largely attributable to the 1995 write-down of long-lived assets (see Note 4) and various state net operating loss and tax credit carryforwards. Deferred tax assets, net of the valuation reserve, are expected to be realized through future taxable income and from the reversal of temporary differences. The actual income tax provision (benefit) varies from the Federal statutory rate applied to consolidated pretax income (loss) as follows: 1996 1995 1994 Income taxes at Federal statutory rate of 35% $6,853,000 $(3,592,000) $(4,182,000) Increases resulting from State and local income taxes net of Federal income tax benefit1,080,000 177,000 123,000 Amortization of cost in excess of net assets acquired534,000 478,000 509,000 Other-net 658,000 77,000 132,000 Actual tax provision (benefit)$9,125,000 $(2,860,000) $(3,418,000) NOTE 10 RETIREMENT PLANS The Company provides retirement benefits to certain of its salaried and hourly employees through non-contributory defined benefit pension plans. The benefits provided are primarily based upon length of service and compensation, as defined. The Company funds the plans in amounts as actuarially determined and to the extent deductible for federal income tax purposes. The pension plan assets are invested in a diversified portfolio of common stock and fixed income securities. The components of pension expense are as follows: 1996 1995 1994 Service cost-benefits earned in current year$ 1,032,000 $ 1,013,000 $ 1,044,000 Interest cost on projected benefit obligation 983,000 923,000 782,000 Income earned on plan assets (643,000) (1,053,000) (866,000) Net amortization and deferral (317,000) 200,000 28,000 $ 1,055,000 $ 1,083,000 $ 988,000 Assumptions used in the computation of net pension expense are as follows: 1996 1995 1994 Weighted average discount rate for plan obligations 8.0% 8.0% 8.0% Rate of future compensation increases5.0 5.0 5.0 Weighted average rate of return on plan assets 8.8 8.8 8.8 The reconciliation of the funded status of the plans at year end follows: 1996 1995 Accumulated benefit obligation: Vested $ 11,200,000 $ 10,595,000 Nonvested 572,000 676,000 Total 11,772,000 11,271,000 Projected salary increases 2,050,000 1,793,000 Projected benefit obligation 13,822,000 13,064,000 Plan assets at fair value 12,883,000 12,088,000 Assets less than projected benefit obligation (939,000) (976,000) Unrecognized net (gain) loss (1,053,000) (1,111,000) Unrecognized prior service cost 1,656,000 1,742,000 Unrecognized transition cost 120,000 158,000 Additional liability (1,403,000) (1,623,000) Accrued pension $ (1,619,000) $ (1,810,000) The Company maintains a discretionary profit sharing plan with a voluntary 401(k) option for certain of its salaried and hourly employees who vest after meeting certain minimum age and service requirements. Profit sharing plan expense, including the Company's 401(k) match was $2,243,000, $1,371,000 and $2,636,000 for 1996, 1995 and 1994, respectively. The contributions consisted of the Company's common stock. NOTE 11 NONRECURRING CHARGES During 1994, the Company recorded nonrecurring charges of $41.0 million ($25.7 million after tax), consisting of approximately $29.1 million related to a restructuring program and $11.9 million for unusual items primarily consisting of the write down of certain intangible assets and discontinued products. The status of the components of the restructuring provision at the end of the year was: Balance 1996 Balance at at December Activity December 31, 1995 31, 1996 Consolidation and closure of facilities, including severance and related costs $7,779,000 $5,663,00 $2,116,000 0 Other, including lease termination expenses and costs to execute the 235,000 restructuring program 235,000 $5,898,00 $8,014,000 0 $2,116,000 * * *The following amounts are included in the consolidated balance sheet at December 31, 1996 and 1995, respectively under the captions: "accrued restructuring" ($1.1 and $4.5 million), "other liabilities" ($.8 and $3.1 million), property, plant and equipment" (reduction of $.1 and $.2 million), and "various other asset accounts" (reduction of $.1 and $.2 million). NOTE 12 STOCK PLANS The Company's stock plans authorize the granting of incentive and non- qualified stock options and restricted stock to executives, key employees and directors of the Company. Stock options are granted at prices not less than the fair market value on the date of grant. Option terms, vesting and exercise periods vary except that the term of an option may not exceed ten years. Certain options provide, among other things, that in the event of a change in control, as defined, such options will become immediately exercisable. At December 31, 1996, approximately 531,000 shares were available for future grants under the Company's plans. In 1991, the Company granted 250,000 shares of restricted stock to an executive officer of the Company. The restrictions on these shares will be released at the rate of 25,000 shares per year upon the attainment of certain performance goals and the continued employment of the officer. These goals were attained in 1994 and 1996. The restrictions will be released in the event of a change in control of the Company. The unamortized restricted stock resulting from this stock award has been deducted from stockholders' equity and is being amortized over the periods earned. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock Based Compensation". Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost been determined based on the fair value at the grant date for stock option awards in 1995 and 1996 consistent with the provision of SFAS No. 123, the Company's net loss and loss per share for 1995 would have been increased by approximately $2,100,000 or $.15 per share, respectively and net income and earnings per share for 1996 would have been decreased by approximately $3,800,000 or $.27 per share, respectively. During the initial phase-in period of SFAS No. 123, such compensation may not be representative of the future effects of applying this statement. The weighted average fair value at date of grant for options granted during 1996 and 1995 was $4.11 and $4.99 per option, respectively. The fair value of each option at date of grant was estimated using the Black- Scholes option pricing model with the following weighted average assumptions for grants in 1996 and 1995, respectively: expected stock price volatility 35% and 39%; expected lives of options of six and three years; expected dividend rate of $.12 per year and risk free interest rate of 6.26% and 5.81%. The pro forma effect for 1995 does not take into account grants made prior to 1995. Information regarding these option plans for 1996, 1995 and 1994 is as follows: 1996 1995 1994 Weighted- Weighted- Average Average Exercise Exercise (Shares in Shares Price Shares Price Shares thousands) Options outstanding beginning of 4,926 $14.10 4,479 $11.77 5,604 year.............. ..... Exercised......... ................... (216) 9.34 (167) 9.21 (2,672) ........ Granted........... ................... 1,436 13.10 776 16.18 1,589 ........ Cancelled or ( forfeited......... (489) 17.64 (162) 20.13 42) ....... Options outstanding end of 5,657 $13.72 4,926 $14.10 4,479 year.............. .............. The following table summarizes information about stock options outstanding at December 31, 1996: Options Outstanding Options Exercisable Weight (Shares in ed- Weight Weight thousands) Number Averag ed- Number ed- Outstan e Averag Exerci Averag Range of ding Remain e sable e Exercise Prices at ing Exerci at Exerci 12/31/9 Contra se 12/31/ se 6 ctual Price 96 Price Life $ 6.63 to $ 9.75 4 years $ 258 8.62 258 $ 8.62 10.25 to 13.75 6 years 3,407 11.73 3,097 11.66 14.25 to 18.875 7 years 926 16.21 926 16.21 19.125 to 20.125 8 years 1,066 19.14 1,066 19.14 5,657 5,347 NOTE 13 COMMITMENTS AND CONTINGENCIES Leases The Company leases certain of its manufacturing, distribution and office facilities as well as some transportation and manufacturing equipment under noncancellable leases expiring at various dates through the year 2017. Certain real estate leases contain escalation clauses and generally provide for payment of various occupancy costs. Minimum future lease obligations on noncancellable leases in effect at December 31, 1996 are as follows: Capital Operating leases leases Year ending December 31, 1997 $1,115,000 $11,912,000 1998 1,161,000 10,889,000 1999 1,143,000 9,819,000 2000 138,000 8,013,000 2001 32,000 7,139,000 Subsequent years through 2017 7,000,000 43,816,000 Net minimum lease payments 10,589,000 $91,588,000 Amount representing interest 407,000 Present value of net minimum lease payments $10,182,000 (including $951,000 payable within one year) Rental expense for operating leases amounted to approximately $19,645,000 in 1996, $19,883,000 in 1995 and $19,993,000 in 1994. Hoover Treated Wood Products, Inc. Hoover Treated Wood Products, Inc. ("Hoover"), a wholly-owned subsidiary of Ply Gem, is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated interior wood products. Hoover has not manufactured or sold these products since August, 1988. The number of lawsuits pending has declined significantly from earlier periods. Most of the suits have been resolved by dismissal or settlement with settlements being paid out of insurance proceeds or other third party recoveries. Hoover and Ply Gem are vigorously defending the suits which remain pending and defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement by Hoover with suppliers of material used in the production of interior treated wood products. Hoover and Ply Gem have engaged in coverage litigation with their insurers and have settled their coverage claims with a majority of the insurers. Ply Gem believes that the remaining coverage disputes will be resolved on a satisfactory basis and a substantial amount of additional coverage will be available to Hoover. In reaching this belief, it has analyzed Hoover's insurance coverage and the status of the coverage litigation, considered its history of settlements with primary and excess insurers and consulted with counsel. Hoover has recorded a receivable at December 31, 1996 for approximately $8.9 million for the estimated proceeds and recoveries related to insurance matters discussed above and recorded an accrual for the same amount for its estimated cost to resolve those matters not presently covered by existing settlements with insurance carriers and suppliers. In evaluating the effect of the lawsuits, a number of factors have been considered, including: the litigation history, the significant decline in the number of cases, the availability of various legal defenses and the likely availability of proceeds from additional insurance. Based on its evaluation, the Company believes that the ultimate resolution of the lawsuits and the insurance claims will not have a material effect upon the financial position of the Company. Letters of Credit At December 31, 1996 approximately $20 million of letters of credit issued by the Company's banks were outstanding, principally in connection with certain financing transactions. Other Ply Gem and its subsidiaries are subject to legal actions from time to time which have arisen in the ordinary course of its business. In the opinion of management, the resolution of these claims will not materially affect the financial position of the Company. The Company has various commitments for the purchase of materials arising in the ordinary course of business. PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Note 14 Quarterly Results (Unaudited) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter (In thousands, except per share data) Year Ended December 31, 1996 Net Sales $142,018 $212,079 $230,143 $190,688 Gross Profit 20,514 42,694 49,423 35,873 Income (loss) Before Taxes (4,753) 7,559 12,924 3,849 Net Income (Loss) (2,638) 4,157 6,915 2,020 Per Share: Primary (.18) .28 .45 .15 Fully Diluted (.18) .28 .45 .15 Year Ended December 31, 1995: Net Sales $162,934 $203,265 $210,973 $178,026 Gross Profit 24,862 34,149 37,444 28,191 Income (loss) Before Taxes (1) (4,594) 1,618 4,365 (11,651) Net Income (Loss) (2,665) 1,028 2,276 (8,041) Per Share: Primary (.18) .07 .16 (.56) Fully Diluted......... (.18) .07 .16 (.56) (1) After charge of $12.0 million for the impairment of assets in the fourth quarter. See Note 4 to the consolidated financial statements. Earnings (loss) per share calculations for each of the quarters presented are based on the weighted average number of shares and common equivalent shares outstanding during such periods. The sum of the quarters may not necessarily be equal to the full year earnings per share amounts. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Ply Gem Industries, Inc. We have audited the accompanying consolidated balance sheets of Ply Gem Industries, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conduct our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ply Gem Industries, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP GRANT THORNTON LLP New York, New York February 25, 1997 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars In Thousands) June 30, December ASSETS 1997 31, 1996 (Unaudited) Cash and cash equivalents $ 7,952 $ 9,924 Accounts receivable, net of allowance of $2,713; $3,039 in 1996 28,003 Inventories 110,450 92,983 Prepaid and deferred income taxes 10,905 10,905 Other current assets 14,931 12,975 Total current assets 190,175 154,790 Property, plant and equipment - at cost net of accumulated depreciation and amortization of $69,084; $62,757 in 1996 101,543 90,681 Patents and trademarks, net of accumulated amortization of $10,331; $9,776 in 1996 13,255 13,793 Other intangible assets - net 14,380 14,794 Cost in excess of net assets acquired - net 20,887 21,618 Other assets 18,220 17,771 Total assets $358,460 $313,447 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 70,755 $ 66,768 Current maturities of long-term debt and 1,380 capital leases 1,528 Total current liabilities 72,283 68,148 Long-term debt 111,496 73,166 Capital leases 8,656 9,231 Other liabilities 18,819 17,119 Stockholders' equity: Preferred stock, $.01 par value; authorized 5,000,000 shares; none - issued Common stock, $.25 par value; authorized 60,000,000 shares; issued 17,747,957; 4,437 4,419 17,676,450 in 1996 Additional paid-in capital 150,059 149,226 Retained earnings 63,129 61,993 Less: Treasury stock-at cost (3,764,278 shares; 3,687,954 in 1996) 64,766 63,936 Unamortized restricted stock 5,919 and note receivable 5,653 Total stockholders' equity 147,206 145,783 Total liabilities and stockholders' $358,460 $313,447 equity See accompanying notes to the consolidated financial statements. PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In Thousands Except per Share Data) Quarter Ended June 30, June 30, 1997 1996 Net sales $218,916 $212,079 Cost of goods sold 177,405 169,385 Gross profit 41,511 42,694 Selling, general and administrative 30,050 32,591 expenses Merger expenses 2,850 - Income from operations 8,611 10,103 Interest expense (1,982) (1,933) Other expense, net (754) (611) Income before income taxes 5,875 7,559 Income taxes 2,842 3,402 Net income $ 3,033 $ 4,157 Earnings per share: Primary $ .20 $ .28 Fully diluted $ .20 .28 Weighted average number of shares outstanding: Primary 16,586 16,102 Fully diluted 16,586 16,102 Cash dividends per share $ .03 $ .03 See accompanying notes to consolidated financial statements. PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited) (In Thousands Except per Share Data) Six Months Ended June 30, June 30, 1997 1996 Net sales $381,728 $354,097 Cost of goods sold 313,403 290,889 Gross profit 68,325 63,208 Selling, general and administrative 56,626 55,988 expenses Merger expenses 2,850 - Income from operations 8,849 7,220 Interest expense (3,649) (3,757) Other expense, net (1,239) (657) Income before income taxes 3,961 2,806 Income taxes 1,981 1,287 Net income $ 1,980 $ 1,519 Earnings per share: Primary $ .14 $ .11 Fully diluted .14 .11 Weighted average number of shares outstanding: Primary 13,842 14,251 Fully diluted 13,842 14,251 Cash dividends per share $ .06 $ .06 See accompanying notes to consolidated financial statements. PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Six Months Ended June 30, June 30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net income $1,980 $1,519 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization $ 8,367 $ 7,569 Provision for doubtful 460 1,526 accounts Changes in assets and liabilities: Accounts receivable (18,394) (13,830) Inventories (17,467) (4,494) Prepaid and deferred income 0 1,272 taxes Prepaid expenses and other (1,956) (2,241) ` current assets Accounts payable and accrued 4,479 8,873 expenses Restructuring (492) (4,294) Other 1,251 (23,75 3,550 (2,069) 2) Net cash used in operating activities (21,77 (550) 2) CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant (17,78 (8,623) and equipment 9) Other 243 117 Net cash used in investing activities (17,54 (8,506) 6) CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury shares (1,808 (4,630) ) Proceeds from borrowings 2,725 - Net change in revolving note borrowings with original 35,900 9,460 maturity of 90 days or less Cash dividends (844) (868) Other 1,373 992 Net cash provided by financing 4,954 activities 37,346 Net decrease in cash and cash (1,972 (4,102) equivalents ) Cash and cash equivalents at 8,107 beginning of period 9,924 Cash and cash equivalents at $ $ 4,005 end of period 7,952 See accompanying notes to consolidated financial statements. PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 The accompanying financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of financial position and results of operations. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the latest annual report on Form 10-K. NOTE 2 On July 24, 1997, Ply Gem Industries, Inc. (the "Company") entered into an Agreement and Plan of Merger ("Agreement") with Nortek, Inc. ("Nortek") and its subsidiary, NTK Sub, Inc. (the "Purchaser") pursuant to which Nortek commenced on July 29, 1997, a cash tender offer to purchase all of the outstanding shares of the Company for cash consideration of $19.50 per share. The Agreement is subject to customary conditions, including the tender of a majority of the outstanding shares, regulatory approvals and the receipt of financing. Also on July 24, 1997, the Company terminated its June 24, 1997 merger agreement with Atrium Acquisition Holdings Corp. (Atrium), an affiliate of Hicks, Muse, Tate & Furst Incorporated. As a result, the Company paid $12 million to Atrium which was funded by the sale of 640,000 shares of the Company's stock to Nortek for the same amount. NOTE 3 The major classes of inventories were as follows: (In Thousands) June 30, December 31, 1997 1996 Finished goods $ 61,696 $53,833 Work in process 13,837 9,724 Raw materials 34,917 29,426 $110,450 $92,983 NOTE 4Earnings per share of common stock is computed by dividing net income by the weighted average number of common shares outstanding. Earnings per share for the second quarter of 1997 and 1996 is calculated using the modified treasury stock method, which limits the assumed purchase of treasury shares to 20% of the outstanding common shares. In February 1997, the Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which is effective for financial statements for both PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 4 CONTINUED interim and annual periods ending after December 15, 1997. Early adoption of the new standard is not permitted. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. Adoption of the new standard would not have had a material effect on earnings per share for the three and six months ended June 30, 1997. NOTE 5 Supplemental cash flow information for the six month periods are as follows: (In Thousands) June 30, June 30, 1996 1997 Interest paid $3,300 $3,156 Income taxes paid 1,098 387 NOTE 6The accumulated amortization of cost in excess of net assets acquired and other intangible assets are $23,502,000 at June 30, 1997 and $22,357,000 at December 31, 1996. NOTE 7The Company's loan agreements with its banks require the Company to maintain a specified leverage ratio, fixed charge ratio and tangible net worth levels and maintain certain financial ratios, among its provisions. Under the most restrictive of these covenants, at June 30, 1997, approximately $1,900,000 of retained earnings was available for the payment of dividends in 1997. NOTE 8During the second quarter of 1997, the Board of Directors adopted resolutions providing for severance payments in the event of a change in control and subsequent termination, as defined, to certain designated employees of the Company. At June 30, 1997, the maximum amount payable would be approximately $5 million. NOTE 9Hoover Treated Wood Products, Inc. ("Hoover"), a wholly-owned subsidiary of Ply Gem Industries, Inc. ("Ply Gem"), is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated interior wood products. Hoover has not manufactured or sold these products since August, 1988. The number of lawsuits pending has declined significantly from earlier periods. Most of the suits have been resolved by dismissal or settlement with settlements being paid out of insurance proceeds or other third party recoveries. Hoover and Ply Gem are vigorously defending the suits which remain pending and defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement by Hoover with suppliers of material used in the production of interior treated wood products. PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 9 - CONTINUED Hoover and Ply Gem have engaged in coverage litigation with their insurers and have settled their coverage claims with a majority of the insurers. Ply Gem believes that the remaining coverage disputes will be resolved on a satisfactory basis and a substantial amount of additional coverage will be available to Hoover. In reaching this belief, it has analyzed Hoover's insurance coverage and the status of the coverage litigation, considered its history of settlements with primary and excess insurers and consulted with counsel. Hoover has recorded a receivable at June 30, 1997 for approximately $7.5 million for the estimated proceeds and recoveries related to insurance matters discussed above and recorded an accrual for the same amount for its estimated cost to resolve those matters not presently covered by existing settlements with insurance carriers and suppliers. In evaluating the effect of the lawsuits, a number of factors have been considered, including, the litigation history, the significant decline in the number of cases, the availability of various legal defenses and the likely availability of proceeds from additional insurance. Based on its evaluation, the Company believes that the ultimate resolution of the lawsuits and the insurance claims will not have a material effect upon the financial position of the Company. Two purported stockholders of the Company, filed a complaint in Delaware Chancery Court against the Company and its Board of Directors ("Board"). The complaint purports to be brought on behalf of a class consisting (with certain exceptions) of all stockholders of the Company, and challenges as inadequate to such stockholders the consideration to be paid in connection with the June 24, 1997 merger agreement with Atrium (that has subsequently been terminated in connection with the execution of the July 24, 1997 Agreement with Nortek referred to in Note 2). The complaint alleges, among other things, that the proposed price to be paid pursuant to the merger agreement with Atrium is inadequate, and that the Board breached their fiduciary duties in agreeing to it. The Company and its Board believe the complaint to be without merit. Item 7(b) Pro Forma Information NORTEK, INC. AND SUBSIDIARIES PLY GEM INDUSTRIES, INC INTRODUCTION TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated statement of operations of Nortek, Inc. and Subsidiaries, ("Pro Forma Nortek") for the year ended December 31, 1996 and the six months and twelve months ended June 28, 1997 give effect to (i) the acquisition of Ply Gem, the sale of $310,000,000 principal amount of 9 1/8% Senior Notes due 2007, ( the "9 1/8% Notes"), the extension of credit under the Ply Gem Credit Facility to refinance certain existing indebtedness of Ply Gem and the termination of Ply Gem's accounts receivable securitization program (collectively, the "Transactions"), (ii) the issuance of the 9 1/4% Senior Notes due 2007 (the "9 1/4% Notes")in March, 1997 and (iii) a portion of the estimated cost reductions which are directly attributable to the acquisition as if all of the foregoing had occurred on January 1, 1996. In addition, the unaudited adjusted pro forma condensed consolidated statement of operations ("Adjusted Pro Forma Nortek") for the year ended December 31, 1996 and the six months and twelve months ended June 28, 1997 give effect to all of the estimated cost reductions (as discussed below). The unaudited pro forma condensed consolidated balance sheet for Pro Forma Nortek as of June 28, 1997 gives effect to the transactions as if they occurred on that date. Nortek expects to realize pre-tax annual cost savings of approximately $23.4 million, based on the last twelve months ended June 28, 1997, as a result of the acquisition. These savings are expected to result from several actions, including: (i) the elimination of expenses associated with Ply Gem's New York headquarters; (ii) the consolidation into Nortek of certain of Ply Gem's corporate functions such as legal, accounting and risk management; and (iii) the identification and rationalization of underperforming product lines. Of the $23.4 million of expected pre-tax savings, $7.9 million is included in footnote (o) for the twelve months ended June 28, 1997 and represents estimated cost reductions directly attributable to the acquisition. The remaining $15.5 million is included in footnote (t) for the twelve months ended June 28, 1997 and relates to additional estimated cost savings and operating efficiencies which management expects will result from the acquisition. The effect of the issuance of the 9 1/4% Notes is reflected in Nortek's June 28, 1997 unaudited condensed consolidated balance sheet since such issuance occurred prior to the date of such balance sheet. The acquisition is accounted for under the purchase method of accounting. The accompanying unaudited pro forma condensed consolidated financial statements have been prepared utilizing a preliminary purchase price allocation. The preliminary purchase price allocation is subject to refinement until all pertinent information regarding the acquisition is obtained and, accordingly, the amounts presented herein are subject to change. NORTEK, INC. AND SUBSIDIARIES PLY GEM INDUSTRIES, INC INTRODUCTION TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (Continued) The accompanying Pro Forma Nortek information is presented for illustrative purposes only and is not necessarily indicative of the financial position or results of operations which would actually have been reported had the above transactions been in effect during the periods presented or which may be reported in the future. The results of operations for the six months ended June 28, 1997 are not necessarily indicative of the results of operations to be expected for the full year. The accompanying unaudited pro forma condensed consolidated financial statements should be read in conjunction with the audited and unaudited Consolidated Financial Statements and related Notes thereto for Ply Gem's and Nortek's periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. When used in this discussion, the word "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, over which Nortek has no control, which could cause actual results to differ materially from those presented. These risks and uncertainties include estimated cost reductions. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. Nortek 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 Nortek, in this report, as well as Nortek's periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission. NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET As of June 28, 1997 Nortek Ply Gem Pro Forma Pro Forma Historical Historical Adjustments Nortek (Dollar Amounts in millions) ASSETS Unrestricted: Cash and cash equivalents $ 56.8 $ 8.0 $ --- (a)$ 64.8 Marketable securities avail- able for sale 168.6 --- (110.5) (b) 58.1 Restricted: Cash and marketable securities 5.7 --- --- 5.7 Accounts receivable, net 137.8 45.9 49.2 (c) 232.9 Inventories, net 107.7 110.5 --- 218.2 Prepaid expenses 4.3 --- --- 4.3 Other current assets 13.8 14.9 (3.8)(d) 24.9 Prepaid income taxes 20.0 10.9 --- 30.9 Total current assets 514.7 190.2 (65.1) 639.8 Property, plant and equipment, net 138.0 101.5 --- 239.5 Goodwill and other intangibles 88.9 20.9 227.9 (e) 337.7 Deferred debt expense 11.0 1.2 10.1 (f) 22.3 Other assets 20.4 44.7 (7.2)(g) 57.9 Total assets $773.0 $358.5 $165.7 $1,297.2 LIABILITIES AND STOCKHOLDERS' INVESTMENT Notes payable $ 12.9 $ --- $ --- $ 12.9 Current maturities of long-term Debt 5.1 1.5 --- 6.6 Accounts payable 86.3 36.9 --- 123.2 Accrued expenses and taxes, net101.0 33.9 9.0 (h) 143.9 Total current liabilities 205.3 72.3 9.0 286.6 Deferred income taxes 18.3 2.6 (3.6)(i) 17.3 Other long-term liabilities 19.5 16.2 --- 35.7 Notes, mortgages, capital leases and obligations payable less current maturities 408.8 120.2 307.5 (j) 836.5 Preference stock --- --- --- --- Common stock 16.0 4.4 (4.4) 16.0 Special common stock .8 --- --- .8 Additional paid-in capital 135.3 150.1 (150.1) 135.3 Retained earnings 48.2 63.1 (63.1) 48.2 Cumulative translation, pension and other adjustments (4.0) (5.6) 5.6 (4.0) Treasury stock-common (73.3) (64.8) 64.8 (73.3) Treasury stock-special common (1.9) --- --- (1.9) Total stockholders' investment121.1 147.2 (147.2)(k) 121.1 Total liabilities and stockholders' investment$773.0 $358.5 $ 165.7 $1,297.2 See Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 Nortek Nortek Historical Adjustments As Adjusted (Dollar Amounts in Millions, Except Per Share Data) Net sales $969.8 $ --- $969.8 Cost of products sold 709.9 --- 709.9 Gross profit 259.9 --- 259.9 Selling, general and admini- strative expense 199.8 --- 199.8 Operating income 60.1 --- 60.1 Interest expense (30.1) (12.2)(l) (42.3) Other expense --- --- --- Interest income 5.3 --- 5.3 Net gain on investment and marketable securities .7 --- .7 Earnings before provision for income taxes 36.0 (12.2) 23.8 Provision for income taxes 14.0 (4.1)(m) 9.9 Net earnings $ 22.0 $ (8.1) $ 13.9 Net earnings per share (v) $ 2.05 $ 1.30 Fully diluted weighted average Shares outstanding (in thousands) 10,722 10,722 EBITDA (w) $82.6 $82.6 Ratio of earnings to fixed charges(x) 2.1x 1.5x For the Year Ended December 31, 1996 - (Continued) Nortek As Ply Gem Combined Adjusted Historical Total Net sales $969.8 $774.9 $1,744.7 Cost of products sold 709.9 626.4 1,336.3 Gross profit 259.9 148.5 408.4 Selling, general and admini- strative expense 199.8 119.5 319.3 Operating income 60.1 29.0 89.1 Interest expense (42.3) (6.8) (49.1) Other expense --- (2.6) (2.6) Interest income 5.3 --- 5.3 Net gain on investment and marketable securities .7 --- .7 Earnings before provision for income taxes 23.8 19.6 43.4 Provision for income taxes 9.9 9.1 19.0 Net earnings $ 13.9 $ 10.5 $ 24.4 Net earnings per share (v) $ 1.30 Fully diluted weighted average shares outstanding (in thousands) 10,722 EBITDA(w) $82.6 Ratio of earnings to fixed charges(x) 1.5x NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 For the Year Ended December 31, 1996 - (Continued) Adjusted Pro Pro Combined Forma Forma Total Adjustments Nortek Nortek Net sales $1,744.7 $ --- $1,744.7 $1,744.7 Cost of products sold 1,336.3 4.5 (n) 1,340.8 1,340.8 Gross profit 408.4 (4.5) 403.9 403.9 Selling, general and admini- strative expense 319.3 (8.6)(o) 310.7 297.1(t) Operating income 89.1 4.1 93.2 106.8 Interest expense (49.1) (30.8)(p) (79.9) (79.9) Other expense (2.6) 2.9 (q) .3 .3 Interest income 5.3 --- 5.3 5.3 Net gain on investment and marketable securities .7 --- .7 .7 Earnings before provision for income taxes 43.4 (23.8) 19.6 33.2 Provision for income taxes 19.0 (6.0)(s) 13.0 17.8(u) Net earnings $ 24.4 $(17.8) $ 6.6 $ 15.4 Net earnings per share (v) $ .62 $ 1.44 Fully diluted weighted average shares outstanding (in thousands) 10,722 10,722 EBITDA(w) $ 135.2 $ 148.0 Ratio of earnings to fixed charges(x) 1.2x 1.4x See Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 28, 1997 Nortek Nortek Historical Adjustments As Adjusted (Dollar Amounts in Millions, Except Per Share Data) Net sales $469.2 $ --- $469.2 Cost of products sold 342.5 --- 342.5 Gross profit 126.7 --- 126.7 Selling, general and admini- strative expense 96.8 --- 96.8 Operating income 29.9 --- 29.9 Interest expense (18.5) (2.5)(l) (21.0) Other expense --- --- --- Interest income 4.4 --- 4.4 Net gain on investment and marketable securities .2 --- .2 Earnings before provision for income taxes 16.0 (2.5) 13.5 Provision for income taxes 5.6 (.8)(m) 4.8 Net earnings $ 10.4 $ (1.7) $ 8.7 Net earnings per share(v) $ 1.05 $ .88 Fully diluted weighted average Shares outstanding(in thousands) 9,923 9,923 EBITDA(w) $ 41.7 $ 41.7 Ratio of earnings to fixed charges(x) 1.8x 1.6x For the Six Months ended June 28, 1997 - (Continued) Nortek As Ply Gem Combined Adjusted Historical Total Net sales $469.2 $381.7 $850.9 Cost of products sold 342.5 313.4 655.9 Gross profit 126.7 68.3 195.0 Selling, general and admini- strative expense 96.8 59.5 156.3 Operating income 29.9 8.8 38.7 Interest expense (21.0) (3.6) (24.6) Other expense --- (1.2) (1.2) Interest income 4.4 --- 4.4 Net gain on investment and marketable securities .2 --- .2 Earnings before provision for income taxes 13.5 4.0 17.5 Provision for income taxes 4.8 2.0 6.8 Net earnings $ 8.7 $ 2.0 $ 10.7 Net earnings per share (v) $ .88 Fully diluted weighted average shares outstanding (in thousands) 9,923 EBITDA(w) $ 41.7 Ratio of earnings to fixed charges(x) 1.6x NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 28, 1997 For the Six Months ended June 28, 1997 - (Continued) Adjusted Pro Pro Combined Forma Forma Total Adjustments Nortek Nortek Net sales $850.9 $ --- $850.9 $850.9 Cost of products sold 655.9 2.3(n) 658.2 658.2 Gross profit 195.0 (2.3) 192.7 192.7 Selling, general and admini- strative expense 156.3 (6.6)(o) 149.7 142.0 (t) Operating income 38.7 4.3 43.0 50.7 Interest expense (24.6) (15.2)(p) (39.8) (39.8) Other expense (1.2) 1.4 (q) .2 .2 Interest income 4.4 (1.7)(r) 2.7 2.7 Net gain on investment and marketable securities .2 --- .2 .2 Earnings before provision for income taxes 17.5 (11.2) 6.3 14.0 Provision for income taxes 6.8 (3.7)(s) 3.1 5.8 (u) Net earnings $ 10.7 $ (7.5) $ 3.2 $ 8.2 Net earnings per share (v) $ .32 $ .83 Fully diluted weighted average shares outstanding (in thousands) 9,923 9,923 EBITDA(w) $ 65.5 $ 72.8 Ratio of earnings to fixed charges(x) 1.1x 1.3x See Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 28, 1997 Nortek Nortek Historical Adjustments As Adjusted (Dollar Amounts in Millions, Except Per Share Data) Net sales $957.8 $ --- $957.8 Cost of products sold 695.2 --- 695.2 Gross profit 262.6 --- 262.6 Selling, general and admini- strative expense 198.4 --- 198.4 Operating income 64.2 --- 64.2 Interest expense (33.1) (8.6)(l) (41.7) Other expense --- --- --- Interest income 6.9 --- 6.9 Net gain on investment and marketable securities .9 --- .9 Earnings before provision for income taxes 38.9 (8.6) 30.3 Provision for income taxes 14.7 (2.9)(m) 11.8 Net earnings $ 24.2 $ (5.7) $ 18.5 Net earnings per share (v) $ 2.40 $ 1.84 Fully diluted weighted average Shares outstanding (in thousands) 10,074 10,074 EBITDA(w) $87.4 $87.4 Ratio of earnings to fixed charges(x) 2.1x 1.7x For the Twelve Months ended June 28, 1997 - (Continued) Nortek As Ply Gem Combined Adjusted Historical Total Net sales $957.8 $802.5 $1,760.3 Cost of products sold 695.2 648.9 1,344.1 Gross profit 262.6 153.6 416.2 Selling, general and admini- strative expense 198.4 123.0 321.4 Operating income 64.2 30.6 94.8 Interest expense (41.7) (6.6) (48.3) Other expense --- (3.2) (3.2) Interest income 6.9 --- 6.9 Net gain on investment and marketable securities .9 --- .9 Earnings before provision for income taxes 30.3 20.8 51.1 Provision for income taxes 11.8 9.8 21.6 Net earnings $ 18.5 $ 11.0 $ 29.5 Net earnings per share (v) $ 1.84 Fully diluted weighted average shares outstanding (in thousands) 10,074 EBITDA(w) $87.4 Ratio of earnings to fixed charges(x) 1.7x NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 28, 1997 For the Twelve Months ended June 28, 1997 - (Continued) Adjusted Pro Pro Combined Forma Forma Total Adjustments Nortek Nortek Net sales $1,760.3 $ --- $1,760.3 $1,760.3 Cost of products sold 1,344.1 4.5 (n) 1,348.6 1,348.6 Gross profit 416.2 (4.5) 411.7 411.7 Selling, general and admini- strative expense 321.4 (11.1)(o) 310.3 294.8(t) Operating income 94.8 6.6 101.4 116.9 Interest expense (48.3) (31.0)(p) (79.3) (79.3) Other expense (3.2) 3.0 (q) (.2) (.2) Interest income 6.9 (1.7)(r) 5.2 5.2 Net gain on investment and marketable securities .9 --- .9 .9 Earnings before provision for income taxes 51.1 (23.1) 28.0 43.5 Provision for income taxes 21.6 (6.6)(s) 15.0 20.4(u) Net earnings $ 29.5 $(16.5) $ 13.0 $ 23.1 Net earnings per share (v) $ 1.29 $ 2.30 Fully diluted weighted average shares outstanding (in thousands) 10,074 10,074 EBITDA(w) $ 144.9 $ 159.6 Ratio of earnings to fixed charges(x) 1.3x 1.5x See Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Millions) As of June 28, 1997 (a)Cash and cash equivalents: Total sources of financing for the acquisition and related transactions: Gross proceeds from the 9 1/8% Notes $307.5 Proceeds from the sale of marketable securities 110.5 Extension of credit under Ply Gem Credit Facility 101.9 $519.9 Total uses of financing for the acquisition and related transactions: Consideration paid for Ply Gem common stock and cancella- tion of options 310.2 Funding of termination fees and costs under prior acquisi- tion agreement 12.0 Refinancing of existing Ply Gem indebtedness 101.9 Termination of accounts receivable securitization program 50.0 Consideration paid for termination of management agreements 24.5 Fees, expenses and other costs related to the Transactions 21.3 (519.9) ------- $ 0.0 ======== (b)Marketable securities available for sale: Sale of marketable securities to fund the acquisition and related transactions $(110.5) ======== (c)Accounts receivable: Forgiveness of notes receivable in connection with the termination of management agreements $ (.8) Termination and repurchase of amounts outstanding under Ply Gem's accounts receivable securitization program 50.0 ------- $ 49.2 ======= (d)Other current assets: Forgiveness of notes receivable in connection with the termination of management agreements $ (3.8) (e)Goodwill: Additional cost in excess of net assets acquired, net $ 227.9 (f)Deferred debt expense: Financing costs related to the offering and extension of credit under Ply Gem Credit Facility $ 10.7 Write-off deferred debt expense related to refinanced indebtedness (.6) -------- $ 10.1 ======== NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In Millions) As of June 28,1997 (g)Other assets: Forgiveness of notes receivable in connection with the termination of management agreements $ (7.2) (h)Accrued expenses and taxes: Estimated liabilities incurred in connection with the acquisition $ 9.0 (i)Deferred income taxes: To record deferred taxes related to the acquisition $ (3.6) (j)Notes, mortgages, capital leases and obligations payable less current maturities: 9 1/8% Notes issued $ 307.5 Extension of credit under the Ply Gem Credit Facility 101.9 Refinancing of existing Ply Gem indebtedness (101.9) $ 307.5 (k)Stockholders' investment: To eliminate equity in connection with the acquisition $(152.2) Forgiveness of notes receivable in connection with the termination of management agreements 5.0 $(147.2) Six Months Twelve Months Year Ended Ended Ended December 31, June 28, June 28, 1996 1997 1997 (l)Interest expense: Interest expense related to the 9 1/4% Notes issued in March 1997 $(16.2) $ (3.3) $ (11.4) Amortization of related debt Issuance costs (.5) (.1) (.4) Reduction of interest expense related to debt refinanced with a portion of the proceeds from the 9 1/4% Notes issued in March 1997 4.5 .9 3.2 $(12.2) $ (2.5) $ (8.6) NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In Millions) Six Months Twelve Months Year Ended Ended Ended December 31, June 28, June 28, 1996 1997 1997 (m)Tax provision: Tax benefit on the interest expense adjustments related to the 9 1/4% Notes issued in March 1997 and the related refinancing $ (4.1) $ (.8) $ (2.9) (n)Reflects the following adjustment to cost of sales: Increased amortization of goodwill over 40 years due to the acquisition $ 4.5 $ 2.3 $ 4.5 (o)Reflects the following adjustments to selling, general and administra- tive expense: Elimination of Ply Gem's non- recurring costs related to the acquisition $ (.8) $ (2.9) $ (3.2) Estimated cost reductions directly attributable to the acquisition (7.8) (3.7) (7.9) $ (8.6) $ (6.6) $(11.1) (p)Interest expense: Interest expense at a rate of 9 1/8% on the Notes issued in the offering $ (28.3) $(14.1) $(28.3) Amortization of related debt issuance costs (1.0) (.5) (1.0) Amortization of debt discount (.2) (.1) (.2) Interest expense at an assumed rate of 6 3/4% on indebtedness assumed to be outstanding under the Ply Gem Credit Facility (7.0) (3.5) (7.0) Reduction in interest expense related to the refinancing of existing Ply Gem indebtedness 5.7 3.0 5.5 $(30.8) $(15.2) $(31.0) NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In Millions) Six Months Twelve Months Year Ended Ended Ended December 31, June 28, June 28, 1996 1997 1997 (q)Other expense: Decrease in other expense, net due to termination and repurchase of amounts outstanding under Ply Gem's accounts receivable securitization program $ 2.9 $ 1.4 $ 3.0 (r)Interest income: Reduction in interest income on marketable securities sold to fund the acquisition and related transactions $ --- $ (1.7) $ (1.7) (s)Tax provision: Tax benefit on the interest expense adjustments related to the 9 1/8% Notes, the Ply Gem Credit Facility and the refinancing of existing Ply Gem indebtedness $ (9.7) $ (4.9) $ (9.8) Tax provision on the elimina- tion of Ply Gem's non-recurring costs related to the acquisition .3 .7 1.0 Tax provision on the estimated cost reductions directly attributable to the acquisition referred to in note (o) above 3.4 1.1 2.8 Tax benefit on the reduction in interest income related to the sale of marketable securities used to fund the acquisition and related transactions --- (.6) (.6) $ (6.0) $ (3.7) $ (6.6) NORTEK, INC. AND SUBSIDIARIES AND PLY GEM INDUSTRIES, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In Millions) (t)Additional estimated cost savings and operating efficiencies related to the acquisition including depreciation and amortization expense of approximately $.8, $.4 and $.8 for the year ended December 31, 1996, the six months ended June 28, 1997 and the twelve months ended June 28, 1997, respectively $ (13.6) $ (7.7) $(15.5) (u)Tax provision on the additional estimated cost savings and operating efficiencies related to the acquisition referred to in note (t) above $ 4.8 $ 2.7 $ 5.4 (v)Pro forma primary and fully diluted earnings per share are computed on the same basis as the historical amounts. (w)"EBITDA" is operating earnings plus depreciation and amortization (other than amortization of deferred debt expense and debt discount). EBITDA should not be considered as an alternative to net earnings as a measure of Nortek's operating results or to cash flows as a measure of liquidity. EBITDA principally differs from net increase (decrease) in unrestricted cash and cash equivalents shown on the Consolidated Statement of Cash Flows, prepared in accordance with generally accepted accounting principles, in that EBITDA does not reflect capital expenditures, borrowings, principal and interest payments under debt and capital lease obligations, income tax payments and cash flows from other operating, investing and financing activities. (x)For purposes of calculating this ratio, "earnings" consist of earnings before provision for income taxes and fixed charges. "Fixed charges" consist of interest expense and the estimated interest portion of rental payments on operating leases. EX-2 2 EXHIBIT 2.2 AMENDMENT NO. 1 TO THE MERGER AGREEMENT Dated as of September 2, 1997 Nortek, Inc., a Delaware corporation ("Parent"), NTK Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent ("Sub") and Ply Gem Industries, Inc., a Delaware corporation (the "Company") hereby agrees as follows: 1. Reference to Merger Agreement: Definitions. Reference is hereby made to the Agreement and Plan of Merger (including the Schedules and Exhibits thereto, the "Merger Agreement") among Parent, Sub and the Company. Terms defined in the Merger Agreement and not otherwise defined herein are used herein with the meanings so defined. 2. Amendment to the Merger Agreement. Subject to all the terms and conditions hereof, the Merger Agreement shall, on the date hereof, be amended as follows: 2.1 Amendment to Section 2.4(c). Section 2.4(c) of the Merger Agreement shall be amended to read in its entirety as follows: " (c) At the Effective Time, Article IV of the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be amended to decrease the number of authorized shares of Company Common Stock to an aggregate amount of Three Thousand (3,000) as of the Effective Time, to change the par value of such shares of Company Common Stock to $.01 per share and to eliminate any authorized preferred stock, by operation of this Agreement and by virtue of the Merger without any further action by the stockholders or directors of the Surviving Corporation and, as so amended, such Certificate of Incorporation shall be the Certificate of Incorporation of the Surviving Corporation, until duly amended in accordance with the terms thereof and the DGCL." 2.2 Amendment to Section 2.4(d). Section 2.4(d) of the Merger Agreement shall be amended to read in its entirety as follows: " (d) The By-Laws of Sub as in effect at the Effective Time shall be the bylaws (the "Bylaws") of the Surviving Corporation until thereafter amended as provided by applicable law, the Certificate of Incorporation or the Bylaws." 2.3 Amendment to Section 3.1(a). Section 3.1(a) of the Merger Agreement shall be amended to read in its entirety as follows: " (a) Capital Stock of Sub. Each share of the capital stock of Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, par value $.01 per share, of the Surviving Corporation." 3. Miscellaneous. Except to the extent specifically amended by this Amendment, the Merger Agreement shall remain unmodified, and the Merger Agreement, as amended hereby is confirmed as being in full force and effect. IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as of the date first above written. NORTEK, INC. By: /s/ Richard J. Harris ---------------------- Title: Vice President NTK SUB, INC. By: /s/ Kevin W. Donnelly ---------------------- Title: Vice President PLY GEM INDUSTRIES, INC. By: /s/ Almon C. Hall -------------------- Title: Vice President EX-23 3 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Nortek, Inc. As independent certified public accountants, we hereby consent to the incorporation of our report of Ply Gem Industries, Inc. dated February 25, 1997, included in this Form 8-K (File No. 1-6112) into Nortek, Inc.'s previously filed registration statements on Form S-8 (File Nos. 33- 22527 and 33-47897). /s/Grant Thornton LLP ___________________ GRANT THORNTON LLP New York, New York September 10, 1997 -----END PRIVACY-ENHANCED MESSAGE-----