-----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, Tfhxn11lkNHWOrlrtU6QJZI+BN++AHaOhNjd1s9Pp6M7YjW6GyS4eHlBn3pK1Qir 1oNBvRR6po4rKI1nKz5RfA== 0000072423-98-000010.txt : 19980819 0000072423-98-000010.hdr.sgml : 19980819 ACCESSION NUMBER: 0000072423-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980818 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: SEC FILE NUMBER: 001-06112 FILM NUMBER: 98693321 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 July 4, 1998 ------------------------------ 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 August 7, 1998 was 11,177,768. The number of shares of Special Common Stock outstanding as of August 7, 1998 was 573,455. 2 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollar Amounts in Thousands) July 4, Dec. 31, Assets 1998 1997 ---- ---- (Unaudited) Current Assets: Unrestricted Cash and cash equivalents $201,619 $125,842 Marketable securities available for sale 12,055 35,988 Restricted investments and marketable securities at cost, which approximates market 6,389 6,348 Net assets of a discontinued operation 32,256 22,386 Accounts receivable, less allowances of $13,239,000 and $11,047,000 209,527 180,414 Inventories Raw materials 54,436 72,693 Work in process 18,437 18,399 Finished goods 99,191 85,161 ------- ------- 172,064 176,253 ------- ------- Prepaid expenses 11,779 8,391 Other current assets 9,982 12,627 Prepaid income taxes 46,800 46,800 ------- ------- Total current assets 702,471 615,049 ------- ------- Property and Equipment, at Cost: Land 11,420 12,081 Buildings and improvements 94,281 96,606 Machinery and equipment 253,473 250,677 ------- ------- 359,174 359,364 Less accumulated depreciation 122,999 116,841 ------- ------- Total property and equipment, net 236,175 242,523 ------- ------- Other Assets: Goodwill, less accumulated amortization of $36,661,000 and $31,773,000 372,718 378,232 Intangible assets 8,246 8,752 Notes receivable and other investments 8,949 9,339 Deferred income taxes 8,473 10,022 Deferred debt expense 19,952 21,066 Other 21,480 19,563 ------- ------- 439,818 446,974 ------- ------- $1,378,464 $1,304,546 ========== ========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Continued) (Dollar Amounts in Thousands) July 4, Dec. 31, 1998 1997 ------- -------- (Unaudited) Liabilities and Stockholders' Investment Current Liabilities: Notes payable and other short-term obligations $ 11,156 $ 11,770 Current maturities of long-term debt 5,746 5,969 Accounts payable 122,567 91,488 Accrued expenses and taxes, net 152,218 164,001 ------- ------- Total current liabilities 291,687 273,228 ------- ------- Other Liabilities 64,697 67,390 ------- ------- Notes, Mortgage Notes and Obligations Payable, Less Current Maturities 826,350 835,840 ------- ------- Stockholders' Investment: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common stock, $1 par value; authorized 40,000,000 shares; 18,409,378 and 16,050,794 shares issued 18,409 16,051 Special common stock, $1 par value; authorized 5,000,000 shares; 860,122 and 767,287 shares issued 860 767 Additional paid-in capital 198,886 135,345 Retained earnings 68,766 58,966 Cumulative translation, pension and other adjustments (6,903) (5,327) Less --treasury common stock at cost, 7,237,237 and 7,032,497 shares (82,331) (75,779) --treasury special common stock at cost, 285,987 and 285,304 shares (1,957) (1,935) ------- ------- Total stockholders' investment 195,730 128,088 ------- ------- $1,378,464 $1,304,546 ========== ========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands Except Per Share Amounts) For The Three Months Ended ------------------ July 4, June 28, 1998 1997 ------- -------- (Unaudited) Net Sales $449,647 $223,795 -------- -------- Costs and Expenses: Cost of products sold 333,941 158,725 Selling, general and administrative expense 79,938 45,521 Amortization of acquired goodwill 2,614 717 ------- ------- 416,493 204,963 ------- ------- Operating earnings 33,154 18,832 Interest expense (19,740) (10,245) Investment income 2,086 3,113 ------- ------- Earnings from continuing operations before provision for income taxes 15,500 11,700 Provision for income taxes 7,000 4,000 ------- ------- Earnings from continuing operations 8,500 7,700 Loss from discontinued operations --- (1,000) ------- ------- Net Earnings $ 8,500 $ 6,700 ======= ======= Net Earnings (Loss) Per Share: Earnings from continuing operations: Basic $ .79 $ .80 Diluted $ .78 $ .78 Loss from discontinued operations: Basic $ --- $ (.10) ------- ------- Diluted $ --- $ (.10) ------- ------- Net Earnings: Basic $ .79 $ .70 ======= ======= Diluted $ .78 $ .68 ======= ======= Weighted Average Number of Shares: Basic 10,718 9,602 ====== ======= Diluted 10,905 9,828 ======= ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands Except Per Share Amounts) For The Six Months Ended ------------------ July 4, June 28, 1998 1997 ------- -------- (Unaudited) Net Sales $842,115 $418,033 ------- ------- Costs and Expenses: Cost of products sold 628,595 295,711 Selling, general and administrative expense 155,499 88,599 Amortization of acquired goodwill 5,174 1,429 ------- ------- 789,268 385,739 ------- ------- Operating earnings 52,847 32,294 Interest expense (39,198) (17,568) Investment income 4,351 4,574 ------- ------- Earnings from continuing operations before provision for income taxes 18,000 19,300 Provision for income taxes 8,200 6,900 ------- ------- Earnings from continuing operations 9,800 12,400 Loss from discontinued operations --- (2,000) ------- ------- Net Earnings $ 9,800 $ 10,400 ======= ======= Net Earnings (Loss) Per Share: Earnings from continuing operations: Basic $ .97 $ 1.28 Diluted $ .95 $ 1.25 Loss from discontinued operations: Basic $ --- $ (.20) -------- --------- Diluted $ --- $ (.20) -------- --------- Net Earnings: Basic $ .97 $ 1.08 ======== ========= Diluted $ .95 $ 1.05 ======== ========= Weighted Average Number of Shares: Basic 10,129 9,663 ======= ======== Diluted 10,311 9,896 ======= ======== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) For the Six Months Ended ------------------ July 4, June 28, 1998 1997 Cash Flows from operating activities: ------ ------- (Unaudited) Earnings from continuing operations $ 9,800 $ 12,400 Loss from discontinued operations --- (2,000) ------- -------- Net earnings 9,800 10,400 ------ -------- Adjustments to reconcile net earnings to cash: Depreciation and amortization expense 19,876 10,439 Non-cash interest expense 1,611 583 Net gain on investments and marketable securities --- (175) Deferred federal income tax provision 4,400 200 Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (40,952) (15,973) Prepaid and other current assets (2,501) (2,286) Inventories (11,761) (6,919) Net assets of discontinued operations (6,659) (4,630) Accounts payable 32,618 12,555 Accrued expenses and taxes (4,281) 5,180 Long-term assets,liabilities and other,net (3,640) (900) ------- ------- Total adjustments to net earnings (11,289) (1,926) -------- ------- Net cash (used in) provided by (1,489) 8,474 operating activities -------- ------- Cash Flows from investing activities: Capital expenditures (15,507) (7,748) Purchase of investments and marketable Securities --- (157,037) Proceeds from the sale of investments and marketable securities 23,978 37,220 Proceeds from businesses sold, net 24,937 --- Other, net (5,048) (1,407) -------- ------- Net cash provided by (used in) investing activities 28,360 (128,972) ------- --------- The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) (Continued) For the Six Months Ended ------------------ July 4, June 28, 1998 1997 -------- --------- Cash Flows from financing activities: (Unaudited) Sale of notes, net --- 169,395 Net decrease in borrowings (10,312) (26,223) Net proceeds from the sale of Nortek Common Stock 64,300 --- Purchase of Nortek Common and Special Common Stock (6,574) (7,626) Other, net 1,492 679 ------- ------- Net cash provided by financing activities 48,906 136,225 ------- -------- Net increase in unrestricted cash and cash equivalents 75,777 15,727 Unrestricted cash and cash equivalents at the beginning of the period 125,842 41,042 ------- -------- Unrestricted cash and cash equivalents at the end of the period $201,619 $ 56,769 ======== ======== Interest paid $ 40,301 $ 13,092 ======== ======== Income taxes paid, net $ 3,856 $ 5,289 ======== ======== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE THREE MONTHS ENDED June 28, 1997 (Dollar Amounts in Thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income Income -------- ------ -------- -------- -------- ------------- --------- (Unaudited) Balance, March 29, 1997 $16,021 $779 $135,311 $41,466 $(74,071) $ (4,536) Net earnings --- --- --- 6,700 --- $6,700 Other comprehensive income: Translation adjustment --- --- --- --- --- 281 281 Unrealized increase in the value of marketable securities 307 307 ------ Comprehensive income $7,288 4,972 shares of ====== special common stock converted into 4,972 shares of common stock 5 (5) --- --- --- --- 57,005 shares of treasury stock acquired --- --- --- --- (1,161) --- Balance, June 28, -------- ------ -------- -------- --------- --------- 1997 $ 16,026 $ 774 $135,311 $ 48,166 $(75,232) $ (3,948) ======== ====== ======== ======== ========= =========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 9 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE THREE MONTHS ENDED JULY 4, 1998 (Dollar Amounts in Thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income Income -------- ------- -------- --------- -------- ------------ ------- (Unaudited) Balance, April 4, 1998 $16,213 $ 865 $136,736 $ 60,266 $(84,356) $ (6,033) Net earnings --- --- --- 8,500 --- --- $8,500 Other comprehensive income: Translation adjustment --- --- --- --- --- (940) (940) Unrealized increase in the value of marketable securities --- --- --- --- --- 70 70 ------ Comprehensive income $7,630 ======= Sale of 2,182,500 shares of common stock 2,182 --- 62,207 --- --- --- 4,459 shares of special common stock converted into 4,459 shares of common stock 5 (5) --- --- --- 8,996 shares of common stock issued upon exercise of stock options 9 --- (57) --- --- --- Other --- --- --- --- 68 --- ------- ------ -------- ------- -------- ------- Balance, July 4,1998 $18,409 $ 860 $198,886 $68,766 $(84,288) $(6,903) ======= ====== ======== ======= ========= ========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 10 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE SIX MONTHS ENDED JUNE 28, 1997 (Dollar Amounts in Thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income Income ------ ------- ------- -------- -------- ------------ ---------- (Unaudited) Balance, December 31, 1996 $ 15,966 $ 784 $ 135,028 $ 37,766 $ (67,537) $ (3,212) Net earnings --- --- --- 10,400 --- --- $10,400 Other comprehensive income: Translation adjustment --- --- --- --- --- (1,105) (1,105) Unrealized increase in the value of marketable securities --- --- --- --- --- 369 369 ------ Comprehensive income $9,664 ------ 15,638 shares of special common stock converted into 15,638 shares of common stock 16 (16) --- --- --- --- 44,319 shares of common stock and 5,808 shares of special common stock issued upon exercise of stock options 44 6 283 --- --- --- 337,905 shares of treasury stock acquired --- --- --- --- (7,695) --- Balance, June 28, -------- ------ --------- -------- ---------- --------- 1997 $ 16,026 $ 74 $ 135,311 $ 48,166 $ (75,232) $ (3,948) ======== ====== ========= ======== ========== =========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 11 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE SIX MONTHS ENDED JULY 4, 1998 (Dollar Amounts in Thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income Income ------ ------- -------- -------- -------- ------------- ---------- (Unaudited) Balance, December 31, 1997 $ 16,051 $ 767 $ 135,345 $ 58,966 $ (77,714) $(5,327) Net earnings --- --- --- 9,800 --- --- $ 9,800 Other comprehensive income: Translation adjustment --- --- --- --- --- (1,597) (1,597) Unrealized increase in the value of marketable securities --- --- --- --- --- 121 121 Minimum pension liability Net of $65 tax benefit --- --- --- --- --- (100) (100) ------- Comprehensive income $ 8,224 ======= Sale of 2,182,500 shares of common stock 2,182 --- 62,207 --- --- --- 8,156 shares of special common stock converted into 8,156 shares of common stock 8 (8) --- --- --- --- 167,982 shares of common stock and 100,991 shares of special common stock issued upon exercise of stock options 168 101 1,334 --- --- --- 205,423 shares of treasury stock acquired --- --- --- --- (6,574) --- Balance, July 4, -------- ------- -------- -------- --------- -------- 1998 $ 18,409 $ 860 $ 98,886 $ 68,766 $(84,288) $(6,903) ======== ====== ======== ======== ========= ========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 12 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 AND JUNE 28, 1997 (A) The unaudited condensed consolidated financial statements (the "Unaudited Financial Statements") presented 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 period have been reclassified to conform to the presentation at July 4, 1998, and for all periods presented, reflect the operations of the Plumbing Products Group as discontinued operations (See Note H). 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, $175,000,000 principal amount of 9 1/4% Senior Notes due March 15, 2007 ("9 1/4% Notes") at a slight discount. The net proceeds were used to refinance certain outstanding indebtedness of the Company's subsidiaries and for acquisitions and other general corporate purposes, including investment in plant and equipment. (C) During the second quarter of 1998, the Company sold, in a public offering, 2,182,500 shares of its common stock for net proceeds of approximately $64,300,000 (the "Common Stock Sale"). (D) Acquisitions are accounted for as purchases and, accordingly, have been included in the Company's consolidated results of operations since the acquisition date. Purchase price allocations are subject to refinement until all pertinent information regarding the acquisitions is obtained. (E) On July 31, 1998, the Company, through a wholly-owned subsidiary, purchased all of the issued and outstanding capital stock of NuTone Inc.("NuTone"), a wholly owned subsidiary of Williams plc ("Williams") for an aggregate purchase price of $242,500,000. In connection with the acquisition, the Company assumed NuTone's operating liabilities (other than intercompany borrowings), including certain liabilities of NuTone concerning post-retirement and other benefit obligations. The purchase price is subject to adjustment based on NuTone's net asset value determined as of August 1, 1998. If the final closing net asset value, as determined in accordance with the NuTone purchase agreement, is within the range 13 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 AND JUNE 28, 1997 (Continued) of $65,100,000 to $67,100,000 (inclusive), then there will be no adjustment to the purchase price. If the final closing net asset value, as determined in accordance with the NuTone purchase agreement, exceeds $67,100,000, then the Company is obligated to pay Williams an amount equal to the difference between the final closing net asset value and $67,100,000. If the final closing net asset value is less than $65,100,000, then Williams is obligated to pay the Company an amount equal to the difference between $65,100,000 and the final closing net asset value. The purchase price was funded, and any adjustments will be funded, through the use of the net proceeds from the sale of $210,000,000 principal amount of 8 7/8 % Senior Notes due August 1, 2008 (the "8 7/8% Notes") at a slight discount, which occurred on July 31, 1998, in a private offering (under an exemption pursuant to securities and Exchange Commission ("SEC") Rule 144A to qualified investors together with a portion of the cash proceeds from the Common Stock Sale. Consummation of the acquisition was subject to expiration or termination of the applicable waiting period under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). On or about June 29, 1998, after a review of the acquisition by the Federal Trade Commission ("FTC"), and in response to the FTC's concerns about the potential adverse competitive effects the acquisition might have on the market for certain hard-wired intercom systems, Nortek executed an Agreement Containing Consent Order ("FTC Order") providing for the divestiture of the Company's M&S System LP ("M&S") subsidiary, which manufactures hard-wired intercom systems and other products. The FTC Order was provisionally accepted by the FTC commissioners on July 27, 1998. The FTC Order was placed on public record on or about July 27, 1998, and is subject to public comment for a period of 60 days. Upon the expiration of the comment period, the FTC will decide whether to withdraw, modify or make final its acceptance of the FTC Order. Under the terms of the FTC Order, the Company must divest, at no minimum price, prior to December 31, 1998, all of the assets, properties, business and goodwill of M&S. Any acquirer must be approved by the FTC. If the Company has not divested the M&S assets within the prescribed time, the FTC may appoint a trustee to divest the M&S assets. The Company will be responsible for any costs and expenses incurred by the trustee that are necessary to carry out the trustee's duties. The Company is required to file compliance reports showing that it has fully complied with the order. Violations of the final consent order may result in substantial monetary penalties, which could have a material adverse effect on the Company's business. Notwithstanding the FTC Order, at 14 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 AND JUNE 28, 1997 (Continued) at any time after the consummation of the acquisition, the FTC or the Department of Justice ("DOJ") could take such actions under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the acquisition or seeking divestiture of certain assets of the acquisition. Furthermore, at any time after the consummation of the acquisition, any state could take such action under the antitrust laws as it deems necessary or desirable to the public interest. While the Company does not expect the FTC, the DOJ or any state to challenge the acquisition on antitrust grounds, there is no assurance that such a challenge will not be made or, if made and successful, would not have a material adverse affect on the Company. On August 26, 1997, a wholly-owned subsidiary of the Company completed the acquisition of Ply Gem Industries, Inc. ("Ply Gem") in a tender offer for a cash price of $19.50 per outstanding share of common stock. Prior to accepting for payment the tendered shares of Ply Gem on August 26, 1997, the Company sold $310,000,000 principal amount of 9 1/8% Senior Notes due September, 2007 (the "9 1/8% Notes") at a slight discount. The Company used a portion of these net proceeds, together with available cash, to purchase the shares of Ply Gem, fund an approximate $45,000,000 payment to terminate Ply Gem's existing accounts receivable securitization program and pay certain fees and expenses. The following presents the unaudited Pro Forma and As Adjusted net sales, operating earnings, earnings from continuing operations and diluted earnings per share from continuing operations of the Company for the three months and six months ended June 28, 1997 and July 4, 1998 and the year ended December 31,1997 and gives pro forma effect to the sale of the 8 7/8% Notes, the acquisition of Nutone, the Common Stock Sale, the acquisition of Ply Gem, the sale of the 9 1/8% Notes, the extension of credit under the Ply Gem Credit Facility to refinance certain existing indebtedness and the termination of Ply Gem's accounts receivable securitization program, the sale of the 9 1/4% Notes in March 1997, the refinancing of certain subsidiary indebtedness, and reflects estimated cost reductions as described below as if such transactions and adjustments had occurred on January 1, 1997. 15 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 AND JUNE 28, 1997 (Continued)
Pro Forma --------- Three Months Ended Six Months Ended Year Ended ------------------ ---------------- ---------- July 4, June 28, July 4, June 28, Dec. 31, 1998 1997 1998 1997 1997 ------- -------- ------- -------- -------- (Amounts in thousands except per share amounts) Net sales $495,306 $491,327 $937,338 $894,938 $1,849,124 Operating earnings 37,822 37,724 60,770 54,828 91,932 Earnings (loss) from continuing operations 7,900 7,700 7,500 2,400 (3,500) Diluted earnings (loss)per share from continuing operations $0.66 $0.64 $0.63 $0.20 $(0.30)
As Adjusted ----------- Three Months Ended Six Months Ended Year Ended ------------------ ---------------- ---------- July 4, June 28, July 4, June 28, Dec. 31, 1998 1997 1998 1997 1997 ------- -------- -------- -------- --------- (Amounts in thousands except per share amounts) Net sales $495,306 $491,327 $937,338$894,938 $1,849,124 Operating Earnings 41,572 45,510 68,270 70,042 143,193 Earnings from continuing operations 10,200 12,500 12,000 12,000 28,000 Diluted Earnings per share from continuing operations $0.85 $1.04 $1.01 $0.99 $2.33
In computing pro forma earnings, earnings have been reduced by the net interest income on the aggregate cash portion of the purchase price of the acquisitions at the historical rate earned by the Company and interest expense on indebtedness incurred in connection with the acquisitions and the refinancing and repayment of certain indebtedness of Ply Gem. Earnings have been reduced by amortization of goodwill and, in relation to the Ply Gem acquisition, reflect net adjustments to depreciation expense as a result of an increase in the estimated fair market value of property and equipment and changes in depreciable lives. Interest expense on the subsidiary indebtedness refinanced with 16 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 AND JUNE 28, 1997 (Continued) funds from the sale of the 9 1/4% Notes was excluded at an average interest rate consistent with the indebtedness outstanding which was refinanced, net of tax effect. Interest expense was included on the 9 1/4% Notes at a rate of approximately 9 1/4%, plus amortization of deferred debt expense and debt discount, net of tax effect, on the 9 1/8% Notes at a rate of approximately 9 1/8%, plus amortization of deferred debt expense and debt discount, net of tax effect and on the 8 7/8% Notes, at a rate of approximately 8 7/8% plus amortization of deferred debt expense and debt discount, net of tax effect. Pro forma results reflect investment income earned on the cash proceeds from the actual date of the Common Stock Sale to July 4, 1998. Subsequent to the Nutone acquisition, the Company expects to realize net savings from the elimination of fees and charges paid by NuTone to Williams and related entities. Pro Forma operating earnings for the three and six months ended June 28, 1997 have been adjusted by approximately $474,000 and approximately $875,000, respectively, for the three and six months, ended July 4, 1998 have been adjusted by approximately $482,000 and approximately $384,000, respectively, and for the year ended December 31, 1997 have been adjusted by approximately $1,746,000 for the pro forma effect of estimated cost reductions directly attributable to the acquisition. Subsequent to the NuTone acquisition, the Company expects to realize approximately $15,000,000 in annual cost reductions ("NuTone Cost Adjustments") that can be achieved as a result of the NuTone acquisition. As Adjusted earnings have been adjusted for the NuTone Cost Adjustments by $3,750,000 and $7,500,000 for the three and six months ended July 4, 1998 and June 28, 1997, respectively, and by $15,000,000 for the year ended December 31, 1997. In addition, since the Ply Gem acquisition date, the Company has realized, and expects to continue to realize, cost savings as a result of the acquisition. These savings result from several actions, including: (i) the elimination of expenses associated with Ply Gem's New York headquarters; (ii) the consolidation of Ply Gem's corporate functions such as accounting, legal and risk management into Nortek; and (iii) the elimination of certain under-performing product lines. Pro Forma operating earnings for the three and six months ended June 28, 1997 and the year ended December 31, 1997, have been adjusted for the pro forma effect of estimated cost reductions directly attributable to the Ply Gem acquisition totaling approximately $2,054,000, approximately $3,721,000 and approximately $4,000,000 respectively. As Adjusted operating earnings for the three and six months ended June 28, 1997 and the year ended December 31, 1997, include cost reductions directly attributable to the Ply Gem acquisition and additional estimated cost savings related to expenses associated with the elimination of Ply Gem's New York headquarters, the consolidation 17 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 AND JUNE 28, 1997 (Continued) of Ply Gem's corporate functions and the elimination of certain under-performing product lines which total approximately $4,036,000, $7,714,000, and $14,100,000, respectively. The pro forma information presented does not purport to be indicative of the results which would have been reported if these transactions had occurred on January 1, 1997, or which may be reported in the future. (F) The Company's Board of Directors has authorized a number of programs to purchase shares of the Company's Common and Special Common Stock. 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 August 7, 1998, the Company has purchased approximately 317,250 shares of its Common and Special Common Stock under this program for approximately $9,300,000 and accounted for such share purchases as Treasury Stock. At August 7, 1998, approximately $64,289,000 was available for the payment of cash dividends or stock purchases under the terms of the Company's most restrictive Indenture. (G) In the fourth quarter of 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share." This statement requires a restatement of all prior-period earnings per share ("EPS") data presented. Accordingly, EPS for the second quarter and first six months of 1997 has been restated. Basic earnings per share amounts have been computed using the weighted average number of common and common equivalent shares outstanding during each period. Special Common Stock is treated as the equivalent of Common Stock in determining earnings per share results. Diluted earnings per share amounts have been computed using the weighted average number of common and common equivalent shares and the dilutive potential common shares outstanding during each period. 18 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 AND JUNE 28, 1997 (Continued) A reconciliation between basic and diluted earnings per share from continuing operations is as follows:
Three Six Months Ended Months Ended -------------------- ------------------ July 4, June 28, July 4, June 28, 1998 1997 1998 1997 ------- ------- ------- -------- (In thousands except per share amounts) Earnings from continuing operations $8,500 $7,700 $9,800 $12,400 Basic EPS: Basic common shares 10,718 9,602 10,129 9,663 ====== ====== ====== ====== Basic EPS $ .79 $ .80 $ .97 $1.28 ====== ====== ====== ====== Diluted EPS: Basic common shares 10,718 9,602 10,129 9,663 Plus: Impact of stock Options 187 226 182 233 ------ ------ ------ ------ Diluted common shares 10,905 9,828 10,311 9,896 ====== ====== ====== ====== Diluted EPS $ .78 $ .78 $.95 $1.25 ====== ====== ====== ======
(H) In the fourth quarter of 1997, the Company adopted a plan of disposition for its Plumbing Products Group and provided a pre-tax reserve of $2,500,000 for future expenses including interest expense. On July 10, 1998, the Company sold its Plumbing Products Group, including a product line included in the Company's Residential Building Products Group, for approximately $33,700,000. In the three months and six months ended July 4, 1998, approximately $525,000 and $1,000,000, respectively, of corporate interest expense was allocated against this reserve. In the three months and six months ended June 28, 1997, the loss for discontinued operations included an allocation of corporate interest expense of approximately $425,000 and $950,000 respectively. The following is an unaudited summary of the results of discontinued operations for the three months and six months ended June 28, 1997: 19 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 AND JUNE 28, 1997 (Continued) Three Months Six Months Ended June 28, Ended June 28, 1997 1997 --------------------------------------- (In thousands except per share amounts) Net sales $25,796 $51,185 ======= ======= Loss before income taxes $(1,700) $(3,300) Income tax benefit 700 1,300 -------- -------- Loss from discontinued operations $(1,000) $(2,000) ======== ======== (I) In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") which requires the display of comprehensive income and its components in the financial statements. Comprehensive income includes net earnings and unrealized gains and losses from currency translation, marketable securities and pension liability adjustments. The components of the Company's comprehensive income and the effect on earnings, for the second quarter and first six months of 1997 and 1998, are detailed in the Statements of Stockholders' Investment. (J) In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Statement 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). Statement 133 cannot be applied retroactively. Statement 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). 20 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 AND JUNE 28, 1997 (Continued) The company is in the process of quantifying the impacts of adopting Statement 133 on its financial statements and has not determined the timing of or method of adoption of Statement 133. (K) During the second quarter of 1998, the Company made several dispositions of nonstrategic assets. On May 8, 1998, the Company sold Studley Products, Inc. ("Studley"). Studley had net sales of approximately $22,000,000 for the year ended December 31, 1997 and had been treated as an asset held for sale since the Ply Gem acquisition. On May 22, 1998, the Company consummated the sale of another Ply Gem subsidiary, Sagebrush Sales, Inc. ("Sagebrush") for approximately $9,800,000 in cash. Sagebrush had net sales of approximately $47,600,000, for the year ended December 31, 1997. On July 2, 1998, the Company completed the sale of another Ply Gem subsidiary, Goldenberg Group, Inc. ("Goldenberg") for approximately $11,000,000, including approximately $2,100,000 in notes. Goldenberg had net sales of approximately $41,300,000 for the year ended December 31, 1997. The Company is currently negotiating for the sale of all of the outstanding equity interests of the Electronics Group of the Company. The Electronics Group includes M&S and certain other of Nortek's businesses. The sale of the Electronics Group is subject to the completion of satisfactory due diligence by the purchaser, expiration or termination of the applicable waiting period under the HSR Act and the negotiation of definitive documentation, which is expected to contain customary terms and conditions. In addition, under the FTC Order, the disposition of M&S is subject to the prior approval of the FTC. For the year ended December 31, 1997, net sales, operating earnings and earnings before interest, taxes and depreciation and amortization expense ("EBITDA") of the Electronics Group were approx- imately $70,300,000, $6,300,000 and $8,300,000, respectively. For the three months ended July 4, 1998, net sales, operating earnings and earnings before interest, taxes and depreciation and amortization ("EBITDA") of the Electronics Group were approximately $16,600,000, $700,000 and $1,200,000, respectively. For the six months ended July 4, 1998, net sales, operating earnings and EBITDA of the Electronics Group were approximately $36,100,000, $2,300,000 and $3,300,000, respectively. 21 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 The Company is a diversified manufacturer of residential and commercial building products, operating within four principal product groups: the Residential Building Products Group; the Air Conditioning and Heating("HVAC") Products Group; the Windows, Doors and Siding Group; and the Specialty Products and Distribution 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. On August 26, 1997, the Company acquired Ply Gem, which has been accounted for under the purchase method of accounting. Accordingly, the results of Ply Gem are included in the Company's consolidated results since that date. (See "Liquidity and Capital Resources" and Note D of the Notes to the Unaudited Financial Statements included elsewhere herein.) In the fourth quarter of 1997, the Company adopted a plan to discontinue its Plumbing Products Group. Accordingly, the results of the Plumbing Products Group have been excluded from earnings from continuing operations and classified separately as discontinued operations for all periods presented. On July 10, 1998, the Company sold its Plumbing Products Group, including a product line included in the Residential Building Products Group, for approximately $33,700,000. In the second and third quarter of 1998 the Company also sold several businesses acquired with the Ply Gem acquisition, is currently negotiating to sell the Electronics Group and is continuing its program of divesting certain other businesses. (See Notes E, H and K of the Notes to the Unaudited Financial Statements included elsewhere herein.) 22 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) 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 second quarter ended July 4, 1998 are not necessarily indicative of the results of operations to be expected for any other interim period or the full year.
Change in Second Quarter Ended Second Quarter 1998 ------------------- July 4, June 28, as Compared to 1997 ------------------ 1998 1997 $ % ---- ---- ----- ------ (Dollar amounts in millions) Net sales $449.6 $223.8 $225.8 100.9% Cost of products sold 334.0 158.7 (175.3) (110.5) Selling, general and administrative expense 79.9 45.6 (34.3) (75.2) Amortization of acquired goodwill 2.6 .7 (1.9) NM ------ ------ ------ ------ Operating earnings 33.1 18.8 14.3 76.1 ------ ------ ------ ------ Interest expense (19.7) (10.3) (9.4) (91.3) Investment income 2.1 3.2 (1.1) (34.3) ------ ------ ------- ------- Earnings from continuing operations before provision for income taxes 15.5 11.7 3.8 32.5 Provision for income taxes 7.0 4.0 (3.0) (75.0) ------ ------ ------ ------ Earnings from continuing operations 8.5 7.7 .8 10.4 Loss from discontinued operations --- (1.0) 1.0 NM ------ ------- ------ ------ Net earnings $8.5 $6.7 $1.8 26.9% ====== ======= ====== ======
NM = not meaningful 23 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued)
Change in Percentage of Net Sales Percentage Second Quarter Ended for the Second ------------------- July 4, June 28, Quarter 1998 1998 1997 as Compared to 1997 ------- ------- ------------------- Net sales 100.0% 100.0% --- Cost of products sold 74.3 70.9 (3.4) Selling, general and administrative expense 17.7 20.4 2.7 Amortization of acquired goodwill .6 .3 (.3) ------ ------ ------- Operating earnings 7.4 8.4 (1.0) Interest expense (4.4) (4.6) .2 Investment income .5 1.4 (.9) ------- ------ ------- Earnings from continuing operations before provision for income taxes 3.5 5.2 (1.7) Provision for income taxes 1.6 1.8 .2 ------ ------ ------- Earnings from continuing operations 1.9 3.4 (1.5) Loss from discontinued operations --- (.4) .4 ------ ------ ------- Net earnings 1.9% 3.0% (1.1) ====== ====== ========
24 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) 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 six months ended July 4, 1998 are not necessarily indicative of the results of operations to be expected for any other interim period or the full year.
Change in Six Months Ended First Six Months 1998 ------------------- as Compared to 1997 July 4, June 28, ------- -------- ------------------ 1998 1997 $ % ---- ---- ----- ------ (Dollar amounts in millions) Net sales $842.1 $418.0 $424.1 101.5% Cost of products sold 628.6 295.7 (332.9) (112.6) Selling, general and administrative expense 155.5 88.6 (66.9) (75.5) Amortization of acquired goodwill 5.2 1.4 (3.8) NM ------ ------ ------ ------ Operating earnings 52.8 32.3 20.5 63.5 ------ ------ ------ ------ Interest expense (39.2) (17.6) (21.6) (122.7) Investment income 4.4 4.6 (.2) (4.3) ------ ------ ------ ------ Earnings from continuing operations before provision for income taxes 18.0 19.3 (1.3) (6.7) Provision for income taxes 8.2 6.9 (1.3) (18.8) ------ ------ ------ ------ Earnings from continuing operations 9.8 12.4 (2.6) (21.0) Loss from discontinued operations --- (2.0) 2.0 NM ------ ------ ------ ------ Net earnings $9.8 $10.4 $ (.6) (5.8)% ====== ====== ====== ======
NM = not meaningful 25 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued)
Change in Percentage of Net Sales Percentage First Six Months Ended for the First ------------------- July 4, June 28, Six Months 1998 1998 1997 as Compared to 1997 ---- ---- ------------------- Net sales 100.0% 100.0% --- Cost of products sold 74.7 70.7 (4.0) Selling, general and administrative expense 18.4 21.2 2.8 Amortization of acquired goodwill .6 .4 (.2) ------ ------ ------ Operating earnings 6.3 7.7 (1.4) Interest expense (4.7) (4.2) (.5) Investment income .5 1.1 (.6) ------ ------ ------ Earnings from continuing operations before provision for income taxes 2.1 4.6 (2.5) Provision for income taxes .9 1.6 .7 ------ ------ ------ Earnings from continuing operations 1.2 3.0 (1.8) Loss from discontinued operations --- (.5) .5 ------ ------ ------ Net earnings 1.2% 2.5% (1.3) ====== ====== ======
The following presents net sales for the Company's principal product groups for the second quarter and the six months ended July 4, 1998 as compared to the second quarter and six months ended June 28, 1997 and the amount and the percentage change of such results as compared to the prior comparable period.
Second Quarter Ended ------------------------------------- July 4, June 28, Increase l998 1997 $ % ---- ---- ----- ----- (000's omitted) Net Sales: Residential Building Products $108,809 $108,276 $ 533 .5% Air Conditioning and Heating Products 133,794 115,519 18,275 15.8 Windows, Doors and Siding 141,142 --- 141,142 --- Specialty Products and Distribution 65,902 --- 65,902 --- -------- -------- -------- ----- Total $449,647 $223,795 $225,852 100.9% ======== ======== ======== =====
26 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued)
Six Months Ended --------------------------------------- July 4, June 28, Increase ------------------- 1998 1997 $ % ---- ---- ----- ----- (000's omitted) Net Sales: Residential Building Products $227,758 $211,435 $ 16,323 7.7% Air Conditioning and Heating Products 234,670 206,598 28,072 13.6 Windows, Doors and Siding 240,371 --- 240,371 --- Specialty Products and Distribution 139,316 --- 139,316 --- ------- -------- -------- ----- Total $842,115 $418,033 $424,082 101.5% ======== ======== ======== =====
Certain amounts in the tables for the prior periods have been reclassified to conform to the classifications for the second quarter and the six months ended July 4, 1998. Operating Results - ----------------- Net sales increased approximately $225,800,000 or approximately 100.9%, (or increased approximately $227,400,000 or approximately 101.6% excluding the effect of foreign exchange) in the second quarter of 1998 as compared to the second quarter of 1997 and increased approximately $ 424,100,000, or approximately 101.5%, (or increased approximately $428,700,000 or approximately 102.6% excluding the effect of foreign exchange) for the first six months of 1998 as compared to 1997. Net sales increased principally as a result of the acquisition of Ply Gem, which contributed approximately $207,100,000 and approximately $379,700,000 to net sales in the second quarter and first six months of 1998, respectively. Excluding sales from the Ply Gem acquisition, net sales increased approximately $18,700,000 or approximately 8.4% (or increased approximately $20,300,000, or approximately 9.1% excluding the effect of foreign exchange), and increased approximately $44,400,000 or approximately 10.6%, (or increased approximately $49,000,000 or approximately 11.7% excluding the effect of foreign exchange) for the second quarter and the first six months of 1998, respectively as compared to 1997. The increase in the second quarter and first six months, is a result of higher sales volume in the Air Conditioning and Heating Products Group, principally related to the residential and manufactured housing markets, in both periods and increased sales volume in the Residential Building Products Group in the first six months, with the majority of the increase occurring in the first quarter. 27 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) In the second quarter of 1998, the Company sold three Ply Gem businesses, one of which was treated as an asset held for sale as of the date of the Ply Gem acquisition. Subsequent to July 4, 1998, the Company sold its Plumbing Products Group which was discontinued in the fourth quarter of 1997, together with a product line which was included in the Residential Building Products Group and sold another Ply Gem business. The Company's sales for the first half of 1998, include approximately $66,900,000 of sales related to businesses sold in 1998 through July 31, 1998 of which approximately $5,800,000 of such sales are included in the Residential Building Products Group and approximately $61,100,000 are included in the Specialty Products and Distribution Group. Cost of products sold as a percentage of net sales increased from approximately 70.9% in the second quarter of 1997 to approximately 74.3% in the second quarter of 1998, and increased from approximately 70.7% in the first six months of 1997 to approximately 74.7% in the first six months of 1998. These increases in the percentage were in large part due to the Ply Gem businesses, which have a higher level of cost of sales than the overall group of businesses owned prior to the Ply Gem acquisition, combined with the effect of low sales levels (seasonality) related to Ply Gem in the first quarter, but with fairly constant quarterly levels of fixed costs throughout the year. Ply Gem's Windows, Doors and Siding Group's net sales levels, with their heavy concentration in the upper mid-west and northeast regions of the country, tend to be significantly lower in the first quarter than the other three quarters of the year, while fixed labor, overhead and depreciation remain constant among the four quarters of each year. Excluding the Ply Gem businesses, cost of products sold as a percentage of net sales decreased from approximately 70.9% in the second quarter of 1997 to approximately 69.6% in the second quarter of 1998, and decreased from approximately 70.7% in the first six months of 1997 to approximately 69.4% in the first six months of 1998. The decrease in the percentage principally resulted from increased sales without a proportionate increase in fixed costs, combined with a decrease in material costs in both periods in the Air Conditioning and Heating Products Group and to a lesser extent increased sales without a proportionate increase in fixed costs in the second quarter and the first six months in the Residential Building Products Group. Overall, changes in the 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 material cost of products sold and changes in productivity levels. 28 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) Selling, general and administrative expense as a percentage of net sales decreased from approximately 20.4% in the second quarter of 1997 to approximately 17.7% in the second quarter of 1998 and decreased from approximately 21.2% in the first six months of 1997 to approximately 18.4% in the first six months of 1998. These decreases in the percentages were principally the result of the acquisition of Ply Gem, which has a lower level of selling, general and administrative expense to net sales than the overall group of businesses owned prior to the acquisition, partially offset by the effect of certain constant fixed expense levels throughout the year at Ply Gem on relatively low first quarter and first half sales levels dueto the seasonality of the Windows, Doors and Siding Products Group. Excluding the Ply Gem businesses, selling, general and administrative expense as a percentage of net sales increased slightly from approximately 20.4% in the second quarter of 1997 to approximately 21.1% in the second quarter of 1998, and increased slightly from approximately 21.2% in the first six months of 1997 to approximately 21.3% in the first six months of 1998 principally in the Air Conditioning and Heating Products Group. Amortization of acquired goodwill as a percentage of net sales increased from approximately .3% of net sales in the second quarter of 1997 to approximately .6% of net sales in the second quarter of 1998, and increased from approximately .4% of net sales in the first six months of 1997 to approximately .6% in the first six months of 1998, principally as a result of the acquisition of Ply Gem. Segment earnings were approximately $37,400,000 for the second quarter of 1998 as compared to approximately $22,400,000 for the second quarter of 1997, and approximately $60,200,000 for the first six months of 1998 as compared to approximately $39,000,000 for the first six months of 1997. Segment earnings are operating earnings from continuing operations before corporate and other expenses that are not directly attributable to the Company's product groups. The Ply Gem acquisition contributed approximately $11,300,000 to segment earnings in the second quarter of 1998, and approximately $11,200,000 in the first six months of 1998. Ply Gem's segment earnings, due to the seasonal nature of the Windows, Doors and Siding Group with their heavy concentration in the upper mid-west and north east regions of the country are proportionately lower in the first quarter than the results expected in other quarters. The Company's segment earnings for the first half of 1998 include approximately $2,000,000 of operating earnings related to businesses sold in 1998 through July 31, 1998, of which approximately $600,000 are included in the Residential Building Products Group and approximately $1,400,000 are included in the Specialty Products and Distribution Group. Segment earnings have been reduced by depreciation and amortization expense of approximately $9,800,000 and approximately $5,700,000 for second quarter 1998 and 1997, 29 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) respectively, and approximately $19,800,000 and $10,500,000 for the first six months of 1998 and 1997 respectively. The acquisition of Ply Gem contributed approximately $4,600,000 of the increase in depreciation and amortization expense in the second quarter of 1998, and approximately $9,400,000 for the first six months of 1998. The overall increase in segment earnings related to businesses owned prior to the acquisition of Ply Gem was due principally to increased sales volume without a proportionate increase in expense particularly in the Air Conditioning and Heating Products Group. Earnings of foreign operations, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries which manufacture built-in ventilating products were approximately 5.5% and 7.1% of segment earnings in the second quarter and first six months of 1998, respectively. Sales and earnings derived from the international market are subject to the risks of currency fluctuations. Operating earnings in the second quarter of 1998 increased approximately $14,300,000 or approximately 76.1% as compared to the second quarter of 1997, and increased approximately $20,500,000 or approximately 63.5% as compared to the first six months of 1997 primarily due to the factors previously discussed. Interest expense in the second quarter of 1998 increased approximately $9,400,000 or approximately 91.3% as compared to the second quarter of 1997, and increased approximately $21,600,000 or approximately 122.7% as compared to the first six months of 1997, primarily as a result of the sale of the 9 1/4% Notes on March 17, 1997, the sale of the 9 1/8% Notes in August 1997 and indebtedness of Ply Gem existing at the date of acquisition. This increase was partially offset by the refinancing of certain outstanding indebtedness of the Company's subsidiaries in 1997. (See Notes B and E of the Notes to the Unaudited Financial Statements included elsewhere herein.) Investment income in the second quarter of 1998 decreased approximately $1,100,000 or approximately 34.3% as compared to the second quarter 1997, and decreased approximately $200,000 or approximately 4.3% as compared to the first six months of 1997, principally due to lower average invested balances of short-term investments and marketable securities. The provision for income taxes was approximately $7,000,000 for the second quarter of 1998, as compared to approximately $4,000,000 for the second quarter of 1997, and approximately $8,200,000 for the first six months of 1998 as compared to approximately $6,900,000 for the first six months 1997. 30 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) The income tax rates differed from the United States Federal statutory rate of 35% principally as a result of applying an estimated annual effective tax rate, which rates include the effects of state income tax provisions, nondeductible amortization expense (for tax purposes), changes in tax reserves, the effect of foreign income tax on foreign source income and the effect of product development tax credits from foreign operations. In the fourth quarter of 1997, the Company adopted a plan to discontinue its Plumbing Products Group and provided a pre-tax reserve of $2,500,000 for future expenses including interest expense. On July 10,1998, the Plumbing Products Group, together with a product line included in the Residential Building Products Group, was sold for approximately $33,700,000. In the second quarter of 1998, approximately $525,000 and for the first six months of 1998 approximately $1,000,000 of corporate interest expense was allocated against this reserve. The loss from discontinued operations related to the Plumbing Products Group was approximately $1,700,000 and $3,300,000 net of income tax benefits of approximately $700,000 and $1,300,000 for the second quarter and first six months of 1997, respectively and reflect an allocation of corporate interest expense of approximately $475,000 and $950,000 for the second quarter and the first six months of 1997 respectively. (See Note H of the Notes to the Unaudited Financial Statements included elsewhere herein.) Liquidity and Capital Resources - ------------------------------- The Company took several actions in 1998 that improved its liquidity and reduced its leverage. These included the Common Stock Sale for net proceeds to Nortek of approximately $64,300,000 and the sale of certain businesses. The Company continues to explore additional sources of liquidity, including the sale of certain other assets, the establishment of an accounts receivable securitization program and the issuance of equity securities in one or more public or private placements. On July 31, 1998, the Company through a wholly-owned subsidiary, purchased all of the issued and outstanding capital stock of NuTone from Williams, for an aggregate purchase price of $242,500,000. In connection with the acquisition, the Company assumed NuTone's operating liabilities (other than intercompany borrowings), including certain liabilities of NuTone concerning post retirement and other benefit obligations. The purchase price is subject to adjustment based on NuTone's net asset value determined as of August 1, 1998. If the final closing net asset value, as determined in accordance with the NuTone Purchase Agreement, is within the range of $65,100,000 (inclusive) to $67,100,000 (inclusive), then there will be 31 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) no adjustment to the purchase price. If the final closing net asset value, as determined in accordance with the NuTone Purchase Agreement, exceeds $67,100,000, then the Company is obligated to pay Williams an amount equal to the difference between the final closing net asset value and $67,100,000. If the final closing net asset value is less than $65,100,000, then Williams is obligated to pay the Company an amount equal to the difference between $65,100,000 and the final closing net asset value. The purchase price was funded, and any adjustments will be funded from the net proceeds from the sale of the 8 7/8% Notes which occurred on July 31, 1998 together with a portion of the cash proceeds from the Common Stock Sale, (see Note E of the Notes to the Unaudited Financial Statements included elsewhere herein.) Unrestricted cash and cash equivalents increased from approximately $125,842,000 at December 31, 1997 to approximately $201,619,000 at July 4, 1998 and was $205,291,000 at July 4, 1998 after giving pro forma effect to the acquisition of NuTone, the sale of the 8 7/8% Notes, the sale of the Plumbing Products Group, together with a product line included in the Residential Building Products Group, and the sales of certain Ply Gem businesses through July 31, 1998 (after $20,000,000 of mandatory debt payments under the Ply Gem Credit Facility.) The Company's investment in marketable securities at July 4, 1998 consisted primarily of investments in bank issued money market instruments, commercial paper and United States Treasury securities. At July 4, 1998, approximately $6,389,000 of the Company's cash and investments were pledged as collateral for insurance and other requirements and were classified as restricted in current assets in the Company's accompanying consolidated balance sheet. As a result of the acquisition of NuTone and the sale of the 8 7/8% Notes, the Company will continue to be highly leveraged and expects to continue to be highly leveraged for the foreseeable future. As of July 4, 1998, after giving pro forma effect to the acquisition of Nutone, the sale of the 8 7/8% Notes and mandatory debt payments under the Ply Gem Credit Facility relating to sales of certain Ply Gem businesses through July 31, 1998, the Company had pro forma consolidated total debt of approximately $1,038,500,000. Capital expenditures were approximately $22,500,000 in 1997 and are expected to be approximately $40,000,000 in 1998. 32 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) The Company's Board of Directors has authorized a program 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 August 7, 1998, the Company had purchased approximately 317,250 shares of its Common and Special Common Stock under this program for approximately $9,300,000 and accounted for such share purchases as Treasury Stock. At August 7, 1998, approximately $64,289,000 was available for the payment of cash dividends or stock payments under the terms of the Company's most restrictive Indenture. (See Note F of the Notes to the Unaudited Financial Statements included elsewhere herein.) The Company's working capital and current ratio increased slightly from approximately $341,821,000 and 2.3:1, respectively, to approximately $410,784,000 and 2.4:1, respectively, between December 31, 1997 and July 4, 1998, principally as a result of the investment of approximately $64,300,000 of the proceeds from the Common Stock Sale, in addition to the factors described below. Accounts receivable increased approximately $29,113,000 or approximately 16.1%, between December 31, 1997 and July 4, 1998, while net sales increased approximately $33,931,000 or approximately 8.2% in the second quarter of 1998 as compared to the fourth quarter of 1997. The increase in accounts receivable is net of a decrease of approximately $8,424,000 attributable to businesses sold. 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. 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 July 4, 1998 as compared to December 31, 1997. The Company has not experienced any significant overall changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in 1998. Inventories decreased approximately $4,189,000 or approximately 2.4%, between December 31, 1997 and July 4, 1998. Excluding the effects of businesses sold inventories increased $7,656,000. Accounts payable increased approximately $31,079,000 or approximately 34.0%, between December 31, 1997 and July 4, 1998 and is net of a decrease of approximately $722,000 attributable to businesses sold. 33 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) Unrestricted cash and cash equivalents increased approximately $75,777,000 from December 31, 1997 to July 4, 1998, principally as a result of the following: Condensed Consolidated Cash Flows ---------- Operating Activities-- Cash flow from operations, net $35,687,000 Increase in accounts receivable, net (40,952,000) Increase in inventories (11,761,000) Increase in prepaids and other current assets (2,501,000) Increase in net assets of discontinued operations (6,659,000) Increase in trade accounts payable 32,618,000 Decrease in accrued expenses and taxes (4,281,000) Investing Activities-- Proceeds from businesses sold 24,937,000 Proceeds from the sale of marketable securities 23,978,000 Capital expenditures (15,507,000) Financing Activities-- Payment of borrowings, net (10,312,000) Net proceeds from the Common Stock Sale 64,300,000 Purchase of Nortek Common and Special Common Stock (6,574,000) Other, net (7,196,000) ----------- $75,777,000 =========== The impact of changes in foreign currency exchange rates on cash was not material and has been included in other, net. The Company's debt-to-equity ratio decreased from approximately 6.7:1 at December 31, 1997 to 4.3:1 at July 4, 1998, primarily as a result of the Common Stock Sale, the net decrease in borrowings, and net earnings for the first six months ended July 4, 1998 partially offset by the purchase of treasury stock, principally in the first quarter of 1998. (See the Consolidated Statement of Stockholders' Investment included elsewhere herein.) As of July 4, 1998, after giving pro forma effect to the acquisition of NuTone, the sale of the 8 7/8% Notes and mandatory debt payments under the Ply Gem Credit Facility relating to the sale of certain Ply Gem businesses through July 31, 1998, the Company's debt-to-equity ratio was 5.3 to 1. 34 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) At December 31, 1997, the Company had approximately $60,800,000 of net U.S. federal prepaid income tax assets which are expected to be realized through future operating earnings. The Company has evaluated and expects to continue to evaluate possible acquisition transactions and the possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions. The indentures and other agreements governing the Company's and its subsidiary's indebtedness (including the indentures for the 8 7/8% Notes, the 9 7/8% Notes, the 9 1/4% Notes and the 9 1/8% Notes and the credit agreement for the Ply Gem Credit Facility) contain restrictive financial and operating covenants including covenants that restrict the ability of the Company and its subsidiaries to complete acquisitions, pay dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions. General Considerations - ---------------------- The Company is in the process of updating its computer systems to ensure that its systems are Year 2000 compliant and to improve the systems. The Company has and will continue to make investments in its computer systems and applications to ensure that the Company is Year 2000 compliant. Although the Company does not believe it will suffer any major effects from the Year 2000 issue, there can be no assurance that the Company, any business acquired by the Company, or any of the Company's customers or vendors will not experience interruptions of operations because of Year 2000 problems. Year 2000 problems might require the company to incur unanticipated expenses and such expenses could have a material adverse effect on the Company's business, financial condition and results of operations. 35 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 (Continued) Forward Looking Statements - -------------------------- When used in this discussion and throughout this document, the words "believes", "anticipates", "are expected" 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, glass, wood and aluminum) and purchased component costs, the level of domestic and foreign construction and remodeling activity affecting residential and commercial markets, interest rates, employment, inflation, consumer spending levels, operating in international economies, the rate of sales growth, price 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. 36 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. At the Annual Meeting of Stockholders held on May 14, 1998, the following directors were elected by the following votes: By the holders of Common Stock voting separately as a class Name For Withheld Class III ( for a term Expiring at the 2001 Annual Meeting) Philip L. Cohen 8,048,987 53,986 By the holders of Common Stock and Special Common Stock voting together as a class Name For Withheld Class III ( for a term Expiring at the 2001 Annual Meeting) Richard L. Bready 12,915,236 66,467 The other matter voted upon at the meeting and the vote was as follows: Proposal 2: Approval of the 1998 Equity and Cash Incentive Plan For Against Abstain 11,457,419 1,461,513 62,771 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 1998 Equity and Cash Incentive Plan (filed herewithin). 27 Financial Data Schedule (filed herewith). (b) The following reports on Form 8-K were filed by the Registrant during the period: May 7, 1998, Item 5. Other Events, Item 7. Financial Statements and Exhibits June 15, 1998, Item 5. Other Events. 37 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 August 18, 1997 - ------------------------- (Date) EX-27 2
5 0000072423 NORTEK, INC. 1000 6-MOS DEC-31-1998 JUL-4-1998 201,619 18,444 222,766 13,239 172,064 702,471 359,174 122,999 1,378,464 291,687 826,350 0 0 19,269 176,461 1,378,464 842,115 842,115 628,595 628,595 0 0 39,198 18,000 8,200 9,800 0 0 0 9,800 .97 .95
EX-10 3 EXHIBIT 10-1 NORTEK, INC. 1998 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 "nonemployee 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 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 May 14, 2008, 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 475,000. 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 50k 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 (I) 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 or 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 SARs may be granted in tandem with, or independently of, Options granted under the Plan. (1) Rules Applicable to Tandem Awards. When SARs are granted in tandem with Options, (a) the SAR 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 SAR will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a SAR 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 SAR; (c) the Option will terminate and no longer be exercisable upon the exercise of the related SAR; and (d) the SAR will be transferable only with the related Option. (2) Exercise of independent SARs. A SAR 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 SAR 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 Stock in such amounts and upon such terms and conditions as the Committee shall determine subject to the restrictions described below ("Restricted Stock"). (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, if a Participant suffers a Termination of Service (as defined at Section 7.1) 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 25k 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, restructuring, financing (issuance of debt or equity) and refinancing; 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 2004 and thereafter is conditioned upon reapproval by Employer's shareholders no later than Employer's first meeting of shareholders in 2003. 7. Events Affecting Outstanding Awards 7.1. Termination of Service. If a Participant who is an Employee ceases to be an Employee, or if there is a termination 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 to be referred to as a "Termination of Service"), except as otherwise provided by the Committee with respect to an Award, the following will apply: (a) Options and SARs. (1) All Options and SARs held by the Participant immediately prior to the Termination of Service, to the extent then exercisable, may be exercised as follows: (i) If the Termination of Service is on account of the Participant's death, such Awards 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, and shall thereupon terminate. (ii) If the Termination of Service is on account of the Participant's retirement with consent of the Company after attainment of age 65 or total and permanent disability (as determined by the Committee), such Awards may be exercised by the Participant at any time in accordance with the original terms of the Award. (iii) If the Termination of Service is for any other reason, such Awards may be exercised by the Participant at any time within the three month period following the Termination, and shall thereupon terminate, unless the Award provides by its terms for immediate termination of the Award in the event of such a Termination of Service or unless the Termination of Service results from a discharge for cause that, in the opinion of the Committee, casts such discredit on the Participant as to justify immediate termination of the Award. (2) In no event, however, shall an Option or SAR remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. (3) Options and SARs held by a Participant immediately prior to the Termination of Service that are not then exercisable shall terminate upon the Termination of Service. (b) Restricted Stock. 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) Deferred Stock and Performance Awards. Any payment or benefit under a Deferred Stock Award or Performance Award to which the Participant was not irrevocably entitled prior to the Termination of Service will be forfeited and the Award canceled upon the Termination of Service. (d) Special Circumstances. In the case of a Participant who is an Employee, a Termination of Service 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 7.2. Change of Control Provisions. (a) Effect of Change of Control Notwithstanding any other provision of the Plan to the contrary, except as otherwise explicitly provided by the Committee in writing with respect to a particular Award at the time the Award is granted, in the event of a Change of Control: (1) Acceleration of Awards. As of the date on which such Change of Control is determined to have occurred, (i) Options and SARs that are outstanding and that are not then exercisable shall, become exercisable to the full extent of the original grants; (ii) shares of Restricted Stock that are not otherwise vested shall vest (and any Stock to be delivered under any other Award as Restricted Stock shall upon delivery be unrestricted); and (iii) holders of Performance Awards granted hereunder as to which the relevant performance period has not ended shall be entitled at the time of the 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 any Stock included in such Award. (2) Termination of Awards in Certain Transactions. If, as part of, or in connection with, the Change of Control, there occurs a merger or consolidation 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 person, entity or group of persons and/or entities acting in concert or there is a dissolution or liquidation of the Company, Awards payable in Stock that are not cashed out or otherwise disposed of in or prior to the transaction will terminate. (3) Restriction on Termination of Awards Due to Termination of Employment. Awards that remain outstanding after a Change of Control shall not be terminated as a result of a Termination of Service, other than by reason of death, for a period of at least seven months following such Termination of Service. (4) 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 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 7.2 would make a Change of Control transaction ineligible for pooling of interests accounting under applicable accounting principles that but for this Section 7.2 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 7.2 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 and when: (1) The Company ceases to be a publicly owned corporation having at least 500 stockholders; or (2) There occurs any event or series of events that would be required to be reported as a change of control in response to Item l(a) on a Form 8-K filed by the Company under the Exchange Act or in any other filing by the Company with the Securities and Exchange Commission unless the person (persons), as that term is defined or used in Section 13(d) or 14(d)(2) of the 1934 Act, acquiring control is an affiliate of the Company as of the date the Plan is approved by stockholders of the Company; (3) The Company 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 the Company will be controlled by another Person; provided, however, for purposes of this subparagraph (3) that (i) if such an agreement requires as a condition precedent approval by the Company'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, (ii) if the voting shareholders of such other Person shall, immediately after such effective date, be substantially the same as the voting shareholders of the Company immediately prior to such effective date, the execution of such agreement shall not, by itself, constitute a "Change of Control"; or (4) Any Person (other than the Company, a majority-owned subsidiary of the Company, an employee benefit plan maintained by the Company or a majority-owned subsidiary of the Company or members of the Board on the date the Plan is approved by stockholders of the Company) becomes the beneficial owner, directly or indirectly (either as a result of the acquisition of securities of as the result of an arrangement or understanding, including the holding of proxies, with or among security holders), of securities of the Company representing 25% or more of the votes that could then be cast in an election for members of the Board unless within 15 days of being advised that such ownership level has been reached, the Company's board of directors adopts a resolution approving the acquisition of that level of securities ownership by such Person; or (5) During any period of 24 consecutive months, commencing after the date this Plan is approved by stockholders of the Company, individuals who at the beginning of such 24- month period were directors of the Company shall cease to constitute at least a majority of the Board, 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 (i) the directors then in office who were directors at the beginning of the 24-month period, or (ii) the directors specified in clause (i) plus directors whose election has been so approved by directors specified in clause (i). 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. -----END PRIVACY-ENHANCED MESSAGE-----