-----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, N3WYuS5z+TP2ogCuNaxlZux2GLedJBEFGUxi/TPIaDRgrhrJg269ZB6zpkTKuLxb J6bN7ROYL7gt66sqiJzoVg== 0000072423-98-000016.txt : 19981123 0000072423-98-000016.hdr.sgml : 19981123 ACCESSION NUMBER: 0000072423-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTEK INC CENTRAL INDEX KEY: 0000072423 STANDARD INDUSTRIAL CLASSIFICATION: 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: 98753621 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 October 3, 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 November 6, 1998 was 11,141,192. The number of shares of Special Common Stock outstanding as of November 6, 1998 was 570,911. 1 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollar Amounts in Thousands) Oct. 3, Dec. 31, Assets 1998 1997 ------- ------- (Unaudited) Current Assets: --------------- Unrestricted Cash and cash equivalents $ 99,201 $ 125,842 Marketable securities available for sale 102,197 35,988 Restricted investments and marketable securities at cost, which approximates market 6,403 6,348 Net assets of a discontinued operation --- 22,386 Accounts receivable, less allowances of $13,512,000 and $11,047,000 237,628 180,414 Inventories Raw materials 66,267 72,693 Work in process 19,545 18,399 Finished goods 100,205 85,161 ------- ------- 186,017 176,253 ------- ------- Prepaid expenses 10,863 8,391 Other current assets 14,352 12,627 Prepaid income taxes 42,847 46,800 ------- ------- Total current assets 699,508 615,049 ------- ------- Property and Equipment, at Cost: -------------------------------- Land 12,420 12,081 Buildings and improvements 96,221 96,606 Machinery and equipment 271,342 250,677 ------- ------- 379,983 359,364 Less accumulated depreciation 123,476 116,841 ------- ------- Total property and equipment, net 256,507 242,523 ------- ------- Other Assets: ------------- Goodwill, less accumulated amortization of $40,130,000 and $31,773,000 607,564 378,232 Intangible assets 8,124 8,752 Notes receivable and other investments 9,350 9,339 Deferred income taxes 25,041 10,022 Deferred debt expense 25,436 21,066 Other 20,893 19,563 ------- ------- 696,408 446,974 ------- ------- $1,652,423 $1,304,546 ========== ========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Continued) (Dollar Amounts in Thousands) Oct. 3, Dec. 31, 1998 1997 --------- -------- (Unaudited) Liabilities and Stockholders' Investment Current Liabilities: - - -------------------- Notes payable and other short-term obligations $ 10,365 $ 11,770 Current maturities of long-term debt 5,862 5,969 Accounts payable 128,562 91,488 Accrued expenses and taxes, net 172,397 164,001 --------- -------- Total current liabilities 317,186 273,228 --------- -------- Other Liabilities 112,398 67,390 - - ------------------ --------- -------- Notes, Mortgage Notes and Obligations Payable, Less Current Maturities 1,010,657 835,840 --------- -------- Stockholders' Investment: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common stock, $1 par value; authorized 40,000,000 shares; 18,417,000, and 16,050,794 shares issued 18,417 16,051 Special common stock, $1 par value; authorized 5,000,000 shares; 857,447 and 767,287 shares issued 857 767 Additional paid-in capital 200,829 135,345 Retained earnings 82,566 58,966 Cumulative translation, pension and other adjustments (6,013) (5,327) Less--treasury common stock at cost, 7,252,835 and 7,032,497 shares (82,516) (75,779) --treasury special common stock at cost, 286,009 and 285,304 shares (1,958) (1,935) ---------- --------- 212,183 128,088 ---------- --------- Total stockholders' investment $1,652,423 $1,304,546 ========== ========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands Except Per Share Amounts) For The Three Months Ended ------------------ Oct. 3, Sept. 27, 1998 1997 ------- ------- (Unaudited) Net Sales $458,193 $300,380 ------- ------- Costs and Expenses: Cost of products sold 331,573 220,076 Selling, general and administrative expense 78,723 55,560 Amortization of acquired goodwill 3,610 1,432 ------- ------- 413,906 277,068 ------- ------- Operating earnings 44,287 23,312 Interest expense (22,928) (13,521) Investment income 3,141 3,109 ------- ------- Earnings from continuing operations before provision for income taxes 24,500 12,900 Provision for income taxes 11,200 4,500 ------- ------- Earnings from continuing operations before extraordinary loss 13,300 8,400 Earnings (loss) from discontinued operations 600 (700) Extraordinary loss from debt retirement (100) --- -------- ------- Net Earnings $13,800 $ 7,700 ======= ======= Net Earnings (Loss) Per Share: Earnings from continuing operations before extraordinary loss: Basic $1.13 $ .87 Diluted $1.11 $ .85 Earnings (loss) from discontinued operations: Basic $ .05 $(.07) Diluted $ .05 $(.07) Extraordinary loss from debt retirements: Basic $(.01) $ --- ------- ----- Diluted $(.01) $ --- ------- ----- Net Earnings: Basic $1.17 $ .80 ===== ===== Diluted $1.15 $ .78 ===== ===== Weighted Average Number of Shares: Basic 11,721 9,569 Diluted 11,951 9,841 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 Nine Months Ended ----------------- Oct. 3, Sept. 27, 1998 1997 --------- --------- (Unaudited) Net Sales $1,300,308 $ 718,413 Costs and Expenses: Cost of products sold 960,168 515,787 Selling, general and administrative expense 234,222 144,159 Amortization of acquired goodwill 8,784 2,861 --------- --------- 1,203,174 662,807 --------- --------- Operating earnings 97,134 55,606 Interest expense (62,126) (31,089) Investment income 7,492 7,683 --------- --------- Earnings from continuing operations before provision for income taxes 42,500 32,200 Provision for income taxes 19,400 11,400 --------- --------- Earnings from continuing operations before extraordinary loss 23,100 20,800 Earnings(loss) from discontinued operations 600 (2,700) Extraordinary loss from debt retirements (100) --- ---------- --------- Net Earnings $ 23,600 $ 18,100 ========= ========= Net Earnings (Loss) Per Share: Earnings from continuing operations before extraordinary loss: Basic $2.17 $2.16 Diluted $2.13 $2.11 Earnings(loss) from discontinued operations: Basic $ .05 $(.29) Diluted $ .05 $(.28) Extraordinary loss from debt retirements: Basic $(.01) $ --- ------ ----- Diluted $(.01) $ --- ------ ----- Net Earnings: Basic $2.21 $1.87 ===== ===== Diluted $2.17 $1.83 ===== ===== Weighted Average Number of Shares: Basic 10,660 9,632 Diluted 10,858 9,878 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) For the Nine Months Ended ----------------- Oct. 3, Sept. 27, 1998 1997 -------- ------- (Unaudited) Cash Flows from operating activities: Earnings from continuing operations $ 23,100 $ 20,800 Earnings (loss) from discontinued operations 600 (2,700) Extraordinary loss from debt retirements (100) --- -------- ------- Net earnings 23,600 18,100 ------- ------- Adjustments to reconcile net earnings to cash: Depreciation and amortization expense 31,043 17,497 Non-cash interest expense 2,497 1,046 Loss on sale of a discontinued operation before income taxes 2,500 --- Loss on debt retirements before income taxes 150 --- Deferred federal income tax provision (credit) 7,300 (3,100) Deferred federal income tax credit from discontinued operations (2,300) --- Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (36,315) (13,440) Prepaid and other current assets (4,492) 3,547 Inventories (12,269) 1,658 Net assets of discontinued operations (6,659) (4,663) Accounts payable 24,346 (2,363) Accrued expenses and taxes (9,536) 20,695 Long-term assets, liabilities and other, net (3,150) (3,825) ------- ------- Total adjustments to net earnings (6,885) 17,052 ------- ------- Net cash provided by operating activities 16,715 35,152 ------- ------- Cash Flows from investing activities: Capital expenditures (24,185) (12,989) Net cash paid for businesses acquired (242,500) (386,952) Purchase of investments and marketable securities (100,512) (238,199) Proceeds from the sale of investments and marketable securities 36,123 183,329 Net proceeds from businesses sold or discontinued 68,947 --- Other, net (7,088) (3,943) --------- --------- Net cash used in investing activities (269,215) (458,754) --------- --------- 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) (Continued) For the Nine Months Ended ----------------- Oct. 3, Sept. 27, 1998 1997 ------- ------- (Unaudited) Cash Flows from financing activities: Sale of notes, net $203,492 $467,663 Purchase of notes (10,511) --- Net decrease in borrowings (26,141) (27,599) Net proceeds from the sale of Nortek Common Stock 64,300 --- Purchase of Nortek Common and Special Common Stock (6,760) (8,824) Other, net 1,479 395 ------- ------- Net Cash Provided by Financing Activities 225,859 431,635 ------- ------- Net (decrease) increase in unrestricted cash and cash equivalents (26,641) 8,033 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 $ 99,201 $ 49,075 ======== ======== Interest paid $ 76,880 $ 32,717 ======== ======== Income taxes paid, net $ 2,617 $ 8,203 ======== ======== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE THREE MONTHS ENDED September 27, 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, June 28, 1997 $16,026 $ 774 $135,311 $48,166 $(75,232) $(3,948) $ --- Net earnings --- --- --- 7,700 --- 7,700 Other comprehensive income: Translation adjustment --- --- --- --- --- (87) (87) Unrealized increase in the value of marketable securities --- --- --- --- --- 123 123 ------ Comprehensive income $7,736 ====== 3,463 shares of special common stock converted into 3,463 shares of common stock 3 (3) --- --- --- --- 11,900 shares of common stock issued upon exercise of stock options 12 --- 22 --- --- --- 44,841 shares of treasury stock acquired --- --- --- --- (1,129) --- ------- ----- -------- ------- --------- ------- Balance, Sept. 27 1997 $16,041 $ 771 $135,333 $55,866 $(76,361) $(3,912) ======= ===== ======== ======= ========= ========
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 OCTOBER 3, 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, July 4, 1998 $18,409 $ 860 $198,886 $68,766 $(84,288) $ (6,903) $ --- Net earnings --- --- --- 13,800 --- --- 13,800 Other comprehensive income: Translation adjustment --- --- --- --- --- 416 416 Unrealized increase in the value of marketable securities --- --- --- --- --- 474 474 ------- Comprehensive income $14,690 ======= 2,675 shares of special common stock converted into 2,675 shares of common stock 3 (3) --- --- --- --- 4,947 shares of common stock issued upon exercise of stock options 5 --- (5) --- --- --- 15,620 shares of treasury stock acquired --- --- --- --- (360) --- Other --- --- 1,948 --- 174 --- ------- ----- -------- ------- -------- ------- Balance, October 3, 1998 $18,417 $ 857 $200,829 $82,566 $(84,474) $(6,013) ======= ===== ======== ======= ======== =======
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 NINE MONTHS ENDED SEPTEMBER 27, 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 --- --- --- 18,100 --- --- 18,100 Other comprehensive income: Translation adjustment --- --- --- --- --- (1,192) (1,192) Unrealized increase in the value of marketable securities --- --- --- --- --- 492 492 ------- Comprehensive income $17,400 ====== 19,101 shares of special common stock converted into 19,101 shares of common stock 19 (19) --- --- --- --- 56,219 shares of common stock and 5,808 shares of special common stock issued upon exercise of stock options 56 6 305 --- --- --- 382,746 shares of treasury stock acquired --- --- --- --- (8,824) --- ------- ----- -------- ------- ------- ------- Balance, September 27, 1997 $16,041 $ 771 $135,333 $55,866 $(76,361) $(3,912) ======= ===== ======== ======= ========= ========
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 NINE MONTHS ENDED OCTOBER 3, 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 --- --- --- 23,600 --- --- 23,600 Other comprehensive income: Translation adjustment --- --- --- --- --- (1,181) (1,181) Unrealized increase in the value of marketable securities --- --- --- --- --- 595 595 Minimum pension liability net of $65 tax benefit --- --- --- --- --- (100) (100) ------- Comprehensive income $22,914 Sale of 2,182,500 shares of common stock 2,182 --- 62,207 --- --- --- 10,831 shares of special common stock converted into 10,831 shares of common stock 11 (11) --- --- --- --- 172,875 shares of common stock and 100,991 shares of special common stock issued upon exercise of stock options 173 101 3,277 --- --- --- 221,043 shares of treasury stock acquired --- --- --- --- (6,934) --- Other --- --- --- --- 174 --- ------ ----- -------- ------- ------- ------- Balance, October 3, 1998 $18,417 $ 857 $200,829 $82,566 $(84,474) $(6,013) ======= ===== ======== ======= ======== =======
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 11 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 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 prior periods have been reclassified to conform to the presentation at October 3, 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 Offering"). (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 approximately $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 was 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 Rule 144A offering to qualified investors together with 12 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (Continued) approximately $44,800,000 of the cash proceeds received from the Common Stock Offering. Consummation of the acquisition was subject to a Federal Trade Commission ("FTC") NuTone Agreement Containing Consent Order ("Order") which, under the terms of which the Company must divest, at no minimum price, prior to December 31, 1998, all of the assets, properties, business and goodwill of its M&S Systems LP ("M&S") subsidiary. On November 2, 1998, the Company entered into an agreement to sell M&S and another Nortek subsidiary; the transaction is subject to FTC approval. (See Note K). If the Company has not divested the M&S assets prior to December 31, 1998, 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. 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, depreciation and amortization expense, operating earnings, earnings from continuing operations and diluted earnings per share from continuing operations of the Company for the three months and nine months ended September 27, 1997 and October 3, 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 Offering, 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: 13 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (Continued) The As Adjusted information is presented as supplemental information only and is not intended to and does not conform with Article 11 Pro Forma Financial Information of Regulation S-X of the Securities and Exchange Commission.
Pro Forma --------- Three Months Ended Nine Months Ended Year Ended ------------------ ----------------- ---------- Oct. 3, Sept. 27, Oct. 3 Sept. 27 Dec. 31, 1998 1997 1998 1997 1997 ------- -------- ------ ------- ---------- (Amounts in thousands except per share amounts) Net sales $473,631 $484,383 $1,410,969 $1,379,321 $1,849,124 Depreciation and amortization expense 11,989 12,521 36,503 37,186 48,571 Operating earnings 38,400 4,300 99,000 59,000 91,600 Earnings (loss) from continuing operations 8,400 (11,400) 15,200 (9,100) (3,800) Diluted earnings (loss)per share from continuing operations $ .70 $(.97) $1.28 $(.76) $(.32)
As Adjusted ----------- Three Months Ended Nine Months Ended Year Ended ------------------ ----------------- ---------- Oct. 3, Sept. 27, Oct. 3, Sept. 27, Dec. 31, 1998 1997 1998 1997 1997 ------- --------- --------- -------- -------- (Amounts in thousands except per share amounts) Net sales $473,631 $484,383 $1,410,969 $1,379,321 $1,849,124 Depreciation and amortization expense 11,989 12,427 36,503 36,790 48,175 Operating earnings 48,100 36,600 116,200 106,500 142,900 Earnings from continuing operations 14,200 8,200 25,500 20,000 27,700 Diluted earnings per share from continuing operations $1.19 $ .68 $2.14 $1.66 $2.30
14 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (Continued) In computing Pro Forma earnings, earnings have been reduced by 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 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, the 9 1/8% Notes, and the 8 7/8% Notes at the applicable coupon rates plus amortization of deferred debt expense and debt discount, net of tax effect. Pro Forma results reflect actual investment income earned on the portion of the cash proceeds not used for the NuTone acquisition from the date of the Common Stock Offering to October 3, 1998. At the date of the NuTone acquisition, the Company achieved cost reductions directly attributable to the acquisition from the elimination of fees and charges paid by NuTone to Williams and related entities. Pro Forma operating earnings have been increased (decreased) for the three and nine months ended September 27, 1997 by approximately $1,711,000 and $2,586,000, respectively, for the three and nine months ended October 3, 1998 by approximately $(30,000) and $354,000, respectively, and for the year ended December 31, 1997 by approximately $1,746,000 for the pro forma effect of such cost reductions. 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 integrating NuTone into the Company's operations. As Adjusted operating earnings, as compared to Pro Forma earnings, have been increased for the NuTone Cost Adjustments by $3,750,000 and $11,250,000 for the three and nine months ended September 27, 1997, respectively, by $1,250,000 and $8,750,000 for the three and nine months ended October 3, 1998, respectively, and by $15,000,000 for the year ended December 31, 1997. Since the Ply Gem acquisition date, the Company has realized cost savings as a result of the acquisition. These savings resulted 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 15 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (Continued) earnings for the three and nine months ended September 27, 1997 and the year ended December 31, 1997, have been increased for the pro forma effect of cost reductions directly attributable to the Ply Gem acquisition totaling approximately $262,000, $3,983,000 and $4,000,000 respectively. As Adjusted operating earnings for the three and nine months ended September 27, 1997 and the year ended December 31, 1997, include the effect of the cost reductions directly attributable to the Ply Gem acquisition noted above and additional cost savings related to expenses associated with the elimination of Ply Gem's New York headquarters, the consolidation of Ply Gem's corporate functions and the elimination of certain under-performing product lines which total approximately $4,997,000, $12,661,000, and $14,100,000, respectively. Included in Pro Forma operating earnings for the three and nine months ended September 27, 1997 and the year ended December 31, 1997, are approximately $22,200,000 of charges recorded by Ply Gem to provide certain valuation reserves. Included in Pro Forma operating earnings for the three and nine months ended October 3, 1998, are approximately $8,400,000 of charges recorded by NuTone to provide certain valuation reserves. The As Adjusted operating earnings, which is presented as supplemental information, excludes the effect of these charges. 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 November 6, 1998, the Company has purchased approximately 356,400 shares of its Common and Special Common Stock under this program for approximately $10,224,000 and accounted for such share purchases as Treasury Stock. At November 6, 1998, approximately $61,100,000 was available for the payment of cash dividends, stock purchases or other restricted payments as defined under the terms of the Company's most restrictive Indenture. 16 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (Continued) (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 third quarter and first nine 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. A reconciliation between basic and diluted earnings per share from continuing operations is as follows: Three Nine Months Ended Months Ended Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1998 1997 1998 1997 (In thousands except per share amounts) Earnings from continuing operations $13,300 $8,400 $23,100 $20,800 Basic EPS: Basic common shares 11,721 9,569 10,660 9,632 ====== ===== ====== ===== Basic EPS $1.13 $ .87 $2.17 $2.16 ===== ===== ===== ===== Diluted EPS: Basic common shares 11,721 9,569 10,660 9,632 Plus: Impact of stock options 230 272 198 246 ------ ----- ------ ----- Diluted common shares 11,951 9,841 10,858 9,878 ====== ===== ====== ===== Diluted EPS $1.11 $_.85 $2.13 $2.11 ===== ===== ===== ===== (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 estimated future losses including interest expense. On July 10, 1998, the Company sold its Plumbing Products Group for approximately $33,700,000 and recorded a $600,000 net after tax gain on the disposition. In the nine months ended October 3, 1998, approximately $1,000,000 of corporate interest expense was allocated against this reserve. In the three 17 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (Continued) months and nine months ended September 27, 1997, the loss from discontinued operations included an allocation of corporate interest expense of approximately $425,000 and $1,375,000 respectively. Corporate interest expense was allocated to discontinued operations based on the ratio of net assets of the discontinued operation to the sum of the total consolidated net assets of the Company plus consolidated debt of the Company, other than debt of the discontinued operation assumed by the buyer, and debt that is directly attributed to other operations of the Company. The following is a summary of the results of discontinued operations for the three months and nine months ended September 27, 1997: Three Months Nine Months Ended Sept. 27, Ended Sept. 27, 1997 1997 (In thousands except per share amounts) Net sales $27,376 $78,561 ======= ======= Loss before income taxes (900) (4,200) Income tax benefit 200 1,500 ------- ------- Loss from discontinued operations $ (700) $(2,700) ======== ======== (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 third quarter and first nine 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 ("Statement 133"). 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 18 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (Continued) 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). 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 first nine months of 1998, the Company made several dispositions of nonstrategic assets of Ply Gem. On May 8, 1998, the Company sold Studley Products, Inc. ("Studley"). Studley, which had net sales and an operating loss of approximately $7,300,000 and $1,600,000, respectively, for the period January 1, 1998 to May 8, 1998, was treated as an operation held for sale since the Ply Gem Acquisition. On May 22, 1998, the Company consummated the sale of Sagebrush Sales, Inc. ("Sagebrush") for approximately $9,100,000 in cash. Sagebrush had net sales, operating (and pre-tax) earnings and depreciation and amortization expense of approximately $19,000,000, $206,000 and $141,000, respectively, for the five months ended May 22, 1998. On July 2, 1998, the Company completed the sale of Goldenberg Group, Inc. ("Goldenberg") for approximately $11,000,000, including approximately $2,100,000 in notes. Goldenberg had net sales, operating (and pre-tax) earnings and depreciation and amortization expense of approximately $21,500,000, $359,000 and $313,000, respectively, for the six months ended July 4, 1998. On July 31, 1998, the Company completed the sale of another Ply Gem business, Ply Gem Manufacturing, which had net sales, operating (and pre-tax) earnings and depreciation and amortization expense of approximately $23,300,000, $665,000 and $81,000, respectively, for the seven months ended July 31, 1998. The operating results of Sagebrush, Goldenberg and Ply Gem Manufacturing are included in the Company's 1997 and 1998 consolidated results from the date of acquisition to the date of sale. The Company has not recorded in net earnings any significant gains or losses associated with these dispositions. 19 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (Continued) On November 2, 1998, the Company entered into an agreement to sell the businesses of two wholly-owned subsidiaries: M&S and Moore-O-Matic, Inc. ("MOM") to the Chamberlain Group, Inc. M&S manufactures and sells intercom systems, built-in music systems, central vacuum systems and related products. MOM sells automatic garage door openers, gate operators and electronic transmitters. Consummation of the transaction is subject to customary conditions and, as to M&S, approval by the FTC pursuant to a consent agreement entered into by the Company and the FTC as part of the FTC's approval of the Company's acquisition of NuTone Inc., on July 31, 1998. For the year ended December 31, 1997, net sales, operating (and pre-tax) earnings and depreciation and amortization expense of M&S and MOM were approximately $37,300,000, $3,500,000 and $600,000, respectively. For the three months ended October 3, 1998, net sales, operating (and pre-tax) earnings and depreciation and amortization expense of M&S and MOM were approximately $10,900,000, $1,000,000 and $160,000, respectively. For the nine months ended October 3, 1998, net sales, operating (and pre-tax) earnings and depreciation and amortization expense of M&S and MOM were approximately $31,700,000, $2,800,000 and $490,000, respectively. (L) On October 9, 1998, the Company completed the acquisition of Napco, Inc. ("Napco"), a privately held manufacturer of exterior building products headquartered in Valencia, Pennsylvania for approximately $77,100,000 in cash plus the assumption of debt of approximately $10,200,000. Napco manufactures four principal product lines: (a) vinyl siding, soffit and accessories, marketed under the American Comfort(R), American Herald(TM) and American '76(R) collection labels; (b) vinyl window systems, marketed under the Premium and American Comfort(R) labels; (c) accessory products, including aluminum-trim coil, soffit, rainware and related specialty products; and (d) coil coating. Napco's manufacturing operations are conducted in three company-owned plants that are located in western Pennsylvania. For the year ended December 31, 1997, Napco had net sales, operating earnings and depreciation and amortization expense of approximately $91,100,000, $8,000,000 and $2,300,000, respectively. (M) The Year 2000 ("Y2K") issue refers to and arises from deficient computer programs and related products, such as embedded chips, which do not properly recognize or process a year that begins with "20" instead of "19." If not corrected, many business and other processes could fail or create erroneous results. The extent of the potential impact of the Y2K issue is not yet known, and if not timely corrected, it could affect the global economy. Although the Company believes that all modifications to 20 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 (Continued) information technology ("IT") and non-IT systems, material to the Company's business, will be Y2K compliant on or before December 31, 1999, it cannot predict the outcome or the success of its Y2K initiative, or that third party systems are or will be Y2K compliant, or that the costs required to address the Y2K issue, or that the impact of a failure to achieve substantial Y2K compliance, will not have a material adverse effect on the company's business, financial condition or results of operations. 21 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 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. The Company acquired Ply Gem on August 26, 1997 and NuTone on July 31, 1998. These acquisitions have been accounted for under the purchase method of accounting. Accordingly, the results of Ply Gem and NuTone are included in the Company's consolidated results since that date. (See "Liquidity and Capital Resources" and Note E 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 for approximately $33,700,000 in cash. During the second and third quarters of 1998, the Company made several dispositions of nonstrategic assets of Ply Gem. On May 8, 1998, the Company sold Studley. Studley, which had net sales and an operating loss of approximately $7,300,000 and $1,600,000, respectively, for the period from January 1, 1998 to May 8, 1998, was treated as an operation held for sale since the Ply Gem Acquisition. On May 22, 1998, the Company consummated the sale of Sagebrush for approximately $9,100,000 in cash. Sagebrush had net sales, operating (and pre-tax) earnings and depreciation and amortization expense of approximately $19,000,000, $206,000 and $141,000, respectively, for the five months ended May 22, 1998. On July 2, 1998, the Company completed the sale of Goldenberg for approximately $11,000,000, including approximately $2,100,000 in notes. Goldenberg had net sales, operating (and pre-tax) earnings and depreciation and amortization expense of approximately $21,500,000, $359,000 and $313,000, respectively, for the six months ended June 30, 1998. On July 31, 1998, the Company completed the sale of another Ply Gem business, Ply Gem Manufacturing, which had net sales, operating (and pre-tax) earnings and depreciation and amortization expense of approximately $23,300,000, $665,000 and $81,000, respectively, for the seven months ended July 31, 1998. See Notes H and K of the Notes to the Unaudited Financial Statements included elsewhere herein. The Company has entered into an agreement for the sale of M&S and MOM. M&S manufactures and sells intercom systems, built-in music systems, central vacuum systems and related products. M&S and MOM had net sales, operating (and pre-tax) 22 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) earnings and depreciation and amortization expense of $37,300,000, $3,500,000 and $600,000, respectively, for the year ended December 31, 1997. Consummation of the transaction is subject to customary terms and conditions. In addition, under the FTC Order, the disposition of M&S is subject to the prior approval of the FTC. See Notes E and K of the Notes to the Unaudited Financial Statements included elsewhere herein. 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 third quarter ended October 3, 1998 are not necessarily indicative of the results of operations to be expected for any other interim period or the full year. Change in Third Quarter Ended Third Quarter 1998 Oct. 3, Sept. 27, as Compared to 1997 1998 1997 $ % ----- ----- ----- ----- (Dollar amounts in millions) Net sales $458.2 $300.4 $157.8 52.5% Cost of products sold 331.6 220.1 (111.5) (50.7) Selling, general and administrative expense 78.7 55.6 (23.1) (41.5) Amortization of acquired goodwill 3.6 1.4 (2.2) NM ----- ----- ----- ----- Operating earnings 44.3 23.3 21.0 90.1 Interest expense (22.9) (13.5) (9.4) (69.6) Investment income 3.1 3.1 --- --- ----- ----- ----- ----- Earnings from continuing operations before provision for income taxes 24.5 12.9 11.6 89.9 Provision for income taxes 11.2 4.5 (6.7) (148.9) ----- ----- ------ ------- Earnings from continuing operations 13.3 8.4 4.9 58.3 Earnings (loss) from discontinued operations .6 (.7) 1.3 NM Extraordinary loss from debt retirement (.1) --- (.1) NM ----- ----- ---- ---- Net earnings $13.8 $ 7.7 $6.1 79.2% ===== ===== ==== ===== NM = not meaningful 23 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) Change in Percentage of Net Sales Percentage Third Quarter Ended for the Third Oct. 3, Sept. 27, Quarter 1998 1998 1997 as Compared to 1997 ------ ------- ------------------- Net sales 100.0% 100.0% --- Cost of products sold 72.3 73.3 1.0 Selling, general and administrative expense 17.2 18.5 1.3 Amortization of acquired goodwill .8 .5 (.3) ---- ---- ----- Operating earnings 9.7 7.7 2.0 Interest expense (5.0) (4.5) (.5) Investment income .6 1.1 (.5) ---- ---- ---- Earnings from continuing operations before provision for income taxes 5.3 4.3 1.0 Provision for income taxes 2.4 1.5 (.9) ---- ---- ----- Earnings from continuing operations 2.9 2.8 .1 Earnings(loss) from discontinued operations .1 (.3) .4 Extraordinary loss from debt retirements --- --- --- ---- ---- ---- Net earnings 3.0% 2.5% .5 ===== ===== ==== 24 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 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 nine months ended October 3, 1998 are not necessarily indicative of the results of operations to be expected for any other interim period or the full year. Change in Nine Months Ended First Nine Months 1998 Oct. 3, Sept. 27, as Compared to 1997 1998 1997 $ % ------- -------- ------- ------ (Dollar amounts in millions) Net sales $1,300.3 $718.4 $581.9 81.0% Cost of products sold 960.2 515.8 (444.4) (86.2) Selling, general and administrative expense 234.2 144.2 (90.0) (62.4) Amortization of acquired goodwill 8.8 2.8 (6.0) NM ------ ------ ------- ------- Operating earnings 97.1 55.6 41.5 74.6 Interest expense (62.1) (31.1) (31.0) (99.7) Investment income 7.5 7.7 (.2) (2.6) ------ ------ ------- ------- Earnings from continuing operations before provision for income taxes 42.5 32.2 10.3 32.0 Provision for income taxes 19.4 11.4 (8.0) (70.2) ------ ------ ------- ------- Earnings from continuing operations 23.1 20.8 2.3 11.1 Earnings (loss) from discontinued operations .6 (2.7) 3.3 122.2 Extraordinary loss from debt retirement (.1) --- (.1) NM ------ ------ ------ ------ Net earnings $ 23.6 $ 18.1 $ 5.5 30.4% ====== ====== ====== ====== NM = not meaningful 25 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) Change in Percentage of Net Sales Percentage First Nine Months Ended for the First Oct. 3, Sept. 27, Nine Months 1998 1998 1997 as Compared to 1997 ---- ---- ------------------- Net sales 100.0% 100.0% --- Cost of products sold 73.8 71.8 (2.0) Selling, general and administrative expense 18.0 20.1 2.1 Amortization of acquired goodwill .7 .4 (.3) ---- ---- ----- Operating earnings 7.5 7.7 (.2) Interest expense (4.8) (4.3) (.5) Investment income .6 1.1 (.5) ---- ---- ----- Earnings from continuing operations before provision for income taxes 3.3 4.5 (1.2) Provision for income taxes 1.5 1.6 .1 ---- ---- ---- Earnings from continuing operations 1.8 2.9 (1.1) Earnings (loss) from discontinued operations --- (.4) .4 Extraordinary loss from debt retirements --- --- --- ---- --- --- Net earnings 1.8% 2.5% (.7) ===== ==== ===== The following presents net sales for the Company's principal product groups for the third quarter and the nine months ended October 3, 1998 as compared to the third quarter and nine months ended September 27, 1997 and the amount and the percentage change of such results as compared to the prior comparable period: Third Quarter Ended ------------------- Oct. 3, Sept. 27, Increase 1998 1997 $ % ---- ---- ------ ------- (000's omitted) Net Sales: Residential Building products $141,611 $105,532 $36,079 34.2% Air Conditioning and heating products 121,975 111,656 10,319 9.2 Windows, Doors and Siding 150,306 55,343 94,963 171.6 Specialty Products and distribution 44,301 27,849 16,452 59.1 ------- -------- ------- ---- Total $458,193 $300,380 $157,813 52.5% ======== ======= ======== ===== 26 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) Nine Months Ended ----------------- Oct. 3, Sept. 27, Increase 1998 1997 $ % ---- ---- ------- ------ (000's omitted) Net Sales: Residential Building products $369,369 $316,967 $ 52,402 16.5% Air Conditioning and heating products 356,645 318,254 38,391 12.1 Windows, Doors and Siding 390,677 55,343 335,334 605.9 Specialty Products and distribution 183,617 27,849 155,768 559.3 ---------- -------- -------- ------ Total $1,300,308 $718,413 $581,895 81.0% ========== ======== ======== ====== Certain amounts in the tables for the prior periods have been reclassified to conform to the presentation for the third quarter and the nine months ended October 3, 1998. Operating Results - - ----------------- Net sales increased approximately $157,800,000 or approximately 52.5%, (or increased approximately $158,900,000 or approximately 52.9% excluding the effect of foreign exchange) in the third quarter of 1998 as compared to the third quarter of 1997 and increased approximately $581,900,000 or approximately 81.0%, (or increased approximately $587,600,000 or approximately 81.8% excluding the effect of foreign exchange) for the first nine months of 1998 as compared to 1997. Net sales increased principally as a result of the acquisition of Ply Gem on August 26, 1997, which contributed approximately $194,600,000 and approximately $574,300,000 to net sales in the third quarter and first nine months of 1998, respectively, as compared to approximately $83,200,000 for the third quarter and first nine months of 1997 and the acquisition of NuTone on July 31, 1998 which contributed approximately $33,200,000 to net sales in the third quarter and first nine months of 1998. Excluding the effect of increased net sales from the acquisition of Ply Gem and NuTone, net sales increased approximately $13,200,000 or approximately 6.1% (or increased approximately $14,300,000, or approximately 6.6% excluding the effect of foreign exchange), and increased approximately $57,600,000 or approximately 9.1%, (or increased approximately $63,200,000 or approximately 10.0% excluding the effect of foreign exchange) for the third quarter and the first nine months of 1998, respectively as compared to 1997. Excluding the effect of acquisitions, the increase in net sales in the third quarter and first nine months is principally as a result of higher sales volume in the Air Conditioning and Heating Products Group related to products sold to the residential and manufactured housing markets, and to a lesser extent, increased sales volume in the Residential Building Products Group. 27 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) As noted above, during the second and third quarters of 1998, the Company sold several nonstrategic assets. The Company's net sales for the first nine months of 1998, include approximately $63,800,000 of net sales related to certain businesses of Ply Gem which were sold in various transactions in 1998 and are included in the Specialty Products and Distribution Group. Cost of products sold as a percentage of net sales decreased from approximately 73.3% in the third quarter of 1997 to approximately 72.3% in the third quarter of 1998, and increased from approximately 71.8% in the first nine months of 1997 to approximately 73.8% in the first nine months of 1998. Changes in the percentages were, in large part, affected by acquisitions. The Ply Gem businesses have a higher level of cost of sales than the overall group of businesses owned prior to the Ply Gem acquisition while NuTone has a lower percentage. Excluding the effect of acquisitions, cost of products sold as a percentage of net sales decreased from approximately 70.5% in the third quarter of 1997 to approximately 68.8% in the third quarter of 1998, and decreased from approximately 70.7% in the first nine months of 1997 to approximately 69.2% in the first nine months of 1998. Excluding the effect of acquisitions, the decreases in the percentages principally resulted from increased sales without a proportionate increase in costs, including lower material costs, in both periods in the Air Conditioning and Heating Products Group and, to a lesser extent, increased net sales without a proportionate increase in costs 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. Selling, general and administrative expense as a percentage of net sales decreased from approximately 18.5% in the third quarter of 1997 to approximately 17.2% in the third quarter of 1998 and decreased from approximately 20.1% in the first nine months of 1997 to approximately 18.0% in the first nine months of 1998. These decreases in the percentages were principally affected as a result of acquisitions. Ply Gem has a lower level of selling, general and administrative expense to net sales than the overall group of businesses owned prior to the acquisition and NuTone has a higher level of expense. Excluding the affect of acquisitions, selling, general and administrative expense as a percentage of net sales decreased from approximately 20.8% in the third quarter of 1997 to approximately 20.0% in the third quarter of 1998, and decreased slightly from approximately 21.1% in the first nine months of 1997 to approximately 20.9% in the first nine months of 1998 in both the Residential Products and Air Conditioning and Heating Products Groups, as net sales increased without a proportionate increase in expense. 28 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) Amortization of acquired goodwill, as a percentage of net sales, increased from approximately .5% of net sales in the third quarter of 1997 to approximately .8% of net sales in the third quarter of 1998, and increased from approximately .4% of net sales in the first nine months of 1997 to approximately .7% in the first nine months of 1998, principally as a result of the acquisitions of Ply Gem and NuTone. Consolidated segment earnings were approximately $49,500,000 for the third quarter of 1998 as compared to approximately $27,200,000 for the third quarter of 1997, and approximately $109,700,000 for the first nine months of 1998 as compared to approximately $66,200,000 for the first nine 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. Acquisitions contributed approximately $19,500,000 and $5,200,000 to segment earnings in the third quarter of 1998 and 1997, respectively, and approximately $30,600,000 and $5,200,000 in the first nine months of 1998 and 1997, respectively. The Company's segment earnings for the first nine months of 1998 include approximately $1,200,000 of earnings related to businesses sold in 1998 (to the date of sale) which are included in the Specialty Products and Distribution Group. Consolidated segment earnings have been reduced by consolidated depreciation and amortization expense of approximately $11,100,000 and approximately $7,000,000 for third quarter 1998 and 1997, respectively, and approximately $30,900,000 and $17,400,000 for the first nine months of 1998 and 1997, respectively. Acquisitions contributed approximately $4,400,000 and $2,000,000 of the increase in consolidated depreciation and amortization expense in the third quarter of 1998 and 1997, respectively, and approximately $13,800,000 and $2,000,000 for the first nine months of 1998 and 1997, respectively. The overall increase in segment earnings related to businesses owned prior to the acquisitions was due principally to increased sales volume without a proportionate increase in cost and expense in the Air Conditioning and Heating Products Group and, to a lesser extent, in the Residential Building 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 6.7% and 7.0% of segment earnings in the third quarter and first nine months of 1998, respectively. Sales and earnings derived from the international market are subject to the risks of currency fluctuations. Operating earnings in the third quarter of 1998 increased approximately $21,000,000 or approximately 90.1% as compared to the third quarter of 1997, and increased approximately $41,500,000 or approximately 74.6% as compared to the first nine months of 1997 primarily due to the factors previously discussed. 29 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) Interest expense in the third quarter of 1998 increased approximately $9,400,000 or approximately 69.6% as compared to the third quarter of 1997, and increased approximately $31,000,000 or approximately 99.7% as compared to the first nine 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, indebtedness of Ply Gem existing at the date of acquisition and the sale of the 8 7/8% Notes on July 31, 1998. 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 was approximately $3,100,000 in the third quarter of 1998 and 1997, and decreased slightly from approximately $7,700,000 in the first nine months of 1997 to approximately $7,500,000 in the first nine months of 1998 or approximately 2.6%, principally due to slightly lower yields earned on short-term investments and marketable securities. The provision for income taxes was approximately $11,200,000 for the third quarter of 1998, as compared to approximately $4,500,000 for the third quarter of 1997, and approximately $19,400,000 for the first nine months of 1998 as compared to approximately $11,400,000 for the first nine months of 1997. 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 nondeductible amortization expense (for tax purposes), state income tax provisions, 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 estimated future losses including interest expense. On July 10, 1998, the Plumbing Products Group was sold for approximately $33,700,000 in cash and the Company recorded a $600,000 net after tax gain on the disposition. For the nine months ended October 3, 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 $900,000 and $4,200,000 excluding income tax benefits of approximately $200,000 and $1,500,000 for the third quarter and first nine months of 1997, respectively and reflect an allocation of corporate interest expense of approximately $475,000 and $1,425,000 for the third quarter and the first nine months of 1997 respectively. (See Note H of the Notes to the Unaudited Financial Statements included elsewhere herein.) 30 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) Liquidity and Capital Resources - - ------------------------------- The Company is highly leveraged and expects to continue to be highly leveraged for the foreseeable future. At October 3, 1998, on a pro forma basis, after giving effect to the acquisition of Napco, the Company had consolidated debt of approximately $1,037,085,000 and consolidated unrestricted cash, cash equivalents and marketable securities of approximately $124,298,000. On a pro forma basis, the Company's debt to equity ratio was approximately 4.89:1 at October 3, 1998 as compared to 6.66:1 at December 31, 1997. The Company's ability to pay interest on or to refinance its indebtedness depends on the successful integration of the operations of recent acquisitions and the Company's future performance, which, in part, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. There can be no assurance that the Company will generate sufficient cash flow from the operation of its subsidiaries or that future financings will be available on acceptable terms or in amounts sufficient to enable the company to service or refinance its indebtedness, or to make necessary capital expenditures. 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. (See Notes K and L of the Notes to the Unaudited Financial Statements included elsewhere herein.) 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. The Company expects to meet its cash flow requirements through fiscal 1999 from cash generated from operations, existing cash, cash equivalents and marketable securities, the sale of assets and possible financings, which may include securitization of accounts receivables and mortgage or capital lease financings. In 1998 the Company improved its liquidity and reduced its leverage from the sale of 2,182,500 shares of common stock for net proceeds of approximately $64,300,000 and net proceeds of approximately $68,947,000 from the sale of certain businesses. Approximately $44,800,000 of the proceeds received from the 31 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) sale of common stock was used for the acquisition of NuTone, and $20,000,000 of the net proceeds received from the sale of businesses was used to reduce debt. (See Notes C, E and K of the Notes to the Unaudited Condensed Consolidated Financial Statements.) On October 9, 1998, the Company, through a wholly-owned subsidiary, purchased all of the issued and outstanding capital stock of Napco for approximately $77,100,000 in cash plus the assumption of approximately $10,200,000 of debt. The acquisition was funded through the use of unrestricted cash, cash equivalents and marketable securities. 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 was 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 Offering, (see Note E of the Notes to the Unaudited Financial Statements included elsewhere herein.) Unrestricted cash and cash equivalents decreased from approximately $125,842,000 at December 31, 1997 to approximately $99,201,000 at October 3, 1998. Marketable securities available for sale increased from approximately $35,988,000 at December 31, 1997 to approximately $102,197,000 at October 3, 1998. The Company's investment in marketable securities at October 3, 1998 consisted primarily of investments in bank issued money market instruments and commercial paper. At October 3, 1998, approximately $6,403,000 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. Capital expenditures were approximately $22,500,000 in 1997 and are expected to be approximately $40,000,000 in 1998. 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 November 6, 1998, the Company purchased approximately 356,400 shares of its Common and Special Common Stock under this program for approximately $10,224,000 and accounted for such share purchases as Treasury Stock. 32 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) At November 6, 1998, approximately $61,100,000 was available for the payment of cash dividends, stock payments or other restricted payments as defined 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 increased and its current ratio decreased slightly from approximately $341,821,000 and 2.25:1, respectively, to approximately $386,275,000 and 2.21:1, respectively, between December 31, 1997 and October 3, 1998, principally as a result of the acquisition of NuTone, the net proceeds from the Common Stock Offering (net of funds used to acquire NuTone) and the sale of the Plumbing Products Group, partially offset by the effect of the sale of other businesses. NuTone contributed approximately $62,632,000 of current assets and approximately $36,189,000 of current liabilities to the net increase in working capital at October 3, 1998. Accounts receivable increased approximately $57,214,000 or approximately 31.7%, between December 31, 1997 and October 3, 1998, while net sales increased approximately $42,477,000 or approximately 10.2% in the third quarter of 1998 as compared to the fourth quarter of 1997. The increase in accounts receivable is primarily attributable to the acquisition of NuTone, which contributed approximately $36,606,000 to the increase and is offset by a decrease of approximately $12,843,000 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 October 3, 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 increased approximately $9,764,000 or approximately 5.5%, between December 31, 1997 and October 3, 1998. Excluding the effects of the acquisition of NuTone and businesses sold, inventories increased $9,149,000. Accounts payable increased approximately $37,074,000 or approximately 40.5%, between December 31, 1997 and October 3, 1998 and is net of an increase of approximately $13,878,000 attributable to the acquisition of NuTone partially offset by a decrease of approximately $2,095,000 attributable to businesses sold. 33 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) Unrestricted cash and cash equivalents decreased approximately $26,641,000 from December 31, 1997 to October 3, 1998, principally as a result of the following: Condensed Consolidated Cash Flows Operating Activities-- Cash flow from operations, net $ 64,790,000 Increase in accounts receivable, net (36,315,000) Increase in inventories (12,269,000) Increase in prepaids and other current assets (4,492,000) Increase in net assets of discontinued operations (6,659,000) Increase in trade accounts payable 24,346,000 Decrease in accrued expenses and taxes (9,536,000) Investing Activities--- Net cash paid for a business acquired (242,500,000) Proceeds from businesses sold or discontinued 68,947,000 Purchase of marketable securities (100,512,000) Proceeds from the sale of marketable securities 36,123,000 Capital expenditures (24,185,000) Financing Activities--- Sale of notes 203,492,000 Purchase of notes (10,511,000) Payment of borrowings, net (26,141,000) Net proceeds from the Common Stock Offering 64,300,000 Purchase of Nortek Common and Special Common Stock (6,760,000) Other, net (8,759,000) ------------- $(26,641,000) ============= 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 6.66:1 at December 31, 1997 to 4.84:1 at October 3, 1998, primarily as a result of the Common Stock Offering, net earnings for the first nine months ended October 3, 1998 and the net decrease in borrowings, partially offset by the effect of the sale of the 8 7/8% Notes. (See the Unaudited Condensed Consolidated Statement of Stockholders' Investment included elsewhere herein.) 34 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 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. Year 2000 Disclosure - - -------------------- The Year 2000 ("Y2K") issue refers to and arises from deficient computer programs and related products, such as embedded chips, which do not properly recognize or process a year that begins with "20" instead of "19". If not corrected, many business and other processes could fail or create erroneous results. The extent of the potential impact of the Y2K problem is not yet known, and if not timely corrected, it could affect the global economy. As required by recent guidance from the SEC applicable to all public companies, the following disclosure provides more detail regarding the Company's Y2K compliance than previous reports filed by the Company. A. The Company's Readiness: To manage its Y2K program, the Company established a corporate-wide initiative and has divided its efforts into five areas: awareness (communication to employees, vendors and suppliers of the Y2K issue), assessment (a complete inventory of all aspects of the business that might be affected), remediation/validation (develop plans to correct all issues identified from the assessment stage), implementation (corrective measures taken to solve the Y2K issues identified) and contingency (alternative actions developed in the event that all corrective measures are not implemented by Y2K). Further, the Company has identified three key areas of concentration: information technology systems, non-IT systems and third parties (suppliers and customers). The Company's subsidiaries are in various stages of completion of this readiness, including the assessment, remediation and implementation stages, for the Y2K issue. Certain of the Company subsidiaries are simultaneously working on the assessment, remediation and implementation stages of this initiative. During the next two fiscal quarters, the company's subsidiaries expect to make significant progress in the remediation and implementation stages. Overall the Company believes that it is in the assessment stage of addressing the Y2K issue and expects by the end of its next fiscal quarter to provide a more definitive assessment of the status of each stage. Although the Company believes that all modifications to information technology ("IT") and non-IT systems, material to the Company's business, will be Y2K compliant on or before December 31, 1999, it cannot predict the outcome or the success of its Y2K program, or that third party systems are or will be Y2K compliant, or that the costs required to address the Y2K initiative, or that the impact of a failure to achieve substantial Y2K compliance, will not have a material adverse effect on the Company's business, financial condition or results of operations. 35 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) 1. Information Technology (IT) systems: The Company is conducting a comprehensive review of its computer systems to identify those that could be affected by the Y2K issue. The Company's operating systems and database systems are not all Y2K compliant. The Company presently believes that with minor modifications (conversion and testing in progress) to existing software and replacement of others, the Y2K problem will not pose significant operational problems for the Company's computer systems as so modified. 2. Non IT systems: Non IT systems are those that typically include "embedded" technology such as microcontrollers and chips. The Company currently is in the process of evaluating the effect of the Y2K problem on all non-IT systems including all telecommunications equipment, shop-floor controls, alarm systems and any other equipment that can potentially use microcontrollers, chips or other systems affected by the Y2K problem. 3. Third parties: Due to the pervasive use of computers by the Company in its dealings with suppliers, customers, financial institutions, and other third parties, the Y2K problem could have a material impact on the Company if not timely addressed by such third parties. To assess third party readiness, the Company is surveying its principal suppliers and financial institutions and receiving responses that indicate that such parties are in the process of adequately addressing the problem. In cases where key suppliers have not responded or are not adequately addressing the issue, the Company will determine what contingency plans will be necessary to protect the Company's interests. While the Company has not surveyed all its customers, it has received surveys from many of its principal customers that indicate that they are also addressing the problem. B. Cost: The Company has completed a preliminary evaluation of anticipated Y2K remediation costs among the various systems for all its businesses and is in the process of validating and finalizing cost projections. Based on information known to date, the Company believes that total remediation costs will not be significant. Actual costs to be incurred by the Company will depend on a number of factors which cannot be accurately predicted including, among others, the extent and difficulty of the remediation and other work to be done, the availability and cost of consultants, and the extent of testing required to demonstrate Y2K compliance. 36 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) C. Risks: Based on current information, the Company believes that the Y2K problem will not have a material adverse effect on the Company, its business or its financial condition. There can, however, be no assurances that Y2K remediation by the Company or third parties will be properly and timely completed, and failure to do so could have a material adverse effect on the Company, its business and its financial condition. The Company believes that the greatest risk presented by the Y2K problem is from third parties, such as suppliers, financial institutions, utility providers, etc. who may not have adequately addressed the problem. A failure of any such third party's computer or other applicable systems in sufficient magnitude could materially and adversely affect the Company. The Company is not presently able to quantify this risk. D. Contingency Plans: The Company is in the process of preparing appropriate contingency plans in the event that a significant internal or external exposure is identified. While the Company is not presently aware of any such significant exposure, there can be no guarantee that the systems of third parties on which the Company relies will be converted in a timely manner, or that a failure to properly convert by another company would not have a material adverse effect on the Company. Readers are cautioned that Y2K forward looking statements should be read in conjunction with the Company's disclosure under the heading "Forward Looking Statements" below. 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, Y2K readiness, 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 37 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 (Continued) 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. 38 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.1 Amendment No. 2 dated June 30, 1998 to Employment Agreement between Richard L. Bready and the Company dated as of February 26, 1997 (filed herewith). 27 Financial Data Schedule (filed herewith). (b) The following reports on Form 8-K were filed by the Registrant during the period: July 15, 1998, Item 2, Acquisition or Disposition of Assets; Item 5, Other Events; Item 7, Financial Statements and Exhibits. July 28, 1998, Item 5, Other Events; Item 7, Financial Statements and Exhibits. August 12, 1998, Item 2, Acquisition or Disposition of Assets; Item 7, Financial Statements, Pro Forma Financial Information and Exhibits. 39 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 November 17, 1998 -------------------- (Date) 40 EX-27 2
5 1000 9-MOS DEC-31-1998 OCT-03-1998 99,201 108,600 251,140 13,512 186,017 699,508 379,983 123,476 1,652,423 317,186 1,010,657 0 0 19,274 192,908 1,378,464 1,300,308 1,300,308 960,168 960,168 0 0 62,126 42,500 19,400 23,100 600 (100) 0 23,600 2.21 2.17
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-----