-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, VoMq8WZrVCXgog1NuqHE5v9Ui7ERkFHCbW/0UEaMCe+PUOTdzhWuzh+b/Ns+TOdp u82pmTt+kfIIONov1H01EA== 0000950135-94-000008.txt : 19940121 0000950135-94-000008.hdr.sgml : 19940121 ACCESSION NUMBER: 0000950135-94-000008 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19940120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTEK INC CENTRAL INDEX KEY: 0000072423 STANDARD INDUSTRIAL CLASSIFICATION: 3444 IRS NUMBER: 050314991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 33 SEC FILE NUMBER: 033-69778 FILM NUMBER: 94502095 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 S-2/A 1 NORTEK, INC. AMENDMENT NO. 1 TO FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 20, 1994 REGISTRATION NO. 33-69778 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NORTEK, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 05-0314991 (I.R.S. Employer identification No.) 50 KENNEDY PLAZA, PROVIDENCE, RHODE ISLAND, 02903 (401) 751-1600 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ RICHARD L. BREADY NORTEK, INC. 50 Kennedy Plaza Providence, Rhode Island 02903 (401) 751-1600 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: DAVID C. CHAPIN, ESQ. MARC WEINGARTEN, ESQ. ROPES & GRAY SCHULTE ROTH & ZABEL One International Place 900 Third Avenue Boston, Massachusetts 02110 New York, New York 10022 (617) 951-7000 (212) 758-0404
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If the registrant elects to deliver its latest annual report to securityholders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form, please check the following box. / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 NORTEK, INC. (CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN FORM S-2)
FORM S-2 ITEM LOCATION IN PROSPECTUS ------------- ---------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........... Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors; Selected Consolidated Financial Data 4. Use of Proceeds.................................. Use of Proceeds 5. Determination of Offering Price.................. Not Applicable 6. Dilution......................................... Not Applicable 7. Selling Security Holders......................... Not Applicable 8. Plan of Distribution............................. Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered....... Description of the Notes; Certain Tax Considerations 10. Interests of Named Experts and Counsel........... Not Applicable 11. Information with Respect to the Registrant....... Prospectus Summary; The Company; Recent Developments; Risk Factors; Capitalization; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Principal Securityholders; Description of the Notes; Certain Tax Considerations; Description of Other Obligations; Consolidated Financial Statements 12. Incorporation of Certain Information by Reference........................................ Inside Front Cover Page of Prospectus 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JANUARY 20, 1994 PROSPECTUS $190,000,000 NORTEK, INC. % SENIOR SUBORDINATED NOTES DUE 2004 The % Senior Subordinated Notes due 2004 (the "Notes") will bear interest at the rate of % per annum, payable semi-annually on and of each year, commencing , 1994. The Notes will be redeemable at the option of the Company, in whole or in part, at any time and from time to time, on and after , 1999, at the redemption prices set forth herein, together with accrued interest. Upon a Change of Control (as defined), holders of the Notes will have the right, subject to certain exceptions, restrictions and conditions, to require the Company to purchase all or any of their Notes at 101% of the principal amount thereof plus accrued and unpaid interest thereon to the date of purchase. The Notes will be unsecured obligations of the Company and will be subordinate in right of payment to all existing and permitted future Senior Indebtedness (as defined) of the Company and will be effectively subordinated to all indebtedness and other liabilities of the Company's subsidiaries. As of October 2, 1993, after giving pro forma effect to the Refinancing (as defined), the Company had no outstanding Senior Indebtedness. As of October 2, 1993, the aggregate liabilities of the Company's subsidiaries, principally consisting of trade payables and accruals, were $146.0 million. Subject to certain restrictions, the Indenture pursuant to which the Notes will be issued permits the Company and its subsidiaries to incur additional indebtedness, including secured indebtedness, and other liabilities, but prohibits the incurrence by the Company of any indebtedness ranking senior to the Notes and subordinate to Senior Indebtedness. See "Description of the Notes." The net proceeds of this offering will be used to redeem, and pay accrued interest on, the $51.4 million outstanding principal amount of the Company's 9 3/4% Senior Notes due 1997, the $79.4 million outstanding principal amount of the Company's 13 1/2% Senior Subordinated Debentures due 1997, the $2.6 million outstanding principal amount of the Company's 10% Subordinated Sinking Fund Debentures due 1999 and the $19.4 million outstanding principal amount of the Company's 11% Subordinated Sinking Fund Debentures due 2004, and to replace working capital used by the Company to redeem and pay accrued interest on the $22.6 million principal amount of its 11 1/2% Senior Subordinated Debentures due 1994, which were redeemed on January 14, 1994. The 13 1/2% Senior Subordinated Debentures are redeemable at 101.5% of the outstanding principal amount thereof, while the other issues are redeemable at par, in each case plus accrued interest. See "Use of Proceeds." FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNT(2) COMPANY(1)(3) - ----------------------------------------------------------------------------------------------------------- Per Note.................................... % % % - ----------------------------------------------------------------------------------------------------------- Total(4).................................... $ $ $ - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) Plus accrued interest from , 1994. (2) The Company has agreed to indemnify the Underwriters against, and to provide contribution with respect to, certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (3) Before deducting expenses payable by the Company estimated at $ . (4) The Company has granted the Underwriters a 30-day option to purchase up to an additional $28,500,000 principal amount of Notes solely to cover over-allotments. If the option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The Notes are offered, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to the approval of certain legal matters by counsel and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify the offer and to reject orders in whole or in part. It is expected that delivery of the Notes will be made against payment therefor on or about , 1994, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167. BEAR, STEARNS & CO. INC. CHASE SECURITIES, INC. , 1994 4 [CAPTIONS FOR PHOTOGRAPHS: TO BE INSERTED] RANGE HOODS AND BATH FANS MANUFACTURED BY THE RESIDENTIAL BUILDING PRODUCTS GROUP. STATE-OF-THE-ART AUTOMATED RANGE HOOD MANUFACTURING LINE. 1.5 GALLON WATER-EFFICIENT TOILET MANUFACTURED BY THE PLUMBING PRODUCTS GROUP. CUSTOM-DESIGNED COMMERCIAL HVAC EQUIPMENT MANUFACTURED BY THE AIR CONDITIONING AND HEATING PRODUCTS GROUP. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048, and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such materials can also be inspected at the New York Stock Exchange, 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a Registration Statement on Form S-2 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement, including exhibits filed as part thereof and otherwise incorporated therein. Statements made in this Prospectus as to the contents of any contract, agreement or other document filed as an exhibit to the Registration Statement or incorporated by reference therein, while complete in all material respects, do not necessarily describe all terms or provisions of such contract, agreement or other document. For a complete description, reference is made to each such contract, agreement or other document filed as an exhibit to the Registration Statement or incorporated by reference therein. Copies of the Registration Statement and the exhibits may be inspected, without charge, at the offices of the Commission, or obtained at prescribed rates from the Public Reference Section of the Commission at the address set forth above. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed with the Commission by the Company pursuant to the Exchange Act are incorporated by reference in this Prospectus and made a part hereof: the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, as amended by a Form 8 dated April 29, 1993 (the "1992 10-K"), the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended April 3, 1993 (the "First Quarter 10-Q"), July 3, 1993 (the "Second Quarter 10-Q") and October 2, 1993 (the "Third Quarter 10-Q"), and the Company's Form 8-K filed October 12, 1993 and Form 8-K filed December 15, 1993 (the "8-Ks"). The 1992 10-K, the First Quarter 10-Q, the Second Quarter 10-Q, the Third Quarter 10-Q and the 8-Ks shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to any person to whom this Prospectus is delivered, upon written or oral requests of such person, a copy of any or all of the documents which have been incorporated by reference in this Prospectus, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into the documents so incorporated. Requests for such copies should be directed to Investor Relations, Nortek, Inc., 50 Kennedy Plaza, Providence, Rhode Island 02903-2360 (telephone number: (401) 751-1600). 3 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the Notes thereto, appearing elsewhere or incorporated by reference in this Prospectus. In addition, except where otherwise indicated, all information set forth herein assumes that the Underwriters' over-allotment option will not be exercised. Unless the context otherwise requires, all references herein to the "Company" or "Nortek" include Nortek, Inc. and its subsidiaries, with the exception of references in "Description of the Notes", where references to the "Company" include only Nortek, Inc. and do not include its subsidiaries. Such definitions are used for convenience only; Nortek, Inc. and each of its subsidiaries are distinct legal entities and manage their affairs separately. THE COMPANY The Company is a diversified manufacturer of residential and commercial building products, operating within three principal product groups: the Residential Building Products Group; the Air Conditioning and Heating Products Group; and the Plumbing Products Group. Through these product groups, the Company manufactures and sells, primarily in the United States and Canada, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. In October 1993, the Company decided to sell its Retail Home Center Operations. The Company currently intends to operate this business until a sale is consummated. Beginning in the fourth quarter of 1990, in order to return the Company to profitability and position it for growth, the Company developed and implemented initiatives to (i) sell non-core or unprofitable businesses, (ii) reduce the costs and expenses of its retained businesses and (iii) significantly reduce debt. Since December 31, 1990, the Company has disposed of eight businesses, which accounted for $310.5 million of net sales and operating losses of $2.0 million in 1990. The $74.3 million in cash proceeds received from disposed businesses, together with cash on hand, were used to reduce indebtedness by $150.7 million, or 42.7%, between December 31, 1990 and October 2, 1993. In addition, a significant reduction in operating costs was the principal factor responsible for a substantial increase in EBITDA from operations from $27.4 million for the year ended December 31, 1990 to $51.0 million for the twelve months ended October 2, 1993. See "Business." STRATEGY The Company's business strategy is to develop and maintain leading positions in selected product lines within the residential and commercial building products industry. To accomplish this strategy, the Company plans to continue to expand the market share of its product groups through new product development, product line extensions and selected acquisitions, and to improve margins on its products through technological innovation, product differentiation, cost efficiency, customer service and attention to quality. The Company has instituted a variety of programs which are designed to increase its market share, including an increase in new product introductions and the establishment of on-line computer access to the Company's order entry and inventory systems for certain distributors. The Company has also pursued a variety of cost reduction activities and manufacturing process improvements, including the investment of substantial resources to consolidate manufacturing facilities and sales, marketing and administrative functions in each of its product groups. These actions have resulted in increased production capacity, enhanced manufacturing efficiency and flexibility, reduced inventory and overhead levels and decreased unit costs for many of the Company's operating facilities. The Company believes that its growth will be generated largely by internal growth in each of its product groups, augmented by strategic acquisitions. The Company regularly reviews potential acquisitions which would increase or expand the market penetration of, or otherwise complement, its current product lines, although there are no pending agreements or negotiations for any material acquisitions and the Company has made no material acquisitions since early 1988. In October 1993, the Company made the strategic decision to sell its Retail Home Center Operations to increase the Company's focus on its other building products businesses. 4 7 FACTORS AFFECTING OPERATING PERFORMANCE The Company's performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation and unemployment. In recent periods, the Company's product groups have operated in an environment of flat to declining levels of construction and remodeling activity, particularly the number of new housing starts which, though improved since 1991, remain significantly below levels experienced in the mid-1980's. Although the Company's operations have been significantly affected by the difficult economic conditions in recent periods, the actions taken by the Company to reduce production costs and overhead levels and improve the efficiency and profitability of its operations have enabled the Company to significantly increase operating earnings in a slow economy and have positioned the Company's product groups for growth should there be a recovery in their markets. In the near term, the Company expects to operate in an environment of relatively stable levels of construction and remodeling activity, without significant further declines or improvements in such levels. PRODUCT GROUP OVERVIEW The Residential Building Products Group manufactures and distributes built-in products primarily for the residential housing, do-it-yourself and professional remodeling and renovation markets. The principal products sold by this Group are kitchen range hoods, bath fans and combination units (fan, heater and light combinations) and bath cabinets, which represented more than 50% of this Group's net sales in 1992. This Group is one of the largest suppliers in the United States and Canada of range hoods, bath fans and combination units. Products are sold under the Broan(R), Nautilus(R) and Air CareTM brand names, among others, to distributors and dealers of electrical and lighting products, kitchen and bath dealers, retail home centers and original equipment manufacturers ("OEMs"). Other products sold by this Group include, among others, wireless security products, garage door openers, built-in home intercoms and entertainment systems and door chimes. The Air Conditioning and Heating Products Group manufactures and sells heating, ventilating and central air conditioning systems ("HVAC") for custom-designed commercial applications and for manufactured and site-built residential housing. This Group's commercial HVAC products and air handler systems are designed to meet customer specifications for use in offices, manufacturing and educational facilities, hospitals, retail stores and governmental buildings. Such systems are primarily designed to operate on building rooftops (including large self-contained walk-in-units) or on individual floors within a building, and range in size from 40 to 600 tons (a ton is an industry measurement of cooling capacity equaling 12,000 BTUs). Commercial products are marketed under the Governair(R), Mammoth(R) and TemtrolTM brand names. Residential manufactured and site-built housing products include central air conditioners, heat pumps, furnaces and a wide range of accessories marketed under the Intertherm(R) and Miller(R) brand names. Residential central air conditioning products range from 1.5 to 5 tons of cooling capacity and furnaces range from 45,000 BTUs to 144,000 BTUs of heating capacity. The Plumbing Products Group manufactures and sells vitreous china bathroom fixtures (including sinks, toilet bowls and tanks), fiberglass and acrylic fixtures and brass and plastic faucets, and also markets stainless steel and enameled steel tubs and sinks. In addition to its standard product offerings, this Group also sells designer bathroom fixtures, 1.5 gallon water-efficient toilets and a variety of products that are accessible by physically challenged individuals. Products are sold under the URCTM, Universal-Rundle(R), CareFree(R), Milwaukee FaucetsTM and Raphael(R) brand names principally to wholesale plumbing distributors and retail home centers. End customers of this Group's products are generally home builders, do-it-yourself homeowners, remodeling contractors and commercial builders. BUSINESS HELD FOR SALE In October 1993, the Company decided to sell its Retail Home Center Operations, which consist of a chain of ten retail home center stores, a contractor and wholesale lumberyard and a truss manufacturing yard in the greater San Diego, California area. The Company reduced its investment in this business to estimated net realizable value and recorded a pre-tax valuation reserve of $20.3 million in the third quarter of 1993. See Note 16B of Notes to Consolidated Financial Statements. 5 8 THE OFFERING Securities Offered............ $190,000,000 principal amount of % Senior Subordinated Notes due 2004 (the "Notes"). Interest Payment Dates........ and , commencing , 1994. Maturity...................... , 2004. Redemption.................... Redeemable at the Company's option, in whole or in part, at any time and from time to time, on and after , 1999, initially at % of principal amount and thereafter at prices declining to 100% from and after , 2002. See "Description of the Notes -- Optional Redemption." Change of Control............. Upon a Change of Control (as defined), holders of the Notes will have the right, subject to certain restrictions and conditions, to require the Company to purchase all or any part of their Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase. If a Change of Control were to occur, there can be no assurance that the Company would have sufficient funds to pay the Change of Control purchase price for all Notes tendered by holders thereof. In addition, the Company's ability to make such payment may be limited by the terms of borrowing and other agreements applicable to the Company or its subsidiaries. The Change of Control provisions are not applicable to certain transactions with Richard L. Bready, the Chairman of the Board, or persons or entities affiliated with Mr. Bready. See "Description of the Notes -- Change of Control" and "Description of Other Obligations." Ranking....................... Subordinate to all existing and permitted future Senior Indebtedness (as defined) of the Company and effectively subordinate to all indebtedness and other liabilities of subsidiaries of the Company. As of October 2, 1993, after giving pro forma effect to the Refinancing, the Company had no outstanding Senior Indebtedness. As of October 2, 1993, the aggregate liabilities of the Company's subsidiaries, principally consisting of trade payables and accruals, were $146.0 million. Subject to certain restrictions, the indenture pursuant to which the Notes will be issued (the "Indenture") permits the Company and its subsidiaries to incur additional indebtedness, including Senior Indebtedness which may be secured, and other liabilities. However, the Indenture prohibits the Company from incurring any indebtedness ranking senior to the Notes but subordinate to Senior Indebtedness. See "Risk Factors -- Substantial Leverage" and "Description of the Notes -- Subordination." Certain Covenants............. The Indenture restricts, among other things, the payment of dividends, the repurchase of capital stock and the making of certain other Restricted Payments (as defined), the incurrence of additional Indebtedness (as defined), the making of certain Investments (as defined) and certain mergers, consolidations or sales of assets. Upon certain Asset Sales (as defined), the Company will be required to offer to purchase, at 100% of their principal amount plus accrued and unpaid interest thereon to the date of purchase, Notes in a principal amount equal to any Net Cash Proceeds (as defined) that are not invested in properties and assets used primarily in the same or a related business to those owned and operated by the Company as of the issue date of the Notes or at the date of such sale and not applied to permanently reduce Senior Indebtedness. See "Description of the Notes -- Certain Covenants."
6 9 Use of Proceeds............... The net proceeds of this offering will be used to redeem, and pay accrued interest and a redemption premium on, certain existing indebtedness, and to replace certain working capital used by the Company to redeem and pay accrued interest on certain other indebtedness redeemed on January 14, 1994. The sale of the Notes and the use of the net proceeds therefrom for such purposes are referred to herein as the "Refinancing." See "Use of Proceeds."
Prospective purchasers of the Notes should consider carefully all of the information set forth in this Prospectus and, in particular, should evaluate the specific factors set forth under "Risk Factors." 7 10 SUMMARY CONSOLIDATED FINANCIAL DATA The following summary of selected consolidated financial data for the five years ended December 31, 1992, and the 39 weeks ended September 26, 1992 and October 2, 1993, are derived from the Selected Consolidated Financial Data appearing elsewhere in this Prospectus and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. The results of operations for the 39 weeks ended October 2, 1993 are not necessarily indicative of the results of operations to be expected for the full year. The consolidated pro forma operating data for the year ended December 31, 1992 and for the 39 weeks ended October 2, 1993 give pro forma effect to the Refinancing as if it had occurred on January 1, 1992 and to certain other adjustments as described in Note 6 below. The consolidated pro forma balance sheet data give pro forma effect to the Refinancing and the redemption on January 14, 1994 of the Company's 11 1/2% Senior Subordinated Debentures due 1994 as if such transactions had occurred on October 2, 1993.
39 WEEKS ENDED YEARS ENDED DECEMBER 31, ------------------------ ----------------------------------------------- SEPTEMBER 26, OCTOBER 2, 1988 1989 1990 1991 1992 1992 1993 -------- ------- ------- ------ ------- ------------- ---------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) CONSOLIDATED OPERATING AND CASH FLOW DATA(1): Net sales.................... $1,029.2 $1,080.2 $1,037.2 $917.0 $ 800.0 $ 617.2 $575.8 Operating earnings (loss)(2).................. 22.3 1.0 (16.6) 11.0 20.4 11.6 21.4 Interest expense, net........ (29.7) (36.6) (33.8) (30.4) (24.8) (18.8) (17.8) Earnings (loss) from continuing operations(3)... 0.2 (42.5) (41.4) (34.7) (21.0) (19.6) (12.8) Net cash provided (used) by operating activities(4).... (21.1) (23.1) 33.8 39.6 12.1 (.2) 1.2 Capital expenditures......... 20.7 35.3 24.5 16.0 8.8 7.8 7.2 Ratio of earnings to fixed charges(5)................. 1.1x -- -- -- -- -- -- CONSOLIDATED PRO FORMA OPERATING DATA: Interest expense, net (6).... $ (20.7) $(16.0) Earnings from continuing operations(6).............. .2 3.3 Earnings per share from continuing operations(6)... .02 .26 Ratio of earnings to fixed charges(5)................. -- -- OTHER CONSOLIDATED DATA: EBITDA from operations(7).... $ 50.3 $ 31.9 $ 27.4 $ 38.2 $ 42.5 $ 29.5 $ 38.0 Ratio of EBITDA from operations to interest expense, net............... 1.7x -- -- 1.3x 1.7x 1.6x 2.1x Pro forma ratio of EBITDA from operations to interest expense, net(7)............ 2.1x 2.4x
AS OF OCTOBER 2, 1993 ------------------------ ACTUAL PRO FORMA ------------- ---------- CONSOLIDATED BALANCE SHEET DATA: Cash, investments and marketable securities(8)... $ 67.2 $ 66.6 Working capital.............. 119.7 149.6 Total assets................. 509.6 513.4 Total indebtedness........... 202.4 224.0 Stockholders' investment(9).............. 112.0 105.2
- ------------------------------ (See footnotes on following page) 8 11 (1) Acquisitions have been accounted for under the purchase accounting method and dispositions have been accounted for as described in Notes 10 and 11 of Notes to Consolidated Financial Statements. See Notes 8 to 13 and Note 15 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the effect of businesses sold and other matters on operating results during the periods covered hereby. See Notes 16D and 16H of Notes to Consolidated Financial Statements with respect to changes in accounting methods, adopted as of January 1, 1993, related to post-retirement health care benefits and income taxes. (2) The operating loss for the year ended December 31, 1990 includes non-recurring pre-tax charges of $12.6 million ($.66 per share, net of tax) as described in Notes 1 and 13 of Notes to Consolidated Financial Statements. (3) The Company has decided to sell its Dixieline Lumber Company subsidiary ("Dixieline") through which the Company conducts its Retail Home Center Operations. In connection with this decision, the Company recorded a pre-tax valuation reserve of $20.3 million ($1.19 per share, net of tax) in the third quarter of 1993 to reduce the Company's net investment in such business to estimated net realizable value. (4) The following summarizes certain additional information from the Company's Consolidated Statement of Cash Flows included in the Consolidated Financial Statements contained elsewhere in this Prospectus.
39 WEEKS ENDED ------------------ YEARS ENDED DECEMBER 31, SEPT. OCTOBER ------------------------------------------------ 26, 2, 1988 1989 1990 1991 1992 1992 1993 ------ ------- ------ ------- ------ ------ ----- (DOLLARS IN MILLIONS) Cash provided by investing activities......... $ 92.1 $ 183.6 $ 10.2 $ 50.3 $ 22.8 $ 25.5 $31.8 Cash used by financing activities............. (99.4) (133.3) (70.9) (104.9) (27.9) (19.8) (6.1)
(5) For purposes of calculating this ratio, "earnings" consist of earnings from continuing operations before provision for income taxes and fixed charges, and "fixed charges" consist of interest expense, including the estimated interest portion of rental payments on operating leases. Such earnings were insufficient to cover fixed charges by $59.5 million, $60.4 million, $45.7 million and $18.0 million for the years ended December 31, 1989, 1990, 1991, 1992, respectively, by $18.3 million and $14.3 million for the 39 weeks ended September 26, 1992 and October 2, 1993, respectively, and by $13.9 million and $12.5 million for the year ended December 31, 1992 and the 39 weeks ended October 2, 1993, respectively, on a pro forma basis. (6) Pro forma (A) to reflect (i) the Refinancing, (ii) the redemption on January 14, 1994 of the Company's 11 1/2% Senior Subordinated Debentures due 1994 and (iii) the sale of L.J. Smith, Inc. and Bend Millwork Systems, Inc. as if the transactions in clauses (i), (ii) and (iii) had occurred on January 1, 1992; (B) to exclude the net after-tax loss of approximately $16 million related to the sale of L.J. Smith, Inc. and Bend Millwork Systems, Inc. in the year ended December 31, 1992; and (C) to exclude the net after-tax loss of $14.9 million recorded in the third quarter of 1993 related to the valuation reserve for Dixieline. See Note 16N of Notes to Consolidated Financial Statements. (7) "EBITDA from operations" is the earnings (loss) from continuing operations before income taxes plus depreciation, amortization and interest expense, and excludes interest and dividend income, net (gain) loss on investment and marketable securities and certain non-operating (income) expense, as follows:
PRO 39 WEEKS ENDED PRO FOR THE YEARS ENDED DECEMBER 31, FORMA --------------------- FORMA ------------------------------------------ DEC. 31, SEPT. 26, OCTOBER 2, OCTOBER 2, 1988 1989 1990 1991 1992 1992 1992 1993 1993 ------ ------ ------ ------ ------ --------- --------- ---------- ---------- (DOLLARS IN MILLIONS) Earnings (loss) from continuing operations before income taxes......................... $ 3.6 $(59.5) $(60.4) $(45.7) $(18.0) $ (13.9) $ (18.3) $(14.3) $(12.5) Add (Deduct): Interest expense............ 58.8 63.9 48.9 39.2 29.2 25.1 22.4 20.2 18.4 Interest and dividend income.................... (29.1) (27.3) (15.1) (8.8) (4.4) (4.4) (3.6) (2.4) (2.4) Net (gain) loss on investment and marketable securities................ (11.0) 23.9 10.0 (.4) (.9) (.9) (1.4) (2.4) (2.4) Depreciation and amortization (excludes amortization of deferred debt expense and debt discount, which is included in interest expense).................. 28.0 30.9 31.4 27.2 22.1 22.1 17.9 15.0 15.0 ------ ------ ------ ------ ------ ------- ------- ------ ------ EBITDA.................. $ 50.3 $ 31.9 $ 14.8 $ 11.5 $ 28.0 $ 28.0 $ 17.0 $ 16.1 $ 16.1 Loss on businesses sold or held for sale (3 above)... -- -- -- 15.2 14.5 14.5 12.5 20.3 20.3 Settlement of litigation.... -- -- -- 11.5 -- -- -- -- -- Other (2 above)............. -- -- 12.6 -- -- -- -- 1.6 1.6 ------ ------ ------ ------ ------ ------- ------- ------- ------ EBITDA from operations............ $ 50.3 $ 31.9 $ 27.4 $ 38.2 $ 42.5 $ 42.5 $ 29.5 $ 38.0 $ 38.0 ====== ====== ====== ====== ====== ======= ======= ====== ======
9 12 The pro forma data in the preceding table have been adjusted to reflect the Refinancing and the redemption on January 14, 1994 of the Company's 11 1/2% Senior Subordinated Debentures due 1994 as if such transactions had occurred on January 1, 1992. EBITDA from operations principally differs from Consolidated Cash Flow as defined in the Indenture in that Consolidated Cash Flow includes net (gain) loss on investment and marketable securities and excludes (i) the results of Dixieline, (ii) after-tax compensation expense in respect of capital stock awarded to employees as part of an employee benefit plan and (iii) net non-cash expense items not to exceed 10% of Consolidated Cash Flow. See "Description of the Notes -- Certain Definitions." EBITDA from operations is presented because it is a financial indicator of a leveraged company's ability to service and/or incur indebtedness. EBITDA from operations should not be considered as an alternative to net earnings as a measure of the Company's operating results or to cash flows as a measure of liquidity. EBITDA from operations principally differs from net increase (decrease) in unrestricted cash and investments shown on the Consolidated Statement of Cash Flows of the Company prepared in accordance with generally accepted accounting principles in that EBITDA from operations does not reflect capital expenditures, borrowings, principal and interest payments under debt and capital lease obligations, income tax payments and cash flows from other operating, investing and financing activities. See Note 4 above. (8) Includes $6.7 million of restricted cash, investments and marketable securities at October 2, 1993 (actual and pro forma). See Note 1, of Notes to Consolidated Financial Statements. (9) Pro forma stockholders' investment as of October 2, 1993 reflects the estimated net after-tax extraordinary loss of $6.8 million ($.54 per share) that would have been recorded at October 2, 1993 as a consequence of the redemption of certain of the Company's outstanding indebtedness as a part of the Refinancing. The loss principally includes the effect of unamortized deferred debt expense and debt discounts and a redemption premium on certain of such indebtedness. The Company estimates that the actual amount of such loss will be approximately $6.1 million ($.48 per share) and will be recorded in the fourth quarter of 1993. 10 13 RISK FACTORS Prospective purchasers of the Notes should consider, among other things, the factors set forth below, as well as the other information set forth in this Prospectus, before making an investment in the Notes. SUBSTANTIAL LEVERAGE The Company has a substantial amount of indebtedness. Although the Company has reduced indebtedness by $150.7 million since December 31, 1990, the Company is, and immediately following the Refinancing will remain, significantly leveraged. At October 2, 1993, the Company had $202.4 million of indebtedness. After giving pro forma effect to the Refinancing, as of October 2, 1993, the Company would have had $224.0 million of indebtedness (or $252.5 million of indebtedness if the Underwriters' over-allotment option is exercised in full). At October 2, 1993, the Company's debt to equity ratio was 1.8 to 1 and after giving pro forma effect to the Refinancing, as of October 2, 1993, the Company's debt to equity ratio would have been 2.1 to 1. See "Capitalization." The degree to which the Company is leveraged could have important consequences to holders of the Notes, including the following: (i) the Company's ability to obtain additional financing in the future for refinancing indebtedness, working capital, capital expenditures, acquisitions or general corporate purposes may be impaired, (ii) a substantial portion of the Company's consolidated cash flow from operations must be used for the payment of interest and principal on its indebtedness, (iii) the Company may be more highly leveraged than its competitors, which may place it at a competitive disadvantage, (iv) the agreements governing the Company's and its subsidiaries' indebtedness (including the Notes) and bank loans contain certain restrictive financial and operating covenants, including certain covenants that restrict the ability of the Company's subsidiaries to pay dividends or make other distributions to the Company, (v) certain of the borrowings under debt agreements of the Company's subsidiaries have floating rates of interest, which cause the Company and its subsidiaries to be vulnerable to increases in interest rates and (vi) the Company's substantial degree of leverage could make it more vulnerable to a downturn in general economic conditions. The terms of the Indenture allow for the incurrence of additional indebtedness, including Senior Indebtedness and secured indebtedness. The incurrence of additional indebtedness is limited by certain conditions, including compliance with a Consolidated Cash Flow Coverage Ratio (as defined), calculated on a pro forma basis to reflect such additional indebtedness, of 2.0 to 1. As of October 2, 1993, after giving pro forma effect to the Refinancing, the Company could incur additional indebtedness based on this covenant in the Indenture. In addition and notwithstanding the foregoing, the Indenture permits the Company, and in certain cases its subsidiaries, to incur up to approximately $107.0 million of specified additional indebtedness, including Senior Indebtedness, and certain other types of indebtedness, without regard to the compliance with the Consolidated Cash Flow Coverage Ratio referred to above or any other financial ratio or covenant in the Indenture. See "Description of the Notes." In the event the Company were to incur additional indebtedness for investment in its current business, acquisitions or other purposes, the Company's leverage may increase and, as a result, the Company could be more susceptible to the factors described above. The ability of the Company to make principal and interest payments under the Company's long-term indebtedness (including the Notes) and bank loans will be dependent upon the Company's future performance, which is subject to financial, economic and other factors affecting the Company, some of which are beyond its control. There can be no assurance that the current level of the Company's operating results will continue or that its operating results will improve. The Company believes that it may need to access the capital markets in the future in order to provide the funds necessary to repay a portion of its indebtedness. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained, particularly in view of the Company's anticipated high levels of debt and the debt incurrence restrictions under its debt agreements, including the Indenture. If no such refinancing or additional financing were available, the Company and/or its subsidiaries could default on their respective debt obligations. In such case, virtually all other debt of the Company and its subsidiaries, including payments to be made under the Notes, could become immediately due and payable. 11 14 SUBORDINATION The Notes will be subordinate in right of payment to all existing and future Senior Indebtedness of the Company, including certain refinancings of such Senior Indebtedness. Further, subject to restrictions, the Indenture permits the Company to incur additional Senior Indebtedness. As of October 2, 1993, after giving pro forma effect to the Refinancing, the Company had no outstanding Senior Indebtedness. By reason of the subordination applicable to the Notes, in the event of an insolvency, liquidation, or other reorganization of the Company, the Senior Indebtedness must be paid in full before the principal of, and interest on, the Notes may be paid. In addition, under certain circumstances, no payments may be made with respect to the principal of, or interest on, the Notes upon the occurrence of a default under the terms of any Senior Indebtedness. See "Description of the Notes". The Notes will be obligations of the Company exclusively. Because the operations of the Company are conducted entirely through subsidiaries, the Company's cash flow and its ability to service debt, including the Notes, are dependent upon the cash flow of its subsidiaries and the payment of funds by those subsidiaries in the forms of loans, dividends or otherwise. The subsidiaries, however, are legally distinct from the Company and have no obligation, contingent or otherwise (except to the extent described below with respect to the requirement to provide guaranties in certain circumstances), to pay amounts due pursuant to the Notes or to make any funds available for such payments. Certain agreements governing the Company's subsidiaries restrict the ability of the subsidiaries to pay dividends or make other distributions to the Company. The Company's Canadian subsidiary, Broan Limited, has a $15.0 million (based on exchange rates in effect on October 2, 1993) secured line of credit, of which $11.1 million (based on exchange rates in effect on October 2, 1993) is available to the Company. The line of credit prohibits dividends or other distributions to the Company from Broan Limited in excess of $11.1 million (based on exchange rates in effect on October 2, 1993). As of January 19, 1994, there were $5.8 million in outstanding borrowings under this line of credit, all the proceeds of which borrowings were advanced to the Company. The Company's Nordyne Inc. subsidiary ("Nordyne") is party to an industrial revenue bond financing agreement that restricts Nordyne's ability to declare cash dividends to the Company in the event that Nordyne's tangible net worth is less than $9.0 million at the end of any quarter. If such net worth is determined to be below $9.0 million at the end of any quarter, this agreement provides that Nordyne shall not pay any cash dividends to the Company in any twelve-month period thereafter to the extent that such cash dividends exceed, in the aggregate, forty percent (40%) of Nordyne's net income accrued after the quarter in which Nordyne's tangible net worth was less than $9.0 million. As of October 2, 1993, Nordyne's tangible net worth substantially exceeded $9.0 million and the amount of indebtedness outstanding under the industrial revenue bond financing agreement was $1.8 million. Except to the extent that the Company may itself be a trade creditor with recognized claims against its subsidiaries, claims of creditors of such subsidiaries, including trade creditors, will have effective priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including holders of the Notes, even though such subsidiary obligations do not fall within the definition of Senior Indebtedness. As of October 2, 1993, the aggregate liabilities of the Company's subsidiaries, principally consisting of trade payables and accruals, were $146.0 million. The Indenture provides that in the event any of the Company's subsidiaries guarantees the payment of any Indebtedness of the Company such subsidiary shall also guarantee the payment of the Notes. Any such guaranty shall be subordinate to Guarantor Senior Indebtedness (as defined) in substantially the same manner and to the same extent as the Notes are subordinated to Senior Indebtedness of the Company. In the event any subsidiary provides such a guaranty, the guaranty may, under certain circumstances, be subject to avoidance or subordination under fraudulent conveyance laws or the preference provisions of The United States Bankruptcy Code or comparable state law. See "Description of the Notes -- Certain Covenants -- Limitation on Guaranties by Subsidiaries." The Company may incur or issue Senior Indebtedness which may be secured by liens on assets and properties of the Company and its subsidiaries without any obligation of the Company or any of its subsidiaries to provide any such liens in favor of the holders of the Notes or to guaranty the payment of the Notes. See "Description of The Notes -- Certain Covenants -- Limitation on Liens." In certain circumstances, the Company may be obligated to repurchase or to make an offer to repurchase the Notes. The amount of funds then available to the Company and the subordination of the Notes to all 12 15 existing and future Senior Indebtedness of the Company may limit the ability of the Company to repurchase the Notes. See "Description of the Notes." CHANGE OF CONTROL The Change of Control repurchase provisions of the Indenture are not applicable to certain transactions with Richard L. Bready, the Chairman of the Board, or persons or entities affiliated with Mr. Bready. If the Company were to incur additional indebtedness in compliance with the terms of the Indenture in order to effect a transaction in which Mr. Bready or persons or entities affiliated with him gained beneficial ownership of 50% or more of the combined voting power of all the Company's then outstanding securities entitled to vote generally for the election of directors, holders of Notes would not have the right to require the repurchase of all or any part of their Notes, and the proceeds of such additional indebtedness might be available to purchase or redeem all or a portion of the Company's then outstanding equity securities, subject to the other limitations in the Indenture, such as the dividend and capital stock repurchase restrictions contained in the Limitation On Restricted Payments covenant. See "Description of the Notes." HISTORY OF OPERATING LOSSES The Company had net losses from continuing operations of $12.8 million in the 39 weeks ended October 2, 1993, $21.0 million in 1992, $34.7 million in 1991, $41.4 million in 1990 and $42.5 million in 1989. The Company believes that its losses from continuing operations reflect the general economic environment, the declining construction market, the performance of certain of its businesses, certain non-operating charges and the effect of the high fixed interest costs associated with the Company's indebtedness. The Company has taken actions throughout each of its businesses to reduce operating expenses and manufacturing costs, although for some businesses these cost reduction efforts have not wholly offset the Company's lower level of sales. The Company's earnings from continuing operations before provision for income taxes and fixed charges were insufficient to cover its fixed charges by $14.3 million in the first 39 weeks of 1993, $18.0 million in 1992, $45.7 million in 1991, $60.4 million in 1990 and $59.5 million in 1989, and by $12.5 million in the first 39 weeks of 1993 on a pro forma basis and $13.9 million for the year ended December 31, 1992 on a pro forma basis. See "Selected Consolidated Financial Data." The Company's future operating results and cash flow will be dependent on, among other things, new residential and non-residential construction, residential replacement and remodeling expenditures and general economic conditions. As a result, there can be no assurance that the Company will achieve a level of earnings before fixed charges that is sufficient to cover its fixed charges in the future, including interest payments on the Notes. If the Company's earnings before fixed charges are insufficient to cover fixed charges, the Company may be required to dispose of assets or operations in order to pay its debt obligations. If such dispositions occur, there can be no assurance that the proceeds realized by the Company will be adequate to meet its obligations then due. SENSITIVITY TO ECONOMIC CYCLES The Company's performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation and unemployment. In recent periods, the Company has operated in an environment of flat to declining levels of construction and remodeling activity, particularly new housing starts which remain significantly below levels experienced in the mid-1980's. Further declines in new residential and non-residential construction may have a material adverse effect on the Company's financial condition and results of operations. See "Business." COMPETITION Substantially all of the markets in which the Company participates are highly competitive with respect to product quality, price, design, distribution and service. Many of the Company's competitors have greater financial and marketing resources and brand awareness than the Company. Competitive factors could require price reductions or increased spending on product development, marketing and sales that would adversely affect the Company's results of operations. See "Business." 13 16 ABSENCE OF PUBLIC MARKET There is currently no public market for the Notes and there can be no assurance as to the liquidity of any market that may develop for the Notes, the ability of the holders of the Notes to sell their Notes or the price at which holders would be able to sell their Notes. Future trading prices of the Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. Bear, Stearns & Co. Inc. and Chase Securities, Inc. (the "Underwriters") have advised the Company that they currently intend to make a market in the Notes. However, the Underwriters are not obligated to do so and any market making may be discontinued at any time without notice. The Company does not intend to apply for listing of the Notes on any securities exchange or to arrange for their quotation on the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"). See "Underwriting." Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Notes. There can be no assurances that the trading market, if any, for the Notes will not be subject to similar disruptions. 14 17 THE COMPANY The Company is a diversified manufacturer of residential and commercial building products, operating within three principal product groups: the Residential Building Products Group; the Air Conditioning and Heating Products Group; and the Plumbing Products Group. Through these product groups, the Company manufactures and sells, primarily in the United States and Canada, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. In October 1993, the Company decided to sell its Retail Home Center Operations. The Company currently intends to operate this business until a sale is consummated. Beginning in the fourth quarter of 1990, in order to return the Company to profitability and position it for growth, the Company developed and implemented initiatives to (i) sell non-core or unprofitable businesses, (ii) reduce the costs and expenses of its retained businesses and (iii) significantly reduce debt. Since December 31, 1990, the Company has disposed of eight businesses, which accounted for $310.5 million of net sales and $2.0 million of operating losses in 1990. The $74.3 million in cash proceeds received from disposed businesses, together with cash on hand, were used to reduce indebtedness by $150.7 million, or 42.7%, between December 31, 1990 and October 2, 1993. In addition, a significant reduction in operating costs was the principal factor responsible for a substantial increase in EBITDA from operations from $27.4 million for the year ended December 31, 1990 to $51.0 million for the twelve months ended October 2, 1993. See "Business." The Company is a Delaware corporation. Its principal executive offices are located at 50 Kennedy Plaza, Providence, Rhode Island 02903 and its telephone number at that address is (401) 751-1600. STRATEGY The Company's business strategy is to develop and maintain leading positions in selected product lines within the residential and commercial building products industry. To accomplish this strategy, the Company plans to continue to expand the market share of its product groups through new product development, product line extensions and selected acquisitions, and to improve margins on its products through technological innovation, product differentiation, cost efficiency, customer service and attention to quality. The Company has instituted a variety of programs which are designed to increase its market share, including an increase in new product introductions and the establishment of on-line computer access to the Company's order entry and inventory systems for certain distributors. The Company has also pursued a variety of cost reduction activities and manufacturing process improvements, including the investment of substantial resources to consolidate manufacturing facilities and sales, marketing and administrative functions in each of its product groups. These actions have resulted in increased production capacity, enhanced manufacturing efficiency and flexibility, reduced inventory and overhead levels and decreased unit costs for many of the Company's operating facilities. The Company believes that its growth will be generated largely by internal growth in each of its product groups, augmented by strategic acquisitions. The Company regularly reviews potential acquisitions which would increase or expand the market penetration of, or otherwise complement, its current product lines, although there are no pending agreements or negotiations for any material acquisitions and the Company has made no material acquisitions since early 1988. In October 1993, the Company made the strategic decision to sell its Retail Home Center Operations to increase the Company's focus on its other building products businesses. See Note 16B of Notes to Consolidated Financial Statements. FACTORS AFFECTING OPERATING PERFORMANCE The Company's performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation and unemployment. In recent periods, the Company's product groups have operated in an environment of flat to declining levels of construction and remodeling activity, particularly the number of new housing starts which, though improved since 1991, remain significantly below levels experienced in the mid-1980's. Although the Company's operations have been significantly affected by the difficult economic conditions in recent periods, the actions taken by the Company to reduce production costs and overhead levels and improve the efficiency and profitability of its operations 15 18 have enabled the Company to significantly increase operating earnings in a slow economy and have positioned the Company's product groups for growth should there be a recovery in their markets. In the near term, the Company expects to operate in an environment of relatively stable levels of construction and remodeling activity, without significant further declines or improvements in such levels. PRODUCT GROUP OVERVIEW The Residential Building Products Group manufactures and distributes built-in products primarily for the residential housing, do-it-yourself and professional remodeling and renovation markets. The principal products sold by this Group are kitchen range hoods, bath fans and combination units (fan, heater and light combinations) and bath cabinets, which represented more than 50% of this Group's net sales in 1992. This Group is one of the largest suppliers in the United States and Canada of range hoods, bath fans and combination units. Products are sold under the Broan(R), Nautilus(R) and Air CareTM brand names, among others, to distributors and dealers of electrical and lighting products, kitchen and bath dealers, retail home centers and OEMs. Other products sold by this Group include, among others, wireless security products, garage door openers, built-in home intercoms and entertainment systems and door chimes. The Air Conditioning and Heating Products Group manufactures and sells HVAC systems for custom-designed commercial applications and for manufactured and site-built residential housing. This Group's commercial HVAC products and air handler systems are designed to meet customer specifications for use in offices, manufacturing and educational facilities, hospitals, retail stores and governmental buildings. Such systems are primarily designed to operate on building rooftops (including large self-contained walk-in-units) or on individual floors within a building, and range in size from 40 to 600 tons of cooling capacity. Commercial products are marketed under the Governair(R), Mammoth(R) and TemtrolTM brand names. Residential manufactured and site-built housing products include central air conditioners, heat pumps, furnaces and a wide range of accessories marketed under the Intertherm(R) and Miller(R) brand names. Residential central air conditioning products range from 1.5 to 5 tons of cooling capacity and furnaces range from 45,000 BTUs to 144,000 BTUs of heating capacity. The Plumbing Products Group manufactures and sells vitreous china bathroom fixtures (including sinks, toilet bowls and tanks), fiberglass and acrylic fixtures and brass and plastic faucets, and also markets stainless steel and enameled steel tubs and sinks. In addition to its standard product offerings, this Group also sells designer bathroom fixtures, 1.5 gallon water-efficient toilets and a variety of products that are accessible by physically challenged individuals. Products are sold under the URCTM, Universal-Rundle(R), CareFree(R), Milwaukee FaucetsTM and Raphael(R) brand names principally to wholesale plumbing distributors and retail home centers. End customers of this Group's products are generally home builders, do-it-yourself homeowners, remodeling contractors and commercial builders. BUSINESS HELD FOR SALE In October 1993, the Company decided to sell its Retail Home Center Operations, which consist of a chain of ten retail home center stores, a contractor and wholesale lumberyard and a truss manufacturing yard in the greater San Diego, California area. The Company reduced its investment in this operation to estimated net realizable value and recorded a pre-tax valuation reserve of $20.3 million in the third quarter of 1993. See Note 16B of Notes to Consolidated Financial Statements. 16 19 RECENT DEVELOPMENTS ESTIMATED OPERATING RESULTS FOR THE FOURTH QUARTER OF 1993 AND THE YEAR ENDED DECEMBER 31, 1993 The Company estimates that net sales from ongoing operations (i.e., total net sales less net sales of businesses sold or held for sale) will be approximately $168.0 million in the fourth quarter of 1993 as compared to approximately $159.4 million in the fourth quarter of 1992, and will be approximately $661.0 million for the year ended December 31, 1993 as compared to approximately $612.3 million for the year ended December 31, 1992. The Company estimates that total net sales for the fourth quarter of 1993 will be approximately $168.0 million as compared to approximately $182.7 million in the fourth quarter of 1992. For the year ended December 31, 1993, the Company estimates that total net sales will be approximately $744.0 million as compared to approximately $800.0 million for the year ended December 31, 1992. Net sales from ongoing operations in the fourth quarter of 1993 and the year ended December 31, 1993 increased principally as a result of increased sales volume of residential air conditioning and heating products, including increased shipments of new and replacement air conditioning and heating products to manufactured housing customers in both periods, and increased sales volume of commercial air conditioning and heating products in the fourth quarter. These increases in the fourth quarter were partially offset by slightly lower net sales in the Residential Building Products Group and lower net sales in the Plumbing Products Group. The Company estimates that EBITDA from ongoing operations for the fourth quarter of 1993 will be between approximately $11.0 million and approximately $13.0 million (after a reduction of approximately $2.8 million due to the curtailment of certain product lines within the Plumbing Products Group) as compared to approximately $13.3 million in the fourth quarter of 1992. The Company estimates that for the year ended December 31, 1993 EBITDA from ongoing operations will be between approximately $48.0 million and approximately $50.0 million (after a reduction of approximately $3.5 million due to provisions for the curtailment of certain product lines within the Plumbing Products Group and reserves for plant consolidations) as compared to approximately $43.6 million for the year ended December 31, 1992. The Company expects that its earnings (loss) before extraordinary gain (loss) and the cumulative effect of an accounting change will be improved in the fourth quarter of 1993 and in the year ended December 31, 1993 as compared to the fourth quarter of 1992 and the year ended December 31, 1992, respectively. If the Refinancing is consummated, the Company expects to have a net loss in the fourth quarter of 1993 due primarily to the extraordinary loss to be recorded as a consequence of the redemption of certain of the Company's outstanding indebtedness as a part of the Refinancing. This loss principally includes the effect of unamortized deferred debt expense and debt discounts and a redemption premium on certain of such indebtedness. Whether or not the Refinancing is consummated, the Company expects to have a net loss for the year ended December 31, 1993, primarily as a result of the approximately $20.3 million pre-tax loss related to the valuation reserve for Dixieline. 17 20 USE OF PROCEEDS The net proceeds from the sale of the Notes are estimated to be $183.7 million ($211.5 million if the Underwriters' over-allotment option is exercised in full). Such net proceeds will be used by the Company to redeem, and pay accrued interest and a redemption premium on, the following indebtedness and to replace working capital used to redeem certain other indebtedness on January 14, 1994, thereby reducing the Company's borrowing costs, lengthening the average maturity of its funded debt and improving its financial position:
TITLE AMOUNT(1) ------------ (DOLLARS IN MILLIONS) 9 3/4% Senior Notes due 1997.......................................... $ 51.4 13 1/2% Senior Subordinated Debentures due 1997....................... 79.4 10% Subordinated Sinking Fund Debentures due 1999..................... 2.6 11% Subordinated Sinking Fund Debentures due 2004..................... 19.4 Redemption Premium(2)................................................. 1.2 Accrued Interest(3)................................................... 5.3 Replace Working Capital Used for Debenture Redemption(4).............. 23.1 ------------ $182.4 ------------ ------------
- --------------- (1) Principal amounts are as of October 2, 1993 and reduced for principal payments made subsequent thereto. (2) The 13 1/2% Senior Subordinated Debentures are redeemable at 101.5% of the outstanding principal amount. All of the other issues are redeemable at par. (3) Estimated accrued interest on all issues assuming a redemption date of March 15, 1994. (4) On January 14, 1994, the Company redeemed and paid accrued interest on the $22.6 million outstanding principal amount of its 11 1/2% Senior Subordinated Debentures due 1994. Following the Refinancing, the remaining net proceeds from the sale of the Notes are estimated to be $1.3 million ($29.1 million if the Underwriters' over-allotment option is exercised in full). Such remaining net proceeds will be added to working capital and used for general corporate purposes. 18 21 CAPITALIZATION The following table sets forth the short-term debt and capitalization of the Company at October 2, 1993, and as adjusted to reflect the Refinancing:
AS ACTUAL(1) ADJUSTED --------- -------- (DOLLARS IN MILLIONS) Short-Term Debt: Current maturities of long-term debt............................. $ 1.1 $ 0.8 11 1/2% Senior Subordinated Debentures due 1994, net(2).......... 22.6 -- -------- ------- Total Short-Term Debt.................................... $ 23.7 $ 0.8 ======== ======= Long-Term Debt: Notes, mortgage notes and other.................................. $ 17.7 $ 17.7 9 3/4% Senior Notes due 1997..................................... 45.4 -- % Senior Subordinated Notes due 2004........................ -- 190.0 7 1/2% Convertible Debentures due 2006........................... 15.5 15.5 13 1/2% Senior Subordinated Debentures due 1997.................. 79.0 -- 10% Subordinated Sinking Fund Debentures due 1999................ 2.4 -- 11% Subordinated Sinking Fund Debentures due 2004................ 18.7 -- -------- ------- Total Long-Term Debt..................................... 178.7 223.2 -------- ------- Stockholders' Investment(3): Preference stock, $1 par value; 7,000,000 shares authorized; none issued........................................................ -- -- Common stock, $1 par value; 40,000,000 shares authorized; 15,742,582 shares issued...................................... 15.7 15.7 Special common stock, $1 par value; 5,000,000 shares authorized; 859,567 shares issued......................................... 0.9 0.9 Additional paid-in capital....................................... 134.6 134.6 Retained earnings (deficit)(4)................................... (11.1) (17.9) Less -- Treasury stock, at cost, 3,795,028 Common shares and 271,574 Special common shares............................ (28.1) (28.1) -------- ------- Total Stockholders' Investment(4)........................ 112.0 105.2 -------- ------- Total Capitalization(4).................................. $ 290.7 $328.4 ======== ======= - --------------- (1) Long-term debt is net of $7.2 million of unamortized debt discount. (2) The Company redeemed its 11 1/2% Senior Subordinated Debentures due 1994 on January 14, 1994. (3) Excludes (i) 2,547,453 shares of common stock at October 2, 1993 which have been reserved for issuance pursuant to options and the conversion of the Company's convertible debentures and special common stock, (ii) 43,500 shares of special common stock at October 2, 1993 which have been reserved for issuance pursuant to options and (iii) 125,355 shares of Series A Participating Preference Stock which may be issuable upon exercise of Rights under the Rights Agreement, as amended and restated as of March 18, 1991, between the Company and State Street Bank and Trust Company. (4) As adjusted to reflect the estimated net after-tax extraordinary loss of $6.8 million ($.54 per share) that would have been recorded at October 2, 1993 as a consequence of the redemption of certain of the Company's outstanding indebtedness as a part of the Refinancing. The loss principally includes the effect of unamortized deferred debt expense and debt discounts and a redemption premium on certain of such indebtedness. The Company estimates that the actual amount of such loss will be approximately $6.1 million ($.48 per share) and will be recorded in the fourth quarter of 1993.
19 22 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the five years ended December 31, 1992 and for the 39 weeks ended September 26, 1992 and October 2, 1993 should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. The selected consolidated operating and cash flow data, per share data and balance sheet data for each of the five years in the period ended December 31, 1992 and as of the end of each such period are derived from the Company's consolidated financial statements which have been audited by Arthur Andersen & Co., independent public accountants. The selected consolidated financial data for the 39 weeks ended September 26, 1992 and October 2, 1993 and as of October 2, 1993 have been derived from the Company's unaudited consolidated financial statements, which, in the opinion of management, contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results of operations and the financial position of the Company for such periods and as of such date. The results of operations for the 39 weeks ended October 2, 1993 are not necessarily indicative of the results of operations to be expected for the full year. The consolidated pro forma operating data for the year ended December 31, 1992 and for the 39 weeks ended October 2, 1993 give pro forma effect to the Refinancing as if it had occurred on January 1, 1992 and to certain other adjustments as described in Note 7 below. The consolidated pro forma balance sheet data give pro forma effect to the Refinancing and the redemption on January 14, 1994 of the Company's 11 1/2% Senior Subordinated Debentures as if such transactions had occurred on October 2, 1993.
39 WEEKS ENDED FOR THE YEARS ENDED DECEMBER 31, ---------------------- ------------------------------------------------- SEPT. 26, OCT. 2, 1988 1989 1990 1991 1992 1992 1993 ------- ------- ------- ------ ------ --------- --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) CONSOLIDATED OPERATING AND CASH FLOW DATA(1): Net sales......................................... $1,029.2 $1,080.2 $1,037.2 $917.0 $800.0 $ 617.2 $ 575.8 Costs and expenses: Cost of products sold........................... 796.4 842.5 808.4 693.1 595.2 465.6 414.6 Selling, general and administrative expense..... 210.5 236.7 245.4 212.9 184.4 140.0 139.8 Operating earnings (loss)(2)...................... 22.3 1.0 (16.6) 11.0 20.4 11.6 21.4 Interest expense................................ (58.8) (63.9) (48.9) (39.2) (29.2) (22.4) (20.2) Interest and dividend income.................... 29.1 27.3 15.1 8.8 4.4 3.6 2.4 Net gain (loss) on investment and marketable securities.................................... 11.0 (23.9) (10.0) 0.4 0.9 1.4 2.4 Settlement of litigation........................ -- -- -- (11.5) -- -- -- Loss on businesses sold or held for sale(3)..... -- -- -- (15.2) (14.5) (12.5) (20.3) ------- ------- ------- ------ ------ ------- ------- Earnings (loss) from continuing operations before income taxes.................................... 3.6 (59.5) (60.4) (45.7) (18.0) (18.3) (14.3) Provision (credit) for income taxes............. 3.4 (17.0) (19.0) (11.0) 3.0 1.3 (1.5) ------- ------- ------- ------ ------ ------- ------- Earnings (loss) from continuing operations...... 0.2 (42.5) (41.4) (34.7) (21.0) (19.6) (12.8) Earnings (loss) from discontinued operations.... 13.0 14.0 (6.6) -- (3.3) -- -- Extraordinary gain from debt retirements........ 6.4 16.0 9.9 7.6 0.1 0.1 -- Cumulative effect of an accounting change....... -- -- -- -- -- -- (2.1) ------- ------- ------- ------ ------ ------- ------- Net earnings (loss)........................... $ 19.6 $ (12.5) $ (38.1) $(27.1) $(24.2) $ (19.5) $ (14.9) ======= ======= ======= ====== ====== ======= ======= Net cash provided (used) by operating activities(4)................................... $ (21.1) $ (23.1) $ 33.8 $ 39.6 $ 12.1 $ (.2) $ 1.2 Capital expenditures.............................. 20.7 35.3 24.5 16.0 8.8 7.8 7.2 Ratio of earnings to fixed charges(5)............. 1.1x -- -- -- -- -- -- PER SHARE DATA: Earnings (loss) from continuing operations(6)..... $ .01 $ (3.10) $ (3.07) $(2.57) $(1.67) $ (1.56) $ (1.02) Cash dividends declared (common and special common stock).......................................... .14 .14 .14 -- -- -- -- CONSOLIDATED PRO FORMA OPERATING DATA: Interest expense, net of interest and dividend income(7)....................................... $(20.7) $ (16.0) Earnings from continuing operations(7)............ .2 3.3 Earnings per share from continuing operations(7)................................... .02 .26 Ratio of earnings to fixed charges(5)............. -- -- OTHER CONSOLIDATED DATA: EBITDA from operations(8)......................... $ 50.3 $ 31.9 $ 27.4 $ 38.2 $ 42.5 $ 29.5 $ 38.0 Ratio of EBITDA from operations to interest expense, net.................................... 1.7x -- -- 1.3x 1.7x 1.6x 2.1x Pro forma ratio of EBITDA from operations to interest expense, net(8)................................. 2.1x 2.4x
AS OF DECEMBER 31, AS OF OCTOBER 2, 1993 ------------------------------------------------- ---------------------- 1988 1989 1990 1991 1992 ACTUAL PRO FORMA ------- ------- ------- ------ ------ --------- --------- CONSOLIDATED BALANCE SHEET DATA: Cash, investments and marketable securities(9).... $ 239.7 $ 163.3 $ 99.3 $ 76.3 $ 81.9 $ 67.2 $ 66.6 Working capital................................... 454.0 322.4 176.7 139.7 132.6 119.7 149.4 Total assets...................................... 993.6 836.8 715.4 582.4 515.4 509.6 513.4 Total indebtedness................................ 589.9 434.8 353.1 237.5 208.7 202.4 224.0 Stockholders' investment(10)...................... 234.9 218.0 180.7 152.9 126.9 112.0 105.2
- --------------- (See footnotes on following page) 20 23 (1) Acquisitions have been accounted for under the purchase accounting method and dispositions have been accounted for as described in Notes 10 and 11 of Notes to Consolidated Financial Statements. See Notes 8 to 13 and Note 15 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the effect of businesses sold and other matters on operating results during the periods covered hereby. See Notes 16D and 16H of Notes to Consolidated Financial Statements with respect to changes in accounting methods, adopted as of January 1, 1993, related to post-retirement health care benefits and income taxes. (2) The operating loss for the year ended December 31, 1990 includes non-recurring pre-tax charges of $12.6 million ($.66 per share, net of tax) as described in Notes 1 and 13 of Notes to Consolidated Financial Statements. (3) The Company has decided to sell Dixieline. In connection with this decision, the Company recorded a pre-tax valuation reserve of $20.3 million ($1.19 per share, net of tax) in the third quarter of 1993 to reduce the Company's net investment in such business to estimated net realizable value. (4) The following summarizes certain additional information from the Company's Consolidated Statement of Cash Flows included in the Consolidated Financial Statements contained elsewhere in this Prospectus.
39 WEEKS ENDED YEARS ENDED DECEMBER 31, ---------------------- ---------------------------------------------------- SEPT. 26, OCTOBER 2, 1988 1989 1990 1991 1992 1992 1993 ------ ------- ------ ------- ------ --------- ---------- (DOLLARS IN MILLIONS) Cash provided by investing activities...... $ 92.1 $ 183.6 $ 10.2 $ 50.3 $ 22.8 $ 25.5 $ 31.8 Cash used by financing activities.......... (99.4) (133.3) (70.9) (104.9) (27.9) (19.8) (6.1)
(5) For purposes of calculating this ratio, "earnings" consist of earnings from continuing operations before provision for income taxes and fixed charges, and "fixed charges" consist of interest expense, including the estimated interest portion on operating leases. Such earnings were insufficient to cover fixed charges by $59.5 million, $60.4 million, $45.7 million and $18.0 million for the years ended December 31, 1989, 1990, 1991, 1992, respectively, by $18.3 million and $14.3 million for the 39 weeks ended September 26, 1992 and October 2, 1993 respectively, and by $13.9 million and $12.5 million for the year ended December 31, 1992 and the 39 weeks ended October 2, 1993, respectively, on a pro forma basis. (6) Per share data for earnings (loss) from continuing operations for all periods presented are primary per share amounts. Fully diluted per share data are the same as primary amounts for each period presented except for the year ended December 31, 1988 in which fully diluted earnings from continuing operations were $.24 per share. (7) Pro forma (A) to reflect (i) the Refinancing, (ii) the redemption on January 14, 1994 of the Company's 11 1/2% Senior Subordinated Debentures due 1994 and (iii) the sale of L.J. Smith, Inc. and Bend Millwork Systems, Inc. as if the transactions in clauses (i), (ii) and (iii) had occurred on January 1, 1992; (B) to exclude the net after-tax loss of approximately $16 million related to the sale of L.J. Smith, Inc. and Bend Millwork Systems, Inc. in the year ended December 31, 1992; and (C) to exclude the net after-tax loss of $14.9 million recorded in third quarter of 1993 related to the valuation reserve for Dixieline. See Note 16N of Notes to Consolidated Financial Statements. (8) "EBITDA from operations" is the earnings (loss) from continuing operations before income taxes plus depreciation, amortization and interest expense, and excludes interest and dividend income, net (gain) loss on investment and marketable securities and certain non-operating (income) expense as follows:
PRO 39 WEEKS ENDED PRO FOR THE YEARS ENDED DECEMBER 31, FORMA --------------------- FORMA ----------------------------------------- DEC. 31, SEPT. 26, OCTOBER 2, OCTOBER 2, 1988 1989 1990 1991 1992 1992 1992 1993 1993 ----- ------ ------ ------ ------ --------- --------- ---------- ---------- (DOLLARS IN MILLIONS) Earnings (loss) from continuing operations before income taxes........................... $ 3.6 $(59.5) $(60.4) $(45.7) $(18.0) $ (13.9) $ (18.3) $(14.3) $(12.5) Add (Deduct): Interest expense.............. 58.8 63.9 48.9 39.2 29.2 25.1 22.4 20.2 18.4 Interest and dividend income...................... (29.1) (27.3) (15.1) (8.8) (4.4) (4.4) (3.6) (2.4) (2.4) Net (gain) loss on investment and marketable securities... (11.0) 23.9 10.0 (.4) (.9) (.9) (1.4) (2.4) (2.4) Depreciation and amortization (excludes amortization of deferred debt expense and debt discount, which is included in interest expense).................... 28.0 30.9 31.4 27.2 22.1 22.1 17.9 15.0 15.0 ----- ------ ------ ------ ------ ------- ------- ------ ------ EBITDA.................... $50.3 $ 31.9 $ 14.8 $ 11.5 $ 28.0 $ 28.0 $ 17.0 $ 16.1 $ 16.1 Loss on businesses sold or held for sale (3 above)..... -- -- -- 15.2 14.5 14.5 12.5 20.3 20.3 Settlement of litigation...... -- -- -- 11.5 -- -- -- -- -- Other (2 above)............... -- -- 12.6 -- -- -- -- 1.6 1.6 ----- ------ ------ ------ ------ ------- ------- ------ ------ EBITDA from operations.... $50.3 $ 31.9 $ 27.4 $ 38.2 $ 42.5 $ 42.5 $ 29.5 $ 38.0 $ 38.0 ===== ====== ====== ====== ====== ======= ======= ====== ======
21 24 The pro forma data in the preceding table have been adjusted to reflect the Refinancing and the redemption on January 14, 1994 of the Company's 11 1/2% Senior Subordinated Debentures due 1994 as if such transactions had occurred on January 1, 1992. EBITDA from operations principally differs from Consolidated Cash Flow as defined in the Indenture in that Consolidated Cash Flow includes net (gain) loss on investment and marketable securities and excludes (i) the results of Dixieline, (ii) after-tax compensation expense in respect of capital stock awarded to employees as part of an employee benefit plan and (iii) net non-cash expense items not to exceed 10% of Consolidated Cash Flow. See "Description of the Notes -- Certain Definitions." EBITDA from operations is presented because it is a widely accepted financial indicator of a leveraged Company's ability to service and/or incur indebtedness. EBITDA from operations should not be considered as an alternative to net earnings as a measure of the Company's operating results or to cash flows as a measure of liquidity. EBITDA from operations principally differs from net increase (decrease) in unrestricted cash and investments shown on the Consolidated Statement of Cash Flows of the Company prepared in accordance with generally accepted accounting principles in that EBITDA from operations does not reflect capital expenditures, borrowings, principal and interest payments under debt and capital lease obligations, income tax payments and cash flows from other operating, investing and financing activities. See Note 4 above. (9) Includes restricted cash, investments and marketable securities in the amounts of $7.8 million, $5.2 million, $39.5 million, $33.4 million, $8.2 million and $6.7 million at December 31, 1988, 1989, 1990, 1991 and 1992 and October 2, 1993 (actual and pro forma), respectively. See Note 1 of Notes to Consolidated Financial Statements. (10) Pro forma stockholders' investment as of October 2, 1993 reflects the estimated net after-tax extraordinary loss of $6.8 million ($.54 per share) that would have been recorded at October 2, 1993 as a consequence of the redemption of certain of the Company's outstanding indebtedness as a part of the Refinancing. The loss principally includes the effect of unamortized deferred debt expense and debt discounts and a redemption premium on certain of such indebtedness. The Company estimates that the actual amount of such loss will be approximately $6.1 million ($.48 per share) and will be recorded in the fourth quarter of 1993. 22 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is a diversified manufacturer of residential and commercial building products, operating within three principal product groups: the Residential Building Products Group; the Air Conditioning and Heating Products Group; and the Plumbing Products Group. Through these product groups, the Company manufactures and sells, primarily in the United States and Canada, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. In October 1993, the Company made the strategic decision to sell its Retail Home Center Operations to increase the Company's focus on its other building products businesses. Although the Company currently intends to operate this business until a sale is consummated, for purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the results of operations attributable to the Retail Home Center Operations have been excluded from all data that are reported as being from ongoing operations, including net sales, cost of products sold, selling, general and administrative expense and segment earnings. RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, (a) certain consolidated operating results, (b) the percentage change of certain of such results as compared to the prior comparable period, (c) the percentage which certain of such results bear to net sales and (d) the change of certain of such percentages (to net sales) as compared to the prior comparable period. The results of operations for the 39 weeks ended October 2, 1993 are not necessarily indicative of the results of operations to be expected for the full year.
PERCENTAGE INCREASE (DECREASE) YEAR ENDED 39 WEEKS ENDED --------------------------------- DECEMBER 31, ------------------------ 1990 1991 SEPT. 26, 1992 ------------------------------ SEPT. 26, OCTOBER 2, TO TO TO 1990 1991 1992 1992 1993 1991 1992 OCTOBER 2, 1993 -------- ------ ------ --------- ---------- ----- ----- --------------- (DOLLARS IN MILLIONS) Net sales.................... $1,037.2 $917.0 $800.0 $ 617.2 $ 575.8 (11.6)% (12.8)% (6.7)% Cost of products sold...... 808.4 693.1 595.2 465.6 414.6 14.3 14.1 11.0 Selling, general and administrative expense... 245.4 212.9 184.4 140.0 139.8 13.2 13.4 0.1 Operating earnings (loss).... (16.6) 11.0 20.4 11.6 21.4 166.3 85.5 84.5 Interest expense........... (48.9) (39.2) (29.2) (22.4) (20.2) 19.8 25.5 9.8 Interest and dividend income................... 15.1 8.8 4.4 3.6 2.4 (41.7) (50.0) (33.3) Net gain (loss) on investment and marketable securities............... (10.0) 0.4 0.9 1.4 2.4 Settlement of litigation... -- (11.5) -- -- -- Loss on businesses sold or held for sale............ -- (15.2) (14.5) (12.5) (20.3) Loss from continuing operations before income taxes...... (60.4) (45.7) (18.0) (18.3) (14.3) Provision (credit) for income taxes............. (19.0) (11.0) 3.0 1.3 (1.5) Loss from continuing operations............... (41.4) (34.7) (21.0) (19.6) (12.8) Loss from discontinued operations............... (6.6) -- (3.3) -- -- Extraordinary gain from debt retirements......... 9.9 7.6 0.1 0.1 -- Cumulative effect of an accounting change........ -- -- -- -- (2.1) Net loss............... (38.1) (27.1) (24.2) (19.5) (14.9)
PERCENTAGE OF NET SALES ----------------------------------------------------------- CHANGE IN PERCENTAGE YEAR ENDED 39 WEEKS ENDED --------------------------------- DECEMBER 31, ------------------------ 1990 1991 SEPT. 26, 1992 ------------------------------ SEPT. 26, OCTOBER 2, TO TO TO 1990 1991 1992 1992 1993 1991 1992 OCTOBER 2, 1993 -------- ------ ------ --------- ---------- ----- ----- --------------- Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% --% --% --% Cost of products sold...... 77.9 75.6 74.4 75.5 72.0 2.3 1.2 3.5 Selling, general and administrative expense... 23.7 23.2 23.0 22.7 24.3 0.5 0.2 (1.6) Operating earnings (loss).... (1.6) 1.2 2.6 1.8 3.7 2.8 1.4 1.9
23 26 The following table presents the unaudited net sales for the Company's principal product groups for the three years ended December 31, 1992, and the 39 weeks ended Sept. 26, 1992 and October 2, 1993, and the percentage change of such results as compared to the prior comparable period. The results of operations for the 39 weeks ended October 2, 1993 are not necessarily indicative of the results of operations to be expected for the full year.
PERCENTAGE INCREASE (DECREASE) YEAR ENDED 39 WEEKS ENDED --------------------------------- DECEMBER 31, ------------------------ 1990 1991 SEPT. 26, 1992 ------------------------------ SEPT. 26, OCTOBER 2, TO TO TO 1990 1991 1992 1992 1993 1991 1992 OCTOBER 2, 1993 -------- ------ ------ --------- ---------- ----- ----- --------------- (DOLLARS IN MILLIONS) Net sales: Residential Building Products................. $ 268.9 $241.5 $249.2 $ 182.2 $191.6 (10.2)% 3.2% 5.2% Air Conditioning and Heating Products......... 198.3 221.1 237.0 178.4 204.0 11.5 7.2 14.4 Plumbing Products.......... 123.5 112.7 126.1 92.3 97.0 (8.7) 11.9 5.1 -------- ------ ------ ------- ------ ----- ----- ----- Net sales from ongoing operations................. 590.7 575.3 612.3 452.9 492.6 (2.6) 6.4 8.8 Businesses sold or held for sale and other........... 446.5 341.7 187.7 164.3 83.2 (23.5) (45.1) (49.4) -------- ------ ------ ------- ------ ----- ----- ----- Total.............. $1,037.2 $917.0 $800.0 $ 617.2 $575.8 (11.6)% (12.8)% (6.7)% ======== ====== ====== ======= ====== ===== ===== =====
39 WEEKS ENDED OCTOBER 2, 1993 AS COMPARED TO THE 39 WEEKS ENDED SEPTEMBER 26, 1992 Net sales from ongoing operations increased approximately $39,655,000, or approximately 8.8%, in 1993 as compared to 1992. Total net sales decreased approximately $41,435,000, or approximately 6.7%, in 1993 as compared to 1992 as a result of businesses sold in 1992, partially offset by the following factors. Net sales from ongoing operations increased principally as a result of increased sales volume of residential air conditioning and heating products (in part, as a result of the addition of certain distributors) and increased shipments of new and replacement air conditioning and heating products to manufactured housing customers by the Air Conditioning and Heating Products Group. To a lesser extent, increased sales levels in the Residential Building Products Group and increased sales levels of bathroom fixtures (principally vitreous china products) by the Plumbing Products Group were also a factor. Cost of products sold from ongoing operations as a percentage of net sales from ongoing operations decreased from approximately 73.2% in 1992 to approximately 71.5% in 1993. Total cost of products sold as a percentage of total net sales decreased from approximately 75.5% in 1992 to approximately 72.0% in 1993 as a result of the effect of businesses sold in 1992, which was partially offset by the effect of increases in cost of products sold as a percentage of net sales at Dixieline and the following factors. The decrease in cost of products sold as a percentage of net sales from ongoing operations primarily was attributable to increased sales levels in the Plumbing Products Group, the Residential Building Products Group and, principally in the third quarter and to a lesser extent, the Air Conditioning and Heating Products Group, in each case without a proportionate increase in costs, in part, due to the Company's ongoing cost control efforts. Selling, general, and administrative expense, as a percentage of net sales from ongoing operations increased from approximately 23.4% in 1992 to approximately 24.2% in 1993. Total selling, general and administrative expense, as a percentage of total net sales increased from approximately 22.7% in 1992 to approximately 24.3% in 1993. The increase in the percentage of net sales from ongoing operations in 1993 was principally due to the effect of third quarter 1993 pre-tax losses of approximately $1,600,000 as a result of the sale in October 1993 of certain real property and $700,000 in connection with the consolidation of certain manufacturing facilities by the Company's Residential Building Products Group and, to a lesser extent, increased expense levels in the Plumbing Products Group. The increase in the percentage of net sales from ongoing operations was partially offset by the effect of increased sales volume of residential and manufactured housing air conditioning and heating products by the Air Conditioning and Heating Products Group, without proportionate increases in expense. Segment earnings from ongoing operations were approximately $34,085,000 for 1993 as compared to approximately $24,828,000 for 1992. Total segment earnings were approximately $33,882,000 for 1993, as compared to approximately $20,690,000 for 1992 as a result of the effect of changes in the operating results of 24 27 Dixieline and a business sold in 1992 and the following factors. Total segment earnings are operating earnings (loss) plus corporate and other expenses not directly attributable to the Company's operating activities. The increase in segment earnings from ongoing operations principally was due to the increased sales level in the Plumbing Products Group, without a proportionate increase in cost, in part due to the Company's ongoing cost control efforts, and increased sales volume of residential and manufactured housing air conditioning and heating products by the Air Conditioning and Heating Products Group, without a proportionate increase in expense. To a lesser extent, the increased sales level in the Residential Building Products Group, without a proportionate increase in cost, was also a factor. The increase in segment earnings from ongoing operations was partially offset by the effect of third quarter 1993 pre-tax losses of approximately $1,600,000 and $700,000 described above. Foreign segment earnings were approximately 12% and 18% of total segment earnings from ongoing operations in the first 39 weeks of 1993 and 1992, respectively. Operating earnings in 1993 increased approximately $9,800,000, or approximately 84.5%, as compared to 1992, primarily as a result of the factors discussed above and include the results of Dixieline and a business sold in 1992. Interest expense decreased approximately $2,200,000, or approximately 9.8%, in 1993, as compared to 1992, principally as a result of purchases, at a discount, in open market and negotiated transactions of the Company's debentures and notes in 1992 and the payment of current maturities of long-term debt. Interest income decreased approximately $1,200,000, or approximately 33.3%, in 1993, as compared to 1992, principally due to lower average invested balances of short-term investments and marketable securities (in part, due to a reduction in indebtedness), and lower yields earned on investment and marketable securities. The net gain on investment and marketable securities was approximately $2,350,000 for 1993, as compared to approximately $1,400,000 for 1992. The pre-tax loss on businesses sold or held for sale of approximately $20,300,000 in 1993 and approximately $12,500,000 in 1992 resulted in the approximately $14,300,000 loss before income tax credit in 1993 and was the primary reason for the approximately $18,300,000 loss before provision for income taxes in 1992. The pre-tax loss on businesses sold or held for sale in the 1993 period resulted from the Company's decision to sell its Dixieline subsidiary (through which the Company conducts its Retail Home Center Operations) and therefore to reduce the Company's net investment in Dixieline to estimated net realizable value. See Note 16B of Notes to Consolidated Financial Statements. The income tax credit was approximately $1,500,000 for 1993, as compared to a provision for income taxes of approximately $1,300,000 for 1992. The income tax rates differed from the United States federal statutory rate of 34% in 1993 as a result of the effect of an increase in income tax valuation reserves and, in the 1992 period, principally as a result of certain nondeductible costs associated with a business sold and unrecorded income tax credits relating to capital loss carryforwards since the income tax benefits attributable thereto may not be realized. See Note 16H of Notes to Consolidated Financial Statements. The charge to operations in 1993 from the cumulative effect of an accounting change of approximately $2,100,000 resulted from the adoption of Statement of Financial Accounting Standards ("SFAS") No. 106. See Note 16D of Notes to Consolidated Financial Statements. YEAR ENDED DECEMBER 31, 1992 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1991 Net sales from ongoing operations increased approximately $36,982,000, or approximately 6.4%, in 1992 as compared to 1991. Total net sales decreased approximately $117,070,000, or approximately 12.8%, in 1992 as compared to 1991 due to businesses sold in 1991 and 1992 partially offset by the following factors. Net sales from ongoing operations increased principally as a result of increased sales volume of residential air conditioning and heating products by the Air Conditioning and Heating Products Group, increased sales prices and sales volume of bathroom fixtures by the Plumbing Products Group. To a lesser extent, increased sales levels in the Residential Building Products Group were also a factor. 25 28 Cost of products sold as a percentage of net sales from ongoing operations decreased slightly from approximately 72.7% in 1991 to approximately 72.5% in 1992. Total cost of products sold as a percentage of total net sales decreased from approximately 75.6% in 1991 to approximately 74.4% in 1992. This differential is attributable to the fact that the businesses sold by the Company during this period operated at higher cost levels than the Company's other product groups. The decrease in cost of products sold as a percentage of net sales from ongoing operations in 1992 was primarily attributable to increased sales levels of residential air conditioning and heating products by the Air Conditioning and Heating Products Group, and increased sales levels by the Plumbing Products and Residential Building Products Groups, in each case without a proportionate increase in cost. This decrease in the percentage was partially offset by increased costs on slightly lower sales in commercial and industrial air conditioning and heating products by the Air Conditioning and Heating Products Group. Selling, general and administrative expense as a percentage of net sales from ongoing operations decreased from approximately 24.7% in 1991 to approximately 23.3% in 1992. Total selling, general and administrative expense as a percentage of total net sales decreased from approximately 23.2% in 1991 to approximately 23.0% in 1992. This differential is attributable to the fact that the businesses sold by the Company during this period operated at lower expense levels than the Company's other product groups. The decrease in the percentage of net sales from ongoing operations in 1992 was principally due to increased sales of bathroom fixtures by the Plumbing Products Group, without a proportionate increase in expense. A reduction in the level of expense in the Residential Building Products Group also contributed to the decrease in the percentage. Net settlements of litigation and related expenses of approximately $700,000 in 1992 as compared to approximately $2,300,000 in 1991 were also factors. Segment earnings from ongoing operations were approximately $37,655,000 for 1992 and approximately $27,595,000 for 1991. Total segment earnings were approximately $32,659,000 for 1992 as compared to approximately $23,847,000 in 1991. The increase in total segment earnings is primarily a result of the factors that follow partially offset by the effect of businesses sold. The increase in segment earnings from ongoing operations was due principally to reduced expense levels in the Residential Building Products Group and increased sales levels of residential air conditioning and heating products by the Air Conditioning and Heating Products Group. To a lesser extent, increased sales levels of plumbing products by the Plumbing Products Group contributed to the increase in segment earnings from ongoing operations. A decline in 1992 in the amount of net settlements of litigation and related expenses was also a factor in the increase in segment earnings from ongoing operations in 1992. These increases in segment earnings from ongoing operations were partially offset by slightly lower earnings attributable to commercial and industrial air conditioning and heating products by the Air Conditioning and Heating Products Group resulting from a slight decrease in net sales of such products, without a proportionate decrease in costs. Foreign segment earnings were approximately 16% and 30% of total segment earnings from ongoing operations in 1992 and 1991, respectively. Operating earnings in 1992 increased approximately $9,421,000 from 1991, primarily as a result of the factors discussed above for segment earnings from ongoing operations, partially offset by an increase in the operating loss of businesses sold to the date of sale. Lower unallocated corporate expenses were also a factor. Interest expense decreased approximately $9,952,000, or approximately 25.5%, in 1992, as compared to 1991, principally as a result of purchases, at a discount, in open market and negotiated transactions of the Company's debentures and notes in 1992 and 1991, payment of current maturities of long-term debt and a reduction in net short-term borrowings. Interest income decreased approximately $4,323,000, or approximately 50%, in 1992, as compared to 1991, principally due to lower average invested balances of short-term investments and marketable securities (in part, due to a reduction in indebtedness), and significantly lower yields earned on investments and marketable securities. The net gain on investment and marketable securities was approximately $850,000 for 1992, as compared to approximately $400,000 in 1991. The gain on investment and marketable securities for 1991 was net of a loss of approximately $1,600,000 on the sale of the Company's investment in Stanley Interiors Corporation preferred stock. 26 29 The pre-tax loss on businesses sold of approximately $14,500,000 in 1992 was the primary factor in the approximately $18,000,000 loss from continuing operations before provision for income taxes in 1992. The approximately $15,200,000 pre-tax loss on businesses sold and the approximately $11,500,000 loss on settlement of litigation in 1991 were significant factors in the approximately $45,700,000 loss from continuing operations before income tax credit in 1991. The provision for income taxes from continuing operations was approximately $3,000,000 for 1992 as compared to an approximately $11,000,000 income tax credit in 1991. The provision for income taxes as a percentage of the pre-tax loss from continuing operations was approximately 16.7% for 1992 compared to an income tax credit of approximately 24.1% for 1991. The income tax rate differed from the U.S. Federal statutory rate of 34% for both years as a result of the effect of certain nondeductible costs associated with businesses sold (approximately $2,827,000 in 1992 and approximately $968,000 in 1991), higher foreign income tax on foreign source income (approximately $1,127,000 in 1992 and approximately $2,728,000 in 1991), a limited amount of state income tax benefits recorded (since the income tax benefits attributable to operating losses for state income tax purposes may not be realized), nondeductible amortization expense (for tax purposes), and in 1992 approximately $3,990,000 of unrecorded income tax credits relating to capital loss carryforwards. Results of discontinued operations in 1992 included a pre-tax gain of $1,474,000 (approximately $900,000 after-tax) which was attributable to the exchange of securities resulting from the settlement of derivative litigation. See Note 8 of Notes to Consolidated Financial Statements. During 1992, results of discontinued operations also included pre-tax valuation reserves of approximately $1,400,000 recorded in the third quarter and approximately $5,000,000 recorded in the fourth quarter. The Company remains contingently liable under approximately $7,100,000 of obligations under Industrial Revenue Bond ("IRB's") agreements, plus unpaid interest, relating to facilities of a previously discontinued business. This discontinued business defaulted on certain principal and interest payments related to these IRB's during 1992 and, in February 1993, filed for protection under federal bankruptcy laws. The Company continues to vigorously pursue all available remedies to minimize any liability that may ultimately result from the outcome of this matter. The Company believes that the resolution of this matter, after giving consideration to amounts previously provided, will not have a material adverse effect on the financial position or results of operations of the Company. See Notes 8 and 11 of Notes to Consolidated Financial Statements. Results of discontinued operations in 1991 included other income and expense items relating to businesses discontinued in prior years, including a pre-tax gain of approximately $700,000 as a result of proceeds from the settlement of certain litigation. Extraordinary gain from debt retirements decreased approximately $7,500,000 in 1992 as compared to 1991. YEAR ENDED DECEMBER 31, 1991 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1990 Net sales from ongoing operations decreased approximately $15,336,000, or approximately 2.6%, in 1991 as compared to 1990. Total net sales decreased approximately $120,190,000, or approximately 11.6%, for 1991 as compared to 1990 as a result of businesses sold in 1991, lower sales levels of products to recreational vehicle customers due to closures of plants used by the Company in late 1990 to service this market and from the following factors. Net sales from ongoing operations decreased principally as a result of lower sales levels of built-in ventilating products by the Residential Building Products Group and lower sales levels of bathroom fixtures and vanities by the Plumbing Products Group (reflecting changes in product mix and lower sales prices and sales volume). The decrease in net sales from ongoing operations was partially offset by a substantial increase in sales levels of residential air conditioning and heating products by the Air Conditioning and Heating Products Group. Lower sales levels in most of the Company's businesses reflected, in part, the effects of the general slowdown in the United States economy, particularly in the home building industry. Cost of products sold as a percentage of net sales from ongoing operations decreased from approximately 74.4% in 1990 to approximately 72.7% in 1991. Total cost of products sold as a percentage of total net sales decreased from approximately 77.9% in 1990 to approximately 75.6% in 1991. This differential is attributable to the fact that the businesses sold by the Company during this period operated at higher relative cost levels than the Company's other product groups. The decrease in cost of products sold as a percentage of net sales 27 30 from ongoing operations in 1991 was primarily attributable to increased sales levels in residential, commercial and industrial air conditioning and heating products without a proportionate increase in costs by the Air Conditioning and Heating Products Group, and lower sales levels of bathroom fixtures in the Plumbing Products Group (all of which have a higher relative cost level than the Company's other product groups). The effect of the write-off of approximately $3,055,000 of certain goodwill in 1990 was also a factor in the decrease in 1991 in total cost of products sold as a percentage of total net sales. Selling, general and administrative expense as a percentage of net sales from ongoing operations, decreased from approximately 28.0% in 1990 to approximately 24.7% in 1991. Total selling, general and administrative expense as a percentage of total net sales decreased from approximately 23.7% in 1990 to approximately 23.2% in 1991. The effect of the approximately $9,500,000 payment to the former Chairman in 1990 in connection with his retirement and settlement of the Company's obligations under his employment agreement and other matters was the principal factor in the decrease in selling, general and administrative expense as a percentage of net sales from ongoing operations. The decrease was also due to increased sales levels, without a proportionate increase in expense, of residential air conditioning and heating products serving the site-built and manufactured housing markets by the Air Conditioning and Heating Products Group, a reduction in expenses of wireless infrared security devices by the Residential Building Products Group and, to a lesser extent, a decline in expense levels in the Plumbing Products Group. A decrease in expense incurred in connection with various litigation matters from approximately $3,700,000 in 1990 to approximately $2,300,000 in 1991 also contributed slightly to the change in the percentage. Segment earnings from ongoing operations were approximately $27,595,000 for 1991 and approximately $13,013,000 for 1990. Total segment earnings were approximately $23,847,000 for 1991 as compared to approximately $14,122,000 for 1990. The increase in total segment earnings primarily was due to the effect of businesses sold, lower expense as a result of the closures by the Company in late 1990 of its plants that had been used to service the recreational vehicle market and the following factors. The increase in segment earnings from ongoing operations principally was due to increased sales levels and lower cost and expense levels of air conditioning and heating products serving the residential and manufactured housing industries and increased sales levels without a proportionate increase in cost in commercial and industrial air conditioning products by the Air Conditioning and Heating Products Group. To a lesser extent, lower expense and cost levels of bathroom fixtures in the Plumbing Products Group and decreased expenses of wireless infrared security devices sold by the Residential Building Products Group also contributed to the increase. These increases were partially offset by net settlements of certain litigation and related expense of approximately $2,300,000 in 1991, as compared to approximately $1,000,000 in 1990. Foreign segment earnings were approximately 30% and 63% of total segment earnings from ongoing operations in 1991 and 1990, respectively. Operating earnings in 1991 increased approximately $27,527,000 from a loss in 1990, primarily as a result of the factors discussed above for segment earnings from ongoing operations, partially offset by the effect of operating losses of businesses sold to the date of sale in 1991 (as compared to operating earnings in 1990), and also includes the effect of an expense in 1990 relating to the $9,500,000 payment to the former Chairman of the Company, the write-off of approximately $3,055,000 of goodwill and $1,550,000 of intangible assets which principally was due to the Company's determination that such assets had no continuing value, and an approximately $2,700,000 reduction in non-segment expense in connection with various litigation matters. Interest expense decreased approximately $9,765,000, or approximately 19.8%, in 1991 as compared to 1990, principally as a result of purchases, at a discount, in open market and negotiated transactions of the Company's debentures and notes in 1991 and 1990, payment of current maturities of long-term debt, a reduction in short-term borrowings, and the payment of subsidiary bank indebtedness with the net proceeds from the sale of businesses. Interest and dividend income decreased approximately $6,342,000, or approximately 41.7%, from 1990 to 1991, principally due to lower average invested balances of short-term investments and marketable securities (in part, due to a reduction in indebtedness), and significantly lower yields earned on investment and marketable securities, in part, as a result of a shift from high yield securities in 1990 to more liquid, higher grade investments in 1991. 28 31 The net gain on investment and marketable securities changed from a loss of approximately $10,000,000 in 1990 to a gain of approximately $400,000 in 1991. This change resulted from a shift from high yield securities to more liquid, higher grade investments. Market declines in the prices of high yield bonds during 1990 resulted in substantial investment losses. The gain on investment and marketable securities for 1991 is net of a loss of approximately $1,600,000 on the sale of the Company's investment in Stanley Interiors Corporation preferred stock. The approximately $15,200,000 pre-tax loss on businesses sold and the $11,500,000 loss on settlement of litigation in 1991 were significant factors in the approximate $45,700,000 loss from continuing operations before income tax credit in 1991. The income tax credit decreased approximately $7,950,000 as compared to 1990. The income tax credit as a percentage of the pre-tax loss was approximately 24.1% for 1991 and approximately 31.4% for 1990. The rate differed from the United States Federal statutory rate of 34.0% for both years as a result of the effect of foreign source deemed income in 1991, the effect of certain nondeductible costs in 1991 associated with the approximately $15,200,000 loss on businesses sold, higher foreign income tax rates on foreign source income in both years, the effect of a limited amount of state income tax benefits recorded in both years (since the income tax benefits attributable to operating losses for state income tax purposes may not be realized), the effect of nondeductible amortization expense (for tax purposes) and in 1990 the effect of approximately $2,400,000 of unrecognized income tax credits relating to 1989 losses being realized for tax purposes. Earnings from discontinued operations were essentially zero, as compared to a loss of approximately $6,600,000 in 1990. Results of discontinued operations in 1991 and 1990 included other income and expense items relating to businesses discontinued in prior years, including a pre-tax gain of approximately $700,000 as a result of proceeds from the settlement of certain litigation in 1991. Results of discontinued operations for 1990 also reflect (i) a net after-tax charge of approximately $8,700,000 from the discontinuance of a product line and reserves established to reduce the carrying value of certain assets of discontinued operations to estimated net realizable value, (ii) after-tax income of approximately $2,200,000 resulting from the cash collection and settlement of amounts owed to the Company relating to certain businesses previously discontinued and (iii) approximately $1,000,000 of net after-tax income which was deferred in 1989 in connection with the sale of Monogram Industries, Inc. ("Monogram") as a result of the collection in June 1990 of the $14,000,000 note due from the purchaser of Monogram, a company controlled by the Company's former Chairman. See Note 11 of Notes to Consolidated Financial Statements. Extraordinary gain from debt retirements decreased approximately $2,300,000 in 1991 as compared to 1990 as a result of differences in the amount of discount and principal amount of purchases in open market and negotiated transactions of debentures and notes. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity in 1991, 1992 and 1993 have been funds provided by subsidiary operations, unrestricted investments and marketable securities, net proceeds from businesses sold or discontinued and in 1991 net United States federal income tax refunds. The Company's Canadian subsidiary, Broan Limited, has a $20,100,000 Canadian (approximately $15,000,000 U.S. at exchange rates prevailing at October 2, 1993) secured line of credit, of which approximately $14,800,000 Canadian (approximately $11,100,000 U.S. at exchange rates prevailing at October 2, 1993) is available to the Company (the "Line of Credit"). The Line of Credit prohibits dividends or other distributions to the Company from Broan Limited in excess of $14,800,000 Canadian (approximately $11,100,000 U.S. at exchange rates prevailing at October 2, 1993). Borrowings under the Line of Credit are available for working capital and other general corporate purposes. The Line of Credit contains covenants requiring Broan Limited to maintain (i) a ratio of earnings before interest and taxes to interest of at least 2 to 1, (ii) a working capital ratio of at least 1.5 to 1 and (iii) a debt to equity ratio of no higher than 3 to 1; the Line of Credit also limits the annual amount of capital expenditures which Broan Limited may make to $500,000 Canadian (approximately $375,000 U.S. at exchange rates prevailing at October 2, 1993). Broan Limited pays a commitment fee of .25% per annum on the unutilized portion of the Line of Credit payable monthly on a pro rata basis, and the Line of Credit is subject to review by the lender in April 1994. As of January 19, 1994, there were $5,800,000 U.S. in 29 32 outstanding borrowings under the Line of Credit, all of the proceeds of which borrowings were advanced to the Company. Unrestricted cash and investments were $60,507,000 at October 2, 1993. On January 14, 1993, the Company used approximately $23,100,000 to redeem and pay accrued interest on the then outstanding $22,600,000 principal amount of its 11 1/2% Senior Subordinated Debentures. The Company intends to use substantially all of the net proceeds from the offering of the Notes to redeem, and pay accrued interest and a redemption premium on, certain other indebtedness, and to replace the working capital it used to effect the redemption of its 11 1/2% Senior Subordinated Debentures. After giving pro forma effect to the Refinancing, the Company believes that its liquidity will be improved as a result of the lengthening of the average maturities of its funded debt and a reduction in borrowing costs. See "Use of Proceeds." The Company believes cash flow from subsidiary operations, unrestricted cash and marketable securities and borrowings under the Line of Credit or under new credit facilities or arrangements which may be entered into will provide sufficient liquidity to meet the Company's working capital, capital expenditure, debt service and other ongoing business needs through, at least, 1994. Capital expenditures were approximately $8,800,000 in 1992, and are expected to be between approximately $11,000,000 and approximately $12,000,000 in 1993. The Indenture contains restrictions on the incurrence by the Company and its subsidiaries of additional indebtedness. See "Description of the Notes." The Company's earnings from continuing operations before income taxes and interest expense have been insufficient to cover fixed charges subsequent to 1988. The Company has been able to meet its fixed charges during this period principally from existing cash and marketable securities and net proceeds from businesses sold. Excluding the results of businesses sold or held for sale, the Company had earnings before income taxes and interest expense for the year ended December 31, 1992 and for the first 39 weeks of 1993 sufficient to cover fixed charges in each such period. The Company currently expects to be able to cover its fixed charges, including interest payments on the Notes, for the forseeable future without needing to sell businesses. However, there can be no assurance that the Company will achieve a level of earnings before fixed charges that is sufficient to cover its fixed charges in the future. If the Company's earnings before fixed charges are insufficient to cover fixed charges, the Company may be required to dispose of assets or operations in order to pay its debt obligations. If such dispositions occur, there can be no assurance that the proceeds realized by the Company will be adequate to meet its obligations then due. The Company's investment in marketable securities at December 31, 1992 and October 2, 1993 consisted primarily of investments in United States Treasury securities. At October 2, 1993, approximately $6,687,000 of the Company's cash and investments were pledged as collateral with an insurance company and were classified as restricted in current assets in the Company's unaudited consolidated balance sheet. At October 2, 1993, approximately $1,625,000 of subsidiary cash and investments were classified as restricted in other assets in the Company's unaudited consolidated balance sheet. During 1992, approximately $13,400,000 of restricted investments became available for the Company's unrestricted use, principally from a reduction in the amount of collateral required for insurance obligations and the release of approximately $8,500,000, principally as a result of the settlement of certain litigation. See Note 8 of Notes to Consolidated Financial Statements. In the first 39 weeks of 1993, approximately $4,787,000 of cash was utilized by the Company and its subsidiaries to pay indebtedness, including purchases, at a slight discount, in open market transactions of approximately $1,202,000 principal amount of the Company's debentures. In 1992, approximately $23,188,000 of cash was utilized by the Company and its subsidiaries to pay indebtedness (net of borrowings), including purchases, at a slight discount, in open market transactions of $22,348,000 principal amount of the Company's debentures. At October 2, the Company remains contingently liable under approximately $7,100,000 of obligations under Industrial Revenue Bond ("IRB's") agreements, plus unpaid interest, relating to facilities of a previously owned subsidiary. This former subsidiary defaulted on certain principal and interest payments related to these IRB's during 1992 and, in February 1993, filed for protection under federal bankruptcy laws. The Company continues to vigorously pursue all available remedies to minimize any liability that may ultimately result from the outcome of this matter. The Company believes that the resolution of this matter, after giving consideration to amounts previously provided, will not have a material adverse effect on the 30 33 financial position or results of operations of the Company. See Notes 8 and 16E of Notes to Consolidated Financial Statements. In the first 39 weeks of 1993, the Company adopted the accounting requirements of SFAS No. 106 for post-retirement health care and related benefits and recorded the accumulated post-retirement benefit obligation of approximately $2,100,000, after an income tax credit of approximately $1,000,000 ($.17 per share, net of tax) as the cumulative effect of an accounting change. Previously, such health care and related benefits for qualified and retired beneficiaries were charged to operating results in the period that such benefits were paid. Approximately $950,000 of the accumulated post-retirement benefit obligation is expected to be paid during 1993 as a result of certain plan modifications. See Notes 7 and 16D of Notes to Consolidated Financial Statements. The Company has decided to sell its Dixieline subsidiary through which the Company conducts its Retail Home Center Operations, and recorded a pre-tax valuation reserve of $20.3 million ($14.9 million after-tax) in the third quarter of 1993 to reduce the Company's net investment in such business to estimated net realizable value. The Company is in preliminary discussions with a potential purchaser of these operations; however, no agreement has yet been reached, and there can be no assurance that any transaction will be consummated. The Company has reflected Dixieline's current assets, non-current assets, current liabilities and long-term mortgage notes payable separately in its consolidated balance sheets. See Note 16B of Notes to Consolidated Financial Statements. In July 1992, derivative litigation against the Company and its directors challenging the transactions involving the retirement in 1990 of the Company's former Chairman was settled. In connection with the settlement, the Company exchanged $5,250,000 principal amount of Monogram 11% Subordinated Notes due December 31, 1995 held by the Company for $4,050,000 principal amount of the Company's 13 1/2% Senior Subordinated Debentures due June 15, 1997 held by Monogram. The Company's working capital and current ratio decreased from approximately $132,587,000 and approximately 1.9:1, respectively, at December 31, 1992 to approximately $119,687,000 and approximately 1.6:1, respectively, at October 2, 1993. These decreases include the effect of the change in the method of accounting for income taxes, pursuant to SFAS 109, adopted in the first 26 weeks of 1993. See Note 16H of Notes to Consolidated Financial Statements. Disregarding the effect of SFAS 109 working capital decreased approximately $16,502,000, or approximately 12.4%, from December 31, 1992 to October 2, 1993. The Company's working capital decreased from approximately $139,657,000 to approximately $132,587,000 between December 31, 1991 and December 31, 1992 (the current ratio remained at approximately 1.9:1 from December 31, 1991 to December 31, 1992). The decrease in working capital reflected the sale of the Company's former L. J. Smith subsidiary ("L.J. Smith") in the first quarter of 1992 and its former Bend Millwork subsidiary ("Bend") in the third quarter of 1992. Disregarding the effect of the sale of L. J. Smith and Bend, working capital decreased approximately $21,947,000, or approximately 14.2% from December 31, 1991 to December 31, 1992. Accounts receivable, including those of Dixieline, increased approximately $21,824,000, or approximately 26.1%, between December 31, 1992 and October 2, 1993, principally as a result of increased sales volume, in part, due to seasonal factors affecting the Air Conditioning and Heating Products Group. Accounts receivable, including those of Dixieline, decreased approximately $5,662,000, or approximately 6.3%, between December 31, 1991 and December 31, 1992, while net sales decreased approximately 11.4% in the fourth quarter of 1992 as compared to the fourth quarter of 1991. Disregarding the effect of the sale of L. J. Smith and Bend, accounts receivable, including those of Dixieline, increased approximately $3,818,000, or approximately 4.8%, during this period, while net sales increased approximately 8.5% in the fourth quarter of 1992 as compared to the fourth quarter of 1991. 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 sales. Significant sales near the end of any period generally result in significant amounts of accounts receivable on the date of the balance sheet at the end of such period. In recent periods, the Company has not experienced any significant changes in credit terms, collection efforts, credit utilization or delinquency. Inventories, including those of Dixieline, increased approximately $11,914,000, or approximately 13.6%, between December 31, 1992 and October 2, 1993. Disregarding the effect of SFAS 109, inventories increased 31 34 approximately $6,567,000, or approximately 7.1%, reflecting an increase in sales volume, in part, due to seasonal factors. Inventories, including those of Dixieline, decreased $16,891,000, or approximately 16.2%, between December 31, 1991 and December 31, 1992. Disregarding the effect of the sale of L. J. Smith and Bend, inventories, including those of Dixieline, increased approximately $2,562,000, or approximately 3.0%, during this period. Unrestricted cash and investments increased approximately $26,888,000 from December 31, 1992 to October 2, 1993, principally as a result of cash provided (used) by the following:
CONDENSED CONSOLIDATED CASH FLOWS ------------ Operating Activities -- Cash flows from operations, net.............................. $ 13,949,000 Increase in accounts receivable, net......................... (21,872,000) Increase in inventories...................................... (6,567,000) Increase in accounts payable................................. 3,202,000 Change in accrued expenses, taxes, prepaids, other assets, liabilities, and other, net............................... 12,480,000 Investing Activities -- Net cash payments relating to businesses sold or discontinued.............................................. (2,420,000) Proceeds from the sale of investment and marketable securities, net of purchases.............................. 42,498,000 Capital expenditures......................................... (7,227,000) Financing Activities -- Payment of borrowings, including purchase of debentures...... (4,787,000) All other, net................................................. (2,368,000) ------------ $ 26,888,000 ============
Unrestricted cash and investments increased approximately $6,958,000 from December 31, 1991 to December 31, 1992, principally as a result of cash provided (used) by the following:
CONDENSED CONSOLIDATED CASH FLOWS ------------ Operating Activities -- Cash flows from operations, net.............................. $ 17,255,000 Increase in accounts receivable, net......................... (7,323,000) Increase in inventories...................................... (2,807,000) Increase in accruals and taxes............................... 3,398,000 Investing Activities -- Net cash proceeds from businesses sold or discontinued....... 38,813,000 Decrease in restricted cash, investment and marketable securities................................................ 13,030,000 Purchase of investment and marketable securities, net of sales..................................................... (22,391,000) Capital expenditures......................................... (8,804,000) Financing Activities -- Purchase of debentures and notes payable..................... (21,693,000) Purchase of Company common and special common stock.......... (2,006,000) Other, net................................................... (4,215,000) All other, net................................................. 3,701,000 ------------ $ 6,958,000 ============
The Company's debt-to-equity ratio increased from approximately 1.6:1 at December 31, 1992 to approximately 1.8:1 at October 2, 1993, primarily as a result of the net loss of $14,900,000 in the first 39 weeks of 1993 which was partially offset by the decrease in total long-and short-term indebtedness of approximately $6,354,000 between December 31, 1992 and October 2, 1993. Between December 31, 1992 and December 31, 1991, total long-and short-term indebtedness declined approximately $28,678,000, principally as a result of the purchase, at a discount, in open market transactions of the Company's debentures and the exchange of $4,050,000 of debentures. See Note 8 of Notes to Consolidated Financial Statements. Stockholders' 32 35 investment declined approximately $26,023,000 in this period, principally as a result of the net loss of approximately $24,200,000 and the purchase of common and special common stock for approximately $2,006,000. At October 2, 1993, the payment of cash dividends or stock payments was prohibited under the most restrictive of the Company's indentures and loan agreements. In 1992, the Company's total net sales to Sears Roebuck & Co. ("Sears") were approximately 3.7% of the Company's consolidated net sales (excluding the results of businesses sold). In January 1993, Sears announced plans to discontinue its catalog and related sales programs and close a number of unprofitable stores. As a result, sales to Sears declined to 2.4% of the Company's consolidated net sales in the first 39 weeks of 1993 as compared to 2.8% of the Company's consolidated net sales in the corresponding period of 1992. The Company's St. Louis, Missouri plant, which is part of the Company's Air Conditioning and Heating Products Group and manufactures products for the residential site-built and manufactured housing markets, experienced damage as a result of the flooding of the Mississippi River in July 1993. The plant was closed for several weeks, but returned to full operation in late August 1993. At October 2, 1993, the Company has accrued for estimated losses of $14,500,000 related to the flooding, has recorded a receivable of approximately $14,500,000 for casualty, property damage and business interruption insurance claims due from its insurance carrier and has recorded as a liability approximately $6,600,000 of cash advances received relating to such claims. Subsequent to October 2, 1993 the Company has received approximately $6,600,000 of additional cash advances from the insurance carrier. The Company believes that it has adequate insurance coverage and does not expect this event to have a material adverse effect on the Company's financial condition or results of operations. See Note 16L of Notes to Consolidated Financial Statements. The Company believes that its growth will be generated largely by internal growth in each of its product groups, augmented by strategic acquisitions. The Company regularly reviews potential acquisitions which would increase or expand the market penetration of, or otherwise complement, its current product lines, although there are no pending agreements or negotiations for any material acquisitions and the Company has made no material acquisitions since early 1988. The Company will realize an estimated net after-tax extraordinary loss of approximately $6,100,000 ($.48 per share) as a consequence of the redemption of certain of the Company's outstanding indebtedness as part of the Refinancing. The loss is expected to be recorded in the fourth quarter of 1993 and principally includes the effect of unamortized deferred debt expense and debt discounts and a redemption premium on certain of such indebtedness. INFLATION, TRENDS AND GENERAL CONSIDERATIONS The Company's performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation and unemployment. In recent periods, the Company's product groups have operated in an environment of flat to declining levels of construction and remodeling activity, particularly new housing starts which decreased 43.8% between 1986 and 1991. New residential construction has made a modest recovery since 1991, although housing starts remain significantly below levels experienced in the mid-1980's. The Company's operations have been significantly affected by the difficult economic conditions, particularly in the Northeastern United States and California. However, the actions taken to reduce production costs and overhead levels and improve the efficiency and profitability of the Company's operations have enabled the Company to significantly increase operating earnings in a slow economy, as well as to position the Company for growth should there be a recovery in the Company's markets. In the near term, the Company expects to operate in an environment of relatively stable levels of construction and remodeling activity, without significant further declines or improvements in such levels. In recent periods, inflation has not had, and is not expected to have for the foreseeable future, a material effect on the Company's results of operations and financial condition. 33 36 BUSINESS GENERAL The Company is a diversified manufacturer of residential and commercial building products, operating within three principal product groups: the Residential Building Products Group; the Air Conditioning and Heating Products Group; and the Plumbing Products Group. Through these product groups, the Company manufactures and sells, primarily in the United States and Canada, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. In October 1993, the Company decided to sell its Retail Home Center Operations. The Company currently intends to operate this business until a sale is consummated. Beginning in the fourth quarter of 1990, in order to return the Company to profitability and position it for growth, the Company developed and implemented initiatives to (i) sell non-core or unprofitable businesses, (ii) reduce the costs and expenses of its retained businesses and (iii) significantly reduce indebtedness. Since December 31, 1990, the Company has disposed of eight businesses, which accounted for $310.5 million of net sales and operating losses of $2.0 million in 1990. The net cash proceeds received from disposed businesses were $74.3 million. These proceeds, together with cash on hand, were used to reduce indebtedness by $150.7 million, or 42.7%, between December 31, 1990 and October 2, 1993. In addition, a significant reduction in the Company's operating costs was the principal factor responsible for a substantial increase in EBITDA from operations from $27.4 million for the year ended December 31, 1990 to $51.0 million for the twelve months ended October 2, 1993. The Company's business strategy is to develop and maintain leading positions in selected product lines within the residential and commercial building products industry. To accomplish this strategy, the Company plans to continue to expand the market share of its product groups through new product development, product line extensions and selected acquisitions, and to improve margins on its products through technological innovation, product differentiation, cost efficiency, customer service and attention to quality. The Company has instituted a variety of programs to expand and strengthen its relationships with distributors, including providing on-line computer access to the Company's order entry and inventory systems for certain products. In recent years, the Company has also increased new product introductions in its manufacturing businesses with the objective of increasing product penetration with existing customers and expanding its customer base. In the period 1990 to 1992, the Company invested approximately $49 million in capital expenditures and implemented a variety of cost reduction activities and manufacturing process improvements, including the consolidation of manufacturing facilities and sales, marketing and administrative functions in each of its product groups. The Company has also introduced coordinated purchasing programs for certain services and materials used in its principal manufacturing operations, including freight, steel and other raw materials. These actions have resulted in increased production capacity, enhanced manufacturing efficiency and flexibility, reduced inventory and overhead levels and decreased unit costs for many of the Company's operating facilities. The Company's performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation and unemployment. In recent periods, the Company's product groups have operated in an environment of flat to declining levels of construction and remodeling activity, particularly new housing starts which decreased 43.8% between 1986 and 1991. New residential construction has made a modest recovery since 1991, although housing starts remain significantly below levels experienced in the mid-1980's. The Company's operations have been significantly affected by the difficult economic conditions, particularly in the Northeastern United States and California. However, the actions taken to reduce production costs and overhead levels and improve the efficiency and profitability of the Company's operations have enabled the Company to significantly increase operating earnings in a slow economy, as well as to position the Company for growth should there be a recovery in the Company's markets. In the near term, the Company expects to operate in an environment of relatively stable levels of construction and remodeling activity, without significant further declines or improvements in such levels. 34 37 The following table presents certain residential and commercial construction industry statistics which, among other things, represent factors that the Company believes affect its operating performance: SELECTED INDUSTRY STATISTICS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------------------- 1986 1987 1988 1989 1990 1991 1992 -------- -------- -------- -------- -------- -------- -------- Housing starts(1).................. 1,805.4 1,620.5 1,488.1 1,376.1 1,192.7 1,013.9 1,200.0 Change from previous year........ -- (10.2)% (8.2)% (7.5)% (13.3)% (15.0)% 18.4% Residential replacement and remodeling(2).................... $ 95,300 $ 94,100 $101,100 $100,900 $106,800 $ 97,500 $103,700 Change from previous year........ -- (1.3)% 7.4% (0.2)% 5.8% (8.7)% 6.4% Manufactured housing shipments(3)..................... 244.7 232.6 218.4 198.3 188.0 170.7 210.4 Change from previous year........ -- (4.9)% (6.1)% (9.2)% (5.2)% (9.2)% 23.3% Non-residential construction contracts(4)..................... $ 91,580 $ 98,770 $ 97,885 $106,071 $ 95,470 $ 86,255 $ 87,063 Change from previous year........ -- 7.9% (0.9)% 8.4% (10.0)% (9.7)% 0.9% - --------------- (1) Source: Bureau of the Census (units in thousands) (2) Source: Bureau of the Census (dollars in millions) (3) Source: Manufactured Housing Institute (units in thousands) (4) Source: F.W. Dodge/McGraw Hill (dollars in millions)
The following table presents the unaudited consolidated net sales and EBITDA from ongoing operations for the Company's principal product groups for the five years ended December 31, 1992 and for the 39 weeks ended September 26, 1992 and October 2, 1993. The results of operations for the 39 weeks ended October 2, 1993 are not necessarily indicative of the results of operations to be expected for the full year. This table should be read in conjunction with the Company's Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. NET SALES AND EBITDA FROM OPERATIONS
39 WEEKS ENDED FOR THE YEARS ENDED DECEMBER 31, --------------------------- -------------------------------------------------------- SEPTEMBER 26, OCTOBER 2, 1988 1989 1990 1991 1992 1992 1993 -------- -------- -------- -------- -------- ------------- ---------- (DOLLARS IN MILLIONS) Net sales: Residential Building Products....... $ 243.2 $ 278.0 $ 268.9 $241.5 $249.2 $ 182.2 $191.6 Air Conditioning and Heating Products.......................... 200.9 196.9 198.3 221.1 237.0 178.4 204.0 Plumbing Products................... 133.4 141.7 123.5 112.7 126.1 92.3 97.0 -------- -------- -------- -------- -------- ------ ---------- Net sales from ongoing operations..... 577.5 616.6 590.7 575.3 612.3 452.9 492.6 Net sales from businesses sold or held for sale(3)....................... 451.7 463.6 446.5 341.7 187.7 164.3 83.2 -------- -------- -------- -------- -------- ------ ---------- Total net sales..................... $1,029.2 $1,080.2 $1,037.2 $917.0 $800.0 $ 617.2 $575.8 ======== ======== ======== ======== ======== ====== ========== EBITDA from operations(1): Residential Building Products....... $ 32.1 $ 32.3 $ 29.6 $ 26.7 $ 32.2 $ 22.5 $ 25.4 Air Conditioning and Heating Products(2)....................... 15.2 (.9 ) 11.6 20.8 22.1 16.3 19.5 Plumbing Products................... 3.7 .5 (7.0 ) (1.3) .7 (.7) 3.8 Corporate and other, net............ (16.3 ) (16.9 ) (16.9 ) (12.0) (11.4) (7.8) (11.7) -------- -------- -------- -------- -------- ------ ---------- EBITDA from ongoing operations........ 34.7 15.0 17.3 34.2 43.6 30.3 37.0 EBITDA from businesses sold or held for sale(3)....................... 15.6 16.9 10.1 4.0 (1.1) (.8) 1.0 -------- -------- -------- -------- -------- ------ ---------- EBITDA from operations.............. $ 50.3 $ 31.9 $ 27.4 $ 38.2 $ 42.5 $ 29.5 $ 38.0 ======== ======== ======== ======== ======== ====== ========== - --------------- (1) EBITDA from operations is earnings (loss) from continuing operations before income taxes, plus depreciation, amortization and interest expense and excludes interest and dividend income, net (gain) loss on investment and marketable securities and certain other non-operating (income) expense. See "Selected Consolidated Financial Data." (2) The cost reduction activities of the Air Conditioning and Heating Products Group resulted in certain significant costs and expenses in the Group's residential products business during the period 1989 to 1991. (3) Includes results of the Company's Retail Home Center Operations, which are currently held for sale.
35 38 The Company believes that its growth will be generated largely by internal growth in each of its product groups, augmented by strategic acquisitions. The Company regularly reviews potential acquisitions which would increase or expand the market penetration of, or otherwise complement, its current product lines, although there are no pending agreements or negotiations for any material acquisitions and the Company has made no material acquisitions since early 1988. In October 1993, the Company made the strategic decision to sell its Retail Home Center Operations to increase the Company's focus on its other building products businesses. The Company is in preliminary discussions with a potential purchaser of these operations; however, no agreement has yet been reached, and there can be no assurance that any transaction will be consummated. The Company reduced its investment in this business to estimated net realizable value and recorded a pre-tax valuation reserve of $20.3 million in the third quarter of 1993. RESIDENTIAL BUILDING PRODUCTS GROUP The Residential Building Products Group manufactures and distributes built-in products primarily for the residential new construction, do-it-yourself and professional remodeling and renovation markets. The principal products sold by the Group are kitchen range hoods, bath fans, combination units (fan, heater and light combinations) and bath cabinets, which represented more than 50% of the Group's net sales in 1992. The Group is one of the largest suppliers in the United States and Canada of range hoods, bath fans and combination units. Products are sold under the Broan(R), Nautilus(R)and Air CareTM brand names, among others, to distributors and dealers of electrical and lighting products, kitchen and bath dealers, retail home centers and OEMs. Other products sold by this Group include, among others, wireless security products, garage door openers, built-in home intercoms and entertainment systems and door chimes. The Group's strategy is to retain its significant market share among suppliers of range hoods, bath fans and combination units in the United States and Canada. To accomplish this, the Group seeks to be the low-cost producer of its principal products, to continue to introduce new or improved products and to offer its principal products across a range of price points. To capitalize on the significant increase in the retail distribution of residential building products, the Group has introduced marketing programs which are designed to increase the Company's sales to this market. In addition, the Group continues to develop and expand its strong wholesale customer base. Sales of the Group's products are principally affected by the level of housing starts and residential replacement and remodeling activity in the United States and, to a lesser extent, in Canada. Accordingly, factors such as interest rates, consumer spending and unemployment significantly affect the Group's sales. The recent recession and attendant decrease in home construction continue to adversely affect the Group's business. In addition, the high level of consumer debt and low level of consumer confidence have reduced the amount of discretionary income consumers have available to direct toward remodeling and renovation expenditures. Housing starts, in spite of the lowest mortgage rates in 20 years, are up just 3.9% for the first nine months of 1993 as compared to the corresponding period of 1992 and the growth in the overall economy continues at a sluggish pace. In spite of these negative factors, the operating performance of the Group continues to improve. In addition to the effectiveness of the Group's cost reduction programs, this improvement is due to the successful introduction of many new or improved products, increased penetration of existing customer accounts due to improved customer service, delivery and product line breadth, and expansion of the Group's retail account base. 36 39 The following table presents the unaudited net sales and EBITDA from ongoing operations for the Group for the five years ended December 31, 1992 and for the 39 weeks ended September 26, 1992 and October 2, 1993. The results of operations for the 39 weeks ended October 2, 1993 are not necessarily indicative of the results of operations to be expected for the full year. The table also presents certain industry statistics which, among other things, represent factors that the Company believes affect the operating performance of the Group. RESIDENTIAL BUILDING PRODUCTS GROUP
39 WEEKS ENDED FOR THE YEARS ENDED DECEMBER 31, ----------------------- ------------------------------------------------------- SEPT. 26, OCTOBER 2, 1988 1989 1990 1991 1992 1992 1993 -------- -------- -------- ------- -------- --------- ---------- (DOLLARS IN MILLIONS) Net sales from ongoing operations...... $ 243.2 $ 278.0 $ 268.9 $ 241.5 $ 249.2 $ 182.2 $191.6 EBITDA from ongoing operations......... $ 32.1 $ 32.3 $ 29.6 $ 26.7 $ 32.2 $ 22.5 $ 25.4 Housing starts(1)...................... 1,488.1 1,376.1 1,192.7 1,013.9 1,200.0 924.8 960.6 Residential replacement and remodeling(2)........................ $101,100 $100,900 $106,800 $97,500 $103,700 $76,681 (3) - --------------- (1) Source: Bureau of the Census (units in thousands) (2) Source: Bureau of the Census (3) Not yet available. Amounts for the 26 weeks ended June 27, 1992 and July 3, 1993 were $49,094 and $48,131, respectively.
For the 39 weeks ended October 2, 1993 and for the years ended December 31, 1992, 1991 and 1990, the Group accounted for approximately 39%, 41%, 42% and 45%, respectively, of the Company's net sales from ongoing operations. In the same periods, the Group accounted for approximately 52%, 59%, 58% and 87%, respectively, of the Company's EBITDA from ongoing operations before corporate and other, net. Over the past several years, the Group has significantly reduced costs by consolidating certain manufacturing and administrative functions, upgrading certain production facilities and enhancing its management information systems. For example, since January 1, 1990, the Group has invested $12.7 million in capital expenditures, including the installation of state of the art robotics to automate a significant portion of its range hood manufacturing process. This investment resulted in substantial increases in the Group's production capabilities and flexibility and eliminated a number of high cost, nonvalue-added activities, including many labor-intensive operations. The Group improved its inventory turnover from approximately 3.7x for the year ended December 31, 1990 to approximately 4.4x for the year ended December 31, 1992. These changes have also benefited the Group's customers by permitting quicker delivery and therefore allowing such customers to maintain lower levels of the Group's products in their inventory. Customers for the Group's products include residential and electrical contractors, professional remodelers and do-it-yourself homeowners. The Group's products are sold on a wholesale basis through distributors and dealers of electrical and lighting products, on a retail basis through building supply centers and to OEMs for inclusion in their product lines. The sales and marketing efforts of the Group's dealers and distributors are supported by a 292 person in-house staff as of October 2, 1993. A key component of the Group's operating strategy is the introduction of new products which capitalize on the strong Broan(R), Nautilus(R) and Air CareTM brand names and the extensive distribution system of the Group's businesses. Recent product introductions under these brand names include: indoor air quality systems for continuous and intermittent home ventilation; down-draft ventilating systems for cooking ranges; SensAireTM (humidity sensing) bath fans; and the Rangemaster(R) line of commercial-style range hoods for use in the home. Consumer preferences are important in developing new products and establishing marketing strategies, and the Company believes that the Group's ability to develop new and improved product styles and features provides a significant competitive advantage. Despite recent cost cutting measures, the Group continues to devote substantial resources to product development. For the year ended December 31, 1992, product development expenses were approximately 1.8% of the Group's net sales. The Group offers a broad array of products with various features and styles across a range of price points. The Group's range hoods have retail prices from approximately $30 to $300, with a typical unit price of approximately $50. Similarly, the retail prices of the Group's bath fans range from approximately $12 to $250, with a typical unit price of approximately $25. The Company believes that the Group's variety of product offerings helps the Group maintain and improve its market position for its principal products. In addition, the 37 40 popularity of higher priced, higher margin products tends to decline in difficult economic times, and thus, the Company believes that the Group's ability to offer low-and mid-priced products gives it desirable sales diversification. At the same time, the Company believes that the Group's status as a low-cost producer, in large part as a result of the cost reduction initiatives described above, provides the Group with a competitive advantage. With respect to range hoods, bath fans and combination units, the Company believes that the Group's primary competitor is NuTone, a division of Williams Holdings Companies. The market for bath cabinets is highly fragmented with no single dominant supplier. The Group's other products compete with many domestic and international suppliers in their various markets. The Group competes with suppliers of competitive products primarily on the basis of quality, distribution, delivery and price. Although the Group believes it competes favorably with respect to each of these factors, competition among suppliers of the Group's products is intense and certain of these suppliers have greater financial and marketing resources than the Group. The Group has nine manufacturing plants and employed 1,724 full-time people as of October 2, 1993, 185 of which are covered by collective bargaining agreements which expire in 1994 and 1996. The Company believes that the Group's relationships with its employees are satisfactory. AIR CONDITIONING AND HEATING PRODUCTS GROUP The Air Conditioning and Heating Products Group manufactures and sells HVAC systems for custom-designed commercial applications and for manufactured and site-built residential housing. The Group's commercial products consist of HVAC and air handler systems which are custom-designed to meet customer specifications for commercial offices, manufacturing and educational facilities, hospitals, retail stores and governmental buildings. Such systems are primarily designed to operate on building rooftops (including large self-contained walk-in-units) or on individual floors within a building, and range from 40 to 600 tons of cooling capacity. The Group markets its commercial products under the Governair(R), Mammoth(R) and TemtrolTM brand names. For manufactured and site-built residential housing, the Group's products include central air conditioners, heat pumps, furnaces and a wide range of accessories marketed under the Intertherm(R) and Miller(R) brand names. Residential central air conditioning products range from 1.5 to 5 tons of cooling capacity and furnaces range from 45,000 BTUs to 144,000 BTUs of heating capacity. The Group's residential products also include portable and permanent electric baseboard heating products. The following table presents the unaudited net sales and EBITDA from ongoing operations for the Group for the five years ended December 31, 1992 and for the 39 weeks ended September 26, 1992 and October 2, 1993. The results of operations for the 39 weeks ended October 2, 1993 are not necessarily indicative of the results of operations to be expected for the full year. The table also presents certain industry statistics which, among other things, represent factors that the Company believes affect the operating performance of the Group. AIR CONDITIONING AND HEATING PRODUCTS GROUP
39 WEEKS ENDED FOR THE YEARS ENDED DECEMBER 31, ---------------------------- ------------------------------------------------------------ SEPTEMBER 26, OCTOBER 2, 1988 1989 1990 1991 1992 1992 1993 -------- -------- -------- -------- -------- ------------- ---------- (DOLLARS IN MILLIONS) Net sales from ongoing operations................... $ 200.9 $ 196.9 $ 198.3 $ 221.1 $ 237.0 $ 178.4 $ 204.0 EBITDA from ongoing operations(1)................ $ 15.2 $ (0.9) $ 11.6 $ 20.8 $ 22.1 $ 16.3 $ 19.5 Manufactured housing shipments(2)................. 218.4 198.3 188.0 170.7 210.4 153.1 187.9 Non-residential construction contracts(3)................. $97,885 $106,071 $95,470 $86,255 $87,063 $66,368 $ 63,215 - --------------- (1) Cost reduction activities resulted in certain significant costs and expenses in the residential products business during the period 1989 to 1991. (2) Source: Manufactured Housing Institute (units in thousands) (3) Source: F.W. Dodge/McGraw Hill
For the 39 weeks ended October 2, 1993 and for the years ended December 31, 1992, 1991 and 1990, the Group accounted for approximately 41%, 39%, 38% and 34%, respectively, of the Company's net sales from ongoing operations. In the same periods, the Group accounted for approximately 40%, 40%, 45% and 34%, 38 41 respectively, of the Company's EBITDA from ongoing operations before corporate and other, net. The Group's inventory turnover improved from approximately 4.4x for the year ended December 31, 1990 to approximately 5.3x for the year ended December 31, 1992. This improvement resulted primarily from the implementation of manufacturing process improvements and cost reduction programs. Commercial Products The Group's commercial products include packaged rooftop units and air handlers, custom walk-in units, individual floor units and heat pumps. Individual units range from 40 to 600 tons of cooling capacity, and complete systems generally range in price from $200,000 to $3,000,000. The market for commercial HVAC equipment is segmented between standard and custom-designed equipment. Standard equipment can be manufactured at a lower cost and therefore offered at substantially lower initial prices than custom-designed equipment. As a result, suppliers of standard equipment generally have a larger share of the overall commercial HVAC market than suppliers of custom-designed equipment, including the Group. However, because of certain building designs, shapes or other characteristics, the Company believes there are many applications for which custom-designed equipment is required or is more cost effective over the life of the equipment. Unlike standard equipment, the Group's commercial HVAC equipment can be designed to match the exact space, capacity and performance requirements of the customer. The Group sells its commercial products primarily to contractors, owners and developers of commercial office buildings, manufacturing and educational facilities, hospitals, retail stores and government buildings. The Group seeks to maintain strong relationships nationwide with design engineers, owners and developers, the persons who are most likely to value the benefits and long-term cost efficiencies of the Group's custom-designed equipment. Although the general level of commercial construction activity has declined significantly since 1989, the impact of this decline on the Group has been partially offset due to the Group's focus on certain segments within the commercial construction market (for example, hospitals, prisons and schools) that have outperformed the overall market. The Company estimates that more than half of the Group's commercial sales in 1992 were attributable to replacement and retrofit activity, which typically is less cyclical than new construction activity and generally commands higher margins. The Group continues to develop product and marketing programs to increase penetration in the growing replacement and retrofit market. The Company believes that significant opportunities are available in this market due to, among other things, the development of higher efficiency HVAC systems and the availability of new environmentally acceptable refrigerants. For many commercial applications, the ability to provide a custom-designed system is the principal concern of the customer. The Group's packaged rooftop and self-contained walk-in units maximize a building's rentable floor space because they are located outside the building. In addition, factors relating to the manner of construction and timing of installation of commercial HVAC equipment can often favor custom-designed rather than standard systems. As compared with standard commercial HVAC systems, the Group's systems are factory assembled and then installed, rather than assembled on site, permitting extensive testing prior to shipment. As a result, the Group's commercial systems can be installed later in the construction process than site-built systems, thereby saving the owner or developer construction and labor costs. These savings, together with the reliability and lower operating costs of the Group's walk-in units, led the developers of the Mall of America in Minneapolis, the largest fully enclosed retail/family entertainment center in the United States, to choose the Group as its air cooling and handling supplier. The Group designed and installed 33 custom walk-in units for the Mall of America, each with 400 tons of cooling capacity. The Group's individual floor units offer flexibility in metering and billing, a substantial advantage if a building is to be occupied in stages or where HVAC usage varies significantly from floor to floor. For these reasons as well as the low noise levels of the Group's individual floor units, the Group was chosen as the HVAC supplier for nine buildings within London's Canary Wharf office development project. As part of this project, the Group has provided 152 individual floor units, serving 3.5 million square feet of office space, with an average cooling capacity of 55 tons. The Group's commercial products are marketed through independently owned manufacturers' representatives and an in-house sales, marketing and engineering group of 103 persons as of October 2, 1993. The independent representatives are typically HVAC engineers, a factor which is significant in marketing the 39 42 Group's commercial products because of the design intensive nature of the market segment in which the Group competes. The Company believes that the Group is among the largest suppliers of custom-designed commercial HVAC products in the United States. The Group's five largest competitors in the commercial HVAC market are Brod & McClung, Inc. (which sells under the "Pace" tradename), Carrier Corporation, McQuay (a division of Snyder-General Corporation), Miller-Picking (a division of York International Corporation) and The Trane Company (a subsidiary of American Standard Inc.). The Group competes primarily on the basis of engineering support, quality, flexibility in design and construction and total installed system cost. Although the Company believes that the Group competes favorably with respect to certain of these factors, most of the Group's competitors have greater financial and marketing resources than the Group and enjoy greater brand awareness. However, the Company believes that the Group's ability to produce equipment that meets the performance characteristics required by the particular product application provides it with advantages not enjoyed by certain of these competitors. Residential Products The Group is one of the largest suppliers of air conditioners, heat pumps and furnaces to the manufactured housing market in the United States. In addition, the Group manufactures and markets HVAC products for site-built homes, a business it entered in 1987. Net sales from site-built HVAC products have grown significantly, and in the period 1989 to 1992 net sales of such products experienced 30% compounded annual growth. The Group's strategy for its residential HVAC operations is to maintain its position in the manufactured housing market, to continue with its efforts to reduce costs and improve operating efficiencies, and to expand its site-built residential HVAC business. The Group also intends to continue to use its product engineering expertise to introduce new, more energy efficient products. The principal factors affecting the market for the Group's residential HVAC products are the levels of manufactured housing shipments and housing starts and the demand for replacement and modernization of existing equipment. The Company believes that two recent market trends have caused HVAC sales to outperform the new residential construction market. First, home air conditioning has come to be considered a standard feature by an increasing number of consumers. Second, the trend towards using multiple cooling zones within a home to provide improved comfort and energy efficiency has led to an increasing number of units per home. In addition, the Company anticipates that the replacement market will continue to expand as a large number of previously installed heating and cooling products become outdated or reach the end of their useful lives during the 1990s. This growth may be accelerated by a tendency among consumers to replace older heating and cooling products with higher efficiency models prior to the end of such equipment's useful life. The Company estimates that less than half of the Group's net sales of residential HVAC products in 1992 were attributable to the replacement market, which tends to be less cyclical than the new construction market. The market for residential cooling products, including those sold by the Group, is affected by spring and summer temperatures. The Group does not sell window air conditioners, a segment of the market which is highly seasonal and especially affected by spring and summer temperatures. The Company believes that the Group's ability to offer both heating and cooling products helps offset the effects of seasonality on the Group's sales. Between 1988 and 1992, the Group invested approximately $25 million in capital expenditures for its residential HVAC products business. These capital investments have allowed the Group to significantly reduce the cost of its manufacturing and distribution processes and to introduce new, more energy efficient products. Specifically, the Group significantly reduced its manufacturing and administrative overhead by integrating the Intertherm(R) and Miller(R) manufacturing lines, as well as their respective sales, marketing and administrative functions. Furthermore, the Group changed from a decentralized multiple-site distribution system receiving products from four different manufacturing plants to a centralized system receiving products from two plants. The change in the distribution system and the consolidation of manufacturing operations have produced important efficiencies, such as the improvement of inventory controls, the elimination of redundant product handling activities and the reduction of freight expenses. 40 43 The Group sells its manufactured housing products to builders of manufactured housing and, through distributors, to manufactured housing dealers and owners of such housing. The majority of sales to builders of manufactured housing consist of furnaces designed and engineered to meet or exceed certain standards mandated by federal agencies. These standards differ in several important respects from the standards for furnaces used in site-built residential homes. The aftermarket channel of distribution includes sales of both new and replacement air conditioning units and heat pumps. Approximately two-thirds of the Group's residential HVAC net sales in 1992 were through channels of distribution serving the manufactured housing market. The Group has used its experience and knowledge of residential HVAC equipment to expand its business into the site-built residential market. A substantial portion of site-built residential products have been introduced in the last three years, including a reengineered line of high efficiency air conditioners, heat pumps and furnaces. Residential HVAC products for use in site-built homes are sold through independently-owned distributors who sell to HVAC dealers and contractors. The Group, in conjunction with its distributors, has undertaken a targeted marketing program to introduce contractors to its residential products. To build recognition with these contractors, the Group features television weatherman Willard Scott as its national spokesman. The Group is one of the largest suppliers of HVAC equipment for the manufactured housing market in the United States. The Company believes that the Group has one major competitor in this market, Evcon Industries, which markets its products under the "Evcon/Coleman" name. Competition in the site-built residential HVAC market is intense, and many suppliers of such equipment have substantially greater financial and marketing resources than the Group and enjoy greater brand awareness. In these markets, the Group competes with, among others, Carrier Corporation, Lennox Industries, Trane Company and York International Corporation. The Group competes in both the manufactured housing and site-built markets on the basis of breadth and quality of its product line, distribution, product availability and price. The Company believes that the Group competes favorably with respect to these factors. The Group has eight manufacturing plants and employed 1,621 full-time people as of October 2, 1993, 197 of which are covered under a collective bargaining agreement which expires in 1995. The Company believes that the Group's relationships with its employees are satisfactory. PLUMBING PRODUCTS GROUP The Plumbing Products Group manufactures and sells vitreous china bathroom fixtures (including sinks, toilet bowls and tanks), fiberglass and acrylic fixtures, brass and plastic faucets, bath cabinets and vanities and shower doors, and also markets stainless steel and enameled steel tubs and sinks. In addition to its standard product offerings, the Group also sells designer bathroom fixtures, 1.5 gallon water-efficient toilets and a variety of products that are accessible to physically challenged individuals. Products are sold under the URCTM, Universal-Rundle(R), CareFree(R), Milwaukee FaucetsTM and Raphael(R) brand names principally to wholesale plumbing distributors and retail home centers. End customers of the Group's products are generally home builders, do-it-yourself homeowners, remodeling contractors and commercial builders. The Group's principal strategy is to maintain its position as a low cost and high quality manufacturer, with an emphasis on low-and mid-priced products. As a result, the Company believes that the Group can compete favorably against more well-known brands in the new construction markets where product selection is made by builders and contractors and is therefore influenced significantly by price. At the same time, the Group is expanding its line of higher-margin specialty products in response to the increased prominence of the replacement and remodeling market. In this market, the consumer is generally the purchaser, and, therefore significant emphasis is placed on quality and design as well as on price. The Group intends to continue to emphasize markets in which it has developed considerable expertise, such as the markets for water-efficient toilets and products that are accessible to physically challenged individuals. The installation in new housing of water-efficient toilets is mandated by federal law beginning in January 1994. The Company believes that the Group has one of the most extensive lines of such toilets. 41 44 The principal industry factors affecting the Group's sales are the levels of United States housing starts (particularly in the Northeastern United States where the Group's sales are concentrated), replacement and remodeling expenditures and, to a lesser extent, non-residential construction. An increasing percentage of the Group's products are sold for use by do-it-yourself and professional remodelers. Although the depressed rate of home construction continues to adversely affect the Group's business, the Company believes that the Group's cost reduction efforts and new product initiatives discussed below have been the principal factors leading to the improvement in its operating results in recent periods. The following table presents the unaudited net sales and EBITDA from ongoing operations for the Group for the five years ended December 31, 1992 and for the 39 weeks ended September 26, 1992 and October 2, 1993. The results of operations for the 39 weeks ended October 2, 1993 are not necessarily indicative of the results of operations to be expected for the full year. The table also presents certain industry statistics which, among other things, represent factors that the Company believes affect the operating performance of the Group. PLUMBING PRODUCTS GROUP
39 WEEKS ENDED FOR THE YEARS ENDED DECEMBER 31, ---------------------- --------------------------------------------------- SEPT. 26, OCTOBER 2, 1988 1989 1990 1991 1992 1992 1993 -------- -------- -------- ------- -------- --------- ---------- (DOLLARS IN MILLIONS) Net sales from ongoing operations............ $ 133.4 $ 141.7 $ 123.5 $ 112.7 $ 126.1 $ 92.3 $ 97.0 EBITDA from ongoing operations............... $ 3.7 $ 0.5 $ (7.0) $ (1.3) $ 0.7 $ (0.7) $ 3.8 Housing starts(1)............................ 1,488.1 1,376.1 1,192.7 1,013.9 1,200.0 924.8 960.6 Residential replacement and remodeling(2).... $101,100 $100,900 $106,800 $97,500 $103,700 $76,681 (3) - --------------- (1) Source: Bureau of the Census (units in thousands) (2) Source: Bureau of the Census (3) Not yet available. Amounts for the 26 weeks ended June 27, 1992 and July 3, 1993 were $49,094 and $48,131, respectively.
For the 39 weeks ended October 2, 1993 and for the years ended December 31, 1992, 1991 and 1990, the Group accounted for approximately 20%, 20%, 20% and 21%, respectively, of the Company's net sales from ongoing operations. In the same periods, the Group accounted for approximately 8%, 1%, (3)% and (21)%, respectively, of the Company's EBITDA from ongoing operations before corporate and other, net. The Group has invested $10.7 million in capital expenditures during the four years ended December 31, 1992. In addition, the Group has restructured its operations by closing certain manufacturing facilities. These actions have resulted in improved operating efficiencies at certain of the Group's manufacturing facilities and reduced overhead levels. The Group improved its inventory turnover from approximately 4.9x for the year ended December 31, 1990 to approximately 8.6x for the year ended December 31, 1992. In the current difficult market for residential construction, the Group's cost reduction efforts have been a significant factor leading to the improvement in its operating results. In 1992, approximately 45% of the Group's net sales were attributable to wholesale plumbing distributors, approximately 40% were attributable to retail home centers and approximately 15% were attributable to mass merchandisers and others. Sales to Sears represented approximately 10% of the Group's sales in 1992, as compared to approximately 17% in 1990. In January 1993, Sears announced plans to discontinue its catalog and related sales programs and closed a number of unprofitable stores. As a result, the Group's sales to Sears have declined to 4.9% of the Group's sales in the first 39 weeks of 1993 as compared to 9.2% of the Group's sales in the corresponding period of 1992. The Group sells its products to distributors and home centers through independently owned manufacturer's representatives supported by 37 sales and marketing personnel employed by the Group as of October 2, 1993. The Group competes with many suppliers of plumbing and related products, several of which have greater financial and marketing resources than the Group and greater brand awareness. The Group's competitors include American Standard Inc., Eljer Industries and Kohler Company. The Group competes primarily on the basis of price, quality, service and breadth of product line offerings. The Group believes it 42 45 competes favorably by offering quality products at a reasonable price, serving markets that larger competitors do not emphasize, and developing products using new technologies. The Plumbing Products Group has eight manufacturing facilities and employed 1,338 full-time people as of October 2, 1993, approximately 1,000 of whom are covered by collective bargaining agreements which expire between 1994 and 1997. The Company believes that the Group's relationships with its employees are satisfactory. BUSINESS HELD FOR SALE In October 1993, the Company decided to sell its Dixieline Lumber Company subsidiary ("Dixieline") through which the Company conducts its Retail Home Center Operations. This business consists of a chain of ten retail home center stores, a contractor and wholesale lumberyard and a truss manufacturing yard in the greater San Diego, California area. Dixieline provides a wide assortment of lumber, plywood, building materials and home improvement products serving the new residential construction and residential replacement and remodeling markets, and also provides delivery and lumber cutting and milling services. The contractor and wholesale lumberyard sells lumber, plywood and building materials to professional contractors and wholesalers, and supplies such products for sale in its own retail home center stores. The Company reduced its investment in this business to estimated net realizable value and recorded a pre-tax valuation reserve of $20.3 million in the third quarter of 1993. See Note 16B of Notes to Consolidated Financial Statements. The following table presents the unaudited net sales and EBITDA for Retail Home Center Operations for the five years ended December 31, 1992 and for the 39 weeks ended September 26, 1992 and October 2, 1993. The results of operations for the 39 weeks ended October 2, 1993 are not necessarily indicative of the results of operations to be expected for the full year. The table also presents data regarding the number of San Diego County housing permits, one of the factors which the Company believes affects the operating performance of its Retail Home Center Operations. RETAIL HOME CENTER OPERATIONS
39 WEEKS ENDED FOR THE YEARS ENDED DECEMBER 31, --------------------------- ---------------------------------------------------------------- SEPTEMBER 26, OCTOBER 2, 1988 1989 1990 1991 1992 1992 1993 -------- -------- -------- -------- -------- ------------- ---------- (DOLLARS IN MILLIONS) Net sales.................... $136.9 $157.2 $136.0 $104.5 $ 94.8 $71.7 $ 83.2 EBITDA....................... $ 6.8 $ 7.9 $ 4.9 $ 1.2 $ 0.7 $ 1.0 $ 1.0 San Diego County housing permits(1)................. 28,394 18,813 15,807 7,992 6,081 5,371 4,143 - --------------- (1) Source: Greater San Diego Chamber of Commerce
Dixieline competes primarily with Home Base and Home Depot. Certain of its competitors have greater financial and marketing resources than Dixieline. Dixieline competes primarily on the basis of price, product availability and the knowledge of its sales staff. The Company believes Dixieline competes favorably with respect to these factors. Dixieline employed 689 full-time people as October 2, 1993, 164 of which are covered by collective bargaining agreements which expire in 1995. The Company believes that Dixieline's relationships with its employees are satisfactory. PATENTS AND TRADEMARKS The Company holds numerous design and process patents that it considers important, but no single patent is material to the overall conduct of its business. It is the Company's policy to obtain and protect patents whenever such action would be beneficial to the Company. The Company owns several trademarks that it considers material to the marketing of its products, including Broan(R), Nautilus(R), Air CareTM, Governair(R), Mammoth(R), TemtrolTM, Miller(R), Intertherm(R), URCTM and Universal-Rundle(R). The Company believes that its rights in these trademarks are adequately protected. 43 46 RAW MATERIALS The Company purchases raw materials and most components used in its various manufacturing processes. The principal raw materials purchased by the Company are rolled sheet, formed and galvanized steel, copper, aluminum, plate mirror glass, silica, lumber, plywood, paints, chemicals, resins and plastics. The materials, molds and dies, subassemblies and components purchased from other manufacturers, and other materials and supplies used in manufacturing processes have generally been available from a variety of sources. Whenever practical, the Company establishes multiple sources for the purchase of raw materials and components to achieve competitive pricing, ensure flexibility and protect against supply disruption. PROPERTIES Set forth below is a brief description of the location and general character of the principal administrative, sales and manufacturing facilities and other material real properties of the Company. All properties are owned, except for those indicated by an asterisk, which are leased.
APPROXIMATE LOCATION DESCRIPTION SQUARE FEET - --------------------- ------------------------------------------- ----------- Union, IL Manufacturing/Warehouse/Administrative 174,000* Hartford, WI Manufacturing/Warehouse/Administrative 402,000 Old Forge, PA Warehouse/Administrative 40,000 Bensenville, IL Warehouse/Administrative 69,000* Mississauga, ONT Manufacturing/Administrative 108,000 Elk Grove Village, IL Manufacturing/Warehouse/Administrative 106,000* Dallas, TX Manufacturing/Administrative 71,000 Carlsbad, CA Warehouse/Administrative 26,000* Hong Kong Manufacturing 30,000* Waupaca, WI Manufacturing 35,000 St. Peters, MO Warehouse/Administrative 250,000* St. Louis, MO Manufacturing 214,000 Boonville, MO Manufacturing 250,000* Minneapolis, MN Manufacturing 200,000* Oklahoma City, OK Manufacturing/Administrative 117,000 Okarche, OK Manufacturing/Administrative 107,000 Los Angeles, CA Manufacturing/Administrative 177,000 San Diego, CA(1) Retail/Warehouse/Administrative 180,000* New Castle, PA Manufacturing/Administrative 420,000 Hondo, TX Manufacturing/Administrative 404,000 Monroe, GA Manufacturing/Administrative 414,000 Union Point, GA Manufacturing/Administrative 191,000 Ottumwa, IA Manufacturing/Administrative 85,000 Milwaukee, WI Manufacturing/Administrative 76,000 Rensselaer, IN Manufacturing/Administrative 271,000 Chicago, IL Manufacturing/Sales/Administrative 100,000 Providence, RI Administrative 31,000* - --------------- (1) In addition, Dixieline owns or leases nine other retail locations containing between 13,000 and 56,000 square feet, plus warehouse and outdoor storage space for a total of approximately 3,770,000 square feet.
The Company considers its material properties to be in satisfactory repair. The St. Louis plant, which is part of the Company's Air Conditioning and Heating Products Group and manufactures products for the residential site-built and manufactured housing markets, experienced damage as a result of the flooding of the Mississippi River in July 1993. The plant was closed for several weeks, but returned to full operation in late August 1993. The Company believes that it has adequate insurance coverage and does not expect this event to have a material adverse effect on the Company's financial condition or results of operations. See Note 16L of Notes to Consolidated Financial Statements. 44 47 REGULATIONS AND ENVIRONMENTAL MATTERS; LEGAL PROCEEDINGS The Company and its operating units are subject to numerous federal, state and local laws and regulations, including environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with the material laws and regulations applicable to it. The Company and its subsidiaries or former subsidiaries are involved in current, and may become involved in future, remedial actions under federal and state environmental laws and regulations which impose liability on companies to clean up, or contribute to the cost of cleaning up, sites at which their hazardous wastes or materials were disposed of or released. Such claims may relate to properties or business lines acquired by the Company after a release has occurred. In other instances, the Company may be partially liable under law or contract to other parties that have acquired businesses or assets from the Company for past practices relating to hazardous substances management. The Company believes that all such claims asserted against it, or such obligations incurred by it, will not have a material adverse effect upon the Company's financial condition or results of operations. Expenditures in 1991 and 1992 to evaluate and remediate such sites were not material. However, the Company is presently unable to estimate accurately its ultimate financial exposure in connection with identified or yet to be identified remedial actions due among other reasons to: (i) uncertainties surrounding the nature and application of environmental regulations, (ii) the Company's lack of information about additional sites at which it may be listed as a potentially responsible party ("PRP"), (iii) the level of clean-up that may be required at specific sites and choices concerning the technologies to be applied in corrective actions and (iv) the time periods over which remediation may occur. Furthermore, since liability for site remediation is joint and several, each PRP is potentially wholly liable for other PRPs that become insolvent or bankrupt. Thus, the solvency of other PRPs could directly affect the Company's ultimate aggregate clean-up costs. In certain circumstances, the Company's liability for clean-up costs may be covered in whole or in part by insurance or indemnification obligations of third parties. The Company's HVAC products (and those of many of its competitors) utilize HCFC-22, a refrigerant that has been found to have an ozone-depleting effect when released into the atmosphere. Under current United States Environmental Protection Agency ("EPA") regulations, the use of HCFC-22 in new equipment must be phased out by January 1, 2010, and must be phased out for use in all equipment by January 1, 2020. The Air Conditioning and Refrigeration Institute, a trade association to which certain of the Company's operating units belong, has been working closely with refrigerant manufacturers and others in the industry to develop new refrigerants that are compatible with existing HVAC products. However, such new refrigerants may require the Company and its competitors to modify the design of their existing products, particularly residential and light commercial products. The availability of new refrigerants may also prompt an acceleration by the EPA of the phase-out dates. The costs of the substitution of alternative refrigerants are expected to be industry-wide product modification costs and accordingly these costs are not expected to have a material adverse impact on the Company. Various federal and state statutes, including the National Appliance Energy Conservation Act of 1987, as amended, impose energy efficient standards for certain of the Company's unitary air conditioning products. While the Company has been able to meet or exceed such standards to date, stricter standards in the future could require substantial research and development expense and capital expenditures to achieve compliance. In addition to the legal matters described above, the Company and its subsidiaries are parties to various legal proceedings incident to the conduct of their businesses. None of these proceedings is expected to have a material adverse effect, either individually or in the aggregate, on the Company's financial position or results of operations. See Note 8 of Notes to Consolidated Financial Statements. 45 48 MANAGEMENT
NAME AGE POSITION - --------------------------------------- --- --------------------------------------- Richard L. Bready...................... 49 Chairman, President and Chief Executive Officer Almon C. Hall.......................... 47 Vice President, Controller and Chief Accounting Officer Richard J. Harris...................... 57 Director, Vice President and Treasurer Siegfried Molnar....................... 53 Senior Vice President -- Group Operations Kenneth J. Ortman...................... 58 Senior Vice President -- Group Operations Kevin W. Donnelly...................... 39 Vice President, General Counsel and Secretary Dennis J. McGillicuddy................. 52 Director D. Stevens McVoy....................... 50 Director Philip B. Brooks....................... 79 Director J. Peter Lyons......................... 58 Director Barry Silverstein...................... 60 Director
The executive officers have served in the same or substantially similar executive positions with the Company for at least the past five years, except Mr. Bready, who became Chairman and Chief Executive Officer in 1990 after serving as President, Chief Operating Officer and Chief Financial Officer of the Company for more than the past five years; Mr. Molnar, who was President and Chief Operating Officer (1987-1990) of RB&W Corporation prior to joining the Company in March, 1990; and Mr. Ortman, who was Vice President, Operations and later Senior Vice President and General Manager of the Supply Division of the Wheelabrator Corporation division of Wheelabrator Technologies (1984-1988) prior to joining the Company in September, 1989. Mr. McGillicuddy has been President and a director and Mr. McVoy has been Vice President and a director, for more than the past five years, of the Coaxial Communications Companies, which they founded along with Mr. Silverstein. Mr. Brooks is a certified public accountant who retired from active practice in 1967. Mr. Lyons, for more than the past five years, has been President of The J. Peter Lyons Companies which has designed benefit plans and provided insurance services to the Company. Mr. Silverstein, for more than the past five years, has been the principal owner and a director of the Coaxial Communications Companies, which he founded along with Messrs. McGillicuddy and McVoy. Mr. Silverstein, for more than the past five years, has also been Chief Executive Officer (June 1985 to May 1988 and February 1991 to May 1991), Chairman of the Executive Committee (May 1988 to February 1991) and Chairman of the Board (June 1986 to May 1988 and February 1991 to the present) of CCX, Inc. a manufacturer of building products. Messrs. Bready, McGillicuddy and McVoy are also directors of CCX, Inc. In a civil injunction action filed March 12, 1990 in federal court in Washington, D.C., the Securities and Exchange Commission ("SEC") alleged that the Company violated Sections 10(b) and 13(d) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13d-1 thereunder in connection with reporting on a Schedule 13D its purchases of stock of Rexham Corporation ("Rexham") in January 1987. The complaint also alleged that Messrs. Harris and Bready and Ralph R. Papitto (former Chairman and Chief Executive Officer of the Company) aided and abetted the Company's violations of Section 13(d) and Rule 13d-1. For purposes of settling, each of the Company and Messrs. Papitto, Harris and Bready, without admitting or denying the SEC allegations, agreed to an entry of a permanent injunction enjoining them from future violations of the statutory provisions and rules they were alleged to have violated, and the Company agreed to pay into a fund created by the court $634,593 including interest, to compensate persons who sold Rexham securities during the four-day period the Company's Schedule 13D filing was allegedly delinquent. 46 49 PRINCIPAL SECURITYHOLDERS The following table sets forth the beneficial ownership of equity securities of the Company by those persons known by the Company to own beneficially more than 5% of its Common Stock or Special Common Stock, all as of December 31, 1993 except for the number of shares held by Gabelli Funds, Inc. as to which the date is November 2, 1992 and by UBS Asset Management (New York) Inc. as to which the date is December 31, 1992.
COMMON STOCK SPECIAL COMMON STOCK ------------------------ ------------------------ AMOUNT AND AMOUNT AND NATURE OF PERCENT NATURE OF PERCENT BENEFICIAL OF BENEFICIAL OF NAME(1) OWNERSHIP(2) CLASS OWNERSHIP(2) CLASS - --------------------------------------- ------------ ------- ------------ ------- Richard L. Bready(3)(4)................ 1,738,759 14.5 318,327 51.7 Richard J. Harris(4)................... 287,376 2.4 50,106 8.7 Dennis J. McGillicuddy(3).............. 1,501,959 12.6 234,564 40.6 D. Stevens McVoy(3).................... 1,501,959 12.6 234,564 40.6 Barry Silverstein(3)................... 1,501,959 12.6 234,564 40.6 All directors and executive officers as a group(3)(4)(5)..................... 1,914,721 15.8 330,957 53.3 Bready Associates(3)................... 1,501,959 12.6 234,564 40.6 Phoenix Associates III(3).............. 1,501,959 12.6 234,564 40.6 Gabelli Funds, Inc. One Corporate Center Rye, NY 10580(6)..................... 2,031,215 16.7 24,631 4.3 UBS Asset Management (New York) Inc. 1211 Avenue of the Americas, New York, NY 10036(6)................ 1,079,400 9.0 -- --
- --------------- (1) The address of all such persons unless otherwise stated is c/o Nortek, Inc., 50 Kennedy Plaza, Providence, Rhode Island 02903-2360. The address of Mr. McVoy, Bready Associates and Phoenix Associates III is 3770 East Livingston Avenue, Columbus, Ohio 43227. The address of Messrs. McGillicuddy and Silverstein is 5111 Ocean Boulevard, Sarasota, Florida 34242. Certain of the shares shown in the table are shares as to which the persons named in the table have the right to acquire beneficial ownership, as specified in Rule 13d-3(d)(1) promulgated under the Exchange Act. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially held by them, subject to community property laws where applicable. (2) Includes shares subject to currently exercisable options in the case of Messrs. Bready (37,500 shares of Special Common Stock) and Harris (30,000 shares of Common Stock). Does not include future rights to acquire shares upon the exercise of options in the case of Messrs. Bready (500,000 shares of Common Stock) and Harris (30,000 shares of Common Stock). Includes 200 shares of Common Stock and 33 shares of Special Common Stock beneficially owned by Mr. McGillicuddy's wife, as to which Mr. McGillicuddy disclaims beneficial ownership, and 869 shares of Common Stock beneficially owned by Mr. McVoy's wife, as to which he disclaims beneficial ownership. (3) Mr. Bready holds a 15% interest, Mr. McGillicuddy a 19% interest, Mr. McVoy a 9% interest and Mr. Silverstein a 57% interest in Bready Associates, a partnership which directly held 1,059,291 shares of Common Stock at December 31, 1993. Under the terms of the partnership agreement of Bready Associates, the partnership also exercises sole voting and dispositive power over shares of Common and Special Common held by the partners and their affiliates. Phoenix Associates III is a partnership whose general partners are Messrs. McGillicuddy (a 22.5% interest), McVoy (a 10% interest) and Silverstein (a 67.5% interest). As of December 31, 1993 Phoenix Associates III directly held 183,700 shares of Common Stock. Accordingly, all shares held by the partnerships, the partners and their affiliates are included in the table as being beneficially owned by Messrs. Bready, McGillicuddy, McVoy and Silverstein and by the partnerships and are also included under shares held by directors and executive officers as a group. 47 50 (4) Various defined benefit pension plans of the Company and certain of its subsidiaries held approximately 2.0% of the outstanding Common Stock of the Company and 8.0% of the outstanding Special Common Stock at December 31, 1993. Under the provisions of the trust agreement governing the plans, the Company may instruct the trustee regarding the acquisition and disposition of plan assets and the voting of securities held by the trust. Accordingly, although the directors and officers disclaim beneficial ownership of such shares, the shares are included in the table as being beneficially owned by Messrs. Bready and Harris and are also included under shares held by directors and executive officers as a group. (5) Includes 127,200 shares of Common Stock and 43,500 shares of Special Common Stock that directors and executive officers as a group have a right to acquire upon the exercise of currently exercisable options. Does not include future rights of executive officers to acquire shares upon exercise of options totalling 606,000 shares of Common Stock. Includes 200 shares of Common Stock and 33 shares of Special Common Stock owned by Mr. McGillicuddy's wife as to which Mr. McGillicuddy disclaims beneficial ownership, and 869 shares of Common Stock owned by Mr. McVoy's wife as to which Mr. McVoy disclaims beneficial ownership. Except as set forth in the above table, the Company knows of no persons who at December 31, 1993, beneficially owned more than 5% of the shares of Common Stock or Special Common Stock of the Company outstanding on that date. (6) The information is based on filings made with the Commission and for Gabelli Funds, Inc. includes 234,915 shares of Common Stock which may be acquired upon the exercise of conversion rights of the Company's 7 1/2% Convertible Debentures due 2006 at $21.56 per share. DESCRIPTION OF THE NOTES GENERAL The Notes will be issued pursuant to an indenture (the "Indenture") to be dated as of , 1994 between the Company and State Street Bank and Trust Company, a Massachusetts banking corporation, as trustee (the "Trustee"), a form of which has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. The terms of the Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act") as in effect on the date of the Indenture. The Notes are subject to all such terms, and holders of the Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of certain provisions of the Indenture, while complete in all material respects, does not purport to describe all terms or provisions thereof and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. The definitions of certain terms used in the following summary are set forth below under "Certain Definitions." The Notes will be senior subordinated obligations of the Company, subordinate in right of payment to all Senior Indebtedness of the Company and senior in right of payment to, or pari passu in right of payment with, other subordinated indebtedness of the Company. The Notes will be effectively subordinated to all indebtedness and other liabilities of the Company's Subsidiaries. At October 2, 1993, after giving pro forma effect to the Refinancing, the Company had no outstanding Senior Indebtedness. At October 2, 1993, the aggregate liabilities of the Company's Subsidiaries, principally consisting of trade payables and accruals, were $146.0 million. In the future, subject to the terms of the Indenture, the Company may incur or issue Senior Indebtedness, which may be secured by Liens on assets and properties of the Company and its Subsidiaries (without any obligation of the Company or any of its Subsidiaries to provide any Liens in favor of Holders of the Notes or to guarantee the payment of the Notes). See Limitation on Liens covenant under "Certain Covenants" below. However, where a Subsidiary of the Company guarantees the payment of Indebtedness of the Company, the Company will be required to cause such Subsidiary to guarantee on a senior subordinated basis payment of the Company's obligations under the Notes. See the Limitation on Guaranties by Subsidiaries covenant under "Certain Covenants" below. Although the Indenture contains certain covenants and provisions that afford certain protections to Holders of the Notes, such covenants and provisions would not necessarily afford the Holders of the Notes 48 51 protection in the event of a highly leveraged transaction involving the Company, including a leveraged transaction initiated or supported by the Company, the management of the Company or any affiliate of either party. See "Certain Covenants" below. PRINCIPAL, MATURITY AND INTEREST The Notes are limited in aggregate principal amount to $190,000,000 (or $218,500,000 if the Underwriters' over-allotment option is exercised in full) and will mature on , 2004. Interest on the Notes will accrue at the rate of % per annum and will be payable semi-annually on each and commencing on , 1994, to holders of record of the Notes ("Holders") on the immediately preceding or , whether or not a business day. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from , 1994. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal of, premium, if any, and interest on the Notes will be payable at the office or agency of the Company maintained for such purpose or, at the option of the Company, payment of interest and principal may be made by check mailed to the Holders at their respective addresses set forth in the register of Holders. The Notes will be issued only in registered form, without coupons, in denominations of $1,000 and integral multiples thereof. OPTIONAL REDEMPTION The Notes will be redeemable by the Company, in whole or in part, on or after , 1999 at the following redemption prices (expressed as a percentage of the principal amount) if redeemed during the 12-month period beginning of the years indicated below, in each case, together with accrued interest thereon to the redemption date:
YEAR PERCENTAGE ---------------------------------------------------------------- 1999.................................................. % 2000.................................................. % 2001.................................................. % 2002 and thereafter................................... 100%
Notice of the redemption must be mailed by first class mail at least 15 but not more than 60 days before the redemption date to each Holder of the Notes to be redeemed at such Holder's registered address. If any Note is to be redeemed in part only, the notice of redemption relating to that Note will state the principal amount thereof to be redeemed and a new Note in principal amount equal to the unredeemed portion will be issued in the name of the Holder upon cancellation of the original Note. On or after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. If less than all the outstanding Notes are to be redeemed at any time, selection of the Notes for redemption will be made by the Trustee by lot or, if such method is prohibited by the rules of any stock exchange on which the Notes are then listed, any other method the Trustee considers reasonable, provided that Notes shall be redeemed in principal amounts of $1,000 or integral multiples thereof. CHANGE OF CONTROL Upon the occurrence of a Change of Control (as defined below), each Holder will have the right to require the repurchase of all or any part of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at a purchase price equal to 101% of the aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase. Immediately following any Change of Control, the Company is required to mail a notice to the Trustee and to each Holder stating: (i) that the Change of Control Offer is being made pursuant to the Repurchase Upon Change of Control covenant of the Indenture and that all Notes tendered will be accepted for payment; (ii) the purchase price and the purchase date (the "Change of Control Payment Date"), which may not be earlier than 30 days or no later than 60 days from the date such notice is mailed; (iii) that any Note not 49 52 tendered will continue to accrue interest; (iv) that, unless the Company defaults in the payment therefor, all Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest on and after the Change of Control Payment Date; (v) that Holders electing to have any Notes purchased pursuant to a Change of Control Offer will be required to surrender the Notes to be purchased to the Paying Agent at the address specified in the notice prior to the close of business on the third business day preceding the Change of Control Payment Date; (vi) that Holders will be entitled to withdraw Notes they have tendered on the terms and conditions set forth in such notice; and (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that the portion of each Note purchased and each such new Note issued shall be in a principal amount of $1,000 or an integral multiple thereof. On the Change of Control Payment Date, the Company will (i) accept for payment all Notes or portions thereof tendered pursuant to the Change of Control Offer and not withdrawn, (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so tendered and not withdrawn, and (iii) deliver or cause to be delivered to the Trustee, all Notes so tendered and not withdrawn together with an officers' certificate specifying the Notes or portions thereof tendered to the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered and not withdrawn payment in an amount equal to the purchase price for such Notes, and the Trustee will promptly authenticate and mail to such Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered; provided that each such new Note shall be in a principal amount of $1,000 or an integral multiple thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act, and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes triggered by a Change of Control. A "Change of Control" will be deemed to have occurred at such time as any of the following events occur: (i) there is consummated any consolidation or merger of the Company with or into another corporation, or all or substantially all of the assets of the Company are sold, leased or otherwise transferred or conveyed to another Person (other than pursuant to a bona fide pledge of assets to secure Indebtedness made in accordance with the Indenture), and the holders of the Company's common stock outstanding immediately prior to such consolidation, merger, sale, lease or other transfer or conveyance or one or more Exempt Persons do not hold, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or at least a majority of the Equity Interests of such Person; (ii) there is filed a report on Schedule 13D or 14D-1 (or any successor schedule, form or report) pursuant to the Exchange Act disclosing that any person (defined, solely for the purposes of the Change of Control provision, as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act or any successor provision to either of the foregoing) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of 50% or more of the combined voting power of all the Company's then outstanding securities entitled to vote generally for the election of directors; provided, however, that a person shall not be deemed to be the beneficial owner of, or to own beneficially, (A) any securities tendered pursuant to a tender or exchange offer made by or on behalf of such person or any of such person's Affiliates or associates until such tendered securities are accepted for purchase or exchange thereunder, or (B) any securities if such beneficial ownership (1) arises solely as a result of a revocable proxy delivered in response to a proxy or consent solicitation made pursuant to the applicable rules and regulations under the Exchange Act, and (2) is not also then reportable on Schedule 13D (or any successor schedule) under the Exchange Act; or (iii) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. 50 53 Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred under clause (ii) of the immediately preceding paragraph solely by virtue of the Company, any Subsidiary of the Company, any employee stock ownership plan or any other employee benefit plan of the Company or any such Subsidiary, any other person holding securities of the Company for or pursuant to the terms of any such employee benefit plan or an Exempt Person, filing or becoming obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) under the Exchange Act disclosing beneficial ownership by it of securities of the Company, whether in excess of 50% of the combined voting power of the Company's then outstanding securities entitled to vote generally for the election of directors or otherwise. The Change of Control purchase feature may in certain circumstances make more difficult or discourage a takeover of the Company and, thus, the removal of the incumbent management. The Change of Control purchase feature, however, is not the result of management's knowledge of any specific effort to accumulate shares of Common Stock or to obtain control of the Company by means of a merger, tender offer, solicitation or otherwise, or part of a plan by management to adopt a series of antitakeover provisions. Instead, the Change of Control purchase feature is a standard term contained in other similar debt offerings and the terms of such feature result from negotiations between the Company and the Underwriters. If a Change of Control were to occur, there can be no assurance that the Company would have sufficient funds to pay the Change of Control purchase price for all Notes tendered by Holders thereof. In addition, the Company's ability to make such payment may be limited by the terms of then-existing borrowing and other agreements applicable to the Company or its Subsidiaries. Certain existing agreements applicable to certain of the Company's Subsidiaries restrict the ability of these Subsidiaries to make distributions to the Company. See "Description of Other Obligations." The failure of the Company to pay the Change of Control purchase price to Holders of Notes when due, if continued for 30 days after receipt of written notice of Default from the Trustee or the Holders of at least 25% of the aggregate principal amount of the Notes then outstanding, specifying such Default and requiring that it be remedied, would constitute an Event of Default under the terms of the Indenture. See "Events of Default and Remedies." Neither the Board of Directors of the Company nor the Trustee may waive the Change of Control repurchase feature of the Indenture. After giving effect to the Refinancing, the Company will have no outstanding Senior Indebtedness that contains change of control repurchase provisions similar to the Change of Control repurchase feature applicable to the Notes. One of the events that constitute a Change of Control under the Indenture is a sale, lease or other transfer or conveyance of all or substantially all of the assets of the Company. There is no precise established definition under applicable law of the term "substantially all" and, accordingly, if the Company were to engage in transactions in which it disposed of less than all of its assets, a question could arise as to whether such disposition was of "substantially all" of its assets and whether because of such disposition the Company was required to repurchase the Notes as a result of a Change of Control. SUBORDINATION The payment of the principal of, premium, if any, and interest on the Notes is subordinated in right of payment, as set forth in the Indenture, to the prior payment in full of all Senior Indebtedness. Upon any bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, or any assignment for the benefit of creditors or any marshalling of the assets and liabilities of the Company or any distribution to creditors of the Company in a liquidation or dissolution of the Company, the holders of Senior Indebtedness, shall be entitled to receive payment in full in cash or, at the option of the holders of the Senior Indebtedness, cash equivalents of such Senior Indebtedness (including, in the case of Specified Senior Indebtedness, interest accruing after the commencement of any such proceeding at the rate specified in the instrument evidencing the applicable Specified Senior Indebtedness, whether or not a claim therefor is allowed, to the date of payment of such Specified Senior Indebtedness), before the Holders shall be entitled to receive any payment of principal of, premium, if any, or interest on the Notes or receive any distributions to which the Holders would otherwise be entitled, except that Holders may receive 51 54 securities that (i) are subordinated to Senior Indebtedness and to any securities issued in exchange for Senior Indebtedness to at least the same extent as the Notes are subordinated to Senior Indebtedness and (ii) have no maturity or mandatory prepayment prior to the final maturity of any securities issued in exchange for Senior Indebtedness. The Company may not pay principal of, premium, if any, or interest on the Notes and may not make any deposit pursuant to the provisions described under "Discharge of the Indenture and the Notes" below or acquire any Notes for cash or property if (i) a default in the payment of the principal of, premium, if any, interest, fees or expenses on any Senior Indebtedness occurs and is continuing (a "Payment Default") and the Trustee or the Paying Agent receives a notice of the default from a Person who may give it pursuant to the Indenture; or (ii) a default, other than a Payment Default, on any Specified Senior Indebtedness occurs and is continuing that then permits the holders (or the agent) of such Specified Senior Indebtedness to accelerate its maturity immediately and without any further notice (other than notice of such permitted acceleration, whether or not such acceleration has occurred) or grace periods (a "Non-Payment Default"), and such default is either the subject of judicial proceedings or the Trustee or the Paying Agent receives a notice of the default from a Person who may give it pursuant to the Indenture. The Trustee or the Paying Agent shall resume payments (including any missed payments) on the Notes and may make any deposit pursuant to the provisions described under "Discharge of the Indenture and the Notes" below or acquire them (i) in the case of a Payment Default, when the default is cured or waived, any such acceleration is rescinded or the Senior Indebtedness to which such default relates or which has been accelerated is discharged, or when the right under the Indenture to prevent any such payment is waived by written notice to the Trustee by or on behalf of the holders of such Senior Indebtedness, or (ii) in the case of a Non-Payment Default, at the end of the period (the "Payment Blockage Period") ending on the earlier of (a) when the default is cured or waived, the Specified Senior Indebtedness to which such default relates is discharged or such Payment Blockage Period is terminated by written notice to the Trustee by or on behalf of the holders of such Specified Senior Indebtedness, or (b) the 179th day after the receipt by the Trustee or the Paying Agent of the notice commencing such Payment Blockage Period. Not more than one Payment Blockage Period may be commenced with respect to the Notes during any period of 360 consecutive days, and there shall be a period of at least 181 consecutive days in each period of 360 consecutive days when no Payment Blockage Period is in effect. In addition, no default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Specified Senior Indebtedness and which was known to the holders (or the agent) of such Specified Senior Indebtedness on such date of commencement shall be made the basis for the commencement of a second Payment Blockage Period by the holders (or the agent) of such Specified Senior Indebtedness whether or not within a period of 360 consecutive days unless such default shall have been cured or waived for a period of not less than 90 consecutive days. Nothing contained in the Indenture shall limit the right of the Trustee or the Holders of Notes to take any action to accelerate the maturity of the Notes or to pursue any other rights or remedies thereunder or under applicable law; provided, however, that all Senior Indebtedness of the Company then or thereafter due and payable, shall first be paid in full in cash or, at the option of the holders of the Senior Indebtedness, cash equivalents before the Holders shall be entitled to receive any payment of principal of, premium, if any, or interest on the Notes. Notwithstanding the foregoing, any acceleration of the maturity of the Notes or other remedies pursued under the Indenture or under applicable law due to the default by the Company to make a payment of principal of, premium, if any, or interest on the Notes required by the Indenture and resulting from the operation of the foregoing subordination provisions relating to a Payment Default or a Non-Payment Default shall be automatically rescinded or discontinued to the extent permitted by applicable law and all Events of Default which permitted the acceleration of the Notes or the pursuit of other remedies under the Indenture or under applicable law shall be deemed to be automatically and permanently cured to the extent permitted by applicable law if (i) the payment or payments the omission of which gave rise to the Event of Default is or are made within 179 days after the date on which the Trustee or the Paying Agent received notice of the default or defaults on the Senior Indebtedness and (ii) at the time of such automatic rescission no other 52 55 Event of Default or Default shall have occurred and be continuing. Such automatic rescission shall be effective as of the date the conditions specified in clauses (i) and (ii) above are satisfied. In the event that the Company makes any payment to the Trustee, or a distribution is made to the Holders, on account of principal of, premium, if any, or interest on the Notes at a time when such payment or distribution is prohibited by the subordination provisions of the Indenture, such payment shall be held by the Trustee, and such distribution shall be held by such Holders, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Indebtedness (pro rata as to each of such holders on the basis of the respective amounts of Senior Indebtedness held by them) or their representative, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in accordance with the terms thereof, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. By reason of the subordination provisions described above, in the event of insolvency of the Company, funds that would otherwise be payable to the Holders may be paid or turned over to the holders of Senior Indebtedness to the extent necessary to pay the Senior Indebtedness in full, and the Company may be unable to make all payments due under the Notes. Accordingly, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than the Holders, and creditors of the Company who are not holders of Senior Indebtedness or the Holders of the Notes may recover less, ratably, than holders of Senior Indebtedness and may recover more, ratably, than the Holders. The Notes will be structurally subordinated to all liabilities, including trade payables and Capital Lease Obligations, of the Company's Subsidiaries (except for any Subsidiary that is a Subsidiary Guarantor, if any, and then the obligation of such Subsidiary Guarantor under its guaranty of payment of the Notes will be contractually subordinated to the prior payment of Guarantor Senior Indebtedness of such Subsidiary Guarantor). The right of the Company to participate as a stockholder in any distribution of assets of any such Subsidiary upon its liquidation or reorganization or winding up (and thus the ability of Holders of the Notes to benefit as creditors of the Company) is subject to the prior claims of creditors of any such Subsidiary regardless of whether such creditors are holders of Senior Indebtedness, unless such creditors have expressly agreed that their claims are subordinate to the claims of the Holders of the Notes or such Subsidiary is a Subsidiary Guarantor (and then the obligation of such Subsidiary Guarantor under its guaranty of payment of the Notes will be contractually subordinated to the prior payment of Guarantor Senior Indebtedness of such Subsidiary Guarantor). The operations of the Company are conducted through its Subsidiaries. The subordination provisions described above will cease to be applicable upon the effectiveness of any defeasance of the Notes pursuant to the provisions described under "Discharge of the Indenture and the Notes" below. CERTAIN COVENANTS Limitation on Restricted Payments. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend on, or make any distribution in respect of the Company's or any such Subsidiary's Capital Stock or other Equity Interests, except to the extent any such dividend or other distribution is (a) actually received by the Company or a Subsidiary thereof or (b) payable solely in shares of Capital Stock or other Equity Interests (other than Redeemable Stock or Capital Stock convertible into any security other than such Capital Stock) of the Company or such Subsidiary, as the case may be; (ii) purchase, redeem or otherwise acquire or retire for value any Capital Stock or other Equity Interests of the Company or any of its Subsidiaries (other than Capital Stock or other Equity Interests held by the Company or any Wholly-Owned Subsidiary of the Company); (iii) prepay, repay, purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to a scheduled repayment date, scheduled mandatory sinking fund payment date or maturity date any Indebtedness of the Company that is subordinate in right of payment to the Notes (other than in connection with any refinancing of such Indebtedness permitted by the Indenture); or (iv) make any Investment other than Permitted Investments (each such action described in any of clauses (i) through (iv) above being referred to as a "Restricted Payment"), if, at 53 56 the time of such Restricted Payment, (1) a Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof; (2) such Restricted Payment, together with the aggregate amount of all other Restricted Payments declared or made on or after the issue date of the Notes (including, without duplication, Restricted Payments described in the next succeeding paragraph), exceeds the sum of (A) 50% of the cumulative Consolidated Net Income of the Company for the period commencing on January 1, 1994 through the last day of the fiscal quarter immediately preceding the date of such proposed Restricted Payment (or, if the Consolidated Net Income of the Company shall be a deficit, minus 100% of such deficit); (B) the aggregate net cash proceeds, and the Fair Market Value of any property other than cash, if any, received by the Company (other than from a Subsidiary of the Company) from the issuance and sale of either Capital Stock of the Company (other than Redeemable Stock or any Capital Stock convertible into any security other than such Capital Stock) or Indebtedness that is convertible into Capital Stock of the Company (other than Redeemable Stock or any Capital Stock convertible into any security other than such Capital Stock), to the extent such Indebtedness is actually converted into such Capital Stock; and (C) $20,000,000; or (3) the Company could not incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of the Limitation on Additional Indebtedness covenant. The foregoing provisions shall not prohibit, so long as no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such date of declaration such payment would have complied with the provisions of the Indenture; or (ii) the declaration and payment by a Subsidiary of the Company which is required to file periodic reports under Section 13 or 15(d) of the Exchange Act (a "Reporting Subsidiary") of dividends on its common stock to all holders of such common stock on a pro rata basis out of funds legally available for the payment of dividends. Limitation on Other Senior Subordinated Indebtedness. The Company shall not incur, issue, create, assume, guarantee or otherwise become liable for any Indebtedness that is contractually subordinated in right of payment to any Senior Indebtedness and contractually senior in right of payment to the Notes. Limitation on Additional Indebtedness. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to (each, an "incurrence") any Indebtedness, including, without limitation, Acquired Indebtedness; provided, however, that the Company may incur Indebtedness if (i) no Default or Event of Default shall have occurred and be continuing at the time or after giving effect to the incurrence of such Indebtedness and (ii) the Consolidated Cash Flow Coverage Ratio of the Company for the four full fiscal quarters ending immediately prior to the date of the incurrence of such additional Indebtedness is at least 2.0 to 1.0. The foregoing limitations shall not apply, without duplication, to: (i) Existing Indebtedness; (ii) Indebtedness of (a) the Company represented by the Notes or (b) any Subsidiary Guarantor under any Subsidiary Guaranty; (iii) Indebtedness of the Company under the Company Credit Facility, up to $60,000,000 in aggregate outstanding principal amount (including the available undrawn amount of any letters of credit issued thereunder) at any time; (iv) Indebtedness of (a) Broan Limited under the Broan Limited Credit Facility, provided that such Indebtedness shall not exceed at any time $20,100,000 (Canadian) in aggregate outstanding principal amount (including the available undrawn amount of any letters of credit issued under such facility) and shall be secured only by Liens on assets of Broan Limited and (b) the Company under its limited guaranty of not more than $10,000,000 (Canadian) of the Indebtedness of Broan Limited under the Broan Limited Credit Facility; 54 57 (v) Indebtedness of Aubrey Manufacturing, Inc. or Broan Mfg. Co., Inc. not exceeding at any time $3,000,000 in aggregate outstanding principal amount and, if secured, secured only by Liens on certain real property owned by such Persons; (vi) Indebtedness of Universal-Rundle Corporation for working capital or joint venture investment purposes not exceeding at any time $4,000,000 in aggregate outstanding principal amount and, if secured, secured only by Liens on assets of Universal-Rundle Corporation; (vii) Indebtedness of the Company to any of its Wholly-Owned Subsidiaries, provided that such Indebtedness is contractually subordinated in right of payment to the Notes, or Indebtedness of any Subsidiary of the Company to the Company or to any other Wholly-Owned Subsidiary of the Company, provided that if the Company or any of its Subsidiaries incurs Indebtedness to a Wholly-Owned Subsidiary of the Company which, at any time after such incurrence, ceases to be a Wholly-Owned Subsidiary, then all such Indebtedness in excess of the amount of Allowable Subsidiary Loans shall be deemed to have been incurred at the time such former Wholly-Owned Subsidiary ceases to be a Wholly-Owned Subsidiary of the Company; (viii) Indebtedness of a Subsidiary of the Company under a guaranty of Indebtedness of the Company (other than the Notes) which causes such Subsidiary to become a Subsidiary Guarantor pursuant to the provisions of the Limitation on Guaranties by Subsidiaries covenant; (ix) Indebtedness of the Company and its Subsidiaries under Interest Rate Agreements, Currency Agreements and Commodity Agreements, provided that (a) in the case of Interest Rate Agreements, such Interest Rate Agreements relate to Indebtedness permitted to be incurred under the Indenture and the notional principal amount of the obligations of the Company and its Subsidiaries under such Interest Rate Agreements does not exceed the principal amount of such Indebtedness, and (b) in the case of Currency Agreements that relate to other Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and its Subsidiaries outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (x) Indebtedness of the Company under its guaranty of payment of the principal of and interest on and certain expenses relating to certain industrial revenue bonds issued for the benefit of Spaulding Composites Company, Inc.; (xi) Indebtedness of the Company and its Subsidiaries under guaranties of Indebtedness incurred in the ordinary course of business of suppliers, licensees, franchisees or customers; (xii) Indebtedness incurred by the Company and its Subsidiaries consisting of Purchase Money Obligations and Capital Lease Obligations not exceeding at any time $15,000,000 in aggregate outstanding principal amount; (xiii) Acquired Indebtedness incurred by a Subsidiary of the Company to the extent such Indebtedness could have been incurred by the Company under the limitations set forth in the preceding paragraph, after giving pro forma effect to the acquisition of such Subsidiary by the Company; (xiv) Indebtedness of the Company and its Subsidiaries in respect of performance bonds, bankers' acceptances and surety or appeal bonds provided in the ordinary course of business; (xv) other Indebtedness of the Company and its Subsidiaries not to exceed at any time $10,000,000 in aggregate outstanding principal amount; (xvi) Liens permitted under the Limitation on Liens covenant; and (xvii) Indebtedness ("Refinancing Indebtedness") created, incurred, issued, assumed or guaranteed in exchange for, or the proceeds of which are used to extend, refinance, renew, replace, substitute or refund ("refinance"), Indebtedness described in the preceding paragraph or referred to in clauses (i) through (xv) above; provided, however, that (a) the principal amount of such Refinancing Indebtedness (or if such Refinancing Indebtedness is issued at a price less than the principal amount thereof, the 55 58 original issue amount of such Refinancing Indebtedness), together with the principal amount of any remaining Indebtedness under the agreement or instrument governing the Indebtedness being refinanced, shall not exceed (1) in the case of Refinancing Indebtedness incurred to refinance Indebtedness permitted to be incurred under any of clauses (iii) through (vi) and (xv) above, an amount which, when added to all other Indebtedness outstanding under such clause, shall not exceed the aggregate amount of Indebtedness permitted to be incurred under such clause, and (2) in the case of Refinancing Indebtedness incurred to refinance Indebtedness permitted to be incurred under any of clauses (i), (ii) and (vii) through (xiv) above, the aggregate amount of such Indebtedness outstanding at the time of such refinancing, in either case, after giving effect to any mandatory reductions in principal or other repayments required under the agreement or instrument governing such Indebtedness; (b) except in the case of Refinancing Indebtedness that refinances all of the Notes outstanding at the time of such refinancing, such Refinancing Indebtedness shall be subordinated in right of payment to the Notes at least to the same extent as the Indebtedness to be refinanced; (c) in the case of Refinancing Indebtedness incurred to refinance (1) any Existing Indebtedness, (2) the Notes, or (3) Indebtedness that ranks pari passu with or junior in right of payment to the Notes, such Refinancing Indebtedness shall have an Average Life and Stated Maturity equal to, or greater than, the Average Life and Stated Maturity of the Indebtedness to be refinanced at the time of such incurrence; (d) the proceeds of such Refinancing Indebtedness, if incurred by a Subsidiary of the Company, shall not be used to refinance Indebtedness of the Company or another Subsidiary of the Company; and (e) the incurrence of any such Refinancing Indebtedness is substantially simultaneous with the refinancing of the Indebtedness to be refinanced. Any Indebtedness incurred pursuant to this Limitation on Additional Indebtedness covenant shall be subject to the limitations set forth in the Limitation on Other Senior Subordinated Indebtedness covenant. For purposes of this Limitation on Additional Indebtedness covenant, the accretion of original issue discount on Indebtedness shall not be deemed to be an incurrence of Indebtedness. Limitation on Sale or Issuance of Capital Stock of Subsidiaries. The Company shall not (i) sell or otherwise convey or dispose of any Equity Interests of any of its Subsidiaries except to the Company or a Wholly-Owned Subsidiary of the Company or as permitted by the Limitation on Liens covenant and the Limitation On Use of Proceeds from Asset Sales covenant; or (ii) permit any of its Subsidiaries to issue or sell to any Person except the Company or a Wholly-Owned Subsidiary of the Company (a) any preferred stock of such Subsidiaries or (b) except as permitted by the Limitation On Use of Proceeds from Asset Sales covenant, any other Equity Interests of such Subsidiary. Limitation on Liens. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any of its assets or properties, now owned or hereafter acquired, or any income or profits therefrom, securing any Indebtedness that is pari passu with or contractually subordinated in right of payment to the Notes unless the Company or such Subsidiary, as the case may be, simultaneously executes and delivers a supplemental indenture to the Indenture providing that (i) the Notes are secured by such Lien equally and ratably with any and all other Indebtedness secured by such Lien or (ii) in the case of Indebtedness contractually subordinated in right of payment to the Notes, the Lien securing such Indebtedness shall be subordinate in right of payment to the Lien securing the Notes to the same extent that such Indebtedness is subordinated to the Notes. The foregoing limitations shall not apply to: (i) Liens securing Acquired Indebtedness incurred by the Company or any Subsidiary of the Company and permitted under the Limitation on Additional Indebtedness covenant, provided that such Liens attach solely to the assets acquired and do not extend to or cover any property or assets of the Company or any of its Subsidiaries; (ii) Liens securing Refinancing Indebtedness incurred to refinance Indebtedness that has been secured by a Lien permitted under the Indenture, provided that such Liens do not extend to or cover any property or assets of the Company or any of its Subsidiaries not securing the Indebtedness so refinanced; (iii) Liens securing Existing Indebtedness; or (iv) Permitted Liens. Limitation on Certain Restrictions Affecting Subsidiaries. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or enter into or otherwise cause or permit to exist or become effective any agreement with any Person that would cause any consensual encumbrance or restriction on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock 56 59 or any other interest or participation in, or measured by, its profits, owned by the Company or any of its Subsidiaries, (ii) pay or repay any Indebtedness owed to the Company or any of its Subsidiaries which owns Equity Interests in such Subsidiary, (iii) make loans or advances to the Company or any of its Subsidiaries which owns Equity Interests in such Subsidiary, (iv) transfer any of its properties or assets to the Company or any of its Subsidiaries which owns Equity Interests in such Subsidiary or (v) guarantee any Indebtedness of the Company or any other Subsidiary of the Company except, in each case, for such encumbrances or restrictions existing under or by reason of (a) applicable law, (b) the Indenture, (c) customary nonassignment provisions of any lease governing a leasehold interest of the Company or any of its Subsidiaries, (d) any instrument governing Indebtedness of a Person acquired by the Company or any of its Subsidiaries at the time of such acquisition, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person so acquired, (e) agreements existing as of the issue date of the Notes, (f) the Company Credit Facility and (g) any agreement effecting a refinancing of Indebtedness issued pursuant to any agreement or instrument referred to in clause (d) or (e) above, provided that the terms and conditions of any such encumbrances and restrictions are not materially less favorable to the Holders than those under the agreement or instrument evidencing the Indebtedness being refinanced. The foregoing shall not restrict the ability of any Subsidiary of the Company to grant any Lien to the extent otherwise permitted in the Indenture. Repurchase upon Change of Control. See "Change of Control" above. Limitation on Use of Proceeds from Asset Sales. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, consummate any Asset Sale unless (i) the Company or such Subsidiary, as the case may be, receives consideration at the time of any such Asset Sale having a value (including the Fair Market Value of any non-cash consideration) at least equal to the Fair Market Value of the securities or assets being sold or otherwise disposed of, (ii) at least 75% of the consideration from such Asset Sale is received at the closing in the form of cash, Cash Equivalents (together with cash, "Cash Proceeds") or indebtedness for borrowed money of the Company or such Subsidiary that is assumed by the transferee of any such assets or any such indebtedness of any Subsidiary of the Company whose stock is purchased by the transferee, and (iii) with respect to any Asset Sale involving the Equity Interests of any Wholly-Owned Subsidiary of the Company or, in the case of subclause (b) below, any Subsidiary of the Company that was a Wholly-Owned Subsidiary of the Company prior to the first public offering referred to in such subclause (b), (a) the Company or another Wholly-Owned Subsidiary of the Company shall in such Asset Sale sell all of the Equity Interests it owns of such Subsidiary or receive Cash Proceeds at the closing of such Asset Sale in an amount not less than 75% of the Fair Market Value of all Equity Interests of such Subsidiary owned by the Company or such other Wholly-Owned Subsidiary of the Company, whether or not sold, or (b) the Company or another Subsidiary of the Company may sell, or such Subsidiary may issue, in such Asset Sale not more than 20% of the shares of common stock of such Subsidiary in one or more public offerings for cash only if, as of the date of such Asset Sale, after giving pro forma effect to such Asset Sale by excluding, in the determination of Consolidated Cash Flow of the Company for the four full consecutive fiscal quarters ending immediately prior to such Asset Sale, that portion of the Consolidated Cash Flow accounted for by such Subsidiary equal to the portion of the common stock of such Subsidiary being sold or issued in such Asset Sale, the Company could incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of the Limitation on Additional Indebtedness covenant. Notwithstanding anything to the contrary in the preceding sentence, the sale by the Company of all Equity Interests of Dixieline Lumber Company or all or substantially all of the assets of Dixieline Lumber Company shall not be deemed to be an Asset Sale except to the extent that the Company or any of its Subsidiaries makes after the issue date of the Notes any Investment in Dixieline Lumber Company, in which event the aggregate amount of all such Investments shall be deemed Net Cash Proceeds without regard to the $5,000,000 exception set forth in the definition of the term Asset Sale in the Indenture. Any Net Cash Proceeds (a) in excess of the amount of cash applied by the Company or any Subsidiary of the Company during the period beginning six months prior to the date of the Asset Sale (but not prior to the issue date of the Notes) and ending 12 months after the date of such Asset Sale to purchase any business that is, or any properties and assets used primarily in, the same or a related business as those owned and operated by the Company and its Subsidiaries as of the issue date of the Notes or at the date of 57 60 such Asset Sale and (b) not applied within 12 months after the date of the Asset Sale to permanently reduce Senior Indebtedness shall be deemed to be "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10,000,000, the Company shall make an offer (the "Excess Proceeds Offer") to apply the Excess Proceeds to purchase the Notes. The Excess Proceeds Offer must be in cash in an amount equal to 100% of the principal amount plus accrued and unpaid interest to the date fixed for the closing of such offer, substantially in accordance with the procedures for a Change of Control Offer described in the Repurchase upon Change of Control covenant. To the extent that the aggregate amount of Notes tendered pursuant to the Excess Proceeds Offer is less than the Excess Proceeds, the Company may use the remaining Excess Proceeds for general corporate purposes and such amounts shall no longer be deemed Excess Proceeds. If the aggregate principal amount of Notes surrendered by Holders exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis, subject to the limitation on the authorized denominations of the Notes. Notwithstanding the immediately preceding paragraph (i) the Company and its Subsidiaries may, in the ordinary course of business, sell, lease, or otherwise transfer or dispose of assets acquired and held for resale in the ordinary course of business; (ii) the Company may sell, lease, or otherwise transfer or dispose of assets in accordance with the provisions described under "Merger, Consolidation or Transfer of Assets" below; (iii) the Company and its Subsidiaries may sell, lease or otherwise transfer or dispose of damaged, worn out or obsolete property in the ordinary course of business or other property no longer necessary for the proper conduct of their businesses; and (iv) the Company and its Subsidiaries may abandon assets or properties which are no longer useful in their businesses and cannot be sold. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws are applicable in connection with the repurchase of Notes pursuant to an Excess Proceeds Offer. Limitation on Transactions with Affiliates. Except as otherwise permitted by the Indenture, neither the Company nor any of its Subsidiaries shall make any Investment, loan, advance, guaranty or capital contribution to, or for the benefit of, or sell, lease or otherwise transfer or dispose of any of its properties or assets to, or for the benefit of, or purchase or lease any property or assets from, or enter into or amend any contract, agreement or understanding with, or for the benefit of, any Affiliate of the Company or any of its Subsidiaries, unless (i) such transaction or series of transactions is in the best interests of the Company or such Subsidiary based on all relevant facts and circumstances; (ii) such transaction or series of transactions is fair to the Company or such Subsidiary and on terms that are no less favorable to the Company or such Subsidiary, as the case may be, than those that could have been obtained in a comparable transaction on an arms' length basis from a Person that is not an Affiliate; and (iii) (a) with respect to a transaction or series of related transactions involving aggregate payments in excess of $1,000,000, the Board of Directors and a majority of the Independent Directors shall approve such transaction or series of transactions by a Board Resolution evidencing their determination that such transaction or series of transactions comply with clauses (i) and (ii) above, and (b) with respect to a transaction or series of transactions involving aggregate payments equal to or greater than $10,000,000, the Company receives a written opinion from a nationally recognized investment bank or, with respect to a transaction requiring the valuation of real property, a nationally recognized real estate appraisal firm, that such transaction or series of transactions is fair to the Company from a financial point of view. The foregoing limitation shall not apply to: (i) an Investment to be made by the Company pursuant to a commitment authorized by the Board of Directors of the Company prior to the issue date of the Notes in Ecological Engineering Associates, L.P. in an amount not to exceed $2,100,000 (including such Investments made prior to the issue date of the Notes); (ii) any payment of money or issuance of securities by the Company or any Subsidiary of the Company pursuant to employment agreements or arrangements and employee benefit plans, including reimbursement or advancement of out-of-pocket expenses and directors' and officers' liability insurance; (iii) reasonable and customary payments and other benefits (including indemnification) provided to directors for service on the Board of Directors of the Company or any of its Subsidiaries and reimbursement of expenses related thereto; or (iv) transactions between the Company and any Subsidiary of the Company, or between one Subsidiary of the Company and another Subsidiary of the Company, 58 61 provided that not more than 5% of such Subsidiary is owned by any Affiliate of the Company or any of its Subsidiaries (other than the Company or a Wholly-Owned Subsidiary of the Company). Limitation on Guaranties by Subsidiaries. The Company shall not permit any Subsidiary of the Company, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to any Indebtedness of the Company or any Subsidiary Guarantor (other than the Notes), unless such Subsidiary is a Subsidiary Guarantor or simultaneously executes and delivers (a) to the Company and the Trustee a supplemental indenture to this Indenture providing for a Subsidiary Guaranty of the Notes by such Subsidiary and any other Subsidiary Guarantors having such terms as are set forth in an exhibit to the Indenture and (b) to the Trustee a Subsidiary Guaranty. Each Subsidiary Guaranty shall be subordinate to Guarantor Senior Indebtedness in substantially the same manner and to the same extent as the Notes are subordinated to Senior Indebtedness of the Company under the Indenture. Notwithstanding the foregoing, in the event that a Subsidiary Guarantor is released from all obligations which pursuant to the first sentence of this paragraph obligate it to become a Subsidiary Guarantor, such Subsidiary Guarantor shall be deemed automatically and unconditionally released from all obligations under its Subsidiary Guaranty without any further action required on the part of the Trustee or any Holder. In addition, upon any sale or disposition (by merger or otherwise) of any Subsidiary Guarantor by the Company or a Subsidiary of the Company to any person that is not an Affiliate of the Company or any of its Subsidiaries which is otherwise in compliance with the terms of the Indenture, such Subsidiary Guarantor will be deemed to be released from all obligations under its Subsidiary Guaranty. Each Subsidiary Guaranty may be modified from time to time without the consent of the Holders, to reflect such fraudulent conveyance savings provisions, net worth or maximum amount limitations as to recourse or similar provisions as are set forth in, and after giving effect to, any guaranty by any Subsidiary Guarantor of any Senior Indebtedness with respect to the Company Credit Facility. No Lien on the properties or assets of any Subsidiary of the Company permitted by the Limitation on Liens covenant shall constitute a guaranty of the payment of any Indebtedness of the Company for purposes of this Limitation on Guaranties by Subsidiaries covenant. Payments for Consents. Neither the Company nor any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or agreed to be paid to all Holders of the Notes which so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. Provision of Reports and Other Information. The Company shall file with the Commission all such definitive reports and other information as is required by Section 13 or 15(d) of the Exchange Act. Within 15 days after the same are filed with the Commission, the Company will file with the Trustee and supply to each holder of the Notes, without cost, such reports or other information. If the Company is not subject to the reporting requirements of the Exchange Act, it shall provide to the Trustee and supply to each Holder, without cost, within 15 days after it would have been required to file such information with the Commission, financial statements, including any notes thereto and, with respect to annual reports, an auditors' report by an accounting firm of established national reputation and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," both comparable to that which the Company would have been required to include in such annual reports, information, documents or other reports if the Company had been subject to the requirements of such Sections 13 or 15(d) of the Exchange Act. MERGER, CONSOLIDATION OR TRANSFER OF ASSETS The Company shall not consolidate with, merge with or into, or transfer all or substantially all of its assets (as an entirety or substantially as an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into it, or permit any of its Subsidiaries to enter into any such transaction or transactions if such transaction or transactions in the aggregate would result in a transfer of all or substantially all of the assets of the Company and its Subsidiaries on a consolidated basis, unless: (1) the 59 62 Company shall be the continuing Person, or the Person, if other than the Company, formed by such consolidation or into which the Company is merged or to which the properties and assets of the Company or of the Company and its Subsidiaries on a consolidated basis, substantially as an entirety, are transferred shall be a corporation organized and existing under the laws of the United States or any state thereof or the District of Columbia and shall expressly assume, by an indenture supplemental to the Indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes and the Indenture, and the Indenture remains in full force and effect; (2) immediately before and immediately after giving effect to such transaction, no Event of Default and no Default shall have occurred and be continuing; (3) the Person which is formed by or survives such consolidation or merger or to which such assets are transferred (the "surviving entity"), after giving pro forma effect to such transaction, could incur $1.00 of additional Indebtedness under the first paragraph of the Limitation on Additional Indebtedness covenant; (4) immediately after giving effect to such transaction on a pro forma basis the Consolidated Net Worth of the surviving entity shall be equal to or greater than the Consolidated Net Worth of the Company immediately before such transaction and (5) each Subsidiary Guarantor, if any, unless it is the other party to the applicable transaction described above or its Subsidiary Guaranty, after giving effect to such transaction, is to be released in accordance with the terms hereof and of such Subsidiary Guaranty, shall have confirmed by supplemental indenture that its Subsidiary Guaranty shall apply to the obligations of the Company or the surviving entity under the Indenture. In connection with any such consolidation, merger or transfer, the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an officers' certificate and an opinion of counsel, each stating that such consolidation, merger or transfer and the supplemental indenture in respect thereto comply with the Indenture and that all conditions precedent therein provided for relating to such transactions have been complied with. Upon any consolidation or merger, or any transfer of all or substantially all of the assets of the Company and its Subsidiaries on a consolidated basis, in accordance with the second preceding paragraph, the successor Person formed by such consolidation or into which the Company is merged or the successor Person to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if such successor Person had been named as the Company in the Indenture, and when a successor Person assumes all the obligations of its predecessor under the Indenture or the Notes, the predecessor shall be released from those obligations; provided, however, that in the case of a transfer by lease, the predecessor shall not be released from the payment of principal of, premium, if any, and interest on the Notes. With respect to the transfer of all or substantially all of the assets of the Company or of the assets of the Company and its Subsidiaries on a consolidated basis, there is no precise established definition of the term "substantially all" under applicable law. Accordingly, if the Company were to engage in transactions in which it disposed of less than all of its assets or the Company or a Subsidiary of the Company were to engage in transactions in which less than all of the assets of the Company and its Subsidiaries on a consolidated basis were disposed of, a question could arise as to whether such disposition was of "substantially all" of the assets of the Company or the assets of the Company and its Subsidiaries on a consolidated basis, as the case may be, and, therefore, whether the transaction was subject to the foregoing provisions of the Indenture. EVENTS OF DEFAULT AND REMEDIES The Indenture provides that each of the following constitutes an "Event of Default": (1) the Company defaults in the payment, when due and payable, of (i) interest on any Note and the default continues for a period of 30 days, or (ii) the principal of or premium, if any, on any Notes when the same becomes due and payable at maturity, by acceleration, on the Redemption Date, on the Change of Control Payment Date, on any payment date respecting an Excess Proceeds Offer or otherwise; (2) the Company fails to comply with any of its covenants or agreements under the Repurchase upon Change of Control covenant, the Limitation on Restricted Payments covenant, or the provisions set forth under "Merger, Consolidation or Transfer of Assets" above; (3) the Company fails to comply with any of its covenants or agreements in the Notes or the Indenture (other than those referred to in clause (1) or (2) above), or any Subsidiary Guarantor fails to comply with 60 63 any of its covenants or agreements in the Indenture or its Subsidiary Guaranty and such failure continues for the period and after receipt by the Company of the notice specified below; (4) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries, excluding, however, the guaranty of the Company referred to in clause (x) of the Limitation on Additional Indebtedness covenant) whether such indebtedness or guaranty is now existing or hereafter created, if such default shall constitute a failure to pay any portion of the principal of such indebtedness when due and payable or if as a result of such default the maturity of such indebtedness has been accelerated prior to its stated maturity and, in either case, the principal amount of such indebtedness, together with the principal amount of any other such indebtedness for money borrowed which has not been paid when due and payable or the maturity of which has been accelerated as a result of such default, aggregates $10,000,000 or more; (5) the Company or any of its Material Subsidiaries pursuant to or within the meaning of any bankruptcy law: (A) commences a voluntary case or proceeding; (B) consents to the entry of an order for relief against it in an involuntary case or proceeding; (C) consents to the appointment of a custodian of it or for all or substantially all of its property; (D) makes a general assignment for the benefit of its creditors; or (E) admits in writing its inability to pay its debts generally as they become due; (6) a court of competent jurisdiction enters an order or decree under any bankruptcy law that: (A) is for relief against the Company or any of its Material Subsidiaries in an involuntary case or proceeding; (B) appoints a custodian of the Company or any of its Material Subsidiaries for all or substantially all of its properties; (C) orders the liquidation of the Company or any of its Material Subsidiaries; (D) and in each case the order or decree remains unstayed and in effect for 60 days; (7) final judgments for the payment of money which in the aggregate exceed $10,000,000 shall be rendered against the Company or any of its Subsidiaries by a court and shall remain unstayed or undischarged for a period of 60 days; or (8) any Subsidiary Guaranty ceases to be in full force and effect or is declared null and void, or any Subsidiary Guarantor denies that it has any further liability under any Subsidiary Guaranty or gives notice to such effect (in each case other than by reason of the termination of the Indenture or the release of such Subsidiary Guaranty in accordance with the terms of the Indenture and such Subsidiary Guaranty) and such condition shall have continued for the period and after receipt by the Company of the notice specified below. A Default under clause (3) or (8) above is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in aggregate principal amount of the Notes at the time outstanding notify the Company and the Trustee, of the Default and the Company does not cure such Default within 30 days after receipt of such notice. Any such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default." In the case of any Event of Default (other than as a result of a failure to comply with the Repurchase upon Change of Control covenant) occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium which the Company would have to pay if the Company then had elected to redeem the Notes, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law, anything in the Indenture or in the Notes contained to the contrary notwithstanding. In the case of an Event of Default as a result of a failure to comply with the Repurchase upon Change of Control covenant occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium which the Company would have to pay pursuant to the Repurchase upon Change of Control covenant, such premium shall also become and be immediately due and payable at such time as the principal and interest on the Notes become due and payable pursuant to the acceleration provisions of the Indenture to the extent permitted by law, anything in the Indenture or in the Notes contained to the contrary notwithstanding. If any Event of Default (other than an Event of Default specified in clause (5) or (6) above) occurs and is continuing, the Trustee or the Holders of at least 25% of the principal amount of the Notes then outstanding, by written notice to the Company (and to the Trustee if such notice is given by such Holders) (the "Acceleration Notice"), may, and such Trustee at the request of such Holders shall, declare all unpaid principal of, premium, if any, and accrued interest on the Notes to be due and payable. Upon a declaration of 61 64 acceleration, such principal, premium, if any, and accrued interest shall be due and payable, (i) immediately, if no amount is outstanding and no commitment is in effect under Specified Senior Indebtedness or (ii) if any amount is outstanding or any commitment is in effect under Specified Senior Indebtedness, upon the earlier of five business days after delivery of the Acceleration Notice to the Company and the agent of the holders of Specified Senior Indebtedness by the Trustee or the Holders, as the case may be, or acceleration of the Specified Senior Indebtedness, and thereupon the Trustee may, at its discretion, proceed to protect and enforce the rights of the Holders by appropriate judicial proceedings. If an Event of Default specified in clause (5) or (6) above occurs, all principal of, premium, if any, and accrued interest on the Notes then outstanding shall ipso facto become and be immediately due and payable without declaration or other act on the part of the Trustee or any Holder. The Holders of at least a majority in principal amount of the Notes then outstanding by written notice to the Trustee may rescind an acceleration and its consequences (except an acceleration due to default in payment of principal or interest on the Notes) if all existing Events of Default have been cured or waived except non-payment of principal or interest that has become due solely because of the acceleration. Subject to certain restrictions set forth in the Indenture, the Holders of at least a majority in principal amount of the outstanding Notes by notice to the Trustee may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of, premium, if any, or interest on, any Note or a Default under a provision which requires consent of all Holders to amend. When a Default or Event of Default is waived, it is cured and ceases. A Holder of Notes may not pursue any remedy with respect to the Indenture or the Notes unless: (i) the Holder gives to the Trustee written notice that an Event of Default is continuing; (ii) the Holders of at least 25% in aggregate principal amount of any Notes outstanding make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee reasonable indemnity or security against any loss, liability or expense satisfactory to the Trustee; (iv) the Trustee does not comply with the request within 30 days after receipt of the request and the offer of indemnity or security; and (v) during such 30-day period the Holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a direction which is inconsistent with the request. DISCHARGE OF THE INDENTURE AND THE NOTES If, at any time prior to the Stated Maturity of the Notes or the date of redemption of all outstanding Notes, the Company irrevocably deposits with the Trustee money and/or direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which guarantee or obligation the full faith and credit of the Untied States is pledged, maturing as to principal and interest in such amounts and at such times as are sufficient, without consideration of any reinvestment of such interest, to pay principal of, premium, if any, and interest on, the outstanding Notes (other than replaced Notes) to maturity or redemption, as the case may be, in accordance with the terms of the Indenture and the Notes, the Indenture and each Subsidiary Guaranty, if any, shall cease to be of further effect as to all outstanding Notes (except, among other things, as to (i) remaining rights of registration of transfer and substitution and exchange of the Notes, (ii) rights of Holders to receive payment of principal and interest on the Notes, and (iii) the rights, obligation and immunities of the Trustee). TRANSFER AND EXCHANGE A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar is not required to transfer or exchange any Note selected for redemption. Also, the Registrar is not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed. The registered Holder of a Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Subject to certain exceptions, with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding, the Company and the Trustee may amend the Indenture or the Notes, or may waive compliance by the Company or any Subsidiary Guarantor with any provision of the 62 65 Indenture, the Notes or such Subsidiary Guarantor's Subsidiary Guaranty. However, without the consent of each Holder affected, a waiver or an amendment to the Indenture or the Notes may not: (i) reduce the percentage of principal amount of the Notes whose Holders must consent to an amendment or waiver; (ii) make any change to the Stated Maturity of the principal of, premium, if any, or any interest on the Notes or any Redemption Price thereof, or impair the right to institute suit for the enforcement of any such payment or make any Note payable in money or securities other than that stated in the Note; (iii) make any change in the subordination provisions of the Indenture or any Subsidiary Guaranty that adversely affects the rights of any Holder of the Notes or any other change to the Indenture or any Subsidiary Guaranty that adversely affects the rights of any Holder of the Notes under such subordination provisions; (iv) waive a default in the payment of the principal of, premium, if any, or interest on, any Note; (v) make any change in the provisions of the Repurchase upon Change of Control covenant or the Limitation on Use of Proceeds of Asset Sale covenant; (vi) release any Subsidiary Guarantor from any of its obligations under its Subsidiary Guaranty or the Indenture other than in compliance with the terms of such Subsidiary Guaranty; or (vii) make any change in the amendment provisions of the Indenture. Notwithstanding the foregoing, without the consent of any Holder, the Company and the Trustee may amend or supplement the Indenture or the Notes (i) to cure any ambiguity, defect or inconsistency; (ii) to comply with the provisions described under "Merger, Consolidation or Transfer of Assets"; (iii) to provide for uncertificated Notes in addition to or in place of certificated Notes so long as such uncertificated Notes are in registered form for purposes of the Internal Revenue Code of 1986, as amended; (iv) to make any other change that does not adversely affect the rights of any Holder; (v) to comply with any requirement of the Commission in connection with the qualification of the Indenture under the Trust Indenture Act; or (vi) to add any Subsidiary of the Company as a Subsidiary Guarantor. CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquired any conflicting interest it must eliminate such conflict within 90 days, or apply to the Commission for permission to continue or resign. The Holders of not less than a majority in principal amount of then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur and be continuing (and shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care and skill of a prudent person in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holders of Notes, unless they shall have offered to the Trustee reasonable security or indemnity satisfactory to it against any loss, liability or expense. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Indebtedness" means, with respect to any Person, Indebtedness of such Person (i) assumed in connection with an acquisition of assets or properties from such Person, or (ii) existing at the time such Person becomes a Subsidiary of any other Person (in each case other than any Indebtedness incurred in connection with, or in contemplation of, such acquisition or such Person becoming such a Subsidiary). "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. A Person shall be deemed to "control" (including the correlative meanings, the terms "controlling," "controlled by", and "under common control with") another Person if the controlling Person (i) possesses, directly or indirectly, the power 63 66 to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of voting securities, by agreement or otherwise, or (ii) owns, directly or indirectly, 10% or more of the combined voting power of all classes of the issued and outstanding equity securities of the controlled Person. "Allowable Subsidiary Loans" means Indebtedness of the Company to a Subsidiary not to exceed the Net Cash Proceeds received by the Company as a result of such Subsidiary becoming less than a Wholly-Owned Subsidiary through the sale of Equity Interests in compliance with the terms of the Indenture, provided that (i) all such Allowable Subsidiary Loans are contractually subordinated in right of payment to the Notes and (ii) the total amount of all Allowable Subsidiary Loans does not exceed $25,000,000. "Asset Sale" means, with respect to any Person, the sale, lease, conveyance or other transfer or disposition by such Person of any of its assets or properties (including by way of a sale-and-leaseback and including the sale or other transfer of any of the Capital Stock of any Subsidiary of such Person), in a single transaction or through a series of related transactions, for aggregate consideration received by such Person or a Subsidiary of such Person, net of out-of-pocket costs relating thereto (including, without limitation, legal, accounting and investment banking fees and sales commissions), in excess of $5,000,000. For purposes of this definition, consideration shall include, without limitation, any indebtedness for borrowed money of such Person or such Subsidiary that is assumed by the transferee of any assets or any such indebtedness of any Subsidiary of such Person whose stock is purchased by the transferee. Any transaction consummated in compliance with the provisions set forth under "Merger, Consolidation or Transfer of Assets" above and any Lien permitted under the Limitation on Liens covenant (and any foreclosure or other sale under any such Lien, except to the extent there are surplus proceeds from such foreclosure) shall not constitute an Asset Sale. "Average Life" means, as of the date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the date of each successive scheduled principal payment (assuming the exercise by the obligor of such debt security of all unconditional (other than as to the giving of notice) extension options of each such scheduled payment date) of such debt security multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "Broan Limited Credit Facility" means a credit facility between Broan Limited, a Canadian Subsidiary of the Company, and one or more banks or other institutional lenders, as the same may be amended, extended, amended and restated, supplemented or otherwise modified or replaced from time to time. "Capital Lease Obligations" means, with respect to any Person, all obligations of such Person or any of its Subsidiaries under leases of property by such Person or such Subsidiary as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP, and for purposes of the Indenture the amount of such obligations at any time shall be the aggregate capitalized amount thereof at such time, as determined in accordance with GAAP. "Capital Stock" means any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock (including common or preferred stock) or partnership interests. "Cash Equivalents" means (i) any evidence of Indebtedness, maturing not more than 365 days after the date of acquisition, issued or fully guaranteed or insured by the United States of America, or an instrumentality or agency thereof (provided that the full faith and credit of the United States of America is pledged in support thereof), (ii) any certificate of deposit, overnight bank deposit or bankers acceptance, maturing not more than 365 days after the date of acquisition, issued by, or time deposit of, a commercial banking institution having unsecured long-term debt (or whose holding company has unsecured long-term debt) rated, at the time as of which any Investment therein is made, BBB+ or better by S&P or Moody's or the equivalent of such rating by a successor rating agency, (iii) commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America or any State thereof or the District of Columbia which is rated, at the time as of which any Investment therein is made, P-1 or better by Moody's or A-1 or better by S&P, or the equivalent of such rating by a successor rating agency, (iv) 64 67 Investments in mutual funds, money market funds, investment pools and other savings vehicles, 100% of the assets of which are invested in Investments described in clause (i), (ii) or (iii) above, and (v) in the case of Broan Limited, (a) any evidence of Indebtedness, maturing not more than 365 days after the date of acquisition, issued or fully guaranteed or insured by Canada or any instrumentality or agency thereof (provided that the full faith and credit of Canada is pledged in support thereof), (b) any certificate of deposit, overnight bank deposit or bankers acceptance, maturing not more than 365 days after the date of acquisition, issued by, or time deposit of, a commercial banking institution having unsecured long-term debt (or whose holding company has unsecured long-term debt) rated, at the time as of which any Investment therein is made, A or better by Dominion Bond Rating Services or the equivalent of such rating by a successor rating agency and (c) commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of Canada or any province thereof which is rated, at the time as of which any Investment therein is made, R-1 or better by Dominion Bond Rating Services or the equivalent of such rating by a successor rating agency. "Commodity Agreement" means any agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in the prices of commodities used by the Company or any of its Subsidiaries in the ordinary course of business. "Company Credit Facility" means one or more credit facilities between the Company and one or more banks or other institutional lenders, as the same may be amended, extended, amended and restated, supplemented or otherwise modified or replaced from time to time, specifically designated in each such credit facility as a "Company Credit Facility." All Company Credit Facilities are referred to collectively in the Indenture as the "Company Credit Facility". "Consolidated Amortization Expense" means, with respect to any Person for any period, the amortization expense of such Person and its Subsidiaries, determined on a consolidated basis for such period in accordance with GAAP, excluding any amortization expense included in Consolidated Interest Expense. "Consolidated Cash Flow" means, with respect to any Person for any period, the sum of, without duplication, (i) Consolidated Net Income of such Person for such period, (ii) Consolidated Interest Expense of such Person for such period, (iii) Consolidated Income Tax Expense of such Person for such period, (iv) Consolidated Depreciation Expense of such Person for such period, (v) Consolidated Amortization Expense of such Person for such period, and (vi) the amount, not to exceed 10% of Consolidated Cash Flow of such Person for such period (which amount shall be excluded in determining such Consolidated Cash Flow), by which (A) other non-cash items of expense that reduce Consolidated Net Income of such Person for such period exceed (B) other non-cash items of expense that increase Consolidated Net Income of such Person for such period; provided, however, that, in the case of the Company, any expenses which are included in any of clauses (ii) through (vi) above for such period and which are attributable to Dixieline Lumber Company shall be deducted from Consolidated Cash Flow of the Company for such period. "Consolidated Cash Flow Coverage Ratio" means, with respect to any Person for any period, the ratio of Consolidated Cash Flow of such Person for such period to Consolidated Interest Expense of such Person for such period; provided, however, that, Consolidated Cash Flow and Consolidated Interest Expense shall be calculated on a pro forma basis after giving effect, as if occurring at the beginning of such period, to (i) the incurrence of Indebtedness giving rise to the need to calculate the Consolidated Cash Flow Coverage Ratio and the retirement of any Indebtedness refinanced with the proceeds of such Indebtedness, (ii) the incurrence, during such period or since the last day of such period, of any Indebtedness (other than Indebtedness incurred for working capital purposes), and the retirement of any Indebtedness refinanced with the proceeds of such Indebtedness, (iii) the acquisition by such Person (directly or through a Subsidiary of such Person) of any company or business during such period or since the last day of such period, (iv) the sale or other disposition of assets or properties outside the ordinary course of business by such Person (directly or through a Subsidiary of such Person) and the actual application of the proceeds therefrom during such period or since the last day of such period, and (v) in the case of the Company and with respect to any such period ending prior to the date on which there shall be four fiscal quarters of the Company which commenced and ended after the issue date of the Notes, the income that could have been earned by the Company if the Cash 65 68 Proceeds of the issuance of the Notes (net of underwriters' discounts and commissions and amounts used to retire Indebtedness of the Company), if any, received by the Company were invested from the beginning of such period to but excluding the date of receipt by the Company of such Cash Proceeds at the rate in effect on the last day of the last fiscal quarter within such period for United States Treasury securities maturing one year from the date of issuance of such securities, as compiled and published in the then most recent Federal Reserve Statistical Release H.15 (519). "Consolidated Depreciation Expense" means, with respect to any Person for any period, the depreciation and depletion expense of such Person and its Subsidiaries, determined on a consolidated basis for such period in accordance with GAAP. "Consolidated Income Tax Expense" means, with respect to any Person for any period, the provision for federal, state, local and foreign income taxes (including franchise, net worth or similar taxes) of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, with respect to any Person for any period, without duplication, the sum of (i) the interest expense of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, including, without limitation, all original issue discount and other interest portion of any deferred payment Indebtedness and all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing less, in the case of the Company, any interest income included in Consolidated Net Income of the Company for such period, but excluding any deferred financing fees otherwise includible in Consolidated Interest Expense of the Company for such period; (ii) the interest component of Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP; and (iii) all cash dividends or other distributions declared or paid on any Capital Stock (other than common stock or preferred stock that is not Redeemable Stock or, with respect to the Company, special common stock) of such Person and its Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP; provided, however, that any Indebtedness bearing a floating rate of interest shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate net income (or loss) of such Person and its Subsidiaries for such period, before discontinued operations, extraordinary items and the cumulative effect of a change in accounting principles of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, provided that there shall also be excluded from Consolidated Net Income (i) any net gains or losses in respect of dispositions of assets other than in the ordinary course of business; (ii) any gains from currency exchange transactions not in the ordinary course of business consistent with past practice; (iii) any gains or losses realized from the termination of any employee pension benefit plan; (iv) any gains or losses realized upon the refinancing of any Indebtedness of such Person or any of its Subsidiaries; (v) any gains or losses arising from the destruction of property or assets due to fire or other casualty; (vi) any gains or losses from the revaluation of property or assets; (vii) the net income (or loss) of any other Person (other than a Subsidiary of such Person) except to the extent of cash dividends or distributions paid to such Person by such other Person in such period; (viii) the net income (or loss) of any Subsidiary of such Person except to the extent of the interest of such Person in such Subsidiary, provided that in the case of the Company the net income (or loss) of Dixieline Lumber Company shall be excluded; (ix) the net income (or loss) of any Subsidiary of such Person that is subject to any restriction or limitation on the payment of dividends and other distributions (including loans or advances) by operation of the terms of its charter or by agreement, instrument, judgment, decree, order or governmental regulation applicable to such Subsidiary to the extent of such restriction or limitation in such period; and (x) in the case of the Company the excess of (a) the compensation expense recorded by the Company in the computation of net earnings of the Company in respect of shares of Capital Stock (other than Redeemable Stock) or other Equity Interests, pursuant to a plan or other arrangement approved by the Board of Directors of the Company (or of a Reporting Subsidiary, if applicable), to or for the benefit of any employee, officer or director of the Company or any of its Subsidiaries or to or by any employee stock ownership plan or similar trust for the benefit of any 66 69 such employee, officer or director, over (b) the amount of income taxes recorded by the Company in connection with such compensation expense of the Company. "Consolidated Net Worth" means, with respect to any Person at any date of determination, the sum of the Capital Stock, additional paid-in capital and cumulative translation adjustment account plus retained earnings (or minus accumulated deficit), excluding amounts attributable to Redeemable Stock, any Capital Stock convertible into Indebtedness, or Treasury Stock, of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement entered into in the ordinary course of business and designed to protect the Company or any of its Subsidiaries against fluctuations in currency values to or under which the Company or any of its Subsidiaries is a party or a beneficiary on the issue date of the Notes or becomes a party or a beneficiary thereafter. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Equity Interests" means Capital Stock, warrants, options or other rights to acquire Capital Stock (but excluding any debt security which is convertible into, or exchangeable for, Capital Stock). "Exempt Person" means (i) Richard L. Bready, (ii) any Person which is an Affiliate of Richard L. Bready, and (iii) any other Affiliate of such Person so long as such Person is an Affiliate of Richard L. Bready. "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries, in existence on the issue date of the Notes. "Existing Investments" means (i) Investments of the Company and its Subsidiaries, in existence on the issue date of the Notes and (ii) Investments to be made pursuant to commitments authorized by the Board of Directors of the Company prior to the issue date of the Notes (a) in Ecological Engineering Associates, L.P. in an amount not to exceed $2.1 million (including such Investments made prior to the issue date of the Notes) and (b) in or related to a joint-venture involving Universal-Rundle Corporation in an amount not to exceed $4.0 million. "Fair Market Value" means, with respect to any asset, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of which is under pressure or compulsion to complete the transaction; provided, however, that the Fair Market Value of any asset or assets of the Company or any of its Subsidiaries shall be determined by the Board of Directors of the Company or, if such subsidiary is a Reporting Subsidiary, of such Reporting Subsidiary, acting in good faith, and evidenced by a Board Resolution of the Company or such Reporting Subsidiary, as the case may be, delivered to the Trustee. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession, from time to time; provided, however, that with respect to the obligations of the Company described under "Certain Covenants" and "Merger, Consolidation or Transfer of Assets," GAAP shall be determined on the basis of such principles as in effect on the issue date of the Notes. "Guarantor Senior Indebtedness" means, with respect to any Subsidiary Guarantor, the principal of, premium, if any, and interest on any Indebtedness of such Subsidiary Guarantor, whether outstanding on the issue date of the Notes or thereafter created, incurred, assumed or guaranteed (unless, in the case of any particular Indebtedness, the instrument under which such Indebtedness is created, incurred, assumed or guaranteed expressly provides that such Indebtedness shall not be senior or superior in right of payment to the Subsidiary Guaranty of such Subsidiary Guarantor), including, without limiting the generality of the foregoing, the principal of, premium, if any, and interest (including interest accruing after the commencement of any proceeding under Bankruptcy Law, whether or not such interest is an allowable claim) on, and all other obligations in respect of, Specified Guarantor Senior Indebtedness, but excluding: (i) Indebtedness evidenced 67 70 by the Subsidiary Guaranty of such Subsidiary Guarantor; (ii) any Indebtedness of such Subsidiary Guarantor to any of its Subsidiaries or other Affiliates; (iii) any Indebtedness incurred by such Subsidiary Guarantor that is contractually subordinated in right of payment to any Guarantor Senior Indebtedness; (iv) amounts owed for goods, materials or services purchased in the ordinary course of business or for compensation to employees; (v) any Indebtedness in respect of any Capital Lease Obligation created, incurred, assumed or guaranteed prior to or, unless designated in the instrument evidencing such Capital Lease Obligation as "Senior Indebtedness", after the effective date of the Subsidiary Guaranty of such Subsidiary Guarantor; (vi) Indebtedness represented by Redeemable Stock of such Subsidiary Guarantor; and (vii) Indebtedness which when incurred is without recourse to such Subsidiary Guarantor. "Indebtedness" means, with respect to any Person, without duplication, any indebtedness, contingent or otherwise, (i) with respect to borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), or evidenced by bonds, notes, debentures or similar instruments or consisting of reimbursement obligations with respect to letters of credit, or (ii) representing the deferred and unpaid balance of the purchase price of any property excluding any such balance that constitutes a trade payable or an accrued liability, in each case arising in the ordinary course of business, if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance sheet of such Person prepared on a consolidated basis in accordance with GAAP, and shall also include, to the extent not otherwise included, (a) any Capital Lease Obligations, (b) the maximum fixed repurchase price of any Redeemable Stock, (c) indebtedness secured by a Lien to which the property or assets owned or held by such Person is subject, whether or not the obligations secured thereby shall have been assumed, (d) guaranties of items that would be included within this definition to the extent of such guaranties, and (e) net liabilities in respect of Commodity Agreements, Currency Agreements and Interest Rate Agreements. For purposes of the immediately preceding sentence, the maximum fixed repurchase price of any Redeemable Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock as if such Redeemable Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, provided that if such Redeemable Stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Redeemable Stock. The amount of Indebtedness of any Person at any date shall be without duplication (y) the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any such contingent obligations at such date and (z) in the case of Indebtedness of others secured by a Lien to which the property or assets owned or held by such Person is subject, the lesser of the Fair Market Value at such date of any property or asset subject to a Lien securing the Indebtedness of others or the amount of the Indebtedness secured. The amount of any Indebtedness issued at a discount shall be equal to the gross proceeds of such issuance (and not the face amount of any bond, note, debenture or similar instrument representing such Indebtedness). "Independent Director" means a director of the Company other than a director (i) who (apart from being a director of the Company) is an officer, employee or Affiliate of the Company, or (ii) who is a partner in any partnership which is an Affiliate of the Company. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement, or other similar agreement or arrangement entered into in the ordinary course of business and designed to protect the Company or any of its Subsidiaries against fluctuations in interest rates to or under which the Company or any of its Subsidiaries is a party or a beneficiary thereof. "Investment" means, with respect to any Person, (i) any direct or indirect loan or other extension of credit (other than extensions of trade credit by such Person on commercially reasonable terms and relating to the sale of property or services in the ordinary course of business) or capital contribution (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others) to any other Person, or (ii) any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by any other Person. "Lien" means any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease intended as security, any option or other agreement to sell or give any security 68 71 interest and any filing of or other agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction other than a financing statement covering leased goods under a lease not intended as security). "Material Subsidiary" of any Person means (i) any Subsidiary Guarantor and (ii) any Subsidiary of such Person which at the time of determination (a) had assets which, as of the date of such Person's then most recent quarterly consolidated balance sheet, constituted at least 5% of such Person's total assets on a consolidated basis as of such date, in each case determined in accordance with GAAP, (b) had net sales for the 12-month period ending on the date of such Person's most recent quarterly consolidated statement of income which constituted at least 5% of such Person's total net sales on a consolidated basis for such period, or (c) had operating income for the 12-month period ending on the date of such Person's most recent quarterly consolidated statement of operating income which constituted at least 10% of such Person's total operating income on a consolidated basis for such period. "Net Cash Proceeds" means the aggregate Cash Proceeds received by the Company or any of its Subsidiaries in respect of any Asset Sale, net of the out-of-pocket costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions) and any relocation expenses and severance and shutdown costs incurred as a result thereof, and all federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP as a consequence of such Asset Sale, amounts required to be applied to the repayment of Indebtedness secured by a Lien on the asset or assets which are the subject of such Asset Sale and any reasonable reserve in accordance with GAAP for adjustments in respect of the sale price of such asset or assets. "Notes" means any of the Company's % Senior Subordinated Notes due , 2004, issued under the Indenture. "Permitted Investments" means any of the following: (i) Cash Equivalents; (ii) Existing Investments; (iii) Investments by the Company or a Subsidiary of the Company in any Subsidiary of the Company or any other Person that concurrently with the making of such Investment becomes a Subsidiary of the Company; (iv) guaranties by Subsidiaries of the Company permitted under the Limitation on Additional Indebtedness covenant and the Limitation on Guaranties by Subsidiaries covenant; (v) Indebtedness of the Company to any Subsidiary of the Company, provided that such Indebtedness is contractually subordinated in right of payment to the Notes; (vi) Investments by the Company or any of its Subsidiaries in debt securities or debt instruments having maturities of 10 years or less and (A) issued or fully guaranteed or insured by the United States of America, or an instrumentality or agency thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) or (B) with a rating of BBB- or better by S&P or Baa-3 or better by Moody's or the equivalent of such rating by a successor rating agency; (vii) any Investment by Broan Limited in debt securities or debt instruments having maturities of 10 years or less and issued or fully guaranteed or insured by Canada or an instrumentality or agency thereof or rated, at the time of such Investment, BBB- or better by Dominion Bond Rating Services or the equivalent of such rating by a successor rating agency, so long as the aggregate amount of all such Investments by Broan Limited does not exceed $7,500,000 at any one time outstanding; (viii) loans and advances to officers and directors of the Company or any Subsidiary of the Company made in the ordinary course of business or pursuant to an employee benefit plan, up to $3,000,000 in the aggregate at any one time outstanding; (ix) loans and advances to vendors, suppliers and contractors of the Company or any Subsidiary of the Company and made in the ordinary course of business; (x) the receipt by the Company or its Subsidiaries of consideration other than Cash Proceeds in any Asset Sale made in compliance with the terms of the Indenture; (xi) so long as no Default or Event of Default shall have occurred and be continuing, other Investments made after the issue date of the Notes not exceeding in the aggregate at any time outstanding (A) $10,000,000, if at the time of the making of such Investment the Notes are not rated BB+ or better by S&P or Ba1 or better by Moody's, or (B) $20,000,000, but not more than $10,000,000 in any fiscal year of the Company, if at the time of the making of such Investment the Notes are rated BB+ or better by S&P or Ba1 or better by Moody's; provided, however, that upon the sale by the Company of all of the Equity Interests of Dixieline Lumber Company or all or substantially all of the assets of Dixieline Lumber Company, the aggregate amount of Investments permitted to be outstanding pursuant to this clause (xi) shall be increased by the amount, if any, by which the Net Cash Proceeds received by the Company from such sale (plus the amount of cash collection of any non- 69 72 cash proceeds received by the Company from such sale) exceed the aggregate of all Investments in Dixieline Lumber Company made by the Company or any of its Subsidiaries after the issue date of the Notes; (xii) any Lien permitted under the Limitation on Liens covenant; and (xiii) Investments by Subsidiaries of the Company not exceeding in the aggregate $5,000,000 at any one time outstanding in Cash Equivalents described in clause (ii) of the definition of such term in the Indenture, provided that for purposes of this clause (xiii) an instrument referred to in such clause (ii) may be issued by any commercial banking institution having capital and surplus of not less than $100,000,000. "Permitted Liens" means (i) Liens securing Indebtedness owing to the Company by a Subsidiary of the Company; (ii) Liens securing Acquired Indebtedness incurred by the Company or any of its Subsidiaries in accordance with the provisions of the Indenture, provided such Liens were not incurred in anticipation of or in connection with the transaction pursuant to which such Acquired Indebtedness was so incurred; (iii) Liens securing Purchase Money Obligations permitted to be incurred by the provisions of the Indenture; (iv) Liens securing Indebtedness permitted by clause (xiv) of the Limitation on Additional Indebtedness covenant; and (v) any interest or title of a lessor in property subject to any Capital Lease Obligation or operating lease of the Company and of its Subsidiaries. "Person" means any individual, corporation, partnership, joint venture, incorporated or unincorporated association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind. "Purchase Money Obligations" means any Indebtedness of the Company or any of its Subsidiaries incurred to finance the acquisition or construction of any property or business (including Indebtedness incurred within 180 days following such acquisition or construction), including Indebtedness of a Person existing at the time such Person becomes a Subsidiary of the Company or assumed by the Company or a Subsidiary of the Company in connection with the acquisition of assets from such Person; provided, however, that (i) any Lien on such Indebtedness shall not extend to any property other than the property so acquired or constructed and (ii) at no time shall the aggregate principal amount of outstanding Indebtedness secured thereby be increased. "Redeemable Stock" means any Equity Interest which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable before the Stated Maturity of the Notes), or upon the happening of any event, matures or is mandatorily redeemable, in whole or in part, prior to the Stated Maturity of the Notes. "Senior Indebtedness" means the principal of, premium, if any, and interest on any Indebtedness of the Company, whether outstanding on the issue date of the Notes or hereafter created, incurred, assumed or guaranteed (unless, in the case of any particular Indebtedness, the instrument under which such Indebtedness is created, incurred, assumed or guaranteed expressly provides that such Indebtedness shall not be senior or superior in right of payment to the Notes), including, without limiting the generality of the foregoing, the principal of, premium, if any, and interest (including interest accruing after the commencement of any proceeding under Bankruptcy Law, whether or not such interest is an allowable claim) on, and all other obligations in respect of, Specified Senior Indebtedness but excluding: (i) any Indebtedness represented by the Company's 7 1/2% Convertible Debentures due 2006; (ii) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates; (iii) any Indebtedness hereafter incurred by the Company that is contractually subordinated in right of payment to any Senior Indebtedness; (iv) amounts owed for goods, materials or services purchased in the ordinary course of business or for compensation to employees; (v) any Indebtedness in respect of any Capital Lease Obligation created, incurred, assumed or guaranteed prior to or, unless designated in the instrument evidencing such Capital Lease Obligation as "Senior Indebtedness", after the issue date of the Notes; (vi) Indebtedness represented by Redeemable Stock; (vii) Indebtedness which when incurred is without recourse to the Company; (viii) Indebtedness of the Company under the guaranty referred to in clause (x) of the Limitation on Additional Indebtedness covenant and any Indebtedness incurred by the Company in any refinancing, replacement or settlement thereof and (ix) Indebtedness of the Company and its Norfleet, Inc. Subsidiary under their guaranties of the obligations under the Indebtedness secured by the building and other real property where the Company's headquarters are located and other nearby real property. 70 73 "Specified Senior Indebtedness" means (i) any Indebtedness outstanding under the Company Credit Facility and all fees, expenses, indemnities and other monetary obligations in respect thereof and (ii) any other Senior Indebtedness and all fees, expenses, indemnities and other monetary obligations in respect thereof, under a single credit facility or agreement between the Company and one or more banks or other lenders or under separate credit facilities or agreements between the Company and one or more banks or other lenders, entered into substantially at the same time and having substantially the same terms, which, at the time of creation thereof or determination, had or has an aggregate principal amount outstanding, together with any unutilized commitments to lend, of at least $15,000,000 and is specifically designated in the instrument or instruments evidencing such Senior Indebtedness as "Specified Senior Indebtedness." "Specified Guarantor Senior Indebtedness" means, with respect to any Subsidiary Guarantor, any Guarantor Senior Indebtedness of such Subsidiary Guarantor which consists of a guaranty of any Specified Senior Indebtedness and all fees, expenses, indemnities and other monetary obligations with respect to such Guarantor Senior Indebtedness. "Stated Maturity" means, with respect to any security or Indebtedness, the date specified therein as the fixed date on which the principal of such security or Indebtedness is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security or Indebtedness at the option of the holder thereof upon the happening of any contingency). "Subsidiary" of any Person means any corporation, partnership, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors or, in the case of a Person which is not a corporation, the members of the appropriate governing board or other group is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person or a combination thereof; provided, however, that Forges et Boulonneries D'Ars-sur-Moselle shall not be deemed to be a Subsidiary of the Company so long as (i) all Indebtedness of Forges et Boulonneries D'Ars-sur-Moselle is non-recourse to the Company and its Subsidiaries and (ii) the Company invests not more than $2,000,000 in debt or equity capital of Forges et Boulonneries D'Ars-sur-Moselle on a cumulative basis from the issue date of the Notes. "Subsidiary Guarantor" means, with respect to any Subsidiary Guaranty, the issuer of such Subsidiary Guaranty, so long as such Subsidiary Guaranty remains outstanding. "Subsidiary Guaranty" means any guaranty of the Notes pursuant to a supplemental indenture executed and delivered pursuant to the Limitation on Guaranties by Subsidiaries covenant, including as the context may require either or both of the guaranty of the Notes set forth as an exhibit to the Indenture upon the execution and delivery by a Subsidiary Guarantor of such supplemental indenture and any separate guaranty of the Notes or confirmation of guaranty executed and delivered by such Subsidiary Guarantor pursuant to such supplemental indenture. "Trustee" means the party named as the "Trustee" in the first paragraph of the Indenture until a successor replaces it pursuant to the applicable provisions of the Indenture and, thereafter, shall mean such successor. "Wholly-Owned Subsidiary" of any Person means any Subsidiary of such Person to the extent the entire voting share capital of such Subsidiary is owned by such Person (either directly or indirectly through Wholly-Owned Subsidiaries). 71 74 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS GENERAL The following discussion summarizes the material United States Federal income tax considerations of the purchase, ownership and disposition of the Notes. This summary is based upon the Internal Revenue Code of 1986, as amended, and authorities thereunder, in effect and existing as of the date hereof. This summary applies only to holders of Notes who are United States citizens or residents or United States corporations, partnerships, estates or trusts. This summary does not apply to holders of Notes who are nonresident alien individuals or to foreign corporations, partnerships, estates or trusts, to whom different rules would apply. In addition, this summary only applies to those persons who are the initial holders of Notes and who hold Notes as capital assets. This summary does not address the tax consequences to taxpayers who purchase Notes from such original holders or taxpayers who are subject to special rules (such as dealers in securities or currencies, financial institutions, tax-exempt organizations and insurance companies), or aspects of Federal income taxation that may be relevant to a prospective investor based upon such investor's particular tax situation. PURCHASERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS TO WHICH THEY MAY BE SUBJECT. TAXATION OF THE NOTES Holders of Notes will be required to include interest on the Notes in their gross income as ordinary income under their usual method of accounting for interest income for Federal income tax purposes. Generally, any sale or redemption of a Note will result in taxable gain or loss equal to the difference between the amount of cash or the fair market value of other property received (except to the extent the consideration is attributable to accrued but unpaid interest, which consideration is treated as interest received) and the holder's adjusted tax basis in the Note. Assuming a holder purchased Notes for the full principal amount of such Notes, such holder's adjusted tax basis for determining gain or loss on the sale or other disposition of a Note will be the principal amount of such Notes decreased by any previous principal payments to the holder on the Notes and increased by any interest previously included in income for tax purposes but not paid to the holder. Any gain or loss upon a sale or other disposition of a Note will generally be capital gain or loss, which will be long term if the Note has been held by the holder for more than one year. The taxation of redemptions of a holder's Notes at a premium (see "Description of the Notes -- Optional Redemption" and "Description of the Notes -- Change of Control") will be subject to the rules generally governing the taxation of redemptions and dispositions. BACKUP WITHHOLDING A holder may be subject, under certain circumstances, to backup withholding at a 31% rate with respect to payments received with respect to the Notes. This withholding generally applies only if the holder (i) fails to furnish his or her social security or other taxpayer identification number ("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the Internal Revenue Service (the "IRS") that he or she has failed to properly report payment of interest and dividends and the IRS has notified the Company that he or she is subject to backup withholding, or (iv) fails, under certain circumstances, to provide a certified statement, signed under penalty of perjury, that the TIN provided is his or her correct number and that he or she is not subject to backup withholding. Any amount withheld from a payment to a holder under the backup withholding rules is allowable as a credit against such holder's Federal income tax liability, provided that the required information is furnished to the IRS. Certain holders (including corporations) are not subject to backup withholding. Holders should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining such an exemption. 72 75 DESCRIPTION OF OTHER OBLIGATIONS The following is a description of the principal obligations of the Company in respect of indebtedness for borrowed money that will exist following the Refinancing. This description is complete in all material respects. Mortgage Notes and Other Obligations The Company's subsidiaries have outstanding mortgage notes and other similar indebtedness (the "Mortgage Notes") in the principal amount of $17,237,000 as of October 2, 1993 (net of current maturities of $687,000). The Mortgage Notes are payable in installments through 1999 and bear interest at rates ranging from 2% to 13.5%. Mortgage Notes in the amount of $17,087,000 are collateralized by property and equipment with an aggregate net book value of $15,205,000 at October 2, 1993. The Mortgage Notes rank senior in right and priority of payment to the Notes. One of these Mortgage Notes is payable by the Company's Nordyne subsidiary, and the related industrial revenue bond financing agreement restricts Nordyne's ability to declare cash dividends to the Company in the event that Nordyne's tangible net worth is less than $9,000,000 at the end of any quarter. If such net worth is determined to be below $9,000,000 at the end of any quarter, this agreement provides that Nordyne shall not pay any cash dividends to the Company in any twelve-month period thereafter to the extent that such cash dividends exceed, in the aggregate, forty percent (40%) of its net income accrued after the quarter in which Nordyne's tangible net worth was less than $9,000,000. As of October 2, 1993, Nordyne's tangible net worth substantially exceeded $9,000,000 and the amount of indebtedness outstanding under the industrial revenue bond financing agreement was $1,800,000. Other Obligations The Company's subsidiaries are obligated under debt instruments relating to equipment purchases and other borrowings in the principal amount of $1,542,000 as of October 2, 1993 (net of current maturities of $371,000). Such instruments bear interest from 2% to 13.8% and mature at various dates through 2001. Indebtedness of $1,292,000 represented by such instruments is collateralized by property and equipment with an aggregate net book value of $1,516,000 as of October 2, 1993. Such instruments rank senior in right and priority of payment to the Notes. 7 1/2% Convertible Sinking Fund Debentures As of October 2, 1993, the Company had $15.5 million principal amount outstanding of 7 1/2% Convertible Sinking Fund Debentures due 2006 (the "Convertible Debentures"). The Convertible Debentures were issued under an Indenture dated May 1, 1986 between the Company and Fleet National Bank, a copy of which, through incorporation by reference, is an exhibit to the Registration Statement of which this Prospectus is a part. The following is qualified in its entirety by reference to such Indenture. At December 31, 1992, the Convertible Debentures were convertible into shares of Common Stock of the Company at $21.56 per share, which is subject to adjustment under certain conditions. The Convertible Debentures are redeemable at the option of the Company as a whole or from time to time in part, at 102.25% of par value, declining to 100% on May 1, 1996. All sinking fund requirements of the Convertible Debentures have been met to date. The Convertible Debentures rank pari passu to the Notes. The Indenture governing the Convertible Debentures limits the payment of cash dividends and stock payments and requires that the Company maintain a minimum net worth, as defined, of $100,000,000. If the net worth at the end of any two consecutive fiscal quarters falls below the minimum, then on the last day of the fiscal quarter (the "Accelerated Payment Date") next following such second fiscal quarter, the Company will be required to accelerate the then outstanding principal amount of the Convertible Debentures due after such Accelerated Payment Date. Upon such acceleration, the Company will be required to redeem amounts of the Convertible Debentures until the Company's net worth exceeds $100,000,000 or until all of the Convertible Debentures are redeemed. 73 76 With respect to such mandatory redemptions, the redemption price of the Convertible Debentures will be the outstanding principal amount plus accrued interest to the Accelerated Payment Date. The Company may credit against its redemption obligation upon any Accelerated Payment Date the principal amount of (i) Convertible Debentures acquired by the Company and surrendered for cancellation (including converted Convertible Debentures), and (ii) Convertible Debentures redeemed or called for redemption otherwise than through operation of the sinking fund or through redemption following an Accelerated Payment Date. In no event shall the failure to meet the minimum net worth stated above at the end of any fiscal quarter be counted toward more than one acceleration of any sinking fund payment. Canadian Secured Credit Facility The Company's Canadian subsidiary, Broan Limited, has a $15.0 million (based on exchange rates at October 2, 1993) secured line of credit, of which $11.1 million (based on exchange rates at October 2, 1993) is available to the Company (the "Line of Credit"). The Line of Credit prohibits dividends or other distributions to the Company from Broan Limited in excess of $11.1 million (based on exchange rates at October 2, 1993). Borrowings under the Line of Credit are available for working capital and other general corporate purposes. The Line of Credit contains covenants requiring Broan Limited to maintain (i) a ratio of earnings before interest and taxes to interest of at least 2 to 1, (ii) a working capital ratio of at least 1.5 to 1 and (iii) a debt to equity ratio of no higher than 3 to 1; the Line of Credit also limits the annual amount of capital expenditures which Broan Limited may make to $500,000 Canadian (approximately $375,000 based on exchange rates prevailing at October 2, 1993). Broan Limited pays a commitment fee of .25% per annum on the unutilized portion of the Line of Credit payable monthly on a pro rata basis, and the Line of Credit is subject to review by the lender in April 1994. As of January 19, 1994, there were $5.8 million in outstanding borrowings under the Line of Credit, all the proceeds of which borrowings were advanced to the Company. Contingent Industrial Revenue Bond Obligation The Company remains contingently liable under approximately $7,100,000 of obligations under Industrial Revenue Bond ("IRB's") agreements, plus unpaid interest, relating to facilities of a previously owned subsidiary. This former subsidiary defaulted on certain principal and interest payments related to these IRB's during 1992 and, in February 1993, filed for protection under federal bankruptcy laws. The Company continues to vigorously pursue all available remedies to minimize any liability that may ultimately result from the outcome of this matter. The Company believes that the resolution of this matter, after giving consideration to amounts previously provided, will not have a material adverse effect on the financial position or results of operations of the Company. See Notes 8 and 16E of Notes to Consolidated Financial Statements. UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement") by and among the Company and the Underwriters, the Company has agreed to sell to the Underwriters, and the Underwriters have agreed to purchase from the Company, $190,000,000 in principal amount of the Notes. The Underwriting Agreement provides that the obligations of the Underwriters thereunder are subject to approval of certain legal matters by its counsel and various other conditions. The nature of the obligations of the Underwriters is such that they are committed to purchase all of the Notes if any are purchased. The Underwriters have advised the Company that they propose to offer the Notes directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at that price less a concession not in excess of % of the principal amount. After the initial public offering, the public offering price and concession may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an additional $28.5 million principal amount of Notes at the public offering price set forth on the cover page hereof (plus accrued interest, if any, from the date a Note is first issued under the Indenture) less the underwriting discount. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with this offering. 74 77 There is no public market for the Notes. The Company does not intend to list the Notes on any securities exchange or to arrange for their quotation on NASDAQ. The Company has been advised by the Underwriters that they presently intend to make a market in the Notes after the consummation of this offering, although they are under no obligation to do so. No assurance can be given, however, as to the liquidity of the trading market for the Notes or that an active trading market for the Notes will develop. If an active trading market does not develop, the market price and liquidity of the Notes may be adversely affected. The Company has agreed with the Underwriters that, for a period of 90 days following the date of this Prospectus, it will not issue any additional debt securities without the prior written consent of the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and where such indemnification is not available, to contribute to payments the Underwriters may be required to make in respect of such liabilities. Bear, Stearns & Co. Inc. ("Bear Stearns") has entered into an agreement with the Company whereby Bear Stearns will receive $250,000 and reimbursement of out-of-pocket expenses in the event that this offering or a similar financing does not take place. During 1992 and 1993, Bear Stearns has provided certain investment banking and financial advisory services to the Company, including services in connection with the acquisition of 625,000 shares of its Common Stock. For these services, the Company has paid, or agreed to pay, compensation to Bear Stearns in customary amounts. LEGAL MATTERS The legality of the securities being offered hereby will be passed upon for the Company by Ropes & Gray, Boston, Massachusetts. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Schulte Roth & Zabel, New York, New York. EXPERTS The audited consolidated financial statements and schedules included in or incorporated by reference in this prospectus and elsewhere in the registration statement to the extent and for the periods indicated in their reports have been audited by Arthur Andersen & Co., independent public accountants, as indicated in their reports with respect thereto, and are included or incorporated by reference herein in reliance upon the authority of said firm as experts in giving said reports. 75 78 INDEX TO FINANCIAL STATEMENTS
PAGE ---- NORTEK, INC. AND SUBSIDIARIES: Report of Independent Public Accountants.......................................... F-2 Consolidated Statement of Operations for each of the Three Years in the Period Ended December 31, 1992, and the 39 Weeks Ended September 26, 1992 (unaudited) and October 2, 1993 (unaudited)..................................................... F-3 Consolidated Balance Sheet as of December 31, 1991 and 1992, and October 2, 1993 (unaudited)..................................................... F-4 Consolidated Statement of Cash Flows for each of the Three Years in the Period Ended December 31, 1992, and the 39 Weeks Ended September 26, 1992 (unaudited) and October 2, 1993 (unaudited)..................................................... F-6 Consolidated Statement of Stockholders' Investment for each of the Three Years in the Period Ended December 31, 1992, and the 39 Weeks Ended October 2, 1993 (unaudited)..................................................................... F-7 Notes to Consolidated Financial Statements........................................ F-8 Pro Forma (unaudited) Nortek, Inc. and Subsidiaries Consolidated Statement of Operations for the Year Ended December 31, 1992...................................................... F-29
F-1 79 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Nortek, Inc.: We have audited the accompanying consolidated balance sheet of Nortek, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1991 and 1992 and the related consolidated statements of operations, cash flows and stockholders' investment for each of the three years in the period ended December 31, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nortek, Inc. and subsidiaries as of December 31, 1991 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1992 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN & CO. Boston, Massachusetts March 26, 1993 F-2 80 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
39 WEEKS ENDED YEARS ENDED DECEMBER 31, ----------------------- -------------------------------- SEPT. 26, OCTOBER 2, 1990 1991 1992 1992 1993 ---------- -------- -------- --------- ----------- (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND RATIOS) NET SALES......................................... $1,037,239 $917,049 $799,979 $617,230 $ 575,795 ---------- -------- -------- --------- ----------- COSTS AND EXPENSES: Cost of products sold............................. 808,382 693,091 595,177 465,657 414,600 Selling, general and administrative expense....... 245,369 212,943 184,366 139,953 139,844 ---------- -------- -------- --------- ----------- 1,053,751 906,034 779,543 605,610 554,444 ---------- -------- -------- --------- ----------- Operating earnings (loss)......................... (16,512) 11,015 20,436 11,620 21,351 Interest expense.................................. (48,949) (39,184) (29,232) (22,387) (20,165) Interest and dividend income...................... 15,111 8,769 4,446 3,567 2,464 Net gain (loss) on investment and marketable securities...................................... (10,000) 400 850 1,400 2,350 Settlement of litigation.......................... -- (11,500) -- -- -- Loss on businesses sold or held for sale.......... -- (15,200) (14,500) (12,500) (20,300) ---------- -------- -------- --------- ----------- Loss from continuing operations before provision (credit) for income taxes....................... (60,350) (45,700) (18,000) (18,300) (14,300) Provision (credit) for income taxes............... (18,950) (11,000) 3,000 1,300 (1,500) ---------- -------- -------- --------- ----------- Loss from continuing operations................... (41,400) (34,700) (21,000) (19,600) (12,800) Loss from discontinued operations................. (6,600) -- (3,300) -- -- ---------- -------- -------- --------- ----------- Loss before extraordinary gain.................... (48,000) (34,700) (24,300) (19,600) (12,800) Extraordinary gain from debt retirements.......... 9,900 7,600 100 100 -- ---------- -------- -------- --------- ----------- Loss before the cumulative effect of an accounting change.......................................... (38,100) (27,100) (24,200) (19,500) (12,800) Cumulative effect of an accounting change......... -- -- -- -- (2,100) ---------- -------- -------- -------- --------- NET LOSS.......................................... $ (38,100) $(27,100) $(24,200) $(19,500) $ (14,900) ========== ======== ======== ======== =========
NET EARNINGS (LOSS) PER SHARE: CONTINUING OPERATIONS -- Primary......................................... $ (3.07) $ (2.57) $ (1.67) $ (1.56) $ (1.02) ---------- -------- -------- --------- ----------- Fully diluted................................... $ (3.07) $ (2.57) $ (1.67) $ (1.56) $ (1.02) ---------- -------- -------- --------- ----------- DISCONTINUED OPERATIONS -- Primary......................................... (.49) -- (.26) -- -- ---------- -------- -------- --------- ----------- Fully diluted................................... (.49) -- (.26) -- -- ---------- -------- -------- --------- ----------- LOSS BEFORE EXTRAORDINARY GAIN -- Primary......................................... (3.56) (2.57) (1.93) (1.56) (1.02) ---------- -------- -------- --------- ----------- Fully diluted................................... (3.56) (2.57) (1.93) (1.56) (1.02) ---------- -------- -------- --------- ----------- EXTRAORDINARY GAIN -- Primary......................................... .73 .56 .01 .01 -- ---------- -------- -------- --------- ----------- Fully diluted................................... .73 .56 .01 .01 -- ---------- -------- -------- --------- ----------- CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE -- Primary......................................... -- -- -- -- (.17) ---------- -------- -------- --------- ----------- Fully diluted................................... -- -- -- -- (.17) ---------- -------- -------- --------- ----------- NET LOSS -- Primary......................................... $ (2.83) $ (2.01) $ (1.92) $ (1.55) $ (1.19) ---------- -------- -------- --------- ----------- ---------- -------- -------- --------- ----------- Fully diluted................................... $ (2.83) $ (2.01) $ (1.92) $ (1.55) $ (1.19) ========== ======== ======== ========= =========== WEIGHTED AVERAGE NUMBER OF SHARES: Primary......................................... 13,485 13,460 12,645 12,690 12,605 ========== ======== ======== ========= =========== Fully diluted................................... 14,407 14,312 13,411 13,454 13,332 ========== ======== ======== ========= ===========
The accompanying notes are an integral part of these financial statements. F-3 81 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 31, --------------------- OCTOBER 2, 1991 1992 1993 -------- -------- ----------- (UNAUDITED) (AMOUNTS IN THOUSANDS) CURRENT ASSETS: Unrestricted -- Cash and investments at cost which approximates market............................................... $ 16,509 $ 23,467 $ 50,355 Marketable securities................................... 26,410 50,281 10,152 Restricted -- Cash and investments at cost which approximates market............................................... 32,829 8,187 6,687 Marketable securities................................... 603 -- -- Accounts receivable, less allowances of $4,532,000, $3,961,000 and $4,208,000............................... 83,528 78,363 96,429 Inventories -- Raw materials........................................... 35,468 27,269 29,642 Work in process......................................... 16,958 9,792 10,614 Finished goods.......................................... 41,826 39,082 46,354 -------- -------- ----------- 94,252 76,143 86,610 -------- -------- ----------- Current assets of business held for sale.................. 17,682 18,990 25,581 Insurance claims receivable............................... -- -- 14,500 Prepaid expenses.......................................... 6,826 4,216 3,662 Other current assets...................................... 5,235 3,853 1,217 U.S. Federal deferred income tax asset.................... 18,000 22,000 17,000 -------- -------- ----------- Total Current Assets............................ 301,874 285,500 312,193 -------- -------- ----------- PROPERTY AND EQUIPMENT, AT COST: Land...................................................... 9,597 7,376 5,975 Buildings and improvements................................ 72,001 54,416 54,461 Machinery and equipment................................... 113,232 103,246 111,027 -------- -------- ----------- 194,830 165,038 171,463 Less -- Accumulated depreciation.......................... 67,226 66,469 79,799 -------- -------- ----------- Total Property and Equipment, net............... 127,604 98,569 91,664 -------- -------- ----------- OTHER ASSETS: Restricted cash and investments........................... 1,513 1,625 1,625 Goodwill, less accumulated amortization of $16,305,000, $16,857,000 and $18,645,000............................. 90,980 78,406 76,503 Non-current assets of business held for sale.............. 31,829 30,785 10,775 Investment in and amounts due from businesses sold or discontinued............................................ 10,262 3,019 1,392 Other..................................................... 18,310 17,469 15,453 -------- -------- ----------- 152,894 131,304 105,748 -------- -------- ----------- $582,372 $515,373 $ 509,605 ======== ======== ===========
The accompanying notes are an integral part of these financial statements. F-4 82 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' INVESTMENT
DECEMBER 31, --------------------- OCTOBER 2, 1991 1992 1993 -------- -------- ----------- (UNAUDITED) (AMOUNTS IN THOUSANDS) CURRENT LIABILITIES: Notes payable, current maturities of long-term debt and other short-term obligations............................ $ 4,875 $ 6,810 $ 23,678 Accounts payable.......................................... 52,149 45,052 47,473 Accrued expenses and taxes, net........................... 96,277 92,276 103,543 Current liabilities of business held for sale............. 8,916 8,775 11,212 Insurance claims advances................................. -- -- 6,600 -------- -------- ----------- Total Current Liabilities....................... 162,217 152,913 192,506 -------- -------- ----------- OTHER LIABILITIES: Deferred income taxes..................................... 29,018 29,696 18,000 Other..................................................... 5,627 3,995 8,363 -------- -------- ----------- 34,645 33,691 26,363 -------- -------- ----------- NOTES, MORTGAGE NOTES AND DEBENTURES PAYABLE, LESS CURRENT MATURITIES.............................................. 223,150 192,938 170,063 -------- -------- ----------- Mortgage notes payable of business held for sale.......... 9,431 8,925 8,638 COMMITMENTS AND CONTINGENCIES (NOTE 8) STOCKHOLDERS' INVESTMENT: Preference stock, $1 par value; authorized 7,000,000 shares, none issued................ -- -- -- Common stock, $1 par value; authorized 40,000,000 shares, 15,437,960, 15,602,142 and 15,742,582 shares issued..... 15,438 15,602 15,743 Special common stock, $1 par value; authorized 5,000,000 shares, 1,076,352, 990,007 and 859,567 shares issued.... 1,077 990 859 Additional paid-in capital................................ 134,493 134,599 134,618 Retained earnings......................................... 27,966 3,766 (11,134) Less -- treasury common stock at cost, 3,163,327, 3,795,028 and 3,795,028 shares.......................... (24,365) (26,371) (26,371) -- treasury special common stock at cost, 271,574 shares.................................................. (1,680) (1,680) (1,680) -------- -------- ----------- Total Stockholders' Investment.................. 152,929 126,906 112,035 -------- -------- ----------- $582,372 $515,373 $ 509,605 ======== ======== ===========
The accompanying notes are an integral part of these financial statements. F-5 83 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
39 WEEKS ENDED YEARS ENDED DECEMBER 31, -------------------- ------------------------------- SEPT. 26, OCT. 2, 1990 1991 1992 1992 1993 -------- --------- -------- --------- -------- (UNAUDITED) (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)........................................ $(38,100) $ (27,100) $(24,200) $ (19,500) $(14,900) -------- --------- -------- --------- -------- ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO CASH: Depreciation and amortization.............................. 31,050 28,373 23,644 19,455 16,566 Write off of goodwill and intangible assets................ 4,605 -- -- -- -- (Gain) loss on sale of property and equipment.............. 433 6 (73) 297 33 (Gain) loss on sale of investment and marketable securities............................................... 10,000 (400) (850) (1,400) (2,350) Gain on debt retirements................................... (16,500) (12,600) (150) (150) -- Loss on businesses sold or held for sale................... 9,500 15,200 19,500 12,500 20,300 Settlement of litigation................................... -- 11,500 -- -- -- Cumulative effect of an accounting change.................. -- -- -- -- 2,100 Deferred federal income tax provision (credit) from continuing operations.................................... 1,400 (9,350) (1,700) 2,450 (7,800) Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net................................. 22,184 (8,862) (7,323) (17,526) (21,872) Prepaids and other current assets........................ (4,876) (2,019) 2,443 2,306 398 U. S. Federal income tax refund.......................... 11,883 16,401 1,803 -- -- Inventories.............................................. 27,177 11,703 (2,807) (7,929) (6,567) Net assets of discontinued operations.................... 4,744 1,797 -- -- -- Accounts payable......................................... (17,371) 18,735 (1,638) 2,816 3,202 Accrued expenses and taxes............................... (12,265) (3,087) 3,398 8,016 4,985 Long-term assets, liabilities and other, net............. (47) (679) 52 (1,529) 7,097 -------- --------- -------- --------- -------- Total adjustments to net earnings (loss).......... 71,917 66,718 36,299 19,306 16,092 -------- --------- -------- --------- -------- Net Cash Provided (Used) by Operating Activities...................................... 33,817 39,618 12,099 (194) 1,192 -------- --------- -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures....................................... (23,341) (15,902) (8,804) (7,794) (7,227) Proceeds from the sale of property and equipment........... 1,174 3,573 1,045 948 80 Purchase of investments and marketable securities.......... (41,638) (195,677) (94,671) (77,267) (90,502) Purchase of restricted investments and marketable securities............................................... (2,000) (603) -- -- -- Proceeds from the sale of investments and marketable securities............................................... 70,257 203,133 72,280 72,280 133,000 Proceeds from the sale of restricted investments and marketable securities.................................... 32,535 2,972 -- -- -- Net proceeds from businesses sold or discontinued.......... 20,951 38,496 38,813 23,628 (2,420) Change in restricted cash and investments.................. (46,625) 13,972 13,030 12,993 1,500 Other, net................................................. (1,102) 296 1,080 735 (2,607) -------- --------- -------- --------- -------- Net Cash Provided by Investing Activities......... 10,211 50,260 22,773 25,523 31,824 -------- --------- -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of debentures and notes payable................... (40,612) (43,444) (21,693) (14,578) (1,104) Increase in borrowings..................................... 819 15,860 4,197 3,650 -- Payment of borrowings...................................... (30,002) (73,911) (5,692) (7,821) (3,683) Cash dividends paid........................................ (1,284) (324) -- -- -- Nortek common stock sold to Bready Associates.............. 2,708 -- -- -- -- Purchase of Nortek Common and Special Common Stock......... (2,486) (713) (2,006) (2,006) -- Other, net................................................. (1) (2,357) (2,720) 935 (1,341) -------- --------- -------- --------- -------- Net Cash Used in Financing Activities............. (70,858) (104,889) (27,914) (19,820) (6,128) -------- --------- -------- --------- -------- Net increase (decrease) in unrestricted cash and investments.............................................. (26,830) (15,011) 6,958 5,509 26,888 Unrestricted cash and investments at the beginning of the period................................................... 58,350 31,520 16,509 16,509 23,467 -------- --------- -------- --------- -------- Unrestricted cash and investments at the end of the period................................................... $ 31,520 $ 16,509 $ 23,467 $ 22,018 $ 50,355 ======== ========= ======== ========= ========
The accompanying notes are an integral part of these financial statements. F-6 84 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE THREE YEARS ENDED DECEMBER 31, 1992 AND THE 39 WEEKS ENDED OCTOBER 2, 1993 (UNAUDITED)
SPECIAL ADDITIONAL DEFERRED COMMON COMMON PAID-IN RETAINED TREASURY COMPEN- STOCK STOCK CAPITAL EARNINGS STOCK SATION ------- ------ ---------- -------- -------- ------- (AMOUNTS IN THOUSANDS) BALANCE, December 31, 1989....... $15,023 $1,492 $138,068 $96,243 $(27,731) $(5,064) 288,526 shares of special common stock converted into 288,526 shares of common stock......... 289 (289) -- -- -- -- 510,292 shares of common treasury stock and 172,160 shares of special common treasury stock acquired from the ESOP (Note 6)............................. -- -- (3,194) -- (2,410) 5,064 285,000 shares of common treasury stock sold to Bready Associates..................... -- -- (381) (1,797) 4,886 -- 17,524 shares of common treasury stock and 443 shares of special common treasury stock acquired....................... -- -- -- -- (76) -- Cash dividends of $.10 per common share and $.04 per special common share................... -- -- -- (1,280) -- -- Net loss......................... -- -- -- (38,100) -- -- ------- ------ ---------- -------- -------- ------- BALANCE, December 31, 1990....... 15,312 1,203 134,493 55,066 (25,331) -- 126,817 shares of special common stock converted into 126,817 shares of common stock......... 126 (126) -- -- -- -- 432,292 shares of common treasury stock and 777 shares of special common treasury stock acquired....................... -- -- -- -- (714) -- Net loss......................... -- -- -- (27,100) -- -- ------- ------ ---------- -------- -------- ------- BALANCE, December 31, 1991....... 15,438 1,077 134,493 27,966 (26,045) -- 86,345 shares of special common stock converted into 86,345 shares of common stock......... 87 (87) -- -- -- -- 631,701 shares of common treasury stock acquired, net............ -- -- -- -- (2,006) -- 77,837 shares of common stock issued upon exercise of stock options........................ 77 -- 106 -- -- -- Net loss......................... -- -- -- (24,200) -- -- ------- ------ ---------- -------- -------- ------- BALANCE, December 31, 1992....... 15,602 990 134,599 3,766 (28,051) -- 130,440 shares of special common stock converted into 130,440 shares of common stock......... 131 (131) -- -- -- -- 10,000 shares of common stock issued upon exercise of stock options........................ 10 -- 19 -- -- -- Net loss......................... -- -- -- (14,900) -- -- ------- ------ ---------- -------- -------- ------- BALANCE, October 2, 1993 (unaudited).................... $15,743 $ 859 $134,618 $(11,134) $(28,051) $ -- ======= ====== ========== ======== ======== =======
The accompanying notes are an integral part of these financial statements. F-7 85 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Nortek, Inc. and all of its significant wholly-owned subsidiaries (the "Company" or "Nortek") after elimination of intercompany accounts and transactions. Certain amounts in the prior years' financial statements have been reclassified to conform to the presentation at December 31, 1992. CASH, INVESTMENTS AND MARKETABLE SECURITIES Investments consist of short-term (maturities of less than 30 days) highly liquid investments which are readily convertible into cash. Investments and marketable securities are carried at the lower of aggregate cost or approximate market price. The Company has classified as restricted, certain cash, investments and marketable securities that are not fully available for use in its operations. At December 31, 1992, approximately $8,187,000 of cash and investments has been pledged as collateral for insurance and other requirements and is classified as restricted in current assets, and approximately $1,625,000 of subsidiary cash and investments is classified as restricted in other assets in the accompanying consolidated balance sheet. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND INVESTMENTS -- The carrying amount approximates fair value because of the short maturity of those instruments. MARKETABLE SECURITIES -- The fair value of marketable securities is based on quoted market prices. At December 31, 1992, the fair value of marketable securities approximated the amount on the Company's consolidated balance sheet. LONG-TERM DEBT -- The fair value of long-term indebtedness was estimated based on prices related to transactions involving the Company's long-term indebtedness or valuations prepared by independent third parties. At December 31, 1992, the fair value of long-term indebtedness approximates the amount on the Company's consolidated balance sheet. INVENTORIES Inventories are valued at the lower of cost or market. At December 31, 1991 and 1992, approximately $51,769,000 and $57,432,000 of total inventories, respectively, were valued on the last-in, first-out method. Under the first-in, first-out method (FIFO) of accounting, such inventories would have been $14,642,000 and $15,051,000 greater at December 31, 1991 and 1992, respectively. All other inventories were valued under the FIFO method. SALES RECOGNITION The Company recognizes sales upon the shipment of its products net of applicable provisions for discounts and allowances. The Company also provides for its estimate of warranty and bad debts at the time of shipment as selling, general and administrative expense. F-8 86 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEPRECIATION AND AMORTIZATION Depreciation and amortization of property and equipment is provided on a straight-line basis over the estimated useful lives which are generally as follows: Buildings and improvements..................................... 10-35 years Machinery and equipment, including leases...................... 3-15 years Leasehold improvements......................................... term of lease
Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized. When assets are sold, or otherwise disposed of, cost and accumulated depreciation are eliminated and the resulting gain or loss is recognized. GOODWILL The Company has classified as goodwill the cost in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. The loss from continuing operations for 1990 reflects a net after-tax charge of approximately $3,055,000 ($.23 per share) in the fourth quarter as a result of a determination that the net unamortized goodwill of one of the Company's businesses had no further continuing value. Goodwill is being amortized on a straight-line method over 40 years. Amortization charged to continuing operations amounted to $2,997,000, $2,759,000 and $2,548,000 for 1990, 1991 and 1992, respectively. The reduction in goodwill in 1991 and 1992 also included approximately $3,197,000 and $9,008,000, respectively, charged to loss on businesses sold. At each balance sheet date, the Company evaluates the realizability of goodwill based upon expectations of non-discounted cash flows and operating income for each subsidiary having a material goodwill balance. Based upon its most recent analysis, the Company believes that no material impairment of goodwill exists at December 31, 1992. NET EARNINGS (LOSS) PER SHARE Net earnings (loss) per share amounts have been computed using the weighted average number of common and common equivalent shares outstanding during each year. Earnings (loss) per share calculations for all periods presented do not include the effect of common stock equivalents or convertible debentures (and the reduction in related interest expense) because the assumed exercise of stock options and conversion of debentures is anti-dilutive for the net loss per share amounts. Special Common Stock is treated as the equivalent of common stock in determining earnings per share results. Unallocated and unencumbered shares of the Company's Common and Special Common Stock held by the Company's ESOP were treated as treasury stock for purposes of computing earnings per share. The Company's ESOP was terminated during the second quarter of 1990 (see Note 6). 2. CASH FLOWS Interest paid on indebtedness was $47,334,000, $38,658,000 and $27,436,000 in 1990, 1991 and 1992, respectively. The following table summarizes the activity of businesses sold or discontinued included in the accompanying consolidated statement of cash flows:
YEAR ENDED DECEMBER 31, --------------------------------- 1990 1991 1992 ------- -------- -------- (AMOUNTS IN THOUSANDS) Fair value of assets sold........................... $ -- $ 58,624 $ 52,793 Liabilities assumed by the purchaser................ -- (11,530) (13,329) Notes receivable and other non-cash proceeds received as part of the proceeds.................. -- (10,090) (316) Cash (paid) received relating to businesses sold or discontinued...................................... 20,951 1,492 (335) ------- -------- -------- Net cash proceeds from businesses sold or discontinued...................................... $20,951 $ 38,496 $ 38,813 ======= ======== ========
F-9 87 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes other non-cash financing and investing activities:
YEAR ENDED DECEMBER 31, ----------------------------- 1990 1991 1992 ------ ------ ------- (AMOUNTS IN THOUSANDS) Use of restricted cash and investments in settlement of certain litigation (see Note 8)....................... $ -- $ -- $11,800 Exchange of debentures (see Note 8)..................... -- -- 4,050 Settlement of 11% subordinated notes receivable (see Note 8)............................................... -- -- 2,576 Non-compete agreement................................... -- 540 -- Reduction of debt in connection with the termination of the Company's ESOP.................................... 1,871 -- -- Capitalized lease obligations incurred.................. 1,217 113 -- Other................................................... 989 1,174 1,556
3. INVESTMENTS IN AND AMOUNTS DUE FROM BUSINESSES SOLD OR DISPOSED During the past several years, the Company received notes and other receivables and preferred stock as partial consideration from the sale of businesses. The accompanying consolidated balance sheet at December 31, 1991 and 1992 includes approximately $12,909,000 and $3,888,000, respectively, of such receivables and preferred stock ($2,647,000 and $869,000, respectively, is included in other current assets) and is net of approximately $3,384,000 and $4,320,000, respectively, of valuation reserves (see Notes 8, 10, 11, 12 and 13). 4. INCOME TAXES The following is a summary of the components of earnings (loss) from continuing operations before income tax credit:
YEAR ENDED DECEMBER 31, ---------------------------------- 1990 1991 1992 -------- -------- -------- (AMOUNTS IN THOUSANDS) Domestic........................................... $(67,150) $(52,900) $(24,400) Foreign............................................ 6,800 7,200 6,400 -------- -------- -------- $(60,350) $(45,700) $(18,000) ======== ======== ========
The following is a summary of the provision (credit) for income taxes from continuing operations included in the accompanying consolidated statement of operations:
YEAR ENDED DECEMBER 31, ---------------------------------- 1990 1991 1992 -------- -------- -------- (AMOUNTS IN THOUSANDS) Federal Income Taxes -- Current.......................................... $(24,250) $ (5,400) $ 600 Deferred......................................... 1,400 (9,350) (1,700) -------- -------- -------- (22,850) (14,750) (1,100) Foreign............................................ 3,000 3,000 3,200 State.............................................. 900 750 900 -------- -------- -------- $(18,950) $(11,000) $ 3,000 ======== ======== ========
F-10 88 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The deferred federal income tax provision (credit) from continuing operations includes the following timing differences:
YEAR ENDED DECEMBER 31, --------------------------------- 1990 1991 1992 -------- -------- ------- (AMOUNTS IN THOUSANDS) Accelerated depreciation.......................... $ 933 $ (1,320) $(1,550) Accruals not deductible currently................. 725 (3,975) 1,625 Capitalization of inventory for tax purposes...... 66 (25) 250 Effect of capital loss............................ -- -- (1,400) Alternative minimum income tax.................... -- (3,750) (275) Other, net........................................ (324) (280) (350) -------- -------- ------- Total deferred federal income tax provision (credit) from continuing operations............. $ 1,400 $ (9,350) $(1,700) ======== ======== =======
Prepaid income taxes, relating primarily to accruals not deductible currently, of approximately $18,000,000 at December 31, 1991 and $22,000,000 at December 31, 1992, are classified as a current asset in the accompanying consolidated balance sheet. All other cumulative deferred income tax liabilities are classified as non-current. Income tax (payments) refunds, net, were approximately $4,700,000, $5,700,000 and $(1,600,000) in 1990, 1991 and 1992, respectively. The table below reconciles the federal statutory income tax rate to the effective tax rate from continuing operations of 31.4%, 24.1% and 16.7% in 1990, 1991, and 1992, respectively.
>YEAR ENDED DECEMBER 31, --------------------------------- 1990 1991 1992 -------- -------- ------- (AMOUNTS IN THOUSANDS) Income tax credit at the federal statutory rate... $(20,519) $(15,538) $(6,120) INCREASE (DECREASE) FROM STATUTORY RATE: Effect of unrecognized capital losses............. (2,433) -- 3,990 State taxes, net of federal tax effect............ 868 495 594 Amortization not deductible for tax purposes...... 163 358 552 Write-off of goodwill............................. 1,039 -- -- Businesses sold................................... -- 968 2,827 Foreign source deemed income...................... -- 2,182 648 Tax effect on foreign income...................... 589 546 479 Other, net........................................ 1,343 (11) 30 -------- -------- ------- Income tax provision (credit) from continuing operations...................................... $(18,950) $(11,000) $ 3,000 ======== ======== =======
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," the Company will change its method of accounting for income taxes in the first quarter of 1993. Prior year financial statements will not be restated to reflect the new accounting method. The effect of this new accounting method will not require a material adjustment for the cumulative effect of an accounting change. For years through December 31, 1992, the provision (credit) for income taxes was computed in accordance with the comprehensive income tax allocation method, which recognizes the tax effects of all income and expense transactions included in each year's consolidated statement of operations regardless of the year the transactions are reported for tax purposes. Under SFAS No. 109, deferred income tax assets or liabilities will be computed based on the difference (temporary differences) between the financial statement and income tax bases of assets and liabilities, using the current marginal income tax rates in effect for the year in which the F-11 89 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) differences are expected to reverse. Deferred income tax expenses or credits will be based on the changes in the asset or liability between periods. 5. NOTES, MORTGAGE NOTES AND DEBENTURES PAYABLE Notes, mortgage notes and debentures payable at December 31, 1991 and 1992 consists of the following:
DECEMBER 31, --------------------- 1991 1992 -------- -------- (AMOUNTS IN THOUSANDS) Notes payable to banks......................................... $ 64 $ -- Mortgage notes payable......................................... 21,251 20,661 Other.......................................................... 7,662 4,435 9 3/4% senior notes due 1997 ("9 3/4% Senior Notes"), net of unamortized debt discount of $8,049,000 and $6,967,000....... 43,396 44,478 13 1/2% senior subordinated debentures due 1997 ("13 1/2% Debentures"), net of unamortized original issue discount of $563,000 and $438,000........................................ 83,760 79,685 11 1/2% senior subordinated debentures due 1994 ("11 1/2% Debentures"), net of unamortized original issue discount of $205,000 and $69,000......................................... 40,794 22,531 11% subordinated sinking fund debentures due 2004 ("11% Debentures"), net of unamortized debt discount of $837,000 and $666,000................................................. 20,596 18,758 10% subordinated sinking fund debentures due 1999 ("10% Debentures"), net of unamortized debt discount of $355,000 and $269,000................................................. 3,105 2,742 7 1/2% convertible sinking fund debentures due 2006 ("7 1/2% Convertible Debentures")..................................... 17,133 15,793 -------- -------- 237,761 209,083 Less current maturities........................................ 5,180 7,220 -------- -------- $232,581 $201,863 ======== ========
The Company's Canadian subsidiary has a $15,800,000 secured line of credit and as of December 31, 1992, there were no outstanding borrowings under this line of credit. The line of credit facility is subject to review by April 30, 1994. Broan Limited pays a commitment fee of .25% per annum on the unutilized portion of this line of credit payable monthly on a pro rata basis. Borrowings are available for working capital and other general corporate purposes, of which approximately $11,600,000 is available for Nortek and its other subsidiaries' requirements. Mortgage notes payable obligations include various mortgage notes and other related indebtedness payable in installments through 1999 and bearing interest at rates ranging from 2% to 13.5%. Approximately $20,361,000 of such indebtedness is collateralized by property and equipment with an aggregate net book value of approximately $17,645,000 at December 31, 1992. Other obligations include borrowings relating to equipment purchases and other borrowings bearing interest from 2% to 16.36% and maturing at various dates through 2001. Approximately $1,531,000 of such indebtedness is collateralized by property and equipment with an aggregate net book value of approximately $1,769,000 at December 31, 1992. The 9 3/4% Senior Notes are redeemable by the Company at any time in whole or from time to time in part at 100% of principal amount plus accrued interest, if any, to the date of redemption. The indenture governing the 9 3/4% Senior Notes limits the payment of cash dividends and stock payments. Under this loan agreement, which is the most restrictive of the Company's loan agreements and indentures, share payments were prohibited at December 31, 1992. F-12 90 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The indenture also requires that the Company maintain a minimum net worth, as defined, of $100,000,000. If the net worth at the end of any two consecutive fiscal quarters falls below the minimum, then on the last day of the fiscal quarter (the "Accelerated Payment Date") next following such second fiscal quarter or, if such second fiscal quarter is the fiscal year end of the Company, 120 days following the fiscal year end, the Company shall commence an offer ("Mandatory Purchase Offer") to purchase 7.5% of the principal amount of the 9 3/4% Senior Notes. No fiscal quarter will count towards more than one requirement to make a Mandatory Purchase Offer. The purchase price of the 9 3/4% Senior Notes will be their principal amount plus accrued interest to the date of purchase. The Company may credit against its obligation to purchase the 9 3/4% Senior Notes, 100% of the principal amount of the 9 3/4% Senior Notes acquired or redeemed subsequent to the end of the first fiscal quarter in which the Company's net worth is less than $100,000,000 which were not previously used as a credit. During 1990, 1991 and 1992, the Company acquired, at a discount, in open market and negotiated transactions $57,678,000, $56,485,000 and $26,398,000, respectively, principal amount of its various notes and debentures. These transactions resulted in extraordinary gains of $1,700,000, net of income taxes of $1,150,000 ($.13 per share) in the first quarter of 1990, $3,600,000, net of income taxes of $2,350,000 ($.27 per share) in the second quarter of 1990, $2,450,000, net of income taxes of $1,650,000 ($.19 per share) in the third quarter of 1990, and $2,150,000, net of income taxes of $1,450,000 ($.16 per share) in the fourth quarter of 1990, $3,500,000, net of income taxes of $2,500,000 ($.26 per share) in the first quarter of 1991, $1,200,000, net of income taxes of $650,000 ($.09 per share) in the second quarter of 1991, $2,900,000, net of income taxes of $1,850,000 ($.22 per share) in the fourth quarter of 1991 $200,000, net of income taxes of $150,000 ($.01 per share) in the second quarter of 1992, and an extraordinary loss of $100,000, net of an income tax credit of $100,000 ($.01 per share) in the third quarter of 1992. Discount and deferred costs relating to the 9 3/4% Senior Notes, 13 1/2% Debentures, 11 1/2% Debentures and the 7 1/2% Convertible Debentures are being amortized over the life of the issue. Discount related to the 10% and 11% Debentures is being amortized over the remaining life of those issues. Such amortization of discount and deferred costs was approximately $2,400,000, $2,000,000 and $2,000,000 in 1990, 1991 and 1992, respectively. The indentures governing the 11 1/2% Debentures, the 13 1/2% Debentures and the 7 1/2% Convertible Debentures also limit the payment of cash dividends and stock payments and require that the Company maintain a minimum net worth, as defined, of $100,000,000. If the net worth at the end of any two consecutive fiscal quarters falls below the minimum, then on the last day of the fiscal quarter (the "Accelerated Payment Date") next following such second fiscal quarter, the Company will be required to begin semi-annual redemptions of $2,500,000 principal amount of the 11 1/2% Debentures, $12,500,000 principal amount of the 13 1/2% Debentures, and for the 7 1/2% Convertible Debentures to accelerate the then outstanding principal amount due after such Accelerated Payment Date. Such redemptions will continue until the Company's net worth exceeds $100,000,000 or until all the 11 1/2% Debentures, the 13 1/2% Debentures and the 7 1/2% Convertible Debentures are redeemed. The redemption price of the 7 1/2% Convertible Debentures will be their principal amount plus accrued interest to the Accelerated Payment Date. The Company may credit against its obligation to redeem the 7 1/2% Convertible Debentures upon any Accelerated Payment Date the principal amount of (i) 7 1/2% Convertible Debentures acquired by the Company and surrendered for cancellation (including converted 7 1/2% Convertible Debentures), and (ii) 7 1/2% Convertible Debentures redeemed or called for redemption otherwise than through operation of the sinking fund or through redemption on an Accelerated Payment Date. In no event shall the failure to meet the minimum net worth stated above at the end of any fiscal quarter be counted toward more than one acceleration of any sinking fund payment. All sinking fund requirements of the 7 1/2% Convertible Debentures have been met. F-13 91 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the terms of the indenture governing the 11% Debentures, the Company is required to make annual mandatory sinking fund payments of $1,810,000 until April 2003 to retire 90% of the issue prior to maturity. The sinking fund requirements have been met through April 1993, and a portion (approximately $1,687,420) of the sinking fund requirement due April 1994 has also been met, as a result of open market purchases. The terms of the indenture governing the 10% Debentures require the Company to make seven remaining annual mandatory sinking fund payments of $432,500 each December to retire 90% of the issue prior to maturity. The 13 1/2% Debentures are redeemable at the option of the Company, in whole or in part, upon 30 days notice at 103.0% (as of December 31, 1992) declining to 100% on June 15, 1994. The 11 1/2% Debentures are redeemable at the option of the Company, in whole or in part, upon 30 days notice at 101.5% (as of December 31, 1992) declining to 100% on June 1, 1993. The 11% and 10% Debentures are redeemable at par at any time at the option of the Company. The 7 1/2% Convertible Debentures are redeemable at the option of the Company as a whole or from time to time in part, at 103.0% (as of December 31, 1992), declining to 100% on May 1, 1996. At December 31, 1991 and 1992, the 7 1/2% Convertible Debentures were convertible into shares of Common Stock of the Company at $21.56 per share, which is subject to adjustment under certain conditions. The following is a summary of maturities of all of the Company's debt obligations, excluding unamortized debt discount, due after December 31, 1993:
(AMOUNTS IN THOUSANDS) 1994.................................................... $ 30,580 1995.................................................... 3,028 1996.................................................... 3,053 1997.................................................... 142,351 Thereafter.............................................. 31,260 ----------- $210,272 ===========
6. COMMON STOCK, SPECIAL COMMON STOCK, STOCK OPTIONS AND DEFERRED COMPENSATION Each share of Special Common Stock has 10 votes on all matters submitted to a stockholder vote, except that the holders of Common Stock, voting separately as a class, have the right to elect 25% of the directors to be elected at a meeting to the Company's Board of Directors, with the remaining 75% being elected by the combined vote of both classes. Shares of Special Common Stock are generally non-transferable, but are freely convertible on a share-for-share basis into shares of Common Stock. The Company has a rights plan which provides for the right to purchase for $75, one one-hundredth of a share of $1.00 par value Series A Participating Preference Stock for each right held. The rights that are not currently exercisable, are attached to each share of Common Stock and may be redeemed by the Directors at $.01 per share at any time. After a shareholder acquires beneficial ownership of 17% or more of the Company's Common Stock and Special Common Stock, the rights will trade separately and become exercisable entitling a rights holder to acquire additional shares of the Company's Common Stock having a market value equal to twice the amount of the exercise price of the right. In addition, after a person or group ("Acquiring Company") commences a tender offer or announces an intention to acquire 30% or more of the Company's Common Stock and Special Common Stock, the rights will trade separately and, under certain circumstances, F-14 92 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) will permit each rights holder to acquire common stock of the Acquiring Company, having a market value equal to twice the amount of the exercise price of the right. At December 31, 1992, a total of 2,691,554 shares of Common Stock was reserved as follows: Conversion of convertible debentures.............................. 732,514 Stock option plans................................................ 969,033 Conversion of special common stock................................ 990,007 --------- 2,691,554 =========
At December 31, 1992 a total of 43,500 shares of Special Common Stock was reserved for stock option plans. The Company has several stock option plans which provide for the granting of options to certain officers, employees and non-employee directors of the Company. Options granted under the plans vest over periods ranging up to five years and expire from eight to ten years from the date of grant. These Plans provide for the issuance of 1,183,333 shares of the Company's Common and Special Common Stock, and at December 31, 1992, there were options outstanding covering 240,300 shares of Common and Special Common Stock, of which 172,500 options are currently exercisable. Options for 120,700 and 41,400 shares of Common and Special Common Stock became exercisable during 1991 and 1992, respectively. Proceeds from options exercised are credited to common stock and additional paid-in capital. The following table summarizes all Common and Special Common Stock option transactions for the three years ended December 31, 1992:
OPTION PRICE ---------------------------- NUMBER PER OF SHARES SHARE TOTAL ---------- ------------- ----------- OPTIONS OUTSTANDING AT DECEMBER 31, 1989.... 775,229 $4.69-$15.69 $ 5,203,369 Granted................................... 710,133 2.25-3.56 2,057,782 Exercised................................. -- -- -- Canceled.................................. (1,131,062) 2.88-10.88 (5,731,517) OPTIONS OUTSTANDING AT DECEMBER 31, 1990.... 354,300 $2.25-$15.69 $ 1,529,634 Granted................................... 30,000 2.88 86,250 Exercised................................. -- -- -- Canceled.................................. (7,800) 2.88 (22,425) OPTIONS OUTSTANDING AT DECEMBER 31, 1991.... 376,500 $2.25-$15.69 $ 1,593,459 Granted................................... -- -- -- Exercised................................. (85,700) 2.25-2.88 (240,613) Canceled.................................. (50,500) 2.25-8.69 (288,008) ---------- ------------- ----------- OPTIONS OUTSTANDING AT DECEMBER 31, 1992.... 240,300 $2.25-$15.69 $ 1,064,838 ========== ============= ===========
During 1990, a total of $904,000 was charged to operations as compensation expense relating to the forgiveness of principal and interest on notes receivable from the current Chairman and the former Chairman. On October 31, 1990, in connection with the retirement of the Company's former Chairman, 413,333 Common Stock options were canceled (see Note 13). During 1990, the Company's ESOP, which covered substantially all regular full-time employees not covered by a collective bargaining agreement, was terminated and the Company purchased Treasury Stock from the ESOP consisting of 510,292 Nortek Common shares and 172,160 Nortek Special Common shares F-15 93 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for approximately $2,410,000. In connection with the ESOP termination, the unamortized balance of deferred compensation, net of the guarantee of indebtedness, was accounted for as a charge to additional paid-in capital of approximately $3,193,000. On January 31, 1992, the Company acquired 625,000 shares of its Common Stock in a negotiated transaction for approximately $1,975,000 including expenses. See Note 5 with respect to limitations on the payment of cash dividends and stock payments. 7. PENSION, RETIREMENT, PROFIT SHARING PLANS AND POST-RETIREMENT BENEFITS The Company and its subsidiaries have various pension, retirement and profit sharing plans requiring contributions to qualified trusts and union administered funds. Pension and profit sharing expense charged to operations aggregated approximately $679,000 in 1990, $1,938,000 in 1991 and $2,130,000 in 1992. The Company's policy is to fund currently the actuarially determined annual contribution. The Company's net pension expense (credit) for its defined benefits plans for 1990, 1991 and 1992 consists of the following components:
YEAR ENDED DECEMBER 31, ------------------------------- 1990 1991 1992 ------- ------- ------- (AMOUNTS IN THOUSANDS) Service costs......................................... $ 1,276 $ 1,213 $ 1,584 Interest cost......................................... 2,079 1,818 1,967 Actual net loss (income) on plan assets............... 2,192 (4,762) (3,173) Net amortization and deferred items................... (5,563) 2,635 1,070 ------- ------- ------- Net pension expense (credit).......................... $ (16) $ 904 $ 1,448 ======= ======= =======
The following table sets forth the funded status of the Company's defined benefit plans and amounts recognized in the Company's consolidated balance sheet:
DECEMBER 31, ------------------- 1991 1992 ------- ------- (AMOUNTS IN THOUSANDS) Actuarial present value of benefit obligations at September 30: Vested benefits.................................................. $15,308 $17,535 Non-vested benefits.............................................. 409 552 ------- ------- Accumulated benefit obligation................................... 15,717 18,087 Effect of projected future compensation levels................... 4,526 5,829 ------- ------- Projected benefit obligation..................................... 20,243 23,916 Plan assets at fair value at September 30........................ 24,660 26,065 ------- ------- Plan assets in excess of projected benefit obligation............ 4,417 2,149 Unrecognized net loss............................................ 5,039 5,930 Unrecognized transition net asset at January 1................... (3,635) (3,320) Unrecognized prior service costs................................. 726 985 ------- ------- Prepaid pension costs at December 31............................. $ 6,547 $ 5,744 ======= =======
Plan assets include commingled funds, marketable securities, insurance contracts and cash and short-term investments. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8.5 percent and 6 percent, respectively, in 1990 and 8 percent and 6 percent, respectively, in 1991 and 1992. The expected long-term rate of return on assets was 9.5 percent in 1990, 1991 and 1992. F-16 94 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Certain of the Company's subsidiaries provide health care and related benefits, which were modified in 1993, to qualified active and retired beneficiaries. These benefits are net of reimbursement by Medicare and other insurance coverages. Effective January 1, 1993, the Company will adopt the accounting requirements of Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Post-Retirement Benefits" and expects to record the initial accumulated post-retirement benefit obligation ("APBO") of approximately $2,100,000 (after an income tax credit of approximately $1,000,000) at January 1, 1993 as a charge to operations ($.17 per share, net of tax) as the cumulative effect of an accounting change. Previously, benefits were charged to operating results in the period that such benefits were paid. Approximately $950,000 of the APBO is expected to be paid during 1993 as a result of certain plan modifications. The annual expense for 1993 from adopting SFAS 106 is expected to approximate the expense that would have been recorded under the previous accounting method. The Company continues to fund benefit costs principally on a pay-as-you-go basis, with most retirees paying a portion of the costs. The discount rate used in determining the APBO was 8 percent. A 17 percent annual rate of increase in the per capita cost of such health care and related benefits was assumed for 1993, decreasing gradually to 6 percent in the year 2009. 8. COMMITMENTS AND CONTINGENCIES The Company provides accruals for all direct and indirect costs associated with the estimated resolution of contingencies at the earliest date at which the incurrence of a liability is deemed probable and the amount of such liability can be reasonably estimated. In December 1991, the Company recorded an $11,500,000 pre-tax charge ($.47 per share, net of tax) in connection with the settlement of litigation with the former selling shareholders of the Company's former Bend Millwork Systems Company. Payment was made on March 6, 1992 by an insurance company that held, at December 31, 1991, approximately $16,500,000 of the Company's restricted investments and marketable securities as collateral for a security bond. In July 1992, derivative litigation against the Company and its directors challenging the transactions involving the retirement in 1990 of the Company's former Chairman was settled. In connection with the settlement, the Company recorded a net after-tax gain on discontinued operations in the third-quarter of approximately $900,000 ($.07 per share), resulting from the exchange of $5,250,000 principal amount (included in the Company's consolidated balance sheet at the date of exchange at approximately $2,576,000) of Monogram Industries, Inc. ("Monogram") 11% subordinated notes due December 31, 1995 held by the Company for $4,050,000 principal amount of Nortek 13 1/2% Senior Subordinated Debentures due June 15, 1997 held by a company controlled by Nortek's former Chairman. At December 31, 1992, the Company and its subsidiaries are obligated under lease agreements for the rental of certain real estate and machinery and equipment used in its operations. Minimum annual rental expense (net of minimum sublease rental income of approximately $9,306,000) aggregates approximately $38,119,000 at December 31, 1992. The obligations are payable as follows: 1993............................................................ $ 6,875,000 1994............................................................ 5,233,000 1995............................................................ 2,663,000 1996............................................................ 2,057,000 1997............................................................ 2,258,000 Thereafter...................................................... 19,033,000
Certain of these lease agreements provide for increased payments based on changes in the consumer price index. Rental expense, net, from continuing operations in the accompanying consolidated statement of operations for the years ended December 31, 1990, 1991 and 1992 was approximately $14,617,000, F-17 95 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $12,434,000 and $10,626,000, respectively. Under certain of these lease agreements, the Company and its subsidiaries are also obligated to pay insurance and taxes. At December 31, 1992, the Company is contingently liable for obligations (approximately $7,700,000) under Industrial Revenue Bond agreements ("IRB'S") relating to facilities of previously owned subsidiaries. During 1992, the Company was notified of events of default relating to the failure of one of these previously owned subsidiaries, obligated on $7,100,000 of these IRB'S, to make interest payments of approximately $800,000 due in March and September 1992 and a $75,000 payment of principal and interest due in May 1992. In February 1993, the Company was informed that this former subsidiary filed for protection under Federal bankruptcy laws. The Company has not been informed of what actions might be taken by the holders of these bonds, but it is possible there may be a call for acceleration of payment of the bonds. The Company believes that any liability that may ultimately result from the resolution of this matter, in excess of amounts provided, will not have a material adverse effect on financial position or results of operations of the Company. The Company is subject to other contingencies, including additional legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, product liability, warranty and product recalls, environmental matters and contract and employment claims. The Company has used various substances in its products and manufacturing operations which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and worker's compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts provided, will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 9. OPERATING SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISK The Company predominantly operates in one industry segment, Residential and Commercial Building Products. No single customer accounts for 10% or more of consolidated net sales. More than 90% of net sales and identifiable segment assets are related to the Company's domestic operations. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different geographical regions. At December 31, 1992, the Company had no significant concentrations of credit risk. 10. BUSINESSES SOLD In 1991, the Company completed the sale of substantially all of the assets, subject to certain liabilities, of a group of its operations engaged in the business of manufacturing and selling wood, wood-vinyl and packaging products and DPI completed the sale of the stock of its American Door Company of Michigan, Inc. subsidiary and substantially all of the assets, subject to certain liabilities, of its Castlegate, Inc. and Mohawk Flush Doors, Inc. subsidiaries. In connection with these transactions, the Company recorded pre-tax losses of approximately $8,500,000 ($.45 per share, net of tax) in the second quarter and $6,700,000 ($.37 per share, net of tax) in the third quarter of 1991, respectively. Net cash proceeds from transactions in 1991 were used to retire bank indebtedness of DPI in 1991. F-18 96 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On January 2, 1992, the assets, subject to certain liabilities, of the Company's Dixieline Products, Inc. ("DPI") subsidiary, L. J. Smith, Inc. ("L. J. Smith") were sold for approximately $24,000,000 in cash. The Company recorded a pre-tax gain on the sale of L. J. Smith of approximately $8,000,000 ($.34 per share, net of tax) in the first quarter of 1992. On October 2, 1992, the Company sold all of the capital stock of its wholly-owned subsidiary, Bend Millwork Systems, Inc. ("Bend") for approximately $17,200,000 in cash and recorded a pre-tax loss on sale in the third quarter of 1992 of approximately $20,500,000 ($1.43 per share, net of tax). In the fourth quarter of 1992, the Company recorded an additional provision of approximately $2,000,000 ($.17 per share, net of tax) in connection with the sale of Bend related to purchase price negotiations and settlements. The combined unaudited net sales and pre-tax loss for all businesses sold in 1991 and 1992 were approximately $234,800,000 and $3,700,000, respectively, for the year ended December 31, 1991, and approximately $90,600,000 and $3,900,000, respectively, for the year ended December 31, 1992. Unaudited pro forma net sales, loss from continuing operations and fully diluted loss per share from continuing operations of the Company for the year ended December 31, 1992, assuming that the sale of L.J. Smith and Bend had occurred on January 1, 1992, would have been $709,300,000, $2,500,000 and $.20 respectively. The pro forma data does not purport to be indicative of the results which would actually have been reported, if the dispositions had occurred on January 1, 1992 or which may be reported in the future. In computing the pro forma results, the net after-tax loss on the sale of businesses in 1992 ($14,500,000 before income taxes) has been excluded; however, no investment income was assumed earned on the net cash proceeds of approximately $22,300,000 from the sale of L. J. Smith or the cash proceeds of approximately $17,200,000 on the sale of Bend. 11. DISCONTINUED OPERATIONS Results of discontinued operations in 1990 include other income and expense items relating to businesses discontinued in prior years, and in the fourth quarter primarily reflect a net after-tax charge of approximately $7,000,000 (net of income tax credit of approximately $4,700,000) as a result of the discontinuance of a product line and from reserves established to reduce the carrying value of certain assets of discontinued operations to estimated net realizable value at December 31, 1990. Results of discontinued operations in the fourth quarter of 1990 also include after-tax income previously deferred of approximately $2,200,000 (net of an income tax provision of approximately $1,200,000) resulting from the cash collection and settlement of approximately $5,400,000 from certain businesses previously discontinued. Results for the second quarter of 1990 include approximately $1,000,000 of net after-tax income which was deferred in 1989 in connection with the sale of Monogram as a result of the collection in June 1990 of the $14,000,000 note due from the purchaser of Monogram. The following is an unaudited summary of the results of discontinued operations for the year ended December 31, 1990:
YEAR ENDED DECEMBER 31, 1990 ---------------------- (AMOUNTS IN THOUSANDS) Net sales............................................... $ 15,656 ---------- Loss before income tax credit........................... (3,450) Income tax credit....................................... (1,250) ---------- Loss from discontinued operations....................... (2,200) Loss on disposal, net of income tax credit of $3,900,000............................................ (4,400) ---------- Loss from discontinued operations....................... $ (6,600) ==========
F-19 97 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Results of discontinued operations in 1991 include other income and expense items relating to businesses discontinued in prior years, including proceeds received from the settlement of certain litigation that was pending prior to the sale in 1989 of the Company's former Bradford-White Corporation subsidiary which resulted in a pre-tax gain of approximately $700,000 in the first quarter of 1991 ($.03 per share, net of tax). Results of discontinued operations include other income and expense items relating to businesses discontinued in prior years, including an increase in reserves of approximately $1,400,000 in the third quarter and $5,000,000 in the fourth quarter of 1992. 12. NET GAIN (LOSS) ON INVESTMENT AND MARKETABLE SECURITIES During 1990, the Company recorded a pre-tax loss on investment and marketable securities of $2,300,000 ($.12 per share, net of tax) in the first quarter, a pre-tax loss of $1,200,000 ($.01 per share, net of tax) in the second quarter, a pre-tax loss of $4,250,000 ($.09 per share, net of tax) in the third quarter and a pre-tax loss of $2,250,000 ($.12 per share, net of tax) in the fourth quarter. During 1991, the Company recorded a pre-tax gain on investment and marketable securities of approximately $200,000 ($.01 per share, net of tax) in the first quarter, a pre-tax loss of $1,850,000 ($.09 per share, net of tax) in the second quarter, a pre-tax gain of $350,000 ($.02 per share, net of tax) in the third quarter and a pre-tax gain of $1,700,000 ($.09 per share, net of tax) in the fourth quarter. The pre-tax loss in the second quarter includes a $1,600,000 pre-tax loss ($.07 per share, net of tax) from the sale of the Company's investment in Stanley Interiors preferred stock (previously recorded in other assets) for approximately $1,000,000 in cash. During 1992, the Company recorded a pre-tax loss on investment and marketable securities of $500,000 ($.03 per share, net of tax) in the first quarter, a pre-tax gain of $850,000 ($.04 per share, net of tax) in the second quarter, a $1,050,000 pre-tax gain ($.06 per share, net of tax) in the third quarter and a pre-tax loss of $550,000 ($.04 per share, net of tax) in the fourth quarter. 13. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE In the fourth quarter of 1990, operating results from continuing operations include the payments made by the Company to its former Chairman in connection with the settlement of his employment and other agreements totalling $9,500,000, which resulted in an after-tax charge of $5,700,000 ($.43 per share). Derivative litigation has been settled challenging this transaction (see Note 8). During 1990, the Company recorded net after-tax charges of $800,000 ($.06 per share) in the first quarter, $800,000 ($.06 per share) in the third quarter and $900,000 ($.07 per share) in the fourth quarter in connection with various litigation matters. During 1991, the Company increased reserves (primarily related to businesses sold) for bad debts and warranties and recorded net after-tax charges of approximately $800,000 ($.06 per share) in the first quarter, $600,000 ($.04 per share) in the second quarter, $600,000 ($.04 per share) in the third quarter, and $800,000 ($.06 per share) in the fourth quarter. Also during 1991, the Company recorded net after-tax charges of approximately $400,000 ($.03 per share) in the second quarter, $800,000 ($.06 per share) in the third quarter and $200,000 ($.01 per share) in the fourth quarter in connection with various litigation matters. F-20 98 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. ACCRUED EXPENSES AND TAXES, NET Accrued expenses and taxes, net, consist of the following at December 31, 1991 and 1992:
DECEMBER 31, ------------------- 1991 1992 ------- ------- (AMOUNTS IN THOUSANDS) Interest......................................................... $ 5,071 $ 4,840 Insurance........................................................ 16,844 18,071 Payroll, management incentive and accrued employee benefits...... 13,036 10,567 Settlement of litigation......................................... 11,500 -- Businesses sold or discontinued.................................. 3,813 12,963 Other, net....................................................... 46,013 45,835 ------- ------- $96,277 $92,276 ======= =======
15. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) The following summarizes unaudited quarterly financial data for the years ended December 31, 1991 and December 31, 1992:
FOR THE QUARTERS ENDED ----------------------------------------------- MARCH 30 JUNE 29 SEPT. 28 DEC. 31 -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1991 Net sales............................... $221,984 $248,872 $239,868 $206,325 Gross profit............................ 50,451 58,578 62,979 51,950 Loss from continuing operations......... (7,500) (9,750) (6,550) (10,900) Loss per share from continuing operations: Primary............................... (.56) (.72) (.49) (.82) Fully diluted......................... (.56) (.72) (.49) (.82) Net loss................................ (3,900) (8,800) (6,300) (8,100) Net loss per share: Primary............................... (.29) (.65) (.47) (.61) Fully diluted......................... (.29) (.65) (.47) (.61)
FOR THE QUARTERS ENDED ----------------------------------------------- MARCH 28 JUNE 27 SEPT. 26 DEC. 31 -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1992 Net sales............................... $188,868 $215,862 $212,500 $182,749 Gross profit............................ 46,017 54,239 51,317 53,229 Earnings (Loss) from continuing operations............................ 100 100 (19,800) (1,400) Earnings (Loss) per share from continuing operations: Primary............................... .01 .01 (1.58) (.11) Fully diluted......................... .01 .01 (1.58) (.11) Net earnings (loss)..................... 100 300 (19,900) (4,700) Net earnings (loss) per share: Primary............................... .01 .02 (1.59) (.37) Fully diluted......................... .01 .02 (1.59) (.37)
F-21 99 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The loss from continuing operations in 1991 includes a pre-tax charge of approximately $11,500,000 ($.47 per share, net of tax) in the fourth quarter from the settlement of certain litigation, a pre-tax loss on businesses sold of approximately $6,700,000 ($.37 per share, net of tax) in the third quarter, and a pre-tax loss on businesses sold of approximately $8,500,000 ($.45 per share, net of tax) in the second quarter (see Notes 8 and 10). The earnings (loss) from continuing operations in 1992 includes a pre-tax gain of approximately $8,000,000 ($.34 per share, net of tax) in the first quarter, a pre-tax loss of approximately $20,500,000 ($1.43 per share, net of tax) in the third quarter and a pre-tax loss of approximately $2,000,000 ($.17 per share, net of tax) in the fourth quarter on businesses sold. The net loss in the fourth quarter of 1992 also includes a $3,300,000 after-tax loss ($.27 per share) on discontinued operations (see Notes 8 and 10). Substantially lower sales in 1991 and 1992, as compared to the prior year, in part, reflect the effect of the general slowdown in the U. S. economy, particularly in the home building industry in 1991 and reflects the effect of the sale of businesses in both years. (See Management's Discussion and Analysis of Financial Condition and Results of Operations.) 16. INTERIM FINANCIAL STATEMENTS (UNAUDITED) (A) The unaudited consolidated financial statements presented for the 39 weeks ended October 2, 1993 and September 26, 1992 ("Unaudited Financial Statements") have been prepared by Nortek, Inc. and subsidiaries (the "Company") without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, although, the Company believes that the disclosures included are adequate to make the information presented not misleading. Certain amounts in the Unaudited Financial Statements for the prior periods have been reclassified to conform to the presentation at October 2, 1993. (B) On January 2, 1992, the Company's Dixieline Products, Inc. subsidiary sold the assets, subject to certain liabilities, of its subsidiary, L.J. Smith, Inc. and, on October 2, 1992, the Company sold all of the capital stock of its wholly-owned subsidiary, Bend Millwork Systems, Inc. In October 1993, the Company decided to sell its Dixieline Lumber Retail Home Center Operations ("Dixieline"), and provided a pre-tax valuation reserve of approximately $20,300,000 ($1.19 per share, net of tax) in the third quarter of 1993 to reduce the Company's net investment in such business to estimated net realizable value and has reflected Dixieline's assets and liabilities separately in the accompanying consolidated balance sheets. (C) In the first 39 weeks of 1993, the Company recorded a pre-tax loss of approximately $1,600,000 ($.08 per share, net of tax) as a result of the sale in October 1993 of certain real property and provided a pre-tax reserve of approximately $700,000 ($.04 per share, net of tax) in connection with the consolidation of certain of its manufacturing facilities. (D) Certain of the Company's subsidiaries provide health care and related benefits, which were modified in 1993, to qualified active and retired beneficiaries. These benefits are net of reimbursement by Medicare and other insurance coverages. Effective January 1, 1993, the Company adopted the accounting requirements of Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits" and recorded an accumulated post-retirement benefit obligation ("APBO") of approximately $2,100,000 (after an income tax credit of approximately $1,000,000) at January 1, 1993 as a charge to operations ($.17 per share, net of tax) as the cumulative effect of an accounting change. Previously, benefits were charged to operating results in the period that such benefits were paid. Approximately $950,000 of the APBO is expected to be paid in 1993 as a result of certain plan modifications. The annual expense for 1993 from adopting SFAS 106 is expected to approximate the expense that would have been recorded under the previous accounting method. The Company continues to fund benefit costs principally on a pay-as-you-go basis, with most retirees paying a portion F-22 100 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the costs. The discount rate used in determining the APBO was 8 percent. A 17 percent annual rate of increase in the per capita cost of such health care and related benefits was assumed for 1993, decreasing gradually to 6 percent in the year 2009. If the assumed health care and related benefits cost trend increased 1% for all future years, the APBO would have increased approximately 10%. (E) At October 2, 1993, the Company remains contingently liable for obligations under IRB's, plus unpaid interest, relating to facilities of previously owned subsidiaries. See Note 8. The Company continues to vigorously pursue all available remedies to minimize any liability that may ultimately result from the outcome of this matter. The Company believes that any liability that may ultimately result from the resolution of this matter, in excess of amounts provided, will not have a material adverse effect on financial position or results of operations of the Company. (F) During the first 39 weeks of 1992, the Company purchased, at a discount, in the open market approximately $15,102,000 principal amount of its various debentures. These transactions resulted in an extraordinary gain of approximately $100,000, net of income tax ($.01 per share) in the first 39 weeks of 1992. During the first 39 weeks of 1993, the Company purchased, at a discount, in the open market approximately $1,202,000 principal amount of its various debentures which did not result in a net gain. (G) In July 1992, derivative litigation against the Company and its directors challenging the transactions involving the retirement in 1990 of the Company's former Chairman and Chief Executive Officer was settled. In connection with the settlement, the Company recorded a net after-tax gain on discontinued operations in the third quarter of approximately $900,000 ($.07 per share), resulting from the exchange of $5,250,000 principal amount (included in the Company's condensed consolidated balance sheet at June 27, 1992 at approximately $2,576,000) of Monogram Industries, Inc. ("Monogram") 11% subordinated notes due December 31, 1995 held by the Company for $4,050,000 principal amount of Nortek 13 1/2% senior subordinated debentures due June 15, 1997 held by Monogram, a company controlled by Nortek's former Chairman and Chief Executive Officer. Results of discontinued operations in the third quarter of 1992 also include other income and expense items relating to businesses discontinued in prior years, including an increase in valuation reserves of approximately $1,400,000. (H) In the first 39 weeks of 1993, the Company adopted SFAS No. 109, as a change in accounting method. See Note 4. Prior year financial statements have not been restated to reflect the new accounting method. The effect of adopting this new accounting method in the first 39 weeks of 1993 was not significant to the provision for income taxes as compared to the prior accounting method. The effect of this change in accounting method did not result in a charge to operations for the cumulative effect of an accounting change, but did result in changes to certain account balances on January 1, 1993 relating principally to net deferred income tax liabilities arising from acquisitions that were netted against certain asset and liability balances in the Company's consolidated balance sheet at December 31, 1992 as follows:
EFFECT OF ACCOUNTING CHANGE ---------------------- (AMOUNTS IN THOUSANDS) Increase in inventory, net...................... $5,347 Increase in property and equipment, net......... 1,883 Decrease in accrued liabilities and taxes, net........................................... 1,833 Increase in other liabilities................... 99 Decrease in U.S. Federal prepaid income taxes... 3,578 Increase in deferred income tax liabilities..... 5,386
F-23 101 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effect of temporary differences which gave rise to significant portions of deferred income tax assets and liabilities as of January 1, 1993 and October 2, 1993, as adjusted for the adoption of SFAS No. 109, is as follows:
JAN. 1, OCTOBER 2, 1993 1993 ------- ---------- (AMOUNTS IN THOUSANDS) U.S. Federal Prepaid (Deferred) Income Tax Assets Arising From: Accounts receivable......................................... $ 1,353 $ 1,443 Inventory................................................... (2,229) (1,212) Insurance reserves.......................................... 4,682 5,791 Other reserves, liabilities and assets, net................. 13,162 10,919 Other, net.................................................. 32 59 ------- ---------- $17,000 $ 17,000 ======= ==========
OCTOBER JAN. 1, 2, 1993 1993 ---------- --------- (AMOUNTS IN THOUSANDS) Deferred (Prepaid) Income Tax Liabilities Arising From: Property and equipment, net................................. $ 16,188 $15,687 Prepaid pension assets...................................... 1,977 1,977 Unamortized debt discount................................... 2,369 2,048 Insurance reserves.......................................... (556) (556) Other reserves, liabilities and assets, net................. 3,621 (5,959) Capital loss carryforward................................... (5,925) (5,627) Net operating loss carryforwards............................ (1,350) (2,577) Contribution carryforwards.................................. (544) (571) Alternative minimum tax carryforward........................ (509) (376) Valuation allowances........................................ 11,714 13,959 Other, net.................................................. 15 (5) ---------- --------- $ 27,000 $18,000 ========== =========
The Company has a capital loss carryforward of approximately $17,000,000 and a net operating loss carryforward of approximately $5,000,000, both of which expire in the year 2007. The Company has provided a valuation allowance equal to the tax effect of certain carryforwards (capital loss, net operating loss and contribution) and certain other deferred income tax assets, since realization of these F-24 102 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deferred income tax assets, in part, is dependent on future taxable income which cannot be reasonably assured. The Company's deferred income tax assets are expected to be realized through the future reversal of deferred income tax liabilities. The following is a summary of the provision (credit) for income taxes from continuing operations included in the accompanying unaudited consolidated statement of operations:
39 WEEKS ENDED ---------------------------- SEPT. 26, OCTOBER 2, 1992 1993 --------- ---------- (AMOUNTS IN THOUSANDS) Federal Income Taxes -- Current............................................... $(3,801) $ 3,742 Deferred.............................................. 2,450 (7,800) --------- ---------- (1,351) (4,058) Foreign................................................. 1,976 1,583 State................................................... 675 975 --------- ---------- $ 1,300 $ (1,500) ========= ==========
The deferred federal income tax provision (credit) from continuing operations consists of the tax effect of the following:
39 WEEKS ENDED --------------------------- SEPT. 26, OCTOBER 2, 1992 1993 -------- ---------- (AMOUNTS IN THOUSANDS) Accelerated depreciation................................. $ (892 ) $ (502) Accruals not deductible currently........................ 3,485 (2,554) Income tax credit relating to business held for sale..... -- (7,106) Change in valuation allowance............................ -- 2,251 Other, net............................................... (143 ) 111 -------- ---------- Total deferred federal income tax provision (credit) from continuing operations.................................. $ 2,450 $ (7,800) ======== ==========
F-25 103 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The table below reconciles the provision for income taxes from continuing operations at the Federal statutory income tax rate to the actual provision for income taxes:
39 WEEKS ENDED ---------------------------- SEPT. 26, OCTOBER 2, 1992 1993 --------- ---------- (AMOUNTS IN THOUSANDS) Income tax credit from continuing operations at the Federal statutory rate................................ $(6,222) $ (4,862) Net change from statutory rate: State taxes, net of federal tax effect.................. 446 644 Non-deductible depreciation and amortization for tax purposes.............................................. 344 540 Other non-deductible items.............................. 136 326 Change in valuation reserve............................. -- 2,251 Net loss on business sold or held for sale.............. 3,943 (204) Tax effect on foreign income............................ 702 317 Effect of capital losses................................ 1,651 -- Other, net.............................................. 300 (512) --------- ---------- Provision (credit) for income taxes from continuing operations............................................ $ 1,300 $ (1,500) ========= ==========
The Company recorded a $1,000,000 deferred income tax credit in the first 39 weeks of 1993 relating to the cumulative effect of an accounting change for certain post-retirement benefits. This actual deferred income tax credit was approximately equal to the tax credit at the U.S. Federal statutory rate. (I) Fully diluted earnings (loss) per share calculations presented do not include the effect of common stock equivalents or convertible debentures (and the reduction in related interest expense) because the assumed exercise of stock options and the conversion of debentures is anti-dilutive for the net loss per share amounts. (J) At October 2, 1993, the payment of cash dividends or stock payments was prohibited under the most restrictive of the Company's indenture and loan agreements. (K) The following table summarizes the unaudited activity of businesses sold or discontinued included in the accompanying unaudited condensed consolidated statement of cash flows:
39 WEEKS ENDED -------------------------- SEPT. 26, OCTOBER 2, 1992 1993 --------- ---------- (AMOUNTS IN THOUSANDS) Fair value of assets sold................................ $25,380 $ -- Liabilities assumed by the purchaser..................... (3,615) -- Cash received (paid) relating to businesses sold or discontinued........................................... 236 (2,420) --------- ---------- Net cash proceeds (payments) relating to businesses sold or discontinued........................................ $22,001 $ (2,420) ========= ==========
Significant unaudited non-cash activities excluded from the accompanying unaudited condensed consolidated statement of cash flows for the 39 weeks ended September 26, 1992 consist of approximately $11,800,000 of restricted cash and investments paid in settlement of certain litigation and approximately $4,050,000 exchange of debentures and $2,576,000 settlement of 11% subordinated notes receivable in connection with certain litigation involving the Company's former Chairman. F-26 104 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest paid was approximately $15,554,000 and $13,254,000 in the first 39 weeks of 1992 and 1993, respectively. Income tax payments, net of income tax refunds, were approximately $2,819,000 and $13,678,000 in the first 39 weeks of 1992 and 1993, respectively. (L) The Company's Air Conditioning and Heating Products Group's plant in St. Louis, Missouri, which manufactures products for the residential and manufactured housing markets, experienced damage as a result of the flooding of the Mississippi River in July 1993. The plant was closed for several weeks, but returned to full operation in late August 1993. At October 2, 1993, the Company has accrued for estimated losses of $14,500,000 related to the flooding, has recorded a receivable of approximately $14,500,000 for casualty, property damage and business interruption insurance claims due from its insurance carrier and has recorded as a liability approximately $6,600,000 of cash advances received relating to such claims. Subsequent to October 2, 1993, the Company has received approximately $6,600,000 of additional cash advances. The Company believes that it has adequate insurance coverage and does not expect this event to have a material adverse effect on the Company's financial condition or results of operations. (M) Summarized Quarterly Financial Data The following summarizes unaudited quarterly financial data for the 13 weeks ended April 3, 1993, July 3, 1993 and October 2, 1993:
FOR THE 13 WEEKS ENDED ------------------------------------------------------ APRIL 3, 1993 JULY 3, 1993 OCTOBER 2, 1993 ------------- ------------ --------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net sales............................... $ 178,707 $195,058 $ 202,030 Gross profit............................ 49,545 54,665 56,985 Earnings (Loss) from continuing operations............................ (1,400) 1,500 (12,900) Earnings (Loss) per share from continuing operations: Primary............................... $ (0.11) $ 0.12 $ (1.03) Fully diluted......................... $ (0.11) $ 0.12 $ (1.03) Net earnings (loss)..................... (3,500) 1,500 (12,900) Net earnings (loss) per share: Primary............................... $ (0.28) $ 0.12 $ (1.03) Fully diluted......................... $ (0.28) $ 0.12 $ (1.03)
The net loss of approximately $3,500,000 ($0.28 per share) for the 13 weeks ended April 3, 1993 includes an approximately $2,100,000 net after-tax loss ($0.17 per share) related to the cumulative effect of an accounting change. See Notes 7 and 16D. The net loss of approximately $12,900,000 ($1.03 per share) for the 13 weeks ended October 2, 1993 includes an approximately $14,900,000 net after tax loss ($1.19 per share) relating to a valuation reserve to reduce the Company's investment in Dixieline to estimated net realizable value. See Note 16B. F-27 105 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (N) Pro Forma The Company has filed a registration statement with the Securities and Exchange Commission for a public offering of $190 million of Senior Subordinated Notes (the "Notes"), the net proceeds from which will be used to redeem approximately $145 million of indebtedness (net of approximately $7.2 million of unamortized debt discounts) outstanding as of October 2, 1993, to pay accrued interest on such indebtedness and a redemption premium on certain of such indebtedness, and to replace approximately $23.1 million of working capital used for the redemption and payment of accrued interest on certain other indebtedness on January 14, 1994. The following table presents the unaudited pro forma operating results for the Company for the year ended December 31, 1992 and the 39 week period ended October 2, 1993, as adjusted for the pro forma effect of this refinancing transaction and the sale of L.J. Smith and Bend as if they had occurred on January 1, 1992 (and to exclude the after-tax loss of $16,000,000 related to the sale of these two businesses), and to exclude the net after-tax loss of $14,900,000 recorded in the third quarter of 1993 related to the valuation reserve for Dixieline (See Notes 16B and 10):
YEAR 39 WEEKS ENDED ENDED DECEMBER 31, OCTOBER 2, 1992 1993 ------------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Pro Forma Earnings from Continuing Operations......... $ 200 $3,300 ------ ---------- Pro Forma Fully Diluted Earnings from Continuing Operations Per Share................................ $ .02 $ .26 ====== ==========
In computing the pro forma earnings, interest expense on the refinanced indebtedness outstanding for the periods presented was excluded from earnings at an average interest rate of approximately 13.7% for the year ended December 31, 1992 and approximately 13.6% for the 39 weeks ended October 2, 1993 (including amortization of debt discounts and deferred debt expense), net of the tax effect. Interest expense was included on the Notes at a rate of 10.8% (including amortization of deferred debt expense) for both periods presented, net of the tax effect. For purposes of computing weighted average shares for fully diluted earnings per share for all periods presented, the dilutive effect of convertible debentures was excluded because the assumed conversion is antidilutive to the pro forma earnings amount. F-28 106 NORTEK, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FROM CONTINUING OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1992 (UNAUDITED) The following Unaudited Pro Forma Condensed Consolidated Statement of Operations from continuing operations for the year ended December 31, 1992 reflects the historical results of Nortek, less the operating results of Bend Millwork Systems, Inc. ("Bend") and assumes that the sale of Bend occurred on January 1, 1992. The pro forma data does not purport to be indicative of the results which would actually have been reported, if the disposition had occurred on January 1, 1992, or which may be reported in the future. This statement should be read in conjunction with the accompanying notes and the respective historical consolidated financial statements and related notes of Nortek included elsewhere herein.
NORTEK AS LESS BEND PRO FORMA NORTEK PREVIOUSLY MILLWORK ADJUSTMENTS PRO REPORTED SYSTEMS, INC. (DR) CR FORMA --------- ------------- ----------- ------ (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Net Sales........................................... $ 800.0 $90.7 $ $709.3 --------- ------ ----------- ------ Costs and Expenses and Other: Cost of products sold............................. 595.2 81.3 513.9 Selling, administrative and other, net............ 184.4 13.3 171.1 --------- ------ ----------- ------ 779.6 94.6 685.0 --------- ------ ----------- ------ Operating earnings (loss)......................... 20.4 (3.9) 24.3 Interest expense.................................. (29.2) (0.0) (29.2) Interest income................................... 4.4 0.0 4.4 Net gain on investment and marketable securities..................................... 0.9 0.0 0.9 Loss on businesses sold........................... (14.5) 0.0 14.5(B) 0.0 --------- ------ ----------- ------ Earnings (loss) from continuing operations before income tax provision (credit)..................... (18.0) (3.9) 14.5 0.4 Provision (credit) for income taxes................. 3.0 (1.4) (1.5)(C) 2.9 --------- ------ ----------- ------ Net loss from continuing operations................. $ (21.0) $(2.5) 16.0 $ (2.5) ========= ====== =========== ====== Loss Per Share: Continuing Operations-- Primary........................................ $ (1.67) $(0.20) --------- ------ Fully diluted.................................. $ (1.67) $(0.20) --------- ------ Weighted Average Number of Shares: Primary........................................... 12,645 12,645 ========= ====== Fully diluted..................................... 13,411 13,411 ========= ======
The notes following this Unaudited Pro Forma Condensed Consolidated Statement of Operations from Continuing Operations (alphabetic note references above) and the Notes to Nortek Consolidated Financial Statements included elsewhere herein are an integral part of this Unaudited Pro Forma Condensed Consolidated Statement of Operations. F-29 107 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FROM CONTINUING OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1992 (A) The pro forma amounts reflect the results of Nortek (less the operating results of Bend) and reflect the pro forma adjustments described below. (B) Entry necessary to exclude the loss on the sale of businesses sold. (C) Entry necessary to exclude the provision for income taxes related to the loss on businesses sold. The provision for income taxes differs from the expected credit calculated at the Federal statutory income tax rate of 34%, primarily as a result of certain nondeductible costs associated with businesses sold (approximately $5,500,000) and the Company's inability to record the tax benefit related to capital losses resulting from the dispositions (approximately $900,000) since realization of the tax benefit is not reasonably assured. (D) On January 2, 1992, the assets, subject to certain liabilities, of the Company's Dixieline Products, Inc. subsidiary, L. J. Smith, Inc., were sold for approximately $24,000,000 and the Company recorded a pre-tax gain on the sale of L. J. Smith of approximately $8,000,000 ($.34 per share, net of tax). On October 2, 1992, the Company sold all of the capital stock of its wholly-owned subsidiary Bend, for approximately $17,200,000 in cash and recorded a pre-tax loss on the sale in the third quarter of 1992 of approximately $20,500,000 ($1.43 per share, net of tax). In the fourth quarter of 1992, the Company provided additional reserves of approximately $2,000,000 ($.17 per share, net of tax) related to businesses sold. In computing the pro forma results, the net after-tax loss on businesses sold has been excluded, and no investment income was assumed earned on the net cash proceeds received from the sale of L. J. Smith and Bend. F-30 108 NORTEK, INC. Nortek, Inc. is a diversified manufacturer of residential and commercial building products, operating within three principal product groups: Residential Building Products; Air Conditioning and Heating Products; and Plumbing Products. Through these product groups, the Company manufactures and sells, primarily in the United States and Canada, 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 back page of the prospectus contains a schematic with 23 pictures of products manufactured by the Company. The schematic is a representation of a home with lines drawn from the product pictures to the appropriate location within the home where the products are utilized. 109 - ------------------------------------------------------ ------------------------------------------------------ - ------------------------------------------------------ ------------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE ANY OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES IN ANY STATE TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information................. 3 Incorporation of Certain Documents by Reference........................... 3 Prospectus Summary.................... 4 Risk Factors.......................... 11 The Company........................... 15 Recent Developments................... 17 Use of Proceeds....................... 18 Capitalization........................ 19 Selected Consolidated Financial Data................................ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 23 Business.............................. 34 Management............................ 46 Principal Securityholders............. 47 Description of the Notes.............. 48 Certain Federal Income Tax Considerations...................... 72 Description of Other Obligations...... 73 Underwriting.......................... 74 Legal Matters......................... 75 Experts............................... 75 Index to Financial Statements......... F-1
$190,000,000 NORTEK, INC. % SENIOR SUBORDINATED NOTES DUE 2004 ------------------------------ PROSPECTUS ------------------------------ BEAR, STEARNS & CO. INC. CHASE SECURITIES, INC. , 1994 - ------------------------------------------------------ ------------------------------------------------------ - ------------------------------------------------------ ------------------------------------------------------ 110 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.* SEC Registration Fee................................................... $ 68,281 Printing and engraving expenses........................................ 215,000 Fees and expenses of Trustee........................................... 10,000 Accounting fees and expenses........................................... 450,000 Legal fees and expenses................................................ 375,000 Blue sky fees and expenses (including fees of counsel)................. 25,000 National Association of Securities Dealers, Inc. fees.................. 22,350 Rating agency fees..................................................... 125,000 Miscellaneous.......................................................... 209,369 ---------- Total............................................................. $1,500,000 ========== - --------------- * All amounts except the SEC Registration Fee and NASD fees are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Delaware law empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that that person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including employee benefits plans) against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by that person in connection with that action, suit or proceeding, to the extent that that person (i) acted in good faith and in a manner that person reasonably believed to be in or not opposed to the best interests of the corporation (including with respect to any employee benefit plan actions in good faith and in a manner reasonably believed to be in the interests of the beneficiaries of that employee benefit plan), and (ii) with respect to any criminal action or proceeding, had no reasonable cause to believe that the conduct was unlawful. Delaware law also empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person acted in any of the capacities set forth above (that is, a derivative action or suit) against expenses (including attorneys' fees) actually and reasonably incurred by that person in connection with the defense or settlement of such an action or suit if that person acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which that person has been adjudged to be liable to the corporation unless and to the extent that the Court of Chancery or the court in which the action or suit was brought determines that, despite the adjudication of liability but in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. Delaware law further provides that (i) to the extent a director, officer, employee or agent of a corporation has been successful in the defense of any action suit or proceeding referred to above or in the defense of any claim, issue or matter in any such action, suit or proceeding, that person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by that person in connection with that claim, issue or matter, (ii) indemnification provided for by Delaware law shall not be deemed exclusive of any other rights to which the indemnified party may be entitled, and (iii) a corporation may purchase and maintain insurance on behalf of a director, officer, employee or agent of a corporation against any liability asserted against that person or incurred by that person in any such capacity or arising out of that person's status as such whether or not the corporation would have the power to indemnify against such liabilities under Delaware law. II-1 111 Delaware law also provides that determinations with respect to indemnification shall be made (i) by the board of directors of a corporation by a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding, (ii) by independent legal counsel in a written opinion in cases where a quorum is not obtainable, or, even if obtainable when a quorum of disinterested directors so directs, or (iii) by the stockholders of the corporation. The Company's bylaws allow advances of litigation expenses without further action by the board of directors. The Company's bylaws contain provisions requiring the Company to indemnify any director, officer, employee or agent to the fullest extent permitted under Delaware law, provided the Company shall not be required to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person, other than an action to enforce indemnification rights. The Company has a directors' and officers' liability insurance policy wherein a director or officer of the Company or its subsidiaries is insured against loss arising from any claim or claims which may be made against them, jointly or severally, during the policy period by reason of any wrongful act in their respective capacities. Article Eighth of the Company's Certificate of Incorporation provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages arising out of the director's breach of that persons's fiduciary duty as a director, except to the extent that Delaware law does not permit exemption from such liability. Article Eighth does not eliminate the fiduciary duty of directors or affect their liability to anyone other than the Company or its stockholders; instead, Article Eighth is designed only to limit or eliminate the personal liability of directors for monetary damages to the Company or the stockholders to the maximum extent permitted by Delaware law as it now exists or may be amended in the future. Current Delaware law contains express limitations on the ability to limit or eliminate liability to a corporation or its stockholders. Under these limitations, which Article Eighth incorporates by reference, a director remains potentially liable for monetary damages to the corporation or the stockholders for (i) breach of the director's duty of loyalty, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) an improper payment of a dividend or an improper repurchase of the corporation's stock, as provided in Section 17 of the Delaware General Corporation Law, or (iv) any transaction from which a director derives an improper personal benefit. ITEM 16. EXHIBITS. Unless otherwise indicated, exhibits have heretofore been filed with this Registration Statement or have heretofore been filed with the Commission and are incorporated herein by reference.
EXHIBIT NO. DESCRIPTION - ------------- --------------- 1.1* -- Form of Underwriting Agreement. 4.1 -- Indenture dated as of May 1, 1986 between the Company and Fleet National Bank relating to the 7 1/2% Convertible Debentures due 2006 (Exhibit 4.1 to Registration Statement No. 33-4693 filed April 23, 1986).
4.2 -- First Supplemental Indenture dated as of April 23, 1987 between the Company and Fleet National Bank supplementing the Indenture dated May 1, 1986 relating to the 7 1/2% Convertible Debentures due 2006 (Exhibit 4.11 to Form 10-K filed March 30, 1988, File No. 1-6112). 4.3 -- Rights Agreement dated as of March 31, 1986 as amended and restated as of March 18, 1991 between the Company and State Street Bank and Trust Company, as Rights Agent (Exhibit 1 to Form 8-K filed March 26, 1991, File No. 1-6112). 4.4 -- Amendment No. 1 dated as of October 6, 1993 to Amended and Restated Rights Agreement dated as of March 18, 1991 (Exhibit 1 to Form 8-K filed October 12, 1993, File No. 1-6112).
II-2 112
EXHIBIT NO. DESCRIPTION - ------------- --------------- 4.5* -- Indenture dated as of , 1994 between the Company and State Street Bank and Trust Company, as Trustee, relating to % Senior Subordinated Notes due 2004. 5** -- Opinion of Ropes & Gray, Boston, Massachusetts. 10.1 -- Employment Agreement between Richard L. Bready and the Company, dated as of January 1, 1984 (Exhibit 10.2 to Form 10-K filed March 31, 1986, File No. 1-6112). 10.2 -- Amendment dated as of March 3, 1988 to Employment Agreement between Richard L. Bready and the Company dated of January 1, 1984 (Exhibit 19.2 to Form 10-Q filed May 17, 1988, File No. 1-6112). 10.3 -- Second Amendment dated as of November 1, 1990 to Employment Agreement between Richard L. Bready and the Company dated as of January 1, 1984 (Exhibit 10.3 to Form 10-K filed April 1, 1991, File No. 1-6112). 10.4 -- Deferred Compensation Agreement dated March 7, 1983 between Richard L. Bready and the Company (Exhibit 10.20 to Form 10-K filed March 31, 1983, File No. 1-6112). 10.5 -- Deferred Compensation Agreement dated March 7, 1983 between Almon C. Hall and the Company (Exhibit 10.23 to Form 10-K filed March 30, 1984, File No. 1-6112). 10.6 -- Deferred Compensation Agreement dated March 7, 1983 between Richard J. Harris and the Company (Exhibit 10 to Form 10-Q filed July 31, 1984, File No. 1-6112). 10.7 -- 1984 Stock Option Plan, as amended through May 27, 1987 (Exhibit 28.2 to Registration Statement No. 33-22527 filed June 15, 1988). 10.8 -- Change in Control Severance Benefit Plan for Key Employees adopted February 10, 1986, and form of agreement with employees (Exhibit 10.19 to Form 10-K filed March 31, 1986, File No. 1-6112). 10.9 -- 1987 Stock Option Plan (Exhibit 28.3 to Registration Statement No. 33-22527 filed June 15, 1988). 10.10 -- Form of Indemnification Agreement between the Company and its directors and certain officers (Appendix C to Proxy Statement dated March 23, 1987 for Annual Meeting of Nortek Stockholders, File No. 1-6112). 10.11 -- 1988 General Stock Option Plan (Appendix A to Proxy Statement dated April 1, 1988 for Annual Meeting of Nortek Stockholders, File No. 1-6112). 10.12 -- 1988 General Stock Option Plan III (Appendix C to Proxy Statement dated April 12, 1989 for Annual Meeting of Nortek Stockholders, File No. 1-6112). 10.13 -- Registration Rights Agreement dated as of October 31, 1990 between the Company and Bready Associates (Exhibit 3 to Schedule 13D filed November 13, 1990 by Bready Associates relating to the Common Stock, par value $1.00 per share, of the Company). 10.14 -- 1990 General Stock Option Plan (Appendix A to Proxy Statement dated April 17, 1991 for Annual Meeting of Nortek Stockholders, File No. 1-6112). 10.15 -- Broan Limited Line of Credit (previously filed with this Registration Statement). 11* -- Calculation of shares used in determining earnings per share. 12* -- Nortek, Inc. and Subsidiaries Calculation of Ratio of Earnings to Fixed Charges. 24.1* -- Consent of Arthur Andersen & Co. 24.2 -- Consent of Ropes & Gray is contained in Exhibit 5. 24.3* -- Consent of Manufactured Housing Institute. 24.4* -- Consent of F.W. Dodge/McGraw Hill.
II-3 113
EXHIBIT NO. DESCRIPTION - ------------- --------------- 25 -- Power of Attorney (included in Part II of this Registration Statement under the caption "Signatures"). 26* -- Statement of Eligibility and Qualification of Trustee on Form T-1. - --------------- *Filed herewith. **To be filed by amendment.
ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time is was declared effective. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 114 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Providence, State of Rhode Island, on the 20th day of January, 1994. NORTEK, INC. By: /S/ ALMON C. HALL --------------------------------- ALMON C. HALL VICE PRESIDENT, CONTROLLER AND CHIEF ACCOUNTING OFFICER Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ --------------------------- ------------------- * Chairman of the Board of January 20, 1994 ........................................ Directors, President, Chief RICHARD L. BREADY Executive Officer and Director (Principal Executive Officer) * Vice President, Controller January 20, 1994 ........................................ and Chief Accounting ALMON C. HALL Officer (Principal Accounting Officer) * Vice President, Treasurer January 20, 1994 ........................................ and Director (Principal RICHARD J. HARRIS Financial Officer) * Director January 20, 1994 ........................................ DENNIS J. MCGILLICUDDY * Director January 20, 1994 ........................................ D. STEVENS MCVOY * Director January 20, 1994 ........................................ PHILIP B. BROOKS * Director January 20, 1994 ........................................ J. PETER LYONS * Director January 20, 1994 ........................................ BARRY SILVERSTEIN
*By: /S/ ALMON C. HALL -------------------------------- ALMON C. HALL, FOR HIMSELF AND AS ATTORNEY-IN-FACT II-5 115 EXHIBIT INDEX Unless otherwise indicated, exhibits have heretofore been filed with this Registration Statement or have heretofore been filed with the Commission and are incorporated herein by reference.
EXHIBIT NO. DESCRIPTION - ------------- --------------- 1.1* -- Form of Underwriting Agreement. 4.1 -- Indenture dated as of May 1, 1986 between the Company and Fleet National Bank relating to the 7 1/2% Convertible Debentures due 2006 (Exhibit 4.1 to Registration Statement No. 33-4693 filed April 23, 1986). 4.2 -- First Supplemental Indenture dated as of April 23, 1987 between the Company and Fleet National Bank supplementing the Indenture dated May 1, 1986 relating to the 7 1/2% Convertible Debentures due 2006 (Exhibit 4.11 to Form 10-K filed March 30, 1988, File No. 1-6112). 4.3 -- Rights Agreement dated as of March 31, 1986 as amended and restated as of March 18, 1991 between the Company and State Street Bank and Trust Company, as Rights Agent (Exhibit 1 to Form 8-K filed March 26, 1991, File No. 1-6112). 4.4 -- Amendment No. 1 dated as of October 6, 1993 to Amended and Restated Rights Agreement dated as of March 18, 1991 (Exhibit 1 to Form 8-K filed October 12, 1993, File No. 1-6112). 4.5* -- Indenture dated as of , 1994 between the Company and State Street Bank and Trust Company, as Trustee, relating to % Senior Subordinated Notes due 2004. 5** -- Opinion of Ropes & Gray, Boston, Massachusetts. 10.1 -- Employment Agreement between Richard L. Bready and the Company, dated as of January 1, 1984 (Exhibit 10.2 to Form 10-K filed March 31, 1986, File No. 1-6112). 10.2 -- Amendment dated as of March, 3, 1988 to Employment Agreement between Richard L. Bready and the Company dated of January 1, 1984 (Exhibit 19.2 to Form 10-Q filed May 17, 1988, File No. 1-6112). 10.3 -- Second Amendment dated as of November 1, 1990 to Employment Agreement between Richard L. Bready and the Company dated as of January 1, 1984 (Exhibit 10.3 to Form 10-K filed April 1, 1991, File No. 1-6112). 10.4 -- Deferred Compensation Agreement dated March 7, 1983 between Richard L. Bready and the Company (Exhibit 10.20 to Form 10-K filed March 31, 1983, File No. 1-6112). 10.5 -- Deferred Compensation Agreement dated March 7, 1983 between Almon C. Hall and the Company (Exhibit 10.23 to Form 10-K filed March 30, 1984, File No. 1-6112). 10.6 -- Deferred Compensation Agreement dated March 7, 1983 between Richard J. Harris and the Company (Exhibit 10 to Form 10-Q filed July 31, 1984, File No. 1-6112). 10.7 -- 1984 Stock Option Plan, as amended through May 27, 1987 (Exhibit 28.2 to Registration Statement No. 33-22527 filed June 15, 1988). 10.8 -- Change in Control Severance Benefit Plan for Key Employees adopted February 10, 1986, and form of agreement with employees (Exhibit 10.19 to Form 10-K filed March 31, 1986, File No. 1-6112). 10.9 -- 1987 Stock Option Plan (Exhibit 28.3 to Registration Statement No. 33-22527 filed June 15, 1988). 10.10 -- Form of Indemnification Agreement between the Company and its directors and certain officers (Appendix C to Proxy Statement dated March 23, 1987 for Annual Meeting of Nortek Stockholders, File No. 1-6112). 10.11 -- 1988 General Stock Option Plan (Appendix A to Proxy Statement dated April 1, 1988 for Annual Meeting of Nortek Stockholders, File No. 1-6112). 10.12 -- 1988 General Stock Option Plan III (Appendix C to Proxy Statement dated April 12, 1989 for Annual Meeting of Nortek Stockholders, File No. 1-6112). 10.13 -- Registration Rights Agreement dated as of October 31, 1990 between the Company and Bready Associates (Exhibit 3 to Schedule 13D filed November 13, 1990 by Bready Associates relating to the Common Stock, par value $1.00 per share, of the Company). 10.14 -- 1990 General Stock Option Plan (Appendix A to Proxy Statement dated April 17, 1991 for Annual Meeting of Nortek Stockholders, File No. 1-6112).
116
EXHIBIT NO. DESCRIPTION - ------------- --------------- 10.15 -- Broan Limited Line of Credit (previously filed with this Registration Statement). 11* -- Calculation of shares used in determining earnings per share. 12* -- Nortek Inc. and Subsidiaries Calculation of Ratio of Earnings to Fixed Charges. 24.1* -- Consent of Arthur Andersen & Co. 24.2 -- Consent of Ropes & Gray is contained in Exhibit 5. 24.3* -- Consent of Manufactured Housing Institute. 24.4* -- Consent of F.W. Dodge/McGraw Hill. 25 -- Power of Attorney (included in Part II of this Registration Statement under the caption "Signatures"). 26* -- Statement of Eligibility and Qualification of Trustee on Form T-1. - --------------- *Filed herewith. **To be filed by amendment.
EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 $190,000,000 NORTEK, INC. ______% SENIOR SUBORDINATED NOTES DUE 2004 UNDERWRITING AGREEMENT BEAR, STEARNS & CO. INC. CHASE SECURITIES, INC. ___________ ___, 1994 2 $190,000,000 NORTEK, INC. ______% Senior Subordinated Notes due 2004 UNDERWRITING AGREEMENT _______, 1994 BEAR, STEARNS & CO. INC. CHASE SECURITIES, INC. c/o Bear, Stearns & Co., Inc. 245 Park Avenue New York, New York 10167 Dear Sirs: Nortek, Inc., a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to you (collectively, the "Underwriters") $190,000,000 aggregate principal amount of its ______% Senior Subordinated Notes due 2004 (the "Firm Notes"), to be issued pursuant to an indenture dated as of ________, 1994 (the "Indenture") among the Company and __________________, as trustee (the "Trustee"). The Company also proposes to grant to you the option to purchase up to an aggregate of $28,500,000 additional principal amount of its __% Senior Subordinated Notes due 2004 (the "Option Notes") upon the terms and for the purposes set forth in Section 2(b) hereof. The Firm Notes and the Option Notes are hereinafter sometimes collectively referred to as the "Notes". The Notes are more fully described in the Registration Statement referred to below and in the Indenture, a copy of which has been filed as an Exhibit to such Registration Statement. 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Underwriters that: (a) The Company has prepared and filed with the Securities and Exchange Commission (the "Commission"), pursuant to the Securities Act of 1933, as amended (the "Act"), and the 3 rules and regulations promulgated by the Commission thereunder (the "Regulations"), a registration statement on Form S-2 (Registration No. 33-69778) relating to the Notes and ________ amendments to such registration statement, including in each case a preliminary prospectus. The Company is eligible to file a registration statement on Form S-2. The Company next proposes to file with the Commission either (i) prior to the effectiveness of such registration statement, a further amendment thereto, including therein a final prospectus, or (ii) after the effectiveness of such registration statement, a final prospectus in accordance with Rules 430A and 424(b) of the Regulations; the documents so filed in either case to include all Rule 430A Information (as hereinafter defined) and to conform, in content and form, to the last printer's proof thereof furnished to the Underwriters immediately prior to such filing. As used in this Agreement, (i) the term "Effective Date" means the date and time that the registration statement hereinabove referred to is declared effective by the Commission, (ii) the term "Registration Statement" means such registration statement as last amended prior to the time the same was declared effective by the Commission, including all Rule 430A Information deemed to be included therein at the Effective Date pursuant to Rule 430A of the Regulations and all financial statements, schedules and exhibits, (iii) the term "Rule 430A Information" means information with respect to the Notes and the public offering thereof permitted, pursuant to the provisions of paragraph (a) of Rule 430A of the Regulations, to be omitted from the form of prospectus included in the Registration Statement at the time it is declared effective by the Commission, (iv) the term "Prospectus" means the form of final prospectus relating to the Notes first filed with the Commission pursuant to Rule 424(b) of the Regulations or, if no filing pursuant to Rule 424(b) is required, the form of final prospectus included in the Registration Statement at the Effective Date, and (v) the term "preliminary prospectus" means any preliminary prospectus (as described in Rule 430 of the Regulations) with respect to the Notes that omits Rule 430A Information. Any reference herein to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-2 which were filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on or before the Effective Date, the date of such preliminary prospectus or the date of the Prospectus, as the case may be. (b) At the time of the effectiveness of the Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b) of the Regulations, when any supplement to or amendment of the Prospectus is filed with the Commission, and at the Closing Date, as hereinafter defined (and, with respect to the Option Notes, -2- 4 the Option Closing Date, as hereinafter defined), the Registration Statement and, if filed at such time, the Prospectus and any amendments thereof and supplements thereto complied and will comply in all material respects with the applicable provisions of the Act and the Regulations and with the Trust Indenture Act of 1939, as amended, and the rules and regulations thereunder (the "Trust Indenture Act") and does not and will not contain an untrue statement of a material fact and will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the registration statement for the registration of the Notes or an amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Act and the Regulations and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation and warranty is made in this subsection (b), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related preliminary prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of the Underwriters as herein stated expressly for use in connection with the preparation thereof. The Company acknowledges that the statements specifically relating to the Underwriters set forth on the Prospectus cover page and under the heading "Underwriting" in the Prospectus constitute the only information relating to the Underwriters furnished in writing to the Company by the Underwriters specifically for inclusion in the Registration Statement. (c) Arthur Andersen & Co., who has certified certain financial statements and supporting schedules included in the Registration Statement and whose reports are filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Regulations. (d) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as set forth in the Registration Statement and the Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change, in the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company and its subsidiaries on a consolidated basis, whether or not arising -3- 5 from transactions in the ordinary course of business, and since the date of the latest balance sheet presented in the Registration Statement and the Prospectus, neither the Company nor any of its Subsidiaries has incurred or undertaken any liabilities or obligations, direct or contingent, which are material to the Company and its subsidiaries on a consolidated basis, except for liabilities or obligations which are reflected in the Registration Statement and the Prospectus. (e) The Company has all requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. This Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity), and except to the extent that rights to indemnification and contribution hereunder may be limited by state or federal securities laws or the public policy underlying such laws. (f) The execution, delivery and performance of this Agreement, the Indenture and the Notes and the consummation of the transactions contemplated hereby and thereby by the Company, including the issuance, sale and delivery of the Notes will not: (A) violate or conflict with any provision of the certificate of incorporation or by-laws of the Company or any of its subsidiaries; nor, (B) other than conflicts, violations, breaches, defaults, consents, liens, charges and encumbrances which individually or in the aggregate are not material to the financial condition or the results of operations of the Company and its subsidiaries on a consolidated basis, (1) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) or require consent under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to the terms of any agreement, instrument, franchise, license or permit to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their properties or assets may be bound or subject, or (2) violate or conflict with (i) any judgment, decree or order binding upon the Company or any of its subsidiaries or any of their properties or assets or (ii) any statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of -4- 6 or with any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets is required for the execution, delivery and performance of this Agreement, the Indenture or the Notes and the consummation of the transactions contemplated hereby and thereby, including the execution, authentication, issuance, sale and delivery of the Notes, except for (1) such as may be required under state and foreign securities or Blue Sky laws in connection with the purchase and distribution of the Notes by the Underwriters (as to which the Company expresses no opinion) and (2) such as have been made or obtained under the Act and the Trust Indenture Act. (g) The Company has all requisite corporate power and authority to enter into the Indenture and to perform its obligations thereunder. The Indenture has been duly and validly authorized, executed and delivered by the Company, has been duly qualified under and complies as to form in all material respects with the Trust Indenture Act and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). (h) The Company has all requisite corporate power and authority to execute and to issue and deliver the Notes to the Underwriters and to perform its obligations thereunder. The Notes have been duly and validly authorized, executed, authenticated, issued and delivered and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). (i) The Notes and the Indenture conform to the descriptions thereof contained in the Registration Statement and the Prospectus. (j) The Company is a corporation, duly organized, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority and all -5- 7 necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public, regulatory or governmental agencies and bodies (except where the failure to obtain the same, individually or in the aggregate, has not had, and is not reasonable likely to have, a material adverse effect on the financial condition or the results of operations of the Company and its subsidiaries on a consolidated basis), to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. The Company is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the character of its activities requires such qualification except where the failure to be so qualified would not have a material adverse effect on the business, operations or financial condition of the Company and its subsidiaries on a consolidated basis. (k) Each of the Company's subsidiaries is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public, regulatory or governmental agencies and bodies (except where the failure to obtain the same, individually or in the aggregate, has not had, and is not reasonable likely to have, a material adverse effect on the financial condition or the results of operations of the Company and its subsidiaries on a consolidated basis), to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. Each of the Company's subsidiaries is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the character of its activities requires such qualification except where the failure to be so qualified would not have a material adverse effect on the business, operations or financial condition of the Company and its subsidiaries on a consolidated basis. (l) No order preventing or suspending the use of any preliminary prospectus has been issued and no proceedings for that purpose are pending or, to the best knowledge of the Company, threatened or contemplated by the Commission; no order suspending the offering of the Notes in any jurisdiction designated by the Underwriters pursuant to paragraph (d) of Section 4 of this Agreement has been issued and no proceedings for that purpose have been instituted or, to the best knowledge of the Company, threatened or contemplated, and any request of the Commission for additional information (to be included in the Registration Statement or Prospectus or otherwise) has been complied with. -6- 8 (m) The Company had, at October 2, 1993, an authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus. All of the outstanding capital stock of the Company has been duly and validly authorized and issued and is fully paid and nonassessable. Except as set forth in the Registration Statement and the Prospectus and except for securities outstanding under any of the Company's stock option, equity incentive or similar plans, there are no outstanding options to purchase, or rights or warrants to subscribe for, or any securities or obligations convertible into or exchangeable for, or any contracts or commitments to issue or sell, any shares of capital stock of the Company. (n) The Company has no subsidiary companies or interests in any partnerships except as set forth in Schedule I attached hereto. Except for directors' qualifying shares, the Company owns, either directly or indirectly, 100% of the issued and outstanding shares of capital stock of each subsidiary company. (o) The Company and each of its subsidiaries has good and marketable title to its respective properties, free and clear of all material liens, charges and encumbrances and equities of record, except as set forth in the Registration Statement. Any real properties held under lease by the Company and each of its subsidiaries are held under valid, subsisting and enforceable leases free and clear of any and all liens, charges, encumbrances or restrictions of any kind whatsoever. (p) The Company and each of its subsidiaries has (i) all governmental licenses, certificates, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus, (ii) complied in all respects with all laws, regulations and orders applicable to it or its business and (iii) performed all of its obligations required to be performed by it and is not, and at the Closing Date (and, with respect to the Option Notes, the Option Closing Date) will not be, in default, under any contract or other instrument to which it is a party or by which it or its property is bound or affected, in the case of each of clause (i), (ii) and (iii) above, with such exceptions which, individually or in the aggregate, have not had, and are not reasonably likely to have, a material adverse effect on the business, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries on a consolidated basis. Neither the Company nor any of its subsidiaries is, and at the Closing Date (and, with respect to the Option Notes, the Option Closing Date) will not be, in violation of any provisions of its certificate of incorporation or by-laws. (q) Except as described in the Prospectus, there is no legal or governmental proceeding pending or, to the best -7- 9 knowledge of the Company, threatened to which the Company or any of its subsidiaries is or may be a party or to which the business or property of the Company or any of its subsidiaries is or may be the subject which might result in any material adverse change in the business, operations, condition (financial or other) or results of operations of the Company and its subsidiaries on a consolidated basis or which is required to be disclosed in the Registration Statement and the Prospectus and which is not so disclosed. There is no contract or document concerning the Company or any of its subsidiaries of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not so described or filed as required. The descriptions in the Registration Statement and the Prospectus of any such legal and governmental proceedings and contracts and other documents, insofar as such descriptions or statements constitute summaries of the proceedings or documents referred to therein, fairly present the information called for with respect to such proceedings or documents. (r) The financial statements, schedules and the related notes of the Company included in the Registration Statement and the Prospectus comply in all material respects with the requirements of the Act and the Regulations and present fairly the financial position, results of operations and cash flows of the Company and its subsidiaries on a consolidated basis, as of the dates and for the periods specified therein. Such financial statements (including the related notes and schedules) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods specified therein except as disclosed in the Registration Statement and the Prospectus, subject in the case of interim statements to normal year-end audit adjustments. The other financial information and statistical data set forth in the Prospectus have been prepared on an accounting basis consistent with such financial statements (except for calculations of EBITDA and certain variants thereof to the extent described in the notes to such information and data). (s) The Company and its subsidiaries own, or are licensed or otherwise have the right to use, all material trademarks, trade names, patents and copyrights used in or necessary for the conduct of its business subject to such limitations which, individually or in the aggregate, would not have a material adverse effect on the Company and its subsidiaries on a consolidated basis. No claims have been asserted by any person to the use of any material trademarks, trade names, patents or copyrights, except as disclosed in the Registration Statement and Prospectus. The use, in connection with the business and operations of the Company and its subsidiaries, of such material trademarks, trade names, patents and copyrights does not, to the best of the Company's knowledge, -8- 10 infringe on the rights of any person, except such infringements which, individually or in the aggregate, would not have a material adverse effect on the Company and its subsidiaries on a consolidated basis. (t) There are no holders of securities of the Company who, pursuant to any agreement, understanding or otherwise, have any right to have securities of the Company registered under the Act in connection with the offering contemplated by the Prospectus. (u) The Company is not, nor as a result of the transactions contemplated by the Prospectus would be, required to make any filing or to register under the Investment Company Act of 1940, as amended (the "Investment Company Act"), or is or will become a "holding company" or a "subsidiary company" of a "registered holding company," as defined in the Public Utility Holding Company Act of 1935, as amended. (v) Neither the Company nor any agent acting on its behalf has or will take any action which might cause this Agreement or the issuance, execution or delivery of the Notes to violate Regulation G (12 C.F.R. Part 207), Regulation U (12 C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224), insofar as said Regulation applies to Regulations G and U of the Board of Governors of the Federal Reserve System. (w) The descriptions in the Prospectus under the captions "Capitalization", "Description of Notes", and "Description of Other Obligations" are true and correct in all material respects and fairly present the information required to be disclosed therein. (x) The Company and each of its subsidiaries has filed on a timely basis all material income, franchise and other tax returns and has paid all taxes shown thereon as due, and the Company has no knowledge of any tax deficiency that has been asserted against the Company or any of its subsidiaries which could materially and adversely affect the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries on a consolidated basis. (y) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Underwriters was or will be, when made, inaccurate, untrue or incorrect in any material respect. 2. Purchase, Sale and Delivery of the Notes. (a)(i) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and -9- 11 conditions herein set forth, each of the Underwriters, severally and not jointly, agrees to purchase from the Company, at a purchase price of ___% of the principal amount thereof, the principal amount of the Firm Notes set forth opposite the respective names of the Underwriters in Schedule II. (ii) Delivery of and payment of the purchase price for the Firm Notes shall be made in the offices of Bear, Stearns & Co. Inc. at 245 Park Avenue, New York, New York 10167, or at such other location as may be mutually acceptable. Such delivery and payment shall be made at 10:00 a.m., New York time, on _________, 1994, or at such other time as shall be agreed upon by the Underwriters and the Company. The time and date of such delivery and payment are herein called the "Closing Date." Delivery of the Firm Notes shall be made to the Underwriters for their account against payment of the purchase price for the Firm Notes by certified or official bank check payable in New York Clearing House funds or similar next day funds to the order of the Company. (iii) The Firm Notes shall be in definitive form and registered in such name or names and in such authorized denominations as the Underwriters may request in writing at least two full business days prior to the Closing Date. The Company will permit the Underwriters to examine and package the Firm Notes for delivery at least one full business day prior to the Closing Date. (b)(i) The Company hereby grants to the Underwriters an option (the "Option") to purchase from the Company, for the sole purpose of covering over-allotments in sales of the Firm Notes by the Underwriters, up to an aggregate of $28,500,000 principal amount of the Option Notes, at a purchase price equal to __% of the principal amount thereof, plus accrued interest, if any, thereon from [the earlier of _________________, 1994 or] the date any Note is first issued under the Indenture to the Option Closing Date (as hereinafter defined). The Option shall be exercisable by the Underwriters on one occasion only, at any time before the expiration of 30 days after the Effective Date for the purchase of all or part of the Option Notes, such exercise to be made by notice, given by the Underwriters to the Company in the manner provided by Section 12 hereof, setting forth the principal amount of Option Notes as to which the Option is being exercised, the denominations and the name or names in which the Option Notes so purchased are to be registered, and the date and time of delivery of such Option Notes, which date may be at or subsequent to the Closing Date and shall not be less than two nor more than ten days after such notice. (ii) Delivery of and payment of the purchase price for the Option Notes shall be made at the offices of Bear, Stearns & Co. Inc. at 245 Park Avenue, New York, New York 10167, or such -10- 12 other location as may be mutually acceptable. Such delivery and payment shall be made at the time and on the date designated in such notice, unless some other time and date is mutually agreed upon (such time and date being herein called the "Option Closing Date"). Delivery of the Option Notes shall be made to the Underwriters against payment by the Underwriters of the purchase price therefor by certified or official bank check payable in New York Clearing House funds or similar next day funds to the order of the Company. (iii) The Option Notes shall be in definitive form and registered in such name or names and in such authorized denominations as the Underwriters shall have requested in the notice of exercise of the Option. The Company will permit the Underwriters to examine and package the Option Notes for delivery at least one full business day prior to the Option Closing Date. 3. Offering. Upon the Underwriters' authorization of the release of the Notes, the Underwriters propose to offer the Notes for sale to the public upon the terms set forth in the Prospectus. 4. Covenants of the Company: The Company agrees with the Underwriters as follows: (a) If the Registration Statement has not yet been declared effective, the Company will use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as possible, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) within the prescribed time period and will provide evidence satisfactory to the Underwriters of such timely filing. The Company will notify the Underwriters promptly (and if requested by the Underwriters, will confirm such notice in writing) (i) when the Registration Statement and any amendments thereto become effective, (ii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iii) of the mailing or the delivery to the Commission for filing of any amendment of or supplement to the Registration Statement or the Prospectus, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of the initiation, or the threatening, of any proceedings therefor, (v) of the receipt of any comments from the Commission, and (vi) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Notes for sale in any jurisdiction or the initiation or threatening of any proceeding for that purpose. If the Commission shall propose or enter a stop order at any -11- 13 time, the Company will use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain the lifting of such order as soon as possible. The Company will not file any amendment to the Registration Statement or any amendment of or supplement to the Prospectus to which the Underwriters shall reasonably object after being timely furnished in advance a copy thereof. (b) If at any time when a prospectus relating to the Notes is required to be delivered under the Act any event shall have occurred as a result of which the Prospectus as then amended or supplemented includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it shall be necessary at any time to amend or supplement the Prospectus or Registration Statement to comply with the Act or the Regulations, the Company will notify the Underwriters promptly and prepare and file with the Commission an appropriate amendment or supplement (in form and substance reasonably satisfactory to the Underwriters) which will correct such statement or omission and will use its best efforts to have any amendment to the Registration Statement declared effective as soon as possible. (c) The Company will promptly deliver to the Underwriters three signed copies of the Registration Statement, including exhibits and all amendments thereto, and the Company will promptly deliver to the Underwriters such number of copies of any preliminary prospectus, the Prospectus, the Registration Statement, and all amendments of and supplements to such documents, if any, as the Underwriters may reasonably request. (d) The Company will use its best efforts and will cooperate with the Underwriters, at or prior to the time of effectiveness of the Registration Statement, to qualify the Notes for offering and sale under the securities laws relating to the offering or sale of the Notes of such jurisdictions as the Underwriters may designate and to maintain such qualification in effect for so long as required for the distribution thereof, provided that the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction. (e) The Company will comply with all of the provisions of any undertakings contained in Item 17 of the Registration Statement and will apply the proceeds from the sale of the Notes as set forth under "Use of Proceeds" in the Prospectus. (f) The Company will make generally available to holders of the Notes as soon as may be practicable but in no event later than the last day of the fifteenth full calendar -12- 14 month following the calendar quarter in which the effective date of the Registration Statement falls, an earnings statement (which need not be audited but shall be in reasonable detail) covering a period of at least 12 months commencing after the effective date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (g) During a period of three years from the Effective Date, the Company will furnish to the Underwriters copies of (i) all reports to its stockholders and (ii) all reports, financial statements and proxy or information statements filed by the Company with the Commission or any national securities exchange. (h) The Company will apply the proceeds from the sale of the Notes as set forth under the caption "Use of Proceeds" in the Prospectus. (i) Prior to the Closing Date, the Company shall furnish to the Underwriters, as soon as they have been prepared, copies of any unaudited interim financial statements of the Company, for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. (j) During a period of 90 days from the date of the Prospectus, the Company will not, without the Underwriters' prior written consent, issue, sell, offer or agree to sell, or otherwise dispose of, directly or indirectly, any debt securities of the Company. (k) To the extent permitted by applicable law, the Company hereby waives and will not claim the benefit of any usury laws against any holder of Notes. 5. Payment of Expenses. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company hereby agrees to pay all costs and expenses incident to the performance of the obligations of the Company hereunder, including, without limitation, those in connection with (i) preparing, printing, duplicating, filing and distributing the Registration Statement, as originally filed and all amendments thereof (including all exhibits thereto), any preliminary prospectus, the Prospectus and any amendments thereof or supplements thereto (including, without limitation, fees and expenses of the Company's accountants and counsel), the Indenture, the underwriting documents (including this Agreement), and all other documents related to the public offering of the Notes (including those supplied to the Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer and delivery of the Notes to the Underwriters, including any transfer or other taxes payable thereon, (iii) the qualification of the Notes under state and foreign securities or Blue Sky laws, including the -13- 15 costs of printing and mailing a preliminary and final "Blue Sky Survey" and the fees and disbursements of the Underwriters' counsel in relation thereto, (iv) the filing fees associated with the review of the terms of the public offering of the Notes by the National Association of Securities Dealers, Inc., (v) "roadshow", travel and other expenses incurred by the Company in connection with the marketing and sale of the Notes, (vi) the rating of the Notes by one or more rating agencies and (vii) the fees and expenses of the Trustee and any agent of the Trustee and the fees and disbursements of counsel for the Trustee in connection with the Indenture and the Notes. 6. Conditions to the Obligations of the Underwriters. The Underwriters' obligations to purchase and pay for the Firm Notes and, if and to the extent the Underwriters exercise the Option under Section 2(b) hereof, the Option Notes, shall be subject to the following conditions: (a) Notification that the Registration Statement has become effective shall be received by the Underwriters not later than 5:00 p.m., New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Underwriters and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made on a timely basis. (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Notes under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Underwriters and the Underwriters do not reasonably object thereto, and the Underwriters shall have received a certificate, dated the Closing Date (or, with respect to the Option Notes, the Option Closing Date) and signed by the Chief Executive Officer or the Chairman of the Board of Directors of the Company and the Chief Financial Officer of the Company (who may rely upon the best of their information and belief), to the effect of clauses (i), (ii) and (iii). (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) -14- 16 there shall not have been, in the Underwriters' reasonable opinion, a material adverse change in the business, properties, management, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries on a consolidated basis, whether or not arising from transactions in the ordinary course of business and (ii) neither the Company nor any of its subsidiaries shall have sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree if, in the reasonable judgment of the Underwriters, any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Notes by the Underwriters at the initial public offering price. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company or any of its subsidiaries or their respective officers or directors in their capacities as such, before or by any Federal, state or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding there is a material possibility of an unfavorable ruling, decision or finding that could materially and adversely affect the business, condition (financial or otherwise) or results of operations of the Company and its subsidiaries on a consolidated basis. (e) Each of the representations and warranties of the Company contained herein shall be true and correct in all material respects at the Closing Date (and, with respect to the Option Notes, the Option Closing Date) and all covenants and agreements contained herein to be performed on the part of the Company at or prior to the Closing Date (and, with respect to the Option Notes, the Option Closing Date) shall have been duly performed, fulfilled or complied with in all material respects. (f) The Underwriters shall have received the opinions, dated the Closing Date (and, with respect to the Option Notes, the Option Closing Date) and satisfactory in form and substance to counsel for the Underwriters, from Ropes & Gray, counsel to the Company, to the effect set forth in Exhibit A-1 and from Kevin W. Donnelly, Vice President, General Counsel and Secretary of the Company, to the effect set forth in Exhibit A-2. (g) The Underwriters shall have received an opinion, dated the Closing Date (and, with respect to the Option Notes, the Option Closing Date), from Schulte Roth & Zabel, counsel to the Underwriters, with respect to the Registration Statement, the -15- 17 Prospectus and this Agreement, which opinion shall be satisfactory in all respects to the Underwriters. (h) The Underwriters shall have received a certificate of the Company, dated the Closing Date (and, with respect to the Option Notes, the Option Closing Date), signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company, in form and substance satisfactory to the Underwriters, to the effect that: (i) Each signer of such certificate has examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, such documents do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein (in the case of the Prospectus, in the light of the circumstances under which they were made) not misleading and (B) since the Effective Date no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not untrue or misleading in any material respect. (ii) Each of the representations and warranties of the Company contained in this Agreement are, at the time such certificate is dated, true and correct in all material respects. (iii) Each of the covenants required to be performed by the Company herein on or prior to the date of such certificate has been duly, timely and fully performed in all material respects and each condition herein required to be satisfied or fulfilled on or prior to the date of such certificate has been duly, timely and fully satisfied or fulfilled in all material respects. (i) At the time this Agreement is executed and at the Closing Date (and, with respect to the Option Notes, the Option Closing Date), the Underwriters shall have received a letter, from Arthur Andersen & Co., independent public accountants for the Company, dated, respectively, as of the date of this Agreement and as of the Closing Date (and, with respect to the Option Notes, the Option Closing Date) addressed to the Underwriters and in form and substance satisfactory to the Underwriters, stating that: (i) they are independent public accountants with respect to the Company within the meaning of the Act and the Regulations and stating that the answer to Item 10 of the Registration Statement is correct insofar as it relates to them; (ii) in their opinion, the financial statements and -16- 18 schedules of the Company included in the Registration Statement and the Prospectus and covered by their opinions therein comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable published rules and regulations of the Commission thereunder; (iii) on the basis of procedures (but not an audit made in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited interim financial statements of the Company and its subsidiaries, a reading of the minutes of meetings and consents of the stockholders and board of directors of the Company and the committees of such board subsequent to December 31, 1992, inquiries of officers and other employees of the Company who have responsibility for financial and accounting matters of the Company and its subsidiaries with respect to transactions and events subsequent to December 31, 1992, and other specified procedures and inquiries to a date not more than five business days prior to the date of such letter, nothing has come to their attention that would cause them to believe that: (A) the unaudited financial statements and schedules of the Company presented in the Registration Statement and the Prospectus, if any, do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or that such unaudited financial statements are not presented fairly, in all material respects, in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statement contained in the Registration Statement and Prospectus; (B) with respect to the period subsequent to December 31, 1992 there were, as of the date of the most recent available unaudited monthly financial statements of the Company, and as of a specified date not more than five business days prior to the date of such letter, any changes in the capital stock, long- term indebtedness, current portion of long-term indebtedness or working capital of the Company or any decrease in the stockholder's equity of the Company, in each case as compared with the amounts shown in the most recent balance sheets presented in the Registration Statement and the Prospectus, except for changes or decreases which the Registration Statement and the Prospectus disclose have occurred or which are set forth in such letter or (C) that during the period from January 1, 1993 to the date of the most recent available unaudited monthly financial statements of the Company and to a specified date not more than five business days prior to the date of such letter, there was any decrease, as compared with the corresponding period in the prior fiscal year, in total revenues, net income before interest and taxes or net income, except for decreases which the Registration Statement and the Prospectus disclose have occurred or which are set forth in such letter; and (iv) they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, and other financial information pertaining to the Company set forth in the Registration Statement and the Prospectus, which have been specified by the Underwriters -17- 19 prior to the date of this Agreement, to the extent that such amounts, numbers, percentages, and information may be derived from the general accounting and financial records of the Company or from schedules furnished by the Company, and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries, and other appropriate procedures specified by the Underwriters (which procedures do not constitute an audit in accordance with generally accepted auditing standards) set forth in such letter, and found them to be in agreement. (j) At the Closing Date (and, with respect to the Option Notes, the Option Closing Date), the Underwriters shall have received an opinion from counsel to the Trustee, dated the date of its delivery, addressed to the Underwriters and in form and substance satisfactory to Underwriter's counsel, to the effect that: (i) the Trustee is a national banking association or state chartered bank or trust company and is validly existing in good standing under the laws of the jurisdiction in which it is incorporated; (ii) the Trustee has the power and authority to enter into the Indenture and authenticate the Notes as Trustee under the Indenture; (iii) the Indenture has been duly authorized, executed and delivered by the Trustee, as Trustee under the Indenture, and the Indenture is valid and binding on the Trustee and enforceable against the Trustee in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). (iv) the Notes have been duly authenticated and delivered by the Trustee, as Trustee, under the Indenture. (k) The Company shall have furnished to the Underwriters such certificates and other documents, in addition to those specifically mentioned herein, as the Underwriters may have reasonably requested as to the accuracy and completeness at the Closing Date (and, with respect to the Option Notes, the Option Closing Date) of any statement in the Registration Statement or the Prospectus, as to the accuracy at the Closing Date (and, with respect to the Option Notes, the Option Closing Date) of the representations and warranties of the Company herein, as to the -18- 20 performance by the Company of its obligations hereunder or as to the fulfillment of the conditions precedent to the obligations hereunder of the Underwriters. If any of the conditions specified in this Section 6 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to the Underwriters or to the Underwriters' counsel pursuant to this Section 6 shall not be in all material respects reasonably satisfactory in form and substance to the Underwriters, and to the Underwriters' counsel, all the Underwriters' obligations hereunder may be cancelled by the Underwriters at, or at any time prior to, the Closing Date (and, with respect to the Option Notes, the Option Closing Date). Notice of such cancellation shall be given to the Company in writing, or by telephone, telex or telegraph, confirmed in writing. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and out-of-pocket expenses whatsoever (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the preliminary prospectus or the Prospectus, in light of the circumstances under which they were made) not misleading; provided, however, that the Company will not be liable in any such case to the extent, but only to the extent, that any such loss, -19- 21 liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Underwriters expressly for use therein; and provided further, that the Company shall not be liable to any Underwriter with respect to any preliminary prospectus to the extent that any such loss, liability, claim, damage or expense results solely from an untrue statement of a material fact contained in, or the omission of a material fact from, such preliminary prospectus, which untrue statement or omission was corrected in the Prospectus, if (i) such Underwriter sold Notes to the person alleging such loss, liability, claim or damage without sending or giving, at or prior to the written confirmation of such sale, a copy of the Prospectus, (ii) delivery of the Prospectus was required under the Act, and (iii) the Company delivered to such Underwriter copies of the Prospectus in such reasonable quantities as were requested by such Underwriter. This indemnity agreement will be in addition to any liability which the Company may otherwise have, including, under this Agreement. (b) Each Underwriter severally, and not jointly, agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who shall have signed the Registration Statement, and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever (including but not limited to attorneys' fees and any and all out-of-pocket expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a preliminary prospectus or the Prospectus, in light of the circumstances under which they were made) not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Underwriters expressly for use therein, provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount received by such Underwriter. This indemnity will be in addition to any liability which the Underwriters may otherwise have, including, under this Agreement. -20- 22 (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 7). In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have retained counsel for the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties. Anything in this subsection to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent will not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is a party and indemnification has been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability or claims that are the subject matter of such proceeding. 8. Contribution. In order to provide for contribution in circumstances in which the indemnification provided for in Section 7 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and out-of-pocket expenses of the nature contemplated by such indemnification provision (including any investigation, -21- 23 legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company, any contribution received by the Company from persons, other than the Underwriters, who may also be liable for contribution, including persons who control the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) to which the Company and the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Notes or, if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and (y) the underwriting discounts and commissions received by the Underwriters respectively, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and of the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the other provisions of this Section 8, (i) in no case shall any Underwriter be required to contribute any amount in excess of the amount by which the underwriting discount applicable to the Notes purchased by such Underwriter pursuant to this Agreement exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter and each person, if any, who -22- 24 controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each of its officers who shall have signed the Registration Statement and each of its directors shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section 8, notify such party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 8 or otherwise. No party shall be liable for contribution with respect to any action or claim settled without its consent; provided, however, that such consent will not be unreasonably withheld. 9. Survival of Representations and Agreements. All representations and warranties, covenants and agreements of the Underwriters and the Company contained in this Agreement, including the agreements contained in Section 5, the indemnity agreements contained in Section 7 and the contribution agreements contained in Section 8, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of an Underwriter or any controlling person thereof or by or on behalf of the Company, any of its officers and directors or any controlling person thereof, and shall survive delivery of and payment for the Notes to and by the several Underwriters. The agreements contained in Sections 5, 7, 8 and 10(c) hereof shall survive the termination of this Agreement including pursuant to Section 10 hereof. 10. Termination. (a) The Underwriters shall have the right to terminate this Agreement by notice to the Company at any time prior to the Closing Date (and, with respect to the Option Notes, the Option Closing Date), without liability (other than with respect to Sections 7 and 8 hereof) if: (i) the Company shall have failed, refused or been unable to perform in any material respect any obligation, agreement or undertaking on its part to be performed hereunder; (ii) any other material condition to the obligations of the Underwriters as provided in Section 6 hereof is not fulfilled when and as required; (iii) trading in securities generally on the New York or American Stock Exchanges is suspended, or -23- 25 minimum or maximum prices for trading shall have been established on either of such exchanges by order of such exchanges or the Commission or any other governmental authority having jurisdiction; (iv) a general banking moratorium shall have been declared by a New York State or federal authority; (v) there is an outbreak or escalation of armed hostilities involving the United States on or after the date hereof or a declaration of a national emergency or war by the United States on or after the date hereof, which, in the judgment of the Underwriters, makes it inadvisable or impracticable to proceed with the delivery of the Notes on the terms and in the manner contemplated in the Prospectus; (vi) there is a material adverse change in general economic, political or financial conditions, or in the effect of international conditions on financial markets in the United States, which, in the judgment of the Underwriters, makes it inadvisable or impracticable to proceed with the delivery of the Notes on the terms and in the manner contemplated in the Prospectus; or (vii) in the Underwriters' reasonable opinion, any material adverse change shall have occurred since the respective dates as of which information is given in the Registration Statement or the Prospectus in the condition (financial or other) of the Company and its subsidiaries, taken as a whole, whether or not arising in the ordinary course of business other than as set forth in the Prospectus. (b) Any notice of termination pursuant to this Section 10 shall be by telephone or telecopy confirmed in writing by letter. (c) If this Agreement shall be terminated pursuant to any of the provisions hereof (otherwise than pursuant to Section 10(a) or 11 hereof), or if the sale of the Notes provided for herein is not consummated because any condition to the Underwriters' obligations set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof, the Company will, subject to demand by the Underwriters, reimburse the Underwriters for all out-of-pocket expenses (including the reasonable fees and expenses of Underwriters' counsel), incurred by the Underwriters in connection herewith. -24- 26 11. Substitution of Underwriter. If any one or more of the Underwriters shall fail or refuse to purchase any Notes and arrangements satisfactory to the Underwriters and the Company for the purchase of such Notes are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company for the purchase or sale of any Notes under this Agreement. In any such case either the Underwriters or the Company shall have the right to postpone the Closing Date (and, with respect to the Option Notes, the Option Closing Date), but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken pursuant to this Section 11 shall not relieve any defaulting Underwriter from liability in respect of any default of the Underwriter under this Agreement. 12. Notice. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and, if sent to the Underwriters shall be mailed, delivered, or telecopied and confirmed in writing, to Bear, Stearns & Co. Inc., 245 Park Avenue, New York, N.Y. 10167, Attention: Corporate Finance Department (Telecopy No. (212) 272-3092); if sent to the Company, shall be mailed, delivered, or telecopied and confirmed in writing to the Company, 50 Kennedy Plaza, Providence, Rhode Island 02903-2360, Attention: General Counsel (Telecopy No. (401) 751-4610). 13. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon the Underwriters and the Company and the controlling persons, directors, officers, employees and agents referred to in Sections 7 and 8, and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. The term "successors and assigns" shall not include a purchaser, in its capacity as such, of Notes from the Underwriters. 14. Construction. This Agreement shall be construed in accordance with the laws of the State of New York without regard to principles of conflicts of law. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -25- 27 The Company and the Underwriters each hereby irrevocably waive any right they may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby. If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, NORTEK, INC. By:_____________________________ Name: Title: Accepted, as of the date first above written. BEAR, STEARNS & CO. INC. By:___________________________ Name: Title: CHASE SECURITIES, INC. By:___________________________ Name: Title: -26- 28 SCHEDULE I NORTEK SUBSIDIARY CHART Broan Limited Broan Mfg. Co., Inc. Aubrey Manufacturing, Inc. Monarch Metal Products Corporation Diamond Architecturals, Inc. CSGT, Inc. Gray Textile Corp. U.S. Laminating Corporation Dixieline Lumber Company Dixieline Builders Fund Control, Inc. Fidelity Investment Co. General Woodworker, Inc. Glassalum Engineering Corp. Glassalum Installations, Inc. J & M Products, Inc. Jensen Industries, Inc. Jensen Aero Products Linear Corporation Linear H.K. Manufacturing, Limited We Monitor America Incorporated Linear Foreign Sales Corporation Moore-O-Matic, Inc. M & S Systems, Inc. The Major Glass Company, Inc. Perfection Glass Co., Inc. MPDC, Inc. Monosolar, Inc. Nordyne Inc. Commercial Environmental Systems Group, Inc. (formerly SMB Corporation) Mammoth, Inc. (formerly Intertherm Investments, Inc.) Governair Corporation Temtrol, Inc. Norfleet, Inc. Raphael Ltd. Ring Brothers Investment Co., Inc. Ring Brothers Corporation Royal Limousine Service, Inc. Universal-Rundle Corporation 29 SCHEDULE II
PRINCIPAL AMOUNT OF FIRM NOTES TO BE PRINCIPAL AMOUNT NAME OF UNDERWRITER PURCHASED OF OVER-ALLOTMENT ------------------- ------------------- ----------------- Bear, Stearns & Co., Inc. $ $ Chase Securities, Inc. $ $
EX-4.5 3 INDENTURE 1 SR&Z DRAFT 01/20/94 EXHIBIT 4.5 NORTEK, INC., Company, and STATE STREET BANK AND TRUST COMPANY, Trustee ____________________________________ INDENTURE Dated as of______ __, 1994 ____________________________________ [$218,500,000] __% Senior Subordinated Notes due ________ __, 2004 2 CROSS REFERENCE TABLE 1
TIA Indenture Section Section - ------- --------- 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.2 (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.08; 7.10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.02 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.02; 11.02 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.03 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05; 11.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.07 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316(a) (last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.08 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.05 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.04 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.01 ____________________ 1 Note: This Cross Reference Table shall not, for any purpose, be deemed to be part of this Indenture. 2 N.A. means Not Applicable.
i 3 TABLE OF CONTENTS 3
PAGE ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 1.03. Incorporation by Reference of Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 1.04. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 1.05. Acts of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 1.06. Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 2 THE SECURITIES SECTION 2.01. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.02. Execution and Authentication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.03. Registrar and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.04. Paying Agent to Hold Money in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.05. Securityholder Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 2.06. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 2.07. Replacement Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.08. Outstanding Securities; Determinations of Holders' Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 2.09. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 2.10. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 2.11. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 2.12. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 3 REDEMPTION SECTION 3.01. Right to Redeem; Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.02. Selection of Securities to be Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.03. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.04. Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 3.05. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 3.06. Securities Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ____________________ 3 This Table of Contents shall not, for any purpose, be deemed to be part of this Indenture.
ii 4 ARTICLE 4 COVENANTS SECTION 4.01. Payment of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 4.02. SEC Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 4.03. Compliance Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 4.04. Further Instruments and Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 4.05. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 4.06. Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 4.07. Limitation on Other Senior Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 4.08. Limitation on Additional Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 4.09. Limitation on Sale or Issuance of Capital Stock of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.10. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 4.11. Limitation on Certain Restrictions Affecting Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 4.12. Repurchase Upon Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 4.13. Limitation on Use of Proceeds from Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 4.14. Limitation on Transactions With Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 4.15. Limitation on Guarantees by Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 4.16. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 4.17. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 4.18. Maintenance of Properties and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 4.19. Stay, Extension and Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.20. Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.21. Payments for Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.22. Covenant to Comply with Securities Laws upon Purchase of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE 5 SUCCESSOR CORPORATION SECTION 5.01. When the Company May Merge or Transfer Assets, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 5.02. Successor Corporation Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 6.02. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.03. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 6.05. Control by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 6.06. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 6.07. Rights of Holders to Receive Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
iii 5 SECTION 6.08. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 6.09. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 6.12. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE 7 TRUSTEE SECTION 7.01. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 7.02. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 7.03. Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 7.05. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 7.06. Reports by Trustee to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 7.07. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 7.08. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 7.09. Successor Trustee by Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 7.11. Preferential Collection of Claims Against the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.01. Discharge of Liability on Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 8.02. Repayment to the Company or Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ARTICLE 9 AMENDMENTS SECTION 9.01. Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 9.02. With Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 9.03. Compliance with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 9.04. Revocation and Effect of Consents, Waivers and Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 9.05. Notation on or Exchange of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 9.06. Trustee to Sign Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 9.07. Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 ARTICLE 10 SUBORDINATION SECTION 10.01. Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 10.02. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 10.03. Liquidation; Dissolution; Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 10.04. Default on Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
iv 6 SECTION 10.05. No Suspension of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 10.06. When Distribution Must be Paid Over . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 10.07. Notice by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 10.08. Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 10.09. Relative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 10.10. No Waiver of Subordination Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 10.11. Distribution or Notice to Representative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 10.12. Rights of Trustee and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 10.13. Authorization to Effect Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 10.14. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 ARTICLE 11 MISCELLANEOUS SECTION 11.01. Trust Indenture Act Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 11.02. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 11.03. Communication by Holders with Other Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 11.04. Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 11.05. Statements Required in Certificate or Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 11.06. Separability Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 11.07. Rules by Trustee, Paying Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 11.08. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 11.09. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 11.10. No Recourse Against Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 11.11. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 11.12. Multiple Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 EXHIBIT A Form of Security EXHIBIT B Terms of Guaranty EXHIBIT C Form of Guaranty
v 7 INDENTURE, dated as of _______ ___, 1994, between Nortek, Inc., a Delaware corporation (the "Company"), and State Street Bank and Trust Company, a Massachusetts banking corporation (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's __% Senior Subordinated Notes due _____________ ___, 2004 (the "Securities"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE ------------------------------------------ Section 1.01. DEFINITIONS. "Acquired Indebtedness" means, with respect to any Person, Indebtedness of such Person (i) assumed in connection with an acquisition of assets or properties from such Person or (ii) existing at the time such Person becomes a Subsidiary of any other Person (in each case other than any Indebtedness incurred in connection with, or in contemplation of, such acquisition or such Person becoming such a Subsidiary). "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. A Person shall be deemed to "control" (including the correlative meanings, the terms "controlling," "controlled by", and "under common control with") another Person if the controlling Person (i) possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of voting securities, by agreement or otherwise, or (ii) owns, directly or indirectly, 10% or more of the combined voting power of all classes of the issued and outstanding equity securities of the controlled Person. "Allowable Subsidiary Loans" means Indebtedness of the Company to a Subsidiary not to exceed the Net Cash Proceeds received by the Company as a result of such Subsidiary becoming less than a Wholly-Owned Subsidiary through the sale of Equity Interests in compliance with this Indenture, PROVIDED that (i) all such Allowable Subsidiary Loans are contractually subordinated in right of payment to the Securities and (ii) the total amount of all Allowable Subsidiary Loans does not exceed $25,000,000. 8 "Asset Sale" means, with respect to any Person, the sale, lease, conveyance or other transfer or disposition by such Person of any of its assets or properties (including by way of a sale-and-leaseback and including the sale or other transfer of any of the Capital Stock of any Subsidiary of such Person), in a single transaction or through a series of related transactions, for aggregate consideration received by such Person or a Subsidiary of such Person, net of out-of-pocket costs relating thereto (including, without limitation, legal, accounting and investment banking fees and sales commissions), in excess of $5,000,000. For purposes of this definition, consideration shall include, without limitation, any indebtedness for borrowed money of such Person or such Subsidiary that is assumed by the transferee of any assets or any such indebtedness of any Subsidiary of such Person whose stock is purchased by the transferee. Any transaction consummated in compliance with Article 5 hereof and any Lien permitted under Section 4.10 hereof (and any foreclosure or other sale under any such Lien, except to the extent there are surplus proceeds from such foreclosure) shall not constitute an Asset Sale. "Average Life" means, as of the date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the date of each successive scheduled principal payment (assuming the exercise by the obligor of such debt security of all unconditional (other than as to the giving of notice) extension options of each such scheduled payment date) of such debt security multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "Board of Directors" of any corporation means the Board of Directors of such corporation, or any duly authorized committee of such Board of Directors. "Board Resolution" means, with respect to any Person, a copy of a resolution or resolutions certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, as filed with the corporate records of such Person. "Broan Limited Credit Facility" means a credit facility between Broan Limited, a Canadian Subsidiary of the Company, and one or more banks or other institutional lenders, as the same may be amended, extended, amended and restated, supplemented or otherwise modified or replaced from time to time. 2 9 "Business Day" means any day that is not a Saturday, a Sunday or a day on which banking institutions in the Commonwealth of Massachusetts are authorized or required to close. "Capital Lease Obligations" means, with respect to any Person, all obligations of such Person or any of its Subsidiaries under leases of property by such Person or such Subsidiary as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP, and for purposes of this Indenture the amount of such obligations at any time shall be the aggregate capitalized amount thereof at such time, as determined in accordance with GAAP. "Capital Stock" means any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock (including common or preferred stock) or partnership interests. "Cash Equivalents" means (i) any evidence of Indebtedness, maturing not more than 365 days after the date of acquisition, issued or fully guaranteed or insured by the United States of America, or an instrumentality or agency thereof (provided that the full faith and credit of the United States of America is pledged in support thereof), (ii) any certificate of deposit, overnight bank deposit or bankers acceptance, maturing not more than 365 days after the date of acquisition, issued by, or time deposit of, a commercial banking institution having unsecured long-term debt (or whose holding company has unsecured long-term debt) rated, at the time as of which any Investment therein is made, BBB+ or better by S&P or Moody's or the equivalent of such rating by a successor rating agency, (iii) commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America or any State thereof or the District of Columbia which is rated, at the time as of which any Investment therein is made, P-1 or better by Moody's or A-1 or better by S&P, or the equivalent of such rating by a successor rating agency, (iv) Investments in mutual funds, money market funds, investment pools and other savings vehicles, 100% of the assets of which are invested in Investments described in clause (i), (ii) or (iii) above, and (v) in the case of Broan Limited, (a) any evidence of Indebtedness, maturing not more than 365 days after the date of acquisition, issued or fully guaranteed or insured by Canada or any instrumentality or agency thereof (PROVIDED that the full faith and credit of Canada is pledged in support thereof), (b) any certificate of deposit, overnight bank deposit or bankers acceptance, maturing not more than 365 days after the date of acquisition, issued by, or time deposit of, a commercial banking institution having unsecured long-term debt (or whose holding company has unsecured long-term debt) rated, at the time as of which any Investment therein is made, A or better 3 10 by Dominion Bond Rating Services or the equivalent of such rating by a successor rating agency, and (c) commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of Canada or any province thereof which is rated, at the time as of which any Investment therein is made, R-1 or better by Dominion Bond Rating Services or the equivalent of such rating by a successor rating agency. "Commodity Agreement" means any agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in the prices of commodities used by the Company or any of its Subsidiaries in the ordinary course of business. "Company Credit Facility" means one or more credit facilities between the Company and one or more banks or other institutional lenders, as the same may be amended, extended, amended and restated, supplemented or otherwise modified or replaced from time to time, specifically designated in each such credit facility as a "Company Credit Facility." All Company Credit Facilities are referred to collectively in this Indenture as the "Company Credit Facility". "Consolidated Amortization Expense" means, with respect to any Person for any period, the amortization expense of such Person and its Subsidiaries, determined on a consolidated basis for such period in accordance with GAAP, excluding any amortization expense included in Consolidated Interest Expense. "Consolidated Cash Flow" means, with respect to any Person for any period, the sum of, without duplication, (i) Consolidated Net Income of such Person for such period, (ii) Consolidated Interest Expense of such Person for such period, (iii) Consolidated Income Tax Expense of such Person for such period, (iv) Consolidated Depreciation Expense of such Person for such period, (v) Consolidated Amortization Expense of such Person for such period, and (vi) the amount, not to exceed 10% of Consolidated Cash Flow of such Person for such period (which amount shall be excluded in determining such Consolidated Cash Flow), by which (A) other non-cash items of expense that reduce Consolidated Net Income of such Person for such period exceed (B) other non-cash items of expense that increase Consolidated Net Income of such Person for such period; PROVIDED, HOWEVER, that, in the case of the Company, any expenses which are included in any of clauses (ii) through (vi) above for such period and which are attributable to Dixieline Lumber Company shall be deducted from Consolidated Cash Flow of the Company for such period. "Consolidated Cash Flow Coverage Ratio" means, with respect to any Person for any period, the ratio of Consolidated 4 11 Cash Flow of such Person for such period to Consolidated Interest Expense of such Person for such period; PROVIDED, HOWEVER, that, Consolidated Cash Flow and Consolidated Interest Expense shall be calculated on a pro forma basis after giving effect, as if occurring at the beginning of such period, to (i) the incurrence of Indebtedness giving rise to the need to calculate the Consolidated Cash Flow Coverage Ratio and the retirement of any Indebtedness refinanced with the proceeds of such Indebtedness, (ii) the incurrence, during such period or since the last day of such period, of any Indebtedness (other than Indebtedness incurred for working capital purposes), and the retirement of any Indebtedness refinanced with the proceeds of such Indebtedness, (iii) the acquisition by such Person (directly or through a Subsidiary of such Person) of any company or business during such period or since the last day of such period, (iv) the sale or other disposition of assets or properties outside the ordinary course of business by such Person (directly or through a Subsidiary of such Person), and the actual application of the proceeds therefrom, during such period or since the last day of such period, and (v) in the case of the Company and with respect to any such period ending prior to the date on which there shall be four fiscal quarters of the Company which commenced and ended after the issue date of the Securities, the income that could have been earned by the Company if the Cash Proceeds of the issuance of the Securities (net of underwriters' discounts and commissions and amounts used to retire Indebtedness of the Company), if any, received by the Company were invested from the beginning of such period to but excluding the date of receipt by the Company of such Cash Proceeds at the rate in effect on the last day of the last fiscal quarter within such period for United States Treasury securities maturing one year from the date of issuance of such securities, as compiled and published in the then most recent Federal Reserve Statistical Release H.15 (519). "Consolidated Depreciation Expense" means, with respect to any Person for any period, the depreciation and depletion expense of such Person and its Subsidiaries, determined on a consolidated basis for such period in accordance with GAAP. "Consolidated Income Tax Expense" means, with respect to any Person for any period, the provision for federal, state, local and foreign income taxes of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, with respect to any Person for any period, without duplication, the sum of (i) the interest expense of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, including, without limitation, all original issue discount and other interest portion of any deferred payment Indebtedness and all commissions, discounts and other fees and charges owed 5 12 with respect to letters of credit and bankers' acceptance financing (less, in the case of the Company, any interest income included in Consolidated Net Income of the Company for such period), but excluding any deferred financing fees otherwise includible in Consolidated Interest Expense of the Company for such period; (ii) the interest component of Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP; and (iii) all cash dividends or other distributions declared or paid on any Capital Stock (other than common stock, preferred stock that is not Redeemable Stock or, with respect to the Company, special common stock) of such Person and its Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP; PROVIDED, HOWEVER, that any Indebtedness bearing a floating rate of interest shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate net income (or loss) of such Person and its Subsidiaries for such period, before discontinued operations, extraordinary items and the cumulative effect of a change in accounting principles of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, PROVIDED that there shall also be excluded from Consolidated Net Income (i) any net gains or losses in respect of dispositions of assets other than in the ordinary course of business; (ii) any gains from currency exchange transactions not in the ordinary course of business consistent with past practice; (iii) any gains or losses realized from the termination of any employee pension benefit plan; (iv) any gains or losses realized upon the refinancing of any Indebtedness of such Person or any of its Subsidiaries; (v) any gains or losses arising from the destruction of property or assets due to fire or other casualty; (vi) any gains or losses from the revaluation of property or assets; (vii) the net income (or loss) of any other Person (other than a Subsidiary of such Person) except to the extent of cash dividends or distributions paid to such Person by such other Person in such period; (viii) the net income (or loss) of any Subsidiary of such Person except to the extent of the interest of such Person in such Subsidiary, PROVIDED that in the case of the Company the net income (or loss) of Dixieline Lumber Company shall be excluded; (ix) the net income (or loss) of any Subsidiary of such Person that is subject to any restriction or limitation on the payment of dividends and other distributions (including loans or advances) by operation of the terms of its charter or by agreement, instrument, judgment, decree, order or governmental regulation applicable to such Subsidiary to the extent of such restriction or limitation in such period; and (x) in the case of the Company, the excess of (a) the compensation expense recorded by the Company in the computation of net 6 13 earnings of the Company in respect of shares of Capital Stock (other than Redeemable Stock) or other Equity Interests, pursuant to a plan or other arrangement approved by the Board of Directors of the Company (or of a Reporting Subsidiary of the Company, if applicable), to or for the benefit of any employee, officer or director of the Company or any of its Subsidiaries or to or by any employee stock ownership plan or similar trust for the benefit of any such employee, officer or director, over (b) the amount of income taxes recorded by the Company in connection with such compensation expense of the Company. "Consolidated Net Worth" means, with respect to any Person at any date of determination, the sum of the Capital Stock, additional paid-in capital and cumulative translation adjustment account plus retained earnings (or minus accumulated deficit), excluding amounts attributable to Redeemable Stock, any Capital Stock convertible into Indebtedness or Treasury Stock, of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement entered into in the ordinary course of business and designed to protect the Company or any of its Subsidiaries against fluctuations in currency values to or under which the Company or any of its Subsidiaries is a party or a beneficiary on the issue date of the Securities or becomes a party or a beneficiary thereafter. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Equity Interests" means Capital Stock, warrants, options or other rights to acquire Capital Stock (but excluding any debt security which is convertible into, or exchangeable for, Capital Stock). "Exempt Person" means (i) Richard L. Bready, (ii) any Person which is an Affiliate of Richard L. Bready and (iii) any other Affiliate of such Person so long as such Person is an Affiliate of Richard L. Bready. "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries, in existence on the issue date of the Securities. "Existing Investments" means (i) Investments of the Company and its Subsidiaries, in existence on the issue date of the Securities and (ii) Investments to be made pursuant to commitments authorized by the Board of Directors of the Company prior to the issue date of the Securities (a) in Ecological Engineering Associates, L.P. in an amount not to exceed 7 14 $2,100,000 (including such Investments made prior to the issue date of the Securities) and (b) in or related to a joint-venture involving Universal-Rundle Corporation in an amount not to exceed $4,000,000. "Fair Market Value" means, with respect to any asset, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of which is under pressure or compulsion to complete the transaction; PROVIDED, HOWEVER, that the Fair Market Value of any asset or assets of the Company or any of its Subsidiaries shall be determined by the Board of Directors of the Company or, if such Subsidiary is a Reporting Subsidiary of the Company, of such Reporting Subsidiary, acting in good faith, and evidenced by a Board Resolution of the Company or such Reporting Subsidiary, as the case may be, delivered to the Trustee. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession, from time to time; PROVIDED, HOWEVER, that for purposes of Articles IV and V hereof, GAAP shall be determined on the basis of such principles as in effect on the issue date of the Securities. "guaranty" means, with respect to any obligation, (i) a guaranty (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, of all or any part of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure the payment or performance of (or payment of damages in the event of non-performance) of all or any part of such obligation. "Holder" or "Securityholder" means a Person in whose name a Security is registered on the Registrar's books. "Indebtedness" means, with respect to any Person, without duplication, any indebtedness, contingent or otherwise, (i) with respect to borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), or evidenced by bonds, notes, debentures or similar instruments or consisting of reimbursement obligations with respect to letters of credit or (ii) representing the deferred and unpaid balance of the purchase price of any property excluding any such balance that constitutes a trade payable or an accrued liability, in each case arising in the ordinary course of business, if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance 8 15 sheet of such Person prepared on a consolidated basis in accordance with GAAP, and shall also include, to the extent not otherwise included, (a) any Capital Lease Obligations, (b) the maximum fixed repurchase price of any Redeemable Stock, (c) indebtedness secured by a Lien to which the property or assets owned or held by such Person is subject, whether or not the obligations secured thereby shall have been assumed, (d) guaranties of items that would be included within this definition to the extent of such guaranties, and (e) net liabilities in respect of Commodity Agreements, Currency Agreements and Interest Rate Agreements. For purposes of the immediately preceding sentence, the maximum fixed repurchase price of any Redeemable Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock as if such Redeemable Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, PROVIDED that if such Redeemable Stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Redeemable Stock. The amount of Indebtedness of any Person at any date shall be without duplication (y) the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any such contingent obligations at such date and (z) in the case of Indebtedness of others secured by a Lien to which the property or assets owned or held by such Person is subject, the lesser of the Fair Market Value at such date of any property or asset subject to a Lien securing the Indebtedness of others or the amount of the Indebtedness secured. The amount of any Indebtedness issued at a discount shall be equal to the gross proceeds of such issuance (and not the face amount of any bond, note, debenture or similar instrument representing such Indebtedness). "Indenture" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof, including the provisions of the TIA that are deemed to be a part hereof. "Independent Director" means a director of the Company other than a director; (i) who (apart from being a director of the Company) is an officer, employee or Affiliate of the Company or (ii) who is a partner in any partnership which is an Affiliate of the Company. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement, or other similar agreement or arrangement entered into in the ordinary course of business and designed to protect the Company or any of its Subsidiaries against fluctuations in interest rates to or under which the Company or any of its Subsidiaries is a party or a beneficiary thereof. 9 16 "Investment" means, with respect to any Person, (i) any direct or indirect loan or other extension of credit (other than extensions of trade credit by such Person on commercially reasonable terms and relating to the sale of property or services in the ordinary course of business) or capital contribution (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others) to any other Person, or (ii) any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by any other Person. "Lien" means any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease intended as security, any option or other agreement to sell or give any security interest and any filing of or other agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction other than a financing statement covering leased goods under a lease not intended as security). "Material Subsidiary" of any Person means (i) any Subsidiary Guarantor and (ii) any other Subsidiary of such Person which at the time of determination (a) had assets which, as of the date of such Person's then most recent quarterly consolidated balance sheet, constituted at least 5% of such Person's total assets on a consolidated basis as of such date, in each case determined in accordance with GAAP, (b) had net sales for the 12-month period ending on the date of such Person's most recent quarterly consolidated statement of income which constituted at least 5% of such Person's total net sales on a consolidated basis for such period or (c) had operating income for the 12-month period ending on the date of such Person's most recent quarterly consolidated statement of operating income which constituted at least 10% of such Person's total operating income on a consolidated basis for such period. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means the aggregate Cash Proceeds received by the Company or any of its Subsidiaries in respect of any Asset Sale (including, without limitation, Cash Proceeds of deferred payment obligations when received in the form of cash or Cash Equivalents), net of the out-of-pocket costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions) and any relocation expenses and severance and shutdown costs incurred as a result thereof, and all federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP as a 10 17 consequence of such Asset Sale, amounts required to be applied to the repayment of Indebtedness secured by a Lien on the asset or assets which are the subject of such Asset Sale and any reasonable reserve in accordance with GAAP for adjustments in respect of the sale price of such asset or assets. "Officer" means, with respect to any corporation, the Chairman of the Board, any Vice Chairman, the President, any Vice President, the Treasurer, the Secretary, any Assistant Treasurer or any Assistant Secretary of such corporation. "Officers' Certificate" means a written certificate containing the information specified in Sections 11.04 and 11.05 herein, signed in the name of the Company by any two of its Officers, and delivered to the Trustee. "Opinion of Counsel" means a written opinion containing the information specified in Sections 11.04 and 11.05 hereof, rendered by legal counsel (who may be counsel to the Company) acceptable to the Trustee. "Permitted Investments" means any of the following: (i) Cash Equivalents; (ii) Existing Investments; (iii) Investments by the Company or a Subsidiary of the Company in any Subsidiary of the Company or any other Person that concurrently with the making of such Investment becomes a Subsidiary of the Company; (iv) guaranties by Subsidiaries of the Company permitted under Section 4.08 or 4.15 hereof; (v) Indebtedness of the Company to any Subsidiary of the Company, PROVIDED that such Indebtedness is contractually subordinated in right of payment to the Securities; (vi) Investments by the Company or any of its Subsidiaries in debt securities or debt instruments having maturities of 10 years or less and (A) issued or fully guaranteed or insured by the United States of America, or an instrumentality or agency thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) or (B) with a rating of BBB- or better by S&P or Baa-3 or better by Moody's or the equivalent of such rating by a successor rating agency; (vii) any Investment by Broan Limited in debt securities or debt instruments having maturities of 10 years or less and issued or fully guaranteed or insured by Canada or an instrumentality or agency thereof or rated, at the time of such Investment, BBB- or better by Dominion Bond Rating Services or the equivalent of such rating by a successor rating agency, so long as the aggregate amount of all such Investments by Broan Limited do not exceed $7,500,000 at any one time outstanding; (viii) loans and advances to officers and directors of the Company or any Subsidiary of the Company made in the ordinary course of business or pursuant to an employee benefit plan, up to $3,000,000 in the aggregate at any one time outstanding; (ix) loans and advances to vendors, suppliers and contractors of the Company or any Subsidiary of the Company and made in the ordinary course of business; (x) the 11 18 receipt by the Company or its Subsidiaries of consideration other than Cash Proceeds in any Asset Sale made in compliance with the terms of this Indenture; (xi) so long as no Default or Event of Default shall have occurred and be continuing, other Investments made after the issue date of the Securities not exceeding in the aggregate at any time outstanding (A) $10,000,000, if at the time of the making of such Investment the Securities are not rated BB+ or better by S&P or Ba1 or better by Moody's, or (B) $20,000,000, but not more than $10,000,000 in any fiscal year of the Company, if at the time of the making of such Investment the Securities are rated BB+ or better by S&P or Ba1 or better by Moody's; PROVIDED, HOWEVER, that upon the sale by the Company of all of the Equity Interests of Dixieline Lumber Company or all or substantially all of the assets of Dixieline Lumber Company, the aggregate amount of Investments permitted to be outstanding pursuant to this clause (xi) shall be increased by the amount, if any, by which the Net Cash Proceeds received by the Company from such sale exceed the aggregate of all Investments in Dixieline Lumber Company made by the Company or any of its Subsidiaries after the issue date of the Securities; (xii) any Lien permitted under Section 4.10 hereof; and (xiii) Investments by Subsidiaries of the Company not exceeding in the aggregate $5,000,000 at any one time outstanding in Cash Equivalents described in clause (ii) of the definition of such term in this Indenture, PROVIDED that for purposes of this clause (xiii) an instrument referred to in such clause (ii) may be issued by any commercial banking institution having capital and surplus of not less than $100,000,000. "Permitted Liens" means (i) Liens securing Indebtedness owing to the Company by a Subsidiary of the Company; (ii) Liens securing Acquired Indebtedness incurred by the Company or any of its Subsidiaries in accordance with the provisions of this Indenture, PROVIDED such Liens were not incurred in anticipation of or in connection with the transaction pursuant to which such Acquired Indebtedness was so incurred; (iii) Liens securing Purchase Money Obligations permitted to be incurred by the provisions of this Indenture; (iv) Liens securing Indebtedness permitted by clause (xiv) of Section 4.08 hereof; and (v) any interest or title of a lessor in property subject to any Capital Lease Obligation or operating lease of the Company and of its Subsidiaries. "Person" means any individual, corporation, partnership, joint venture, incorporated or unincorporated association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind. "Purchase Money Obligations" means any Indebtedness of the Company or any of its Subsidiaries incurred to finance the acquisition or construction of any property or business 12 19 (including Indebtedness incurred within 180 days following such acquisition or construction), including Indebtedness of a Person existing at the time such Person becomes a Subsidiary of the Company or assumed by the Company or a Subsidiary of the Company in connection with the acquisition of assets from such Person; PROVIDED, HOWEVER, that (i) any Lien on such Indebtedness shall not extend to any property other than the property so acquired or constructed and (ii) at no time shall the aggregate principal amount of outstanding Indebtedness secured thereby be increased. "Redeemable Stock" means any Equity Interest which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable before the Stated Maturity of the Securities), or upon the happening of any event, matures or is mandatorily redeemable, in whole or in part, prior to the Stated Maturity of the Securities. "Redemption Date" or "redemption date" means the date specified for redemption of the Securities in accordance with the terms of the Securities and this Indenture. "Redemption Price" or "redemption price" shall have the meaning set forth in paragraph 6 of the Securities. "Reporting Subsidiary" means, with respect to any Person, a Subsidiary of such Person required to file periodic reports under Section 13 or 15(d) of the Exchange Act. "S&P" means Standard and Poor's Corporation and its successors. "SEC" means the Securities and Exchange Commission. "Securities" means any of the Company's __% Senior Subordinated Notes due ___________ ___, 2004, issued under this Indenture. "Securityholder" or "Holder" means a Person in whose name a Security is registered on the Registrar's books. "Stated Maturity" means, with respect to any security or Indebtedness, the date specified therein as the fixed date on which the principal of such security or Indebtedness is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security or Indebtedness at the option of the holder thereof upon the happening of any contingency). "Subsidiary" of any Person means any corporation, partnership, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to 13 20 vote in the election of directors or, in the case of a Person which is not a corporation, the members of the appropriate governing board or other group is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person or a combination thereof; PROVIDED, HOWEVER, that Forges et Boulonneries D'Ars-sur-Moselle shall not be deemed to be a Subsidiary of the Company so long as (i) all Indebtedness of Forges et Boulonneries D'Ars-sur-Moselle is non-recourse to the Company and its Subsidiaries and (ii) the Company invests not more than $2,000,000 in debt or equity capital of Forges et Boulonneries D'Ars-sur-Moselle on a cumulative basis from the issue date of the Securities. "Subsidiary Guarantor" means, with respect to any Subsidiary Guaranty, the issuer of such Subsidiary Guaranty, so long as such Subsidiary Guaranty remains outstanding. "Subsidiary Guaranty" means any guaranty of the Securities pursuant to a supplemental indenture executed and delivered pursuant to Section 4.15 hereof, including as the context may require either or both of the guaranty of the Securities set forth in Article 12 hereof upon the execution and delivery by a Subsidiary Guarantor of such supplemental indenture and any separate guaranty of the Securities, substantially in the form of Exhibit C hereto, or confirmation of guaranty executed and delivered by such Subsidiary Guarantor pursuant to such supplemental indenture. "TIA" means the Trust Indenture Act of 1939 as amended and as in effect on the date of this Indenture; PROVIDED, HOWEVER, that in the event the TIA is amended after such date, TIA means, to the extent required by any such amendment, the TIA as so amended. "Trust Officer," when used with respect to the Trustee, means any officer assigned to and working in the corporate trust department of the Trustee or any other officer of the Trustee customarily performing functions similar to those performed by any of the above officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Trustee" means the party named as the "Trustee" in the first paragraph of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. "Wholly-Owned Subsidiary" of any Person means any Subsidiary of such Person to the extent the entire voting share 14 21 capital of such Subsidiary is owned by such Person (either directly or indirectly through Wholly-Owned Subsidiaries). SECTION 1.02. OTHER DEFINITIONS.
Defined in Term Section ---- ---------- "Act"............................................. 1.05 "Acceleration Notice"............................. 6.02 "Bankruptcy Law".................................. 6.01 "Cash Proceeds"................................... 4.13 "Change of Control"............................... 4.12 "Change of Control Offer"......................... 4.12 "Change of Control Payment Date".................. 4.12 "Core Subsidiary"................................. 4.13 "Custodian"....................................... 6.01 "Event of Default"................................ 6.01 "Excess Proceeds"................................. 4.13 "Excess Proceeds Offer"........................... 4.13 "Exchange Act".................................... 4.02 "Existing Liens".................................. 4.10 "incurrence"...................................... 4.08 "Lease Basket".................................... 4.08 "Legal Holiday"................................... 11.08 "Non-Payment Default"............................. 10.04 "Paying Agent".................................... 2.03 "Payment Blockage Period"......................... 10.04 "Payment Default"................................. 10.04 "refinance"....................................... 4.08 "Refinancing Indebtedness"........................ 4.08 "Register"........................................ 2.03 "Registrar"....................................... 2.03 "Restricted Payment".............................. 4.06 "Securities Act".................................. 7.04 "Senior Indebtedness"............................. 10.02 "Specified Senior Indebtedness"................... 10.02 "surviving entity"................................ 5.01 "U.S. Government Obligations"..................... 8.01
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "Indenture securities" means the Securities. "Indenture security holder" means a Securityholder. 15 22 "Indenture to be qualified" means this Indenture. "Indenture trustee" or "institutional trustee" means the Trustee. "Obligor" on the Securities means the Company and each Subsidiary Guarantor, if any, and each other obligor on the Securities or any Subsidiary Guaranty. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) "including" means including, without limitation; and (5) words in the singular include the plural, and words in the plural include the singular. SECTION 1.05. ACTS OF HOLDERS. (1) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (2) The fact and date of the execution by any Person of any such instrument or writing may be proved in any manner which the Trustee deems sufficient. 16 23 (3) The ownership of Securities shall be proved by the Register. (4) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. (5) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of outstanding securities have authorized or agreed or consented to such request, demand, authorization, directions, notice, consent, waiver or other Act, and for that purpose the outstanding securities shall be computed as of such record date, PROVIDED that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 1.06. EXCHANGE RATES. Except as otherwise required under GAAP or in connection with the preparation of any financial statements, any computation of the U.S. dollar equivalent of any foreign currency required for any calculation or computation under this Indenture (including, without limitation, in connection with the limitations under the definition of "Consolidated Net Income" and Section 4.03 hereof) shall be made at the exchange rate published in The Wall Street Journal which is in effect as of the close of business on the first Business Day in the month in which such computation is required to be made hereunder. 17 24 ARTICLE 2 THE SECURITIES SECTION 2.01. FORM AND DATING. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A attached hereto. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Security shall be dated the date of its authentication. The terms and provisions contained in the Securities, annexed hereto as Exhibit A, shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company, by its execution and delivery of this Indenture, expressly agrees to such terms and provisions and to be bound thereby. SECTION 2.02. EXECUTION AND AUTHENTICATION. The Securities shall be executed on behalf of the Company by its Chairman of the Board, one of its Vice Chairmen, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any such officer on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper Officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for in Exhibit A annexed hereto duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and made available for delivery hereunder. The Trustee shall authenticate and make available for delivery Securities for original issue in the aggregate principal amount of [$218,500,000] upon a Board Resolution and a written order of the Company signed by two Officers of the Company, but without any further action by the Company. Such order shall specify the amount of the Securities to be authenticated and the date on which the original issue of Securities is to be authenticated and delivered. The aggregate principal amount of Securities outstanding at any time may not exceed [$218,500,000], except as provided in Section 2.07. 18 25 The Trustee shall act as the initial authenticating agent. Thereafter, the Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as a Paying Agent to deal with the Company or an Affiliate of the Company. The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain or cause to be maintained an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Securities may be presented or surrendered for purchase or payment ("Paying Agent") and an office or agency where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Registrar shall keep a register of the Securities and of their transfer and exchange (the "Register"). The Company may have one or more co-registrars and one or more additional paying agents. The term Paying Agent includes any additional paying agent. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar (if not the Trustee or the Company). The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar, Paying Agent or agent for service of notices or demands, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07 hereof. The Company or any Subsidiary or an Affiliate of either of them may act as Paying Agent, Registrar or co-registrar or agent for service of notices and demands. The Company initially appoints the Trustee as Registrar and Paying Agent and agent for service of notices and demands. SECTION 2.04 PAYING AGENT TO HOLD MONEY IN TRUST. Except as otherwise provided herein, prior to each due date of the principal, premium, if any, and interest on any Security, the Company shall deposit with the Paying Agent a sum of money sufficient to pay such principal, premium, if any, and interest so becoming due. The Company shall require each Paying Agent (other than the Trustee or the Company) to agree in writing that such Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal, premium, if any, and interest on 19 26 the Securities (whether such money has been paid to it by the Company or any other obligor on the Securities) and shall notify the Trustee of any default by the Company (or any other obligor on the Securities) in making any such payment. At any time during the continuance of any such default, the Paying Agent shall, upon the request of the Trustee, forthwith pay to the Trustee all money so held in trust and account for any money disbursed to it. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any money disbursed by it. Upon doing so, the Paying Agent shall have no further liability for the money so paid over to the Trustee. If the Company, a Subsidiary or an Affiliate of either of them acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. SECTION 2.05. SECURITYHOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall cause to be furnished to the Trustee on or before each interest payment date and at such other times as the Trustee may request in writing, within five Business Days of such request, a list in such form as the Trustee may reasonably require of the names and addresses of Securityholders. SECTION 2.06. TRANSFER AND EXCHANGE. Upon surrender for registration of transfer of any Security at the office or agency of the Company designated as Registrar or co-registrar pursuant to Section 2.03 or at the office or agency referred to in Section 4.05, the Company shall execute, and the Trustee shall authenticate and make available for delivery, in the name of the designated transferee or transferees, one or more new Securities of any authorized denomination or denominations, of a like aggregate principal amount. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denomination or denominations, of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and make available for delivery, the Securities which the Holder making the exchange is entitled to receive. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed, by the Holder or his attorney duly authorized in writing. 20 27 The Company shall not charge a service charge for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges that may be imposed in connection with the transfer or exchange of the Securities from the Securityholder requesting such transfer or exchange (other than any exchange of a temporary Security for a definitive Security not involving any change in ownership). The Company shall not be required to make, and the Registrar need not register, transfers or exchanges of Securities selected for redemption (except, in the case of Securities to be redeemed in part, the portion thereof not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed. SECTION 2.07. REPLACEMENT SECURITIES. If any mutilated Security is surrendered to the Company or the Trustee, or the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute, and upon its written request, the Trustee shall authenticate and make available for delivery, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, or is about to be purchased by the Company pursuant to Article 3 hereof, the Company in its discretion may, instead of issuing a new Security, pay or purchase such Security, as the case may be. Upon the issuance of new Securities under this Section 2.07, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) in connection therewith. Every new Security issued pursuant to this Section 2.07 in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. 21 28 The provisions of this Section 2.07 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 2.08. OUTSTANDING SECURITIES; DETERMINATIONS OF HOLDERS' ACTION. Securities outstanding at any time are all the Securities authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, those referred to in Section 2.07 hereof, or purchased by the Company pursuant to Article 3 hereof and those described in this Section 2.08 as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate thereof holds the Security; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite principal amount of Securities have given or concurred in any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company, any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Trust Officer of the Trustee knows based upon an examination of the Register to be so owned shall be so disregarded. Subject to the foregoing, only Securities outstanding at the time of such determination shall be considered in any such determination (including determinations pursuant to Articles 6 and 9). If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the Paying Agent (other than the Company) holds, in accordance with this Indenture, at maturity or on a Redemption Date, money sufficient to pay the Securities payable on that date, then immediately on the date of maturity or such Redemption Date, as the case may be, such Securities shall cease to be outstanding and interest, if any, on such Securities shall cease to accrue. SECTION 2.09. TEMPORARY SECURITIES. Pending the preparation of definitive Securities, the Company may execute, and upon receipt of an Officers' Certificate from the Company, the Trustee shall authenticate and make available for delivery, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the Officers of the Company executing such 22 29 Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 2.03 hereof, without charge to the Holder. Upon surrender for cancellation of anyone or more temporary Securities, the Company shall execute and the Trustee, upon receipt of an Officers' Certificate from the Company, shall authenticate and make available for delivery in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 2.10. CANCELLATION. All Securities surrendered for payment, purchase by the Company, redemption by the Company pursuant to Article 3 hereof, or registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and made available for delivery hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. The Company may not reissue, or issue new Securities to replace Securities it has paid or delivered to the Trustee for cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section 2.10, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be destroyed by the Trustee. SECTION 2.11. CUSIP NUMBERS. The Company, in issuing the Securities may use "CUSIP" numbers (if then generally in use), and the Trustee shall use CUSIP numbers in notices of redemption or exchange as a convenience to Holders; provided that any such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Securities and any redemption shall not be affected by any defect in or omission of such numbers. SECTION 2.12. DEFAULTED INTEREST. If the Company defaults on a payment of interest on the Securities, it shall pay the defaulted interest, plus (to the extent lawful) any interest 23 30 payable on the defaulted interest (as provided in Section 4.01), to the Persons who are Holders on a subsequent special record date, and such special record date, as used in this Section 2.12 with respect to the payment of any defaulted interest, shall mean the 15th day next preceding the date fixed by the Company for the payment of defaulted interest, whether or not such day is a Business Day. At least 15 days before the subsequent special record date, the Company shall mail to each Holder and to the Trustee a notice that states the subsequent special record date, the payment date and the amount of defaulted interest to be paid. The Company may also pay defaulted interest in any other lawful manner. ARTICLE 3 REDEMPTION ---------- SECTION 3.01. RIGHT TO REDEEM; NOTICES TO TRUSTEE. At any time on and after ___________ ___, 1999, the Company, at its option, may redeem the Securities for cash in accordance with this Article 3 and the provisions of paragraph 6 of the Securities. If the Company elects to redeem Securities pursuant to paragraph 6 of the Securities, it shall notify the Trustee in writing of the Redemption Date, the principal amount of Securities to be redeemed and the Redemption Price. The Company shall give the notice to the Trustee provided for in this Section 3.01 at least 45 days before the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee). SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED. If less than all the outstanding Securities are to be redeemed at any time, the Trustee shall select the Securities to be redeemed by lot or, if such method is prohibited by the rules of any stock exchange on which the Securities are then listed, any other method the Trustee considers reasonable. The Trustee shall make the selection at least 30 but not more than 60 days before the Redemption Date from outstanding Securities not previously called for redemption. Securities and portions of them the Trustee selects shall be in principal amounts of $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be redeemed. SECTION 3.03. NOTICE OF REDEMPTION. At least 15 days but not more than 60 days before a Redemption Date, the Company shall mail or cause to be mailed a notice of redemption by first-class mail, postage prepaid, to each Holder of Securities to be redeemed at the Holder's last address, as it shall appear on the 24 31 registry book. A copy of such notice shall be mailed to the Trustee on the same day the notice is mailed to Holders of Securities. The notice shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the CUSIP number (subject to the provisions of Section 2.11 hereof); (4) the name and address of the Paying Agent; (5) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (6) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed; and (7) that, unless the Company defaults in making such redemption payment, interest will cease to accrue on Securities called for redemption on and after the Redemption Date. At the Company's written request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense; PROVIDED, HOWEVER, that in all cases, the text of such notice of redemption shall be prepared or approved by the Company and the Trustee shall have no responsibility whatsoever with regard to such notice being accurate or correct. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is given, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon the later of the Redemption Date and the date such Securities are surrendered to the Paying Agent, such Securities called for redemption shall be paid at the Redemption Price plus accrued interest to the Redemption Date, if money sufficient for that purpose has been deposited as provided in Section 3.05 hereof. Notice of redemption shall be deemed to be given when mailed in the manner provided in Section 3.03, whether or not the Holder receives the notice. In any event, failure to give such notice, or any defect therein, shall not affect the validity of the proceedings for the redemption of the Securities. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. Prior to the Redemption Date, the Company shall deposit with the Paying 25 32 Agent (or if the Company or a Subsidiary or an Affiliate of either of them is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the Redemption Price of all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which prior thereto have been delivered by the Company to the Trustee for cancellation. SECTION 3.06. SECURITIES REDEEMED IN PART. Upon surrender of a Security that is redeemed in part, the Company shall execute, and the Trustee shall authenticate and make available for delivery to the Holder, a new Security (accompanied by a confirmation of guaranty with respect to the Subsidiary Guaranty, if any, duly executed and delivered by each Subsidiary Guarantor party thereto) in an authorized denomination equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE 4 COVENANTS --------- SECTION 4.01. PAYMENT OF SECURITIES. The Company shall pay the principal of, premium, if any, and interest (including interest accruing on or after the filing of a petition in bankruptcy or reorganization relating to the Company, whether or not a claim for post-filing interest is allowed in such proceeding) on the Securities on (or prior to) the dates and in the manner provided in the Securities or pursuant to this Indenture. An installment of principal, premium, if any, or interest shall be considered paid on the applicable date due if on such date the Trustee or the Paying Agent holds, in accordance with this Indenture, money sufficient to pay all of such installment then due. The Company shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest (including interest accruing on or after the filing of a petition in bankruptcy or reorganization relating to the Company whether or not a claim for post-filing interest is allowed in such proceeding), to the extent lawful, at 2% above the rate per annum borne by the Securities, which interest on overdue interest shall accrue from the date such amounts became overdue. SECTION 4.02. SEC REPORTS. (1) The Company shall file with the Trustee and supply to each Holder, without cost, within 15 days after it files the same with the SEC, definitive copies of its annual and quarterly reports, information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which it is required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 26 33 1934, as amended (the "Exchange Act"). In the event that the Company is at any time not subject to the reporting requirements of the Exchange Act, it shall provide to the Trustee and supply to each Holder, without cost, within 15 days after it would have been required to file such information with the SEC, financial statements, including any notes thereto and, with respect to annual reports, an auditors' report by an accounting firm of established national reputation and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," both comparable to that which the Company would have been required to include in such annual reports, information, documents or other reports if the Company had been subject to the requirements of such Sections 13 or 15(d) of the Exchange Act. The Company also shall comply with the other provisions of TIA Section 314(a). (2) So long as any Securities remain outstanding, the Company shall cause its annual report to shareholders and any other financial reports furnished by it to shareholders generally, to be mailed to the Holders at their addresses appearing in the register of Securities maintained by the Registrar in each case at the time of such mailing or furnishing to shareholders. If the Company is not required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, the Company shall cause its financial statements, including any notes thereto and with respect to annual reports, an auditors' report by an accounting firm of established national reputation and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," to be so filed with the Trustee and mailed to the Holders within 120 days after the end of each of the Company's fiscal years (which on the date hereof ends on December 31) and within 60 days after the end of each of the first three quarters of each fiscal year. (3) The Company shall provide the Trustee with a sufficient number of copies of all reports and other documents and information that the Company may be required to deliver to the Securityholders under this Section 4.02. SECTION 4.03. COMPLIANCE CERTIFICATES. (1) The Company shall deliver to the Trustee within 90 days after the end of each of the Company's fiscal years an Officers' Certificate executed by Officers of the Company, stating whether or not the signers know of any Default or Event of Default. Such certificate shall contain a certification from the principal executive officer, principal financial officer or principal accounting officer of the Company as to his or her knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this Section 4.03(1), such compliance shall be determined without regard to any period of grace or requirement of notice provided under this 27 34 Indenture. If they do know of such a Default or Event of Default, the certificate shall describe any such Default or Event of Default, and its status. (2) So long as not contrary to the then current recommendation of the American Institute of Certified Public Accountants, the Company shall deliver to the Trustee within 120 days after the end of each fiscal year a written statement by the Company's independent certified public accountants stating (a) that their audit examination has included a review of the terms of this Indenture and the Securities as they relate to accounting matters, and (b) whether, in connection with their audit examination, any Default has come to their attention and, if such a Default has come to their attention, specifying the nature and period of the existence thereof; PROVIDED, HOWEVER, that the independent certified public accountants delivering such statement shall not be liable in respect of such statement by reason of any failure to obtain knowledge of any such Default or Event of Default that would not be disclosed in the course of an audit examination conducted in accordance with GAAP. (3) The Company shall deliver to the Trustee as soon as possible and in any event within 15 days after the Company becomes aware of the occurrence of each Default or Event of Default, which is continuing, an Officers' Certificate setting forth the details of such Default or Event of Default, and the action which the Company proposes to take with respect thereto. SECTION 4.04. FURTHER INSTRUMENTS AND ACTS. Upon request of the Trustee, the Company shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of this Indenture. SECTION 4.05. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain or cause to be maintained an office or agency of the Trustee, Registrar and Paying Agent where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer, exchange or redemption and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The corporate trust office of the Trustee at the address specified in Section 11.02 hereof shall initially be such office or agency for all of the aforesaid purposes. The Company shall give prompt written notice to the Trustee of any change of location of such office or agency. If at any time the Company shall fail to maintain or cause to be maintained any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 11.02 hereof. 28 35 The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in location of any such other office or agency. SECTION 4.06. LIMITATION ON RESTRICTED PAYMENTS. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend on, or make any distribution in respect of the Company's or any such Subsidiary's Capital Stock or other Equity Interests, except to the extent any such dividend or other distribution is (a) actually received by the Company or a Subsidiary thereof or (b) payable solely in shares of Capital Stock or other Equity Interests (other than Redeemable Stock or Capital Stock convertible into any security other than such Capital Stock) of the Company or such Subsidiary, as the case may be; (ii) purchase, redeem or otherwise acquire or retire for value any Capital Stock or other Equity Interests of the Company or any of its Subsidiaries (other than Capital Stock or other Equity Interests held by the Company or any Wholly-Owned Subsidiary of the Company); (iii) prepay, repay, purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to a scheduled repayment date, scheduled mandatory sinking fund payment date or maturity date any Indebtedness of the Company that is subordinate in right of payment to the Securities (other than in connection with any refinancing of such Indebtedness permitted by this Indenture); or (iv) make any Investment other than Permitted Investments (each such action described in any of clauses (i) through (iv) above being referred to as a "Restricted Payment"), if, at the time of such Restricted Payment: (1) a Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof; (2) such Restricted Payment, together with the aggregate amount of all other Restricted Payments declared or made on or after the issue date of the Securities (including, without duplication, Restricted Payments described in the next succeeding paragraph), exceeds the sum of (A) 50% of the cumulative Consolidated Net Income of the Company for the period commencing on January 1, 1994 through the last day of the fiscal quarter immediately preceding the date of such proposed Restricted Payment (or, if the Consolidated Net Income of the Company shall be a deficit, minus 100% of such deficit); (B) the aggregate net cash proceeds and the Fair Market Value of any property other than cash, if any, received by the Company (other than from a Subsidiary of the Company) from the issuance and sale of either Capital Stock of the Company (other than Redeemable Stock or any Capital Stock convertible into any security other 29 36 than such Capital Stock) or Indebtedness that is convertible into Capital Stock of the Company (other than Redeemable Stock or any Capital Stock convertible into any security other than such Capital Stock), to the extent such Indebtedness is actually converted into such Capital Stock; and (C) $20,000,000; or (3) the Company could not incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of Section 4.08 hereof. The foregoing provisions shall not prohibit, so long as no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such date of declaration such payment would have complied with the provisions of this Indenture; or (ii) the declaration and payment by a Reporting Subsidiary of the Company of dividends on its common stock to all holders of such common stock on a pro rata basis out of funds legally available for the payment of dividends. The amount of any dividend or other distribution (other than cash) shall be equal at least to the Fair Market Value of the asset(s) proposed to be transferred by the Company or such Subsidiary of the Company, as the case may be, pursuant to such dividend or other distribution. The Company shall deliver to the Trustee within 90 days after the end of each of the Company's fiscal years in which a Restricted Payment is made under the first paragraph of this Section 4.06, an Officers' Certificate setting forth each Restricted Payment made in such fiscal year, stating that each such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 4.06 were computed, which calculations may be based on the Company's latest available internal financial statements. SECTION 4.07. LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS. The Company shall not incur, issue, create, assume, guarantee or otherwise become liable for any Indebtedness that is contractually subordinated in right of payment to any Senior Indebtedness and contractually senior in right of payment to the Securities. SECTION 4.08. LIMITATION ON ADDITIONAL INDEBTEDNESS. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to (each, an "incurrence") any Indebtedness, including, without limitation, Acquired Indebtedness; PROVIDED, HOWEVER, that the Company may incur Indebtedness if (i) no Default or Event of Default shall have occurred and be continuing 30 37 at the time or after giving effect to the incurrence of such Indebtedness and (ii) the Consolidated Cash Flow Coverage Ratio of the Company for the four full fiscal quarters ending immediately prior to the date of the incurrence of such additional Indebtedness is at least 2.0 to 1.0. The foregoing limitations set forth in this Section 4.08 shall not apply, without duplication, to: (i) Existing Indebtedness; (ii) Indebtedness of (a) the Company represented by the Securities or (b) any Subsidiary Guarantor under any Subsidiary Guaranty; (iii) Indebtedness of the Company under the Company Credit Facility, up to $60,000,000 in aggregate outstanding principal amount (including the available undrawn amount of any letters of credit issued thereunder) at any time; (iv) Indebtedness of (a) Broan Limited under the Broan Limited Credit Facility, PROVIDED that such Indebtedness shall not exceed at any time $20,100,000 (Canadian) in aggregate outstanding principal amount (including the available undrawn amount of any letters of credit issued under such facility) and shall be secured only by Liens on assets of Broan Limited and (b) the Company under its limited guaranty of not more than $10,000,000 (Canadian) of the Indebtedness of Broan Limited under the Broan Limited Credit Facility; (v) Indebtedness of Aubrey Manufacturing, Inc. or Broan Mfg. Co., Inc. not exceeding at any time $3,000,000 in aggregate outstanding principal amount and, if secured, secured only by Liens on certain real property owned by such Persons; (vi) Indebtedness of Universal-Rundle Corporation for working capital or joint venture investment purposes not exceeding at any time $4,000,000 in aggregate outstanding principal amount and, if secured, secured only by Liens on assets of Universal-Rundle Corporation; (vii) Indebtedness of the Company to any of its Wholly-Owned Subsidiaries, or Indebtedness of any Subsidiary of the Company to the Company or to any other Wholly-Owned Subsidiary of the Company, PROVIDED that if the Company or any of its Subsidiaries incurs Indebtedness to a Wholly-Owned Subsidiary of the Company which, at any time after such incurrence, ceases to be a Wholly-Owned Subsidiary, then all such Indebtedness in excess of the amount of Allowable Subsidiary Loans shall be deemed to have been incurred at the time such former Wholly-Owned Subsidiary ceases to be a Wholly-Owned Subsidiary of the Company; 31 38 (viii) Indebtedness of a Subsidiary of the Company under a guaranty of Indebtedness of the Company (other than the Securities) which causes such Subsidiary to become a Subsidiary Guarantor pursuant to Section 4.15 hereof; (ix) Indebtedness of the Company and its Subsidiaries under Interest Rate Agreements, Currency Agreements and Commodity Agreements, PROVIDED that (a) in the case of Interest Rate Agreements, such Interest Rate Agreements relate to Indebtedness permitted to be incurred under this Indenture and the notional principal amount of the obligations of the Company and its Subsidiaries under such Interest Rate Agreements does not exceed the principal amount of such Indebtedness, and (b) in the case of Currency Agreements that relate to other Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and its Subsidiaries outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (x) Indebtedness of the Company under its guaranty of payment of the principal of and interest on and certain expenses relating to certain industrial revenue bonds issued for the benefit of Spaulding Composites Company, Inc.; (xi) Indebtedness of the Company and its Subsidiaries under guaranties of Indebtedness incurred in the ordinary course of business of suppliers, licensees, franchisees or customers; (xii) Indebtedness incurred by the Company and its Subsidiaries consisting of Purchase Money Obligations and Capital Lease Obligations not exceeding at any time $15,000,000 in aggregate outstanding principal amount; (xiii) Acquired Indebtedness incurred by a Subsidiary of the Company to the extent such Indebtedness could have been incurred by the Company under the limitations set forth in the preceding paragraph, after giving PRO FORMA effect to the acquisition of such Subsidiary by the Company; (xiv) Indebtedness of the Company and its Subsidiaries in respect of performance bonds, bankers' acceptances and surety or appeal bonds provided in the ordinary course of business; (xv) other Indebtedness of the Company and its Subsidiaries not to exceed at any time $10,000,000 in aggregate outstanding principal amount; (xvi) Liens permitted under Section 4.10 hereof; and 32 39 (xvii) Indebtedness ("Refinancing Indebtedness") created, incurred, issued, assumed or guaranteed in exchange for, or the proceeds of which are used to extend, refinance, renew, replace, substitute or refund ("refinance"), Indebtedness described in the preceding paragraph or referred to in clauses (i) through (xv) above; PROVIDED, HOWEVER, that (a) the principal amount of such Refinancing Indebtedness (or if such Refinancing Indebtedness is issued at a price less than the principal amount thereof, the original issue amount of such Refinancing Indebtedness), together with the principal amount of any remaining Indebtedness under the agreement or instrument governing the Indebtedness being refinanced, shall not exceed (1) in the case of Refinancing Indebtedness incurred to refinance Indebtedness permitted to be incurred under any of clauses (iii) through (vi) and (xv) above, an amount which, when added to all other Indebtedness outstanding under such clause, shall not exceed the aggregate amount of Indebtedness permitted to be incurred under such clause, and (2) in the case of Refinancing Indebtedness incurred to refinance Indebtedness permitted to be incurred under any of clauses (i), (ii) and (vii) through (xiv) above, the aggregate amount of such Indebtedness outstanding at the time of such refinancing, in either case, after giving effect to any mandatory reductions in principal or other repayments required under the agreement or instrument governing such Indebtedness; (b) except in the case of Refinancing Indebtedness that refinances all of the Securities outstanding at the time of such refinancing, such Refinancing Indebtedness shall be subordinated in right of payment to the Securities at least to the same extent as the Indebtedness to be refinanced; (c) in the case of Refinancing Indebtedness incurred to refinance (1) any Existing Indebtedness, (2) the Securities, or (3) Indebtedness that ranks PARI PASSU ewith or junior in right of payment to the Securities, such Refinancing Indebtedness shall have an Average Life and Stated Maturity equal to, or greater than, the Average Life and Stated Maturity of the Indebtedness to be refinanced at the time of such incurrence; (d) the proceeds of such Refinancing Indebtedness, if incurred by a Subsidiary of the Company, shall not be used to refinance Indebtedness of the Company or another Subsidiary of the Company; and (e) the incurrence of any such Refinancing Indebtedness is substantially simultaneous with the refinancing of the Indebtedness to be refinanced. Any additional Indebtedness incurred pursuant to this Section 4.08 shall be subject to the limitations set forth in Section 4.07 hereof. For purposes of this Section 4.08, the accretion of original issue discount on Indebtedness shall not be deemed to be an incurrence of Indebtedness. SECTION 4.09. LIMITATION ON SALE OR ISSUANCE OF CAPITAL STOCK OF SUBSIDIARIES. The Company shall not (i) sell or otherwise convey or dispose of any Equity Interests of any of its 33 40 Subsidiaries except to the Company or a Wholly-Owned Subsidiary of the Company, or as permitted by Sections 4.10 or 4.13 hereof or (ii) permit any of its Subsidiaries to issue or sell to any Person except the Company or a Wholly-Owned Subsidiary of the Company (a) any preferred stock of such Subsidiaries or (b) except as permitted by Section 4.13 hereof, any other Equity Interests of such Subsidiary. SECTION 4.10. LIMITATION ON LIENS. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any of its assets or properties, now owned or hereafter acquired, or any income or profits therefrom, securing any Indebtedness that is PARI PASSU with or contractually subordinated in right of payment to the Securities unless the Company or such Subsidiary, as the case may be, simultaneously executes and delivers a supplemental indenture to this Indenture providing that (i) the Securities are secured by such Lien equally and ratably with any and all other Indebtedness secured by such Lien or (ii) in the case of Indebtedness contractually subordinated in right of payment to the Securities, the Lien securing such Indebtedness shall be subordinate in right of payment to the Lien securing the Securities to the same extent that such Indebtedness is subordinated to the Securities. The foregoing limitations set forth in this Section 4.10 shall not apply to: (i) Liens securing Acquired Indebtedness incurred by the Company or any Subsidiary of the Company and permitted by Section 4.08 hereof, PROVIDED that such Liens attach solely to the assets acquired and do not extend to or cover any property or assets of the Company or any of its Subsidiaries; (ii) Liens securing Refinancing Indebtedness incurred to refinance Indebtedness that has been secured by a Lien permitted under this Indenture, PROVIDED that such Liens do not extend to or cover any property or assets of the Company or any of its Subsidiaries not securing the Indebtedness so refinanced; (iii) Liens securing Existing Indebtedness; or (iv) Permitted Liens. SECTION 4.11. LIMITATION ON CERTAIN RESTRICTIONS AFFECTING SUBSIDIARIES. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or enter into or otherwise cause or permit to exist or become effective any agreement with any Person that would cause any consensual encumbrance or restriction on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock or any other interest or participation in, 34 41 or measured by, its profits, owned by the Company or any of its Subsidiaries, (ii) pay or repay any Indebtedness owed to the Company or any of its Subsidiaries which owns Equity Interests in such Subsidiary, (iii) make loans or advances to the Company or any of its Subsidiaries which owns Equity Interests in such Subsidiary, (iv) transfer any of its properties or assets to the Company or any of its Subsidiaries which owns Equity Interests in such Subsidiary, or (v) guarantee any Indebtedness of the Company or any other Subsidiary of the Company except, in each case, for such encumbrances or restrictions existing under or by reason of (a) applicable law, (b) this Indenture, (c) customary nonassignment provisions of any lease governing a leasehold interest of the Company or any of its Subsidiaries, (d) any instrument governing Indebtedness of a Person acquired by the Company or any of its Subsidiaries at the time of such acquisition, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person so acquired, (e) agreements existing as of the issue date of the Securities, (f) the Company Credit Facility and (g) any agreement effecting a refinancing of Indebtedness issued pursuant to any agreement or instrument referred to in clause (d) or (e) above, PROVIDED that the terms and conditions of any such encumbrances and restrictions are not materially less favorable to the Holders than those under the agreement or instrument evidencing the Indebtedness being refinanced. The foregoing shall not restrict the ability of any Subsidiary of the Company to grant any Lien to the extent otherwise permitted in this Indenture. SECTION 4.12. REPURCHASE UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control, each Holder shall have the right to require the repurchase of such Holder's Securities pursuant to the offer described below (the "Change of Control Offer") at a purchase price equal to 101% of the aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase. Immediately following any Change of Control, the Company shall mail a notice to the Trustee and to each Holder stating: (1) that the Change of Control Offer is being made pursuant to this Section 4.12 and that all Securities tendered will be accepted for payment; (2) the purchase price and the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Change of Control Payment Date"); (3) that any Security not tendered will continue to accrue interest; (4) that, unless the Company defaults in the payment thereof, all Securities accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest on and after the Change of Control Payment Date; (5) that Holders electing to have any Securities purchased pursuant to a Change of Control Offer will be required to surrender the Securities to be purchased to the Paying Agent at the address specified in the notice prior to the close of 35 42 business on the third Business Day preceding the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election on the terms and conditions set forth in such notice; and (7) that Holders whose Securities are being purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; provided that each Security purchased and each such new Security issued shall be in a principal amount of $1,000 or an integral multiple thereof. On the Change of Control Payment Date, the Company shall (1) accept for payment all Securities or portions thereof tendered, pursuant to the Change of Control Offer, (2) deposit with the Paying Agent money sufficient to pay the purchase price of all Securities or portions thereof so tendered, and (3) deliver, or cause to be delivered to the Trustee, all Securities so tendered together with an Officers' Certificate specifying the Securities or portions thereof tendered to the Company. The Paying Agent shall promptly mail, to each Holder of Securities so tendered, payment in an amount equal to the purchase price for such Securities, and the Trustee shall promptly authenticate and mail to such Holder a new Security equal in principal amount to any unpurchased portion of the Securities surrendered; provided that each such new Security shall be in a principal amount of $1,000 or an integral multiple thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. A "Change of Control" shall be deemed to have occurred at such time as any of the following events shall occur: (i) there is consummated any consolidation or merger of the Company with or into another corporation, or all or substantially all of the assets of the Company are sold, leased or otherwise transferred or conveyed to another Person (other than pursuant to a bona fide pledge of assets to secure Indebtedness made in accordance with this Indenture), and the holders of the Company's common stock outstanding immediately prior to such consolidation, merger, sale, lease or other transfer or conveyance or one or more Exempt Persons do not hold, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or at least a majority of the Equity Interests of such Person; (ii) there is filed a report on Schedule 13D or 14D-1 (or any successor schedule, form or report) pursuant to the Exchange Act disclosing that any person (defined, solely for the purposes of the Change of 36 43 Control provision, as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act or any successor provision to either of the foregoing) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of 50% or more of the combined voting power of all the Company's then outstanding securities entitled to vote generally for the election of directors; PROVIDED, HOWEVER, that a person shall not be deemed to be the beneficial owner of, or to own beneficially, (A) any securities tendered pursuant to a tender or exchange offer made by or on behalf of such person or any of such person's Affiliates or associates until such tendered securities are accepted for purchase or exchange thereunder, or (B) any securities if such beneficial ownership (1) arises solely as a result of a revocable proxy delivered in response to a proxy or consent solicitation made pursuant to the applicable rules and regulations under the Exchange Act, and (2) is not also then reportable on Schedule 13D (or any successor schedule) under the Exchange Act; or (iii) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of 66-2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. Notwithstanding anything to the contrary set forth in this Section 4.12, a Change of Control shall not be deemed to have occurred under clause (ii) of the immediately preceding paragraph solely by virtue of the Company, any Subsidiary of the Company, any employee stock ownership plan or any other employee benefit plan of the Company or any such Subsidiary, or any other Person holding securities of the Company for or pursuant to the terms of any such employee benefit plan or an Exempt Person, filing or becoming obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) under the Exchange Act disclosing beneficial ownership by it of securities of the Company, whether in excess of 50% of the combined voting power of the Company's then outstanding securities entitled to vote generally for the election of directors or otherwise. 37 44 SECTION 4.13. LIMITATION ON USE OF PROCEEDS FROM ASSET SALES. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, consummate any Asset Sale unless (i) the Company or such Subsidiary, as the case may be, receives consideration at the time of any such Asset Sale having a value (including the Fair Market Value of any non-cash consideration) at least equal to the Fair Market Value of the securities or assets being sold or otherwise disposed of, (ii) at least 75% of the consideration from such Asset Sale is received at the closing in the form of cash, Cash Equivalents (together with cash, "Cash Proceeds") or indebtedness for borrowed money of the Company or such Subsidiary that is assumed by the transferee of any such assets or any such indebtedness of any Subsidiary of the Company whose stock is purchased by the transferee, and (iii) with respect to any Asset Sale involving the Equity Interests of any Wholly-Owned Subsidiary of the Company or, in the case of subclause (b) below, any Subsidiary of the Company that was a Wholly-Owned Subsidiary of the Company prior to the first public offering referred to in such subclause (b), (a) the Company or another Wholly-Owned Subsidiary of the Company shall in such Asset Sale sell all of the Equity Interests it owns of such Subsidiary or receive Cash Proceeds at the closing of such Asset Sale in an amount not less than 75% of the Fair Market Value of all Equity Interests of such Subsidiary owned by the Company or such other Wholly-Owned Subsidiary of the Company, whether or not sold, or (b) the Company or another Subsidiary of the Company may sell, or such Subsidiary may issue, in such Asset Sale not more than 20% of the shares of common stock of such Subsidiary in one or more public offerings for cash only if, as of the date of such Asset Sale, after giving PRO FORMA effect to such Asset Sale by excluding, in the determination of Consolidated Cash Flow of the Company for the four full consecutive fiscal quarters ending immediately prior to the date of such Asset Sale, that portion of the Consolidated Cash Flow accounted for by such Subsidiary equal to the portion of the common stock of such Subsidiary being sold or issued in such Asset Sale, the Company could incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of Section 4.07 hereof. Notwithstanding anything to the contrary in the preceding sentence, the sale by the Company of all Equity Interests of Dixieline Lumber Company or all or substantially all of the assets of Dixieline Lumber Company shall not be deemed an Asset Sale except to the extent that the Company or any of its Subsidiaries makes after the issue date of the Securities any Investment in Dixieline Lumber Company, in which event the aggregate amount of all such Investments shall be deemed Net Cash Proceeds without regard to the $5,000,000 exception set forth in the definition of the term Asset Sale in this Indenture. Any Net Cash Proceeds (a) in excess of the amount of cash applied by the Company or any Subsidiary of the Company during the period beginning six months prior to the date of the Asset Sale (but not prior to the issue date of the Securities) and ending 12 months 38 45 after the date of such Asset Sale to purchase any business that is, or any properties and assets used primarily in, the same or a related business as those owned and operated by the Company and its Subsidiaries as of the issue date of the Securities or at the date of such Asset Sale and (b) not applied within 12 months after the date of the Asset Sale to permanently reduce Senior Indebtedness shall be deemed to be "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10,000,000, the Company shall make an offer (the "Excess Proceeds Offer") to apply the Excess Proceeds to purchase the Securities. The Excess Proceeds Offer must be in cash in an amount equal to 100% of the principal amount plus accrued and unpaid interest to the date fixed for the closing of such offer, substantially in accordance with the procedures for a Change of Control Offer described in Section 4.12 hereof. To the extent that the aggregate amount of Securities tendered pursuant to the Excess Proceeds Offer is less than the Excess Proceeds, the Company may use the remaining Excess Proceeds for general corporate purposes and such amounts shall no longer be deemed Excess Proceeds. If the aggregate principal amount of Securities surrendered by Holders exceeds the amount of Excess Proceeds, the Trustee shall select the Securities to be purchased on a pro rata basis, subject to the limitation on the authorized denominations of the Securities. Notwithstanding the limitations set forth in the immediately preceding paragraph: (i) the Company and its Subsidiaries may, in the ordinary course of business, sell, lease, or otherwise transfer or dispose of assets acquired and held for resale in the ordinary course of business; (ii) the Company may sell, lease, or otherwise transfer or dispose of assets pursuant to and in accordance with the provisions of Article 5 hereof; (iii) the Company and its Subsidiaries may sell, lease or otherwise transfer or dispose of damaged, worn out or obsolete property in the ordinary course of business or other property no longer necessary for the proper conduct of their businesses; and (iv) the Company and its Subsidiaries may abandon assets or properties which are no longer useful in their businesses and cannot be sold. SECTION 4.14. LIMITATION ON TRANSACTIONS WITH AFFILIATES. Except as otherwise permitted by this Indenture, neither the Company nor any of its Subsidiaries shall make any Investment, loan, advance, guaranty or capital contribution to, or for the benefit of, or sell, lease or otherwise transfer or dispose of any of its properties or assets to, or for the benefit of, or purchase or lease any property or assets from, or enter 39 46 into or amend any contract, agreement or understanding with, or for the benefit of, any Affiliate of the Company or any of its Subsidiaries, unless (i) such transaction or series of transactions is in the best interests of the Company or such Subsidiary based on all relevant facts and circumstances; (ii) such transaction or series of transactions is fair to the Company or such Subsidiary and on terms that are no less favorable to the Company or such Subsidiary, as the case may be, than those that could have been obtained in a comparable transaction on an arms' length basis from a Person that is not an Affiliate; and (iii) (a) with respect to a transaction or series of related transactions involving aggregate payments in excess of $1,000,000, the Board of Directors and a majority of the Independent Directors shall approve such transaction or series of transactions by a Board Resolution evidencing their determination that such transaction or series of transactions comply with clauses (i) and (ii) above, and (b) with respect to a transaction or series of transactions involving aggregate payments equal to or greater than $10,000,000, the Company receives a written opinion from a nationally recognized investment bank or, with respect to a transaction requiring the valuation of real property, a nationally recognized real estate appraisal firm, that such transaction or series of transactions is fair to the Company from a financial point of view. The foregoing limitation shall not apply to: (i) an Investment to be made by the Company pursuant to a commitment authorized by the Board of Directors of the Company prior to the issue date of the Securities in Ecological Engineering Associates, L.P. in an amount not to exceed (including such Investments made prior to the issue date of the Securities) $2,100,000; (ii) any payment of money or issuance of securities by the Company or any Subsidiary of the Company pursuant to employment agreements or arrangements and employee benefit plans, including reimbursement or advancement of out-of-pocket expenses and directors' and officers' liability insurance; (iii) reasonable and customary payments and other benefits (including indemnification) PROVIDED to directors for service on the Board of Directors of the Company or any of its Subsidiaries and reimbursement of expenses related thereto; or (iv) transactions between the Company and any Subsidiary of the Company, or between one Subsidiary of the Company and another Subsidiary of the Company, PROVIDED that not more than 5% of such Subsidiary is owned by any Affiliate of the Company or any of its Subsidiaries (other than the Company or a Wholly-Owned Subsidiary of the Company). SECTION 4.15. LIMITATION ON GUARANTIES BY SUBSIDIARIES. The Company shall not permit any Subsidiary of the Company, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to any Indebtedness of the Company or any Subsidiary Guarantor (other than the 40 47 Securities), unless such Subsidiary is a Subsidiary Guarantor or simultaneously executes and delivers (i) to the Company and the Trustee a supplemental indenture to this Indenture providing for a Subsidiary Guaranty of the Securities by such Subsidiary and any other Subsidiary Guarantors by adding an Article 12 to this Indenture, in the form of Exhibit B hereto, which Subsidiary Guaranty shall be subordinated to Guarantor Senior Indebtedness of such Subsidiary Guarantor to the extent set forth in such Exhibit B; and (ii) to the Trustee a Subsidiary Guaranty substantially in the form of Exhibit C hereto. No Lien on the properties or assets of any Subsidiary of the Company permitted by Section 4.10 hereof shall constitute a guaranty of any Indebtedness of the Company for purposes of this Section 4.15. SECTION 4.16. PAYMENT OF TAXES AND OTHER CLAIMS. The Company shall pay or discharge or cause to be paid or discharged, before any penalty accrues thereon, (i) all material taxes, assessments and governmental charges levied or imposed upon the Company or any of its Subsidiaries upon the income, profits or property of the Company or any of its Subsidiaries and (ii) all material lawful claims for labor, materials and supplies which, if unpaid, would by law become a Lien upon the property of the Company or any of its Subsidiaries; provided that none of the Company or any of its Subsidiaries shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claims the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate provision has been made or where the failure to effect such payment or discharge is not adverse in any material respect to the Holders. SECTION 4.17. CORPORATE EXISTENCE. Subject to Article 5 hereof, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of any of its Subsidiaries in accordance with the respective organizational documents of such Subsidiary and the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any such Subsidiary, if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries taken as a whole and that the loss thereof is not adverse in any material respect to the Holders. SECTION 4.18. MAINTENANCE OF PROPERTIES AND INSURANCE. The Company shall cause all material properties owned by or leased to it or any of its Subsidiaries and used or useful in the 41 48 conduct of its business or the business of such Subsidiary to be maintained and kept in normal condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 4.18 shall prevent the Company or any of its Subsidiaries from discontinuing the maintenance of any such properties, if such discontinuance is desirable in the conduct of its business or the business of such Subsidiary. The Company shall provide or cause to be provided, for itself and any of its Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds customarily insured against by corporations similarly situated and owning like properties, including, but not limited to, public liability insurance, with reputable insurers in such amounts with such deductibles and by such methods as shall be customary for corporations similarly situated in the industry. SECTION 4.19. STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.20. INVESTMENT COMPANY ACT. The Company shall not become an investment company subject to registration under the Investment Company Act of 1940, as amended. SECTION 4.21. PAYMENTS FOR CONSENTS. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration whether by way of interest, fee or otherwise, to any Holder of any Securities for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Securities unless such consideration is offered to be paid or agreed to be paid to all Holders of the Securities which so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. 42 49 SECTION 4.22. COVENANT TO COMPLY WITH SECURITIES LAWS UPON PURCHASE OF SECURITIES. In connection with any offer to purchase or purchase of Securities under Section 4.12 or 4.13 hereof, the Company shall (i) comply with Rule 14e-1 under the Exchange Act, and (ii) otherwise comply with all Federal and state securities laws so as to permit the rights and obligations under Sections 4.12 and 4.13 hereof to be exercised in the time and in the manner specified in Sections 4.12 and 4.13 hereof. ARTICLE 5 SUCCESSOR CORPORATION --------------------- SECTION 5.01. WHEN THE COMPANY MAY MERGE OR TRANSFER ASSETS, ETC. (a) The Company shall not consolidate with, merge with or into, or transfer all or substantially all of its assets (as an entirety or substantially as an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into it, or permit any of its Subsidiaries to enter into any such transaction or transactions if such transaction or transactions in the aggregate would result in a transfer of all or substantially all of the assets of the Company and its Subsidiaries on a consolidated basis, unless: (1) the Company shall be the continuing Person, or the Person, if other than the Company, formed by such consolidation or into which the Company is merged or to which the properties and assets of the Company or of the Company and its Subsidiaries on a consolidated basis, substantially as an entirety, are transferred shall be a corporation organized and existing under the laws of the United States or any state thereof or the District of Columbia and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, in form and substance satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture, and this Indenture remains in full force and effect; (2) immediately before and immediately after giving effect to such transaction, no Event of Default and no Default shall have occurred and be continuing; (3) the Person which is formed by or survives such consolidation or merger or to which such assets are transferred (the "surviving entity"), after giving pro forma effect to such transaction, could incur $1.00 of additional Indebtedness under the first paragraph of Section 4.08 hereof; (4) immediately after giving effect to such transaction on a pro forma basis the Consolidated Net Worth of the surviving entity shall be equal to or greater than the 43 50 Consolidated Net Worth of the Company immediately before such transaction; and (5) each Subsidiary Guarantor, if any, unless it is the other party to the applicable transaction described above or its Subsidiary Guaranty, after giving effect to such transaction, is to be released in accordance with the terms hereof and of such Subsidiary Guaranty, shall have confirmed by supplemental indenture that its Subsidiary Guaranty shall apply to the obligations of the Company or the surviving entity under this Indenture. In connection with any such consolidation, merger or transfer, the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and the supplemental indenture in respect thereto comply with this Section 5.01(a) and that all conditions precedent provided for in this Indenture relating to such transactions have been complied with. (b) A Subsidiary Guarantor shall not, and the Company shall not permit a Subsidiary Guarantor to, consolidate with, or merge with or into, any Person unless its Subsidiary Guaranty, after giving effect to such merger or consolidation, is to be released in accordance with the terms hereof and of such Subsidiary Guaranty or: (1) such Subsidiary Guarantor or the Company shall be the continuing person or the resulting or surviving person in such transaction ("the surviving entity") or the surviving entity shall be a corporation organized and existing under the laws of the United States or any state thereof or the District of Columbia and shall expressly assume, by a supplemental indenture executed and delivered to the Trustee, in form and substance reasonably satisfactory to the Trustee, all of the obligations of such Subsidiary Guarantor under this Indenture, as modified by such supplemental indenture, and its Subsidiary Guaranty; and (2) immediately before and immediately after giving effect to such merger or consolidation, no Event of Default and no Default shall have occurred and be continuing. In connection with any such consolidation or merger, the Company shall deliver, or caused to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation or merger, and if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Section 5.01(b) and that 44 51 all conditions precedent provided for in this Indenture relating to such transaction have been complied with. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any transfer of all or substantially all of the assets of the Company and its Subsidiaries on a consolidated basis, in accordance with Section 5.01 hereof, the successor Person formed by such consolidation or into which the Company or any Subsidiary Guarantor, as the case may be, is merged or the successor Person to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or such Subsidiary Guarantor, as the case may be, under this Indenture and, in the case of such Subsidiary Guarantor, under such Subsidiary Guaranty, with the same effect as if such successor Person had been named as the Company in this Indenture or as such Subsidiary Guarantor in this Indenture and such Subsidiary Guaranty, as the case may be, and when a successor Person assumes all the obligations of its predecessor under this Indenture, the Securities or a Subsidiary Guaranty, the predecessor shall be released from those obligations; PROVIDED, HOWEVER, that in the case of a transfer by lease, the predecessor shall not be released from the payment of principal of, premium, if any, and interest on the Securities. ARTICLE 6 DEFAULTS AND REMEDIES --------------------- SECTION 6.01. EVENTS OF DEFAULT. An "Event of Default" occurs if one of the following shall have occurred and be continuing: (1) the Company defaults in the payment, when due and payable, of (i) interest on any Security and the default continues for a period of 30 days, or (ii) the principal of or premium, if any, on any Securities when the same becomes due and payable at maturity, by acceleration, on the Redemption Date, on the Change of Control Payment Date, on any payment date respecting an Excess Proceeds Offer or otherwise; (2) the Company fails to comply with any of its covenants or agreements under Section 4.06, Section 4.12 or Article 5 hereof; (3) the Company fails to comply with any of its covenants or agreements in the Securities or this Indenture (other than those referred to in clause (1) or (2) above), or any Subsidiary Guarantor fails to comply with any of its covenants or agreements in this Indenture or its Subsidiary Guaranty, and such 45 52 failure continues for the period and after receipt by the Company of the notice specified below; (4) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries, excluding, however, the guaranty of the Company referred to in clause (x) of the second paragraph of Section 4.08 hereof) whether such indebtedness or guaranty is now existing or hereafter created, if such default shall constitute a failure to pay any portion of the principal of such indebtedness when due and payable or if as a result of such default the maturity of such indebtedness has been accelerated prior to its stated maturity and, in either case, the principal amount of such indebtedness, together with the principal amount of any other such indebtedness for money borrowed which has not been paid when due and payable or the maturity of which has been accelerated as a result of such default, aggregates $10,000,000 or more; (5) the Company or any of its Material Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case or proceeding; (B) consents to the entry of an order for relief against it in an involuntary case or proceeding; (C) consents to the appointment of a Custodian of it or for all or substantially all of its property; (D) makes a general assignment for the benefit of its creditors; or (E) admits in writing its inability to pay its debts generally as they become due; (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any of its Material Subsidiaries in an involuntary case or proceeding; (B) appoints a Custodian of the Company or any of its Material Subsidiaries for all or substantially all of its properties; 46 53 (C) order the liquidation of the Company or any of its Material Subsidiaries; (D) and in each case the order or decree remains unstayed and in effect for 60 days; (7) final judgments for the payment of money which in the aggregate exceed $10,000,000 shall be rendered against the Company or any of its Subsidiaries by a court and shall remain unstayed or undischarged for a period of 60 days; or (8) any Subsidiary Guaranty ceases to be in full force and effect or is declared null and void, or any Subsidiary Guarantor denies that it has any further liability under any Subsidiary Guaranty or gives notice to such effect (in each case other than by reason of the termination of this Indenture or the release of such Subsidiary Guaranty in accordance with the terms of this Indenture and such Subsidiary Guaranty) and such condition shall have continued for the period and after receipt by the Company of the notice specified below. "Bankruptcy Law" means Title 11, United States Code, or any similar Federal or state law for the relief of debtors. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator, custodian or similar official under any Bankruptcy Law. A Default under clause (3) or (8) above is not an Event of Default until the Trustee notifies the Company or the Holders of at least 25% in aggregate principal amount of the Securities at the time outstanding notify the Company and the Trustee, of the Default and the Company does not cure such Default within 30 days after receipt of such notice. Any such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". In the case of any Event of Default (other than as a result of a failure to comply with Section 4.12 hereof) pursuant to the provisions of this Section 6.01 occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium which the Company would have to pay if the Company then had elected to redeem the Securities pursuant to paragraph 6 of the Securities, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law, anything in this Indenture or in the Securities contained to the contrary notwithstanding. In the case of an Event of Default as a result of a failure to comply with Section 4.12 hereof occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of 47 54 the premium which the Company would have to pay pursuant to Section 4.12 hereof, such premium shall also become and be immediately due and payable at such time as the principal and interest on the Securities become due and payable pursuant to Section 6.02 hereof to the extent permitted by law, anything in this Indenture or in the Securities contained to the contrary notwithstanding. SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event of Default specified in clause (5) or (6) of Section 6.01 hereof) occurs and is continuing, the Trustee may, by notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding may, by notice to the Company and the Trustee (each, an "Acceleration Notice"), and the Trustee shall, upon the request of such Holders, declare the principal of the Securities, premium, if any, and accrued interest on the Securities to be due and payable (i) immediately, if no amount is outstanding and no commitment is in effect under Specified Senior Indebtedness, or (ii) if any amount is outstanding or any commitment is in effect under Specified Senior Indebtedness, upon the earlier of five Business Days after delivery of the Acceleration Notice to the Company and the agent of the holders of Specified Senior Indebtedness by the Trustee or the Holders, as the case may be, or acceleration of the Specified Senior Indebtedness, and thereupon the Trustee may, at its discretion, proceed to protect and enforce the rights of the Holders by appropriate judicial proceedings. If any Event or Default under clause (5) or (6) of Section 6.01 hereof occurs, all principal, premium, if any, and interest on the Securities then outstanding shall IPSO FACTO become and be immediately due and payable without declaration or other act on the part of the Trustee or any Holder. The Holders of at least a majority in aggregate principal amount of the Securities then outstanding by written notice to the Trustee and to the Company may rescind an acceleration and its consequences (except an acceleration due to a default in payment of the principal or interest on any of the Securities) if all existing Events of Default have been cured or waived except non-payment of principal or interest that has become due solely because of the acceleration. SECTION 6.03. OTHER REMEDIES. If any Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of, premium, if any, or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if the Trustee does not possess any of the Securities or does not produce any of the Securities in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any 48 55 right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of, or acquiescence in, the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04. WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in aggregate principal amount of the Securities at the time outstanding, by notice to the Trustee (and without notice to any other Securityholder), may waive an existing Default or Event of Default and its consequences except (i) an Event of Default described in Section 6.01(1) hereof, or (ii) a Default in respect of a provision that under Section 9.02 hereof cannot be amended without the consent of each Securityholder affected. When a Default or Event of Default is waived, it is deemed cured and shall cease to exist, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any consequent right. SECTION 6.05. CONTROL BY MAJORITY. The Holders of not less than a majority in aggregate principal amount of the Securities at the time outstanding may direct, by an instrument or concurrent instruments in writing delivered to the Trustee, the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or that the Trustee determines in good faith is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability. The Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 6.06. LIMITATION ON SUITS. Except as provided in Section 6.07 hereof, a Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in aggregate principal amount of the Securities at the time outstanding make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense satisfactory to the Trustee; (4) the Trustee does not comply with the request within 30 days after receipt of the notice, the request and the offer of security or indemnity; and 49 56 (5) the Holders of a majority in aggregate principal amount of the Securities at the time outstanding do not give the Trustee a direction inconsistent with the request during such 30-day period. A Securityholder may not use this Indenture to prejudice the rights of any other Securityholder or to obtain a preference or priority over any other Securityholder. SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of the principal amount, premium, if any, or interest, in respect of the Securities held by such Holder, on or after the respective due dates expressed in the Securities, any Redemption Date, any Change in Control Payment Date or any payment date respecting an Excess Proceeds Offer, or to bring suit for the enforcement of any such payment on or after such respective dates or the right to convert, shall not be impaired or affected adversely without the consent of each such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event or Default described in Section 6.01(1) hereof occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor on the Securities for the whole amount owing with respect to the Securities and the amounts provided for in Section 7.07 hereof. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or the property of the Company or to any other obligor on the Securities or the property of such obligor, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise: (1) to file and prove a claim for the whole amount of the principal amount, premium, if any, and interest on the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding; and (2) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; 50 57 and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: FIRST: to the Trustee for amounts due under Section 7.07 hereof; SECOND: to Securityholders for amounts due and unpaid on the Securities for the principal amount, Redemption Price or interest, if any, as the case may be, ratably, without preference or priority of any kind, according to such amounts due and payable on the Securities; and THIRD: the balance, if any, to the Company or to the Person or Persons otherwise entitled thereto. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant (other than the Trustee) in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 hereof or a suit by Holders of more than 10% in aggregate principal amount of the Securities at the time outstanding. SECTION 6.12 RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to 51 58 enforce any right or remedy under this Indenture, any Security or any Subsidiary Guaranty and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, each Subsidiary Guarantor, if any, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. ARTICLE 7 TRUSTEE ------- SECTION 7.01. DUTIES OF TRUSTEE. (1) If an Event of Default has occurred and is continuing (and is not cured), the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (2) Except during the continuance of an Event of Default: (A) the Trustee need perform only those duties that are specifically set forth in this Indenture and not others and no implied covenants or obligations shall be read into this Indenture against the Trustee and the duties of the Trustee shall be determined solely by the express provisions of this Indenture; and (B) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificate or opinion which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. The Trustee shall not be liable for any interest on any money received by it. 52 59 (3) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (A) this paragraph (3) does not limit the effect of paragraph (2) of this Section 7.01; (B) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (C) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Sections 6.04 or 6.05 hereof. (4) Whether or not expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (1), (2), (3), (5) and (7) of this Section 7.01 and Section 7.02. (5) The Trustee may refuse to perform any duty or exercise any right or power or extend or risk its own funds or otherwise incur any financial liability unless it receives reasonable security or indemnity satisfactory to it against any loss, liability or expense. (6) Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money held by it hereunder. (7) The Trustee shall not be deemed to have knowledge of the existence of any fact or matter unless such fact or matter is known to one of its Trust Officers. SECTION 7.02. RIGHTS OF TRUSTEE. (1) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in any such document but the Trustee may, in its discretion, make such further inquiry or investigation into such facts or matters stated in any such document as it sees fit. (2) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate and an Opinion of Counsel. The Trustee shall not be liable for any action it takes 53 60 or omits to take in good faith in reliance on such Officers' Certificate and Opinion of Counsel. (3) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (4) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (5) The Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (6) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security and indemnity satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have it were not Trustee. Any Paying Agent, Registrar or co-registrar may do the same with like rights. However, the Trustee must comply with Section 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement in the registration statement for the Securities under the Securities Act of 1933, as amended (the "Securities Act") (other than statements contained in the Form T-1 filed with the SEC under the TIA) or in this Indenture or the Securities (other than its certificate of authentication), or the determination as to which beneficial owners are entitled to receive any notices hereunder. SECTION 7.05. NOTICE OF DEFAULTS. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Securityholder as their names and addresses appear on the Security Register notice of the Default within 90 days after it becomes known to the Trustee unless such Default shall have been cured or waived. Except in the case of a 54 61 Default described in Section 6.01(1) hereof, the Trustee may withhold such notice if and so long as a committee of Trust Officers in good faith determines that the withholding of such notice is in the interests of Securityholders. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each _________ beginning with _____________ 199_, the Trustee shall mail to each Securityholder a brief report dated as of such __________ in accordance with and to the extent required under Section 313 of the TIA. A copy of each report at the time of its mailing to Securityholders shall be filed with the Company, the SEC and each stock exchange on which the Securities are listed. The Company agrees to promptly notify the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company agrees: (1) To pay to the Trustee from time to time such compensation as shall be agreed in writing between the Company and the Trustee for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) To reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses, disbursements and advances of its agents and counsel and other persons not regularly in its employ), including all reasonable expenses, disbursements and advances incurred or made by the Trustee in connection with any membership on any creditor's committee, except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) To indemnify the Trustee, its officers, directors and shareholders, for, and to hold it harmless against, any and all loss, liability or expense, incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall have a claim and lien prior to the Securities as to all property and funds held by it hereunder for any amount owing it or any predecessor Trustee pursuant to this Section 7.07, except with respect to funds held in trust for the payment of principal of, premium, if any, or interest on particular Securities. 55 62 The Company's payment obligations pursuant to this Section 7.07 and shall survive the discharge of this Indenture. When the Trustee renders services or incurs expenses after the occurrence of a Default specified in Section 6.01(5) or (6) hereof, the compensation for services and expenses are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.08. REPLACEMENT OF TRUSTEE. The Trustee may resign by so notifying the Company in writing at least 30 days prior to the date of the proposed resignation; PROVIDED, HOWEVER, no such resignation shall be effective until a successor Trustee has accepted its appointment pursuant to this Section 7.08. The Holders of a majority in aggregate principal amount of the Securities at the time outstanding may remove the Trustee by so notifying the Trustee in writing and may appoint a successor Trustee subject to the consent of the Company. The Trustee shall resign if: (1) the Trustee fails to comply with Section 7.10 hereof; (2) the Trustee is adjudged bankrupt or insolvent; (3) a receiver or public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint, by a Board Resolution, a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. Subject to payment of all amounts owing to the Trustee under Section 7.07 hereof and subject further to its lien under Section 7.07, the retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in aggregate principal amount of the Securities at the time outstanding may petition any court of competent jurisdiction for the appointment of a successor Trustee. 56 63 If the Trustee fails to comply with Section 7.10 hereof, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets (including this Trusteeship) to, another corporation, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all times satisfy the requirements of TIA Section 310(a)(1) and (5). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b). In determining whether the Trustee has conflicting interests as defined in TIA Section 310(b)(1), the provisions contained in the proviso to TIA Section 310(b)(1) shall be deemed incorporated herein. SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY. If and when the Trustee shall be or become a creditor of the Company (or any other obligor under the Securities), the Trustee shall be subject to the provisions of the TIA regarding the collection of claims against the Company (or any such other obligor). ARTICLE 8 DISCHARGE OF INDENTURE ---------------------- SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES. When (i) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.07 hereof or Securities which are purchased pursuant to Section 4.12 or 4.13 hereof or Securities for whose payment money has theretofore been held in trust and thereafter repaid to the Company, as provided in Section 8.02 hereof) for cancellation or (ii) the Company irrevocably deposits with the Trustee money and/or direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which guarantee or obligation the full faith and credit of the United States is pledged ("U.S. Government Obligations"), maturing as to principal and interest in such amounts and at such times as are sufficient, without consideration of any reinvestment of such interest, to pay principal of, premium, if any, and interest on, the outstanding Securities (other than Securities replaced pursuant to Section 2.07 hereof) to maturity or redemption, as the case may be, in accordance with the terms of this Indenture and the Securities 57 64 issued hereunder, and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Sections 2.06 and 7.07 hereof, and each Subsidiary Guaranty, if any, shall except as to the obligations of the Subsidiary Guarantor thereunder in respect of such Sections, cease to be of further effect. The Trustee shall join in the execution of any documents prepared by the Company acknowledging satisfaction and discharge of this Indenture and each such Subsidiary Guaranty on written demand of the Company accompanied by an Officers' Certificate and Opinion of Counsel and at the cost and expense of the Company. In the case of any such deposit pursuant to clause (ii) above, the obligation to pay the principal of and any interest on such Securities and the obligations under Section 7.07 hereof shall continue until the Securities are paid in full (provided that the provisions of Section 7.07 hereof shall survive the payment of the Securities and discharge of the Indenture). The Company will be entitled to make such a deposit if the Company has delivered to the Trustee (i)(A) a ruling directed to the Trustee from the Internal Revenue Service to the effect that the holders of the Securities will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of this Indenture and will be subject to federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit and defeasance had not occurred, or (B) an opinion of counsel, reasonably satisfactory to the Trustee, to the same effect as clause (i)(A) above, (ii) an Opinion of Counsel (who may be an employee of or counsel for the Company), and an Officers' Certificate in accordance with this Indenture and (iii) a report from a nationally recognized firm of independent public accountants stating that the amount of such deposit is sufficient to pay and discharge the amounts described in clause (ii) above with respect to the Securities. If the Trustee or Paying Agent is unable to apply any money in accordance with this Section 8.01 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company and each Subsidiary Guarantor under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Section 8.01 until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with this Section 8.01; PROVIDED, HOWEVER, that if the Company or any Subsidiary Guarantor, as the case may be, makes any payment of interest on or principal of any Security following the reinstatement of its obligations, the Company or any Subsidiary Guarantor, as the case may be, shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or Paying Agent. 58 65 SECTION 8.02. REPAYMENT TO THE COMPANY OR SUBSIDIARY GUARANTORS. Subject to Section 7.07 hereof, the Trustee and the Paying Agent shall promptly pay to the Company, or if deposited with the Trustee by any Subsidiary Guarantor, to such Subsidiary Guarantor, upon written request any excess money or U.S. Government Obligations held by them at any time. The Trustee and the Paying Agent shall return to the Company or any Subsidiary Guarantor, as the case may be, upon written request any money held by them for the payment of any amount with respect to the Securities that remains unclaimed for two years; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make such return, may, in the name and at the expense of the Company, cause to be published once in THE WALL STREET JOURNAL or another daily newspaper of national circulation or mail to each such Holder notice that such money or securities remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such mailing, any unclaimed money or securities then remaining will be returned to the Company. After return to the Company or any Subsidiary Guarantor, Holders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. ARTICLE 9 AMENDMENTS ---------- SECTION 9.01. WITHOUT CONSENT OF HOLDERS. From time to time, when authorized by Board Resolutions of each of them, the Company and the Trustee, without notice to or the consent of the Holders of the Securities issued hereunder, may amend or supplement this Indenture or the Securities as follows: (1) to cure any ambiguity, defect or inconsistency; (2) to comply with Article 5 hereof; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities so long as such uncertificated Securities are in registered form for purposes of the Internal Revenue Code of 1986, as amended; (4) to make any other change that does not adversely affect the rights of any Securityholder; (5) to comply with any requirement of the SEC in connection with the qualification of this Indenture under the TIA; or 59 66 (6) to add any Subsidiary of the Company as a Subsidiary Guarantor pursuant to the terms of Article 12 hereof. SECTION 9.02. WITH CONSENT OF HOLDERS. With the written consent of the Holders of at least a majority in aggregate principal amount of the Securities at the time outstanding, the Company and the Trustee may amend this Indenture or the Securities or may waive future compliance by the Company or any Subsidiary Guarantor with any provisions of this Indenture, the Securities or such Subsidiary Guarantor's Subsidiary Guaranty. However, without the consent of each Securityholder affected, a waiver or an amendment to this Indenture or the Securities may not: (1) reduce the percentage of principal amount of the Securities whose Holders must consent to an amendment or waiver; or (2) make any change to the Stated Maturity of the principal of, premium, if any, or any interest on the Securities or any Redemption Price thereof, or impair the right to institute suit for the enforcement of any such payment or make any Security payable in money or securities other than that stated in the Security; or (3) make any change in Article 10 hereof or, if applicable, Article 12 hereof that adversely affects the rights of any Holder of Securities or any change to any other section hereof that adversely affects the rights of any Holder of Securities under Article 10 hereof or, if applicable, Article 12 hereof; or (4) waive a default in the payment of the principal of, premium, if any, or interest on, any Security; or (5) make any change in the provisions of Sections 4.12, 4.13, 6.04 or 6.07 hereof; (6) release any Subsidiary Guarantor from any of its obligations under its Subsidiary Guaranty or this Indenture other than in compliance with Section 12.08 hereof; or (7) make any change to Sections 9.01 or 9.02 hereof. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. In the event that certain Holders are willing to defer or waive certain obligations of the Company hereunder with respect to Securities held by them, such deferral or waiver shall 60 67 not be deemed to affect any other Holder who receives the subject payment or performance in a timely manner. After an amendment or waiver under this Section 9.02 becomes effective, the Company shall mail to each Holder a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment or waiver. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article 9 shall comply with the TIA. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS, WAIVERS AND ACTIONS. Until an amendment, waiver or other action by Holders becomes effective, a consent to it or any other action by a Holder of a Security hereunder is a continuing consent by the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same obligation as the consenting Holder's Security, even if notation of the consent, waiver or action is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent, waiver or action as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the consent of the requisite aggregate principal amount of the Securities then outstanding has been obtained and not revoked. After an amendment, waiver or action becomes effective, it shall bind every Securityholder, except as provided in Section 9.02 hereof. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment or waiver. If a record date is fixed, then, notwithstanding the first two sentences of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES. Securities authenticated and made available for delivery after the execution of any supplemental indenture pursuant to this Article 9 may, and shall, if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any such supplemental indenture may be prepared and executed by the 61 68 Company and authenticated and made available for delivery by the Trustee in exchange for outstanding Securities. SECTION 9.06. TRUSTEE TO SIGN SUPPLEMENTAL INDENTURES. The Trustee shall sign any supplemental indenture authorized pursuant to this Article 9 if the supplemental indenture does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing such amendment the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Officers' Certificate and Opinion of Counsel stating that such supplemental indenture is authorized or permitted by this Indenture. SECTION 9.07. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article 9, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and made available for delivery hereunder shall be bound thereby. ARTICLE 10 SUBORDINATION ------------- SECTION 10.01. AGREEMENT TO SUBORDINATE. The Company agrees, and each Securityholder by accepting a Security agrees, that the indebtedness evidenced by the Securities (including principal, premium, if any, and interest) is subordinated in right of payment, to the extent and in the manner provided in this Article 10 to the prior payment in full of all Senior Indebtedness, and that the subordination is for the benefit of the holders of the Senior Indebtedness. SECTION 10.02. CERTAIN DEFINITIONS. "Senior Indebtedness" means the principal of, premium, if any, and interest on any Indebtedness of the Company, whether outstanding on the issue date of the Securities or hereafter created, incurred, assumed or guaranteed (unless, in the case of any particular Indebtedness, the instrument under which such Indebtedness is created, incurred, assumed or guaranteed expressly provides that such Indebtedness shall not be senior or superior in right of payment to the Securities), including, without limiting the generality of the foregoing, the principal of, premium, if any, and interest (including interest accruing after the commencement of any proceeding under Bankruptcy Law, whether or not such interest is an allowable claim) on, and all other obligations in respect of, Specified Senior Indebtedness but excluding: (i) any Indebtedness represented by the Company's 7-1/2% Convertible Debentures due 2006; (ii) any Indebtedness of 62 69 the Company to any of its Subsidiaries or other Affiliates; (iii) any Indebtedness hereafter incurred by the Company that is contractually subordinated in right of payment to any Senior Indebtedness; (iv) amounts owed for goods, materials or services purchased in the ordinary course of business or for compensation to employees; (v) any Indebtedness in respect of any Capital Lease Obligation created, incurred, assumed or guaranteed prior to or, unless designated in the instrument evidencing such Capital Lease Obligation as "Senior Indebtedness", after the issue date of the Securities; (vi) Indebtedness represented by Redeemable Stock; (vii) Indebtedness which when incurred is without recourse to the Company; (viii) Indebtedness of the Company under the guaranty referred to in clause (x) of the second paragraph of Section 4.08 hereof and any Indebtedness incurred by the Company in any refinancing, replacement or settlement thereof and (ix) Indebtedness of the Company and NorFleet, Inc. under their guaranties of the obligations under the Indebtedness secured by the building and real property where the Company's headquarters are located and other nearby real property. "Specified Senior Indebtedness" means (i) any Indebtedness outstanding under the Company Credit Facility and all fees, expenses, indemnities and other monetary obligations in respect thereof and (ii) any other Senior Indebtedness and all fees, expenses, indemnities and other monetary obligations in respect thereof, under a single credit facility or agreement between the Company and one or more banks or other lenders or under separate credit facilities or agreements between the Company and one or more banks or other lenders, entered into substantially at the same time and having substantially the same terms, which, at the time of creation thereof or determination, had an aggregate principal amount outstanding, together with any unutilized commitments to lend, of at least $15,000,000 and is specifically designated in the instrument or instruments evidencing such Senior Indebtedness as "Specified Senior Indebtedness." SECTION 10.03. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any (i) bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, (ii) assignment for the benefit of creditors or any marshalling of the assets and liabilities of the Company or (iii) distribution to creditors of the Company in a liquidation or dissolution of the Company: (1) holders of Senior Indebtedness shall be entitled to receive payment in full in cash or, at the option of the holders of such Senior Indebtedness, cash equivalents of such Senior Indebtedness (including, in the case of Specified Senior Indebtedness, interest accruing after the commencement of any such proceeding 63 70 at the rate specified in the instrument evidencing the applicable Specified Senior Indebtedness, whether or not a claim therefor is allowed, to the date of payment of such Specified Senior Indebtedness) before Securityholders shall be entitled to receive any payment of principal of, premium, if any, or interest on the Securities; and (2) until the Senior Indebtedness (as provided in subsection (1) above) is paid in full in cash or, at the option of the holders of the Senior Indebtedness, cash equivalents, any distribution to which Securityholders would be entitled but for this Article 10 shall be made to holders of Senior Indebtedness, as their interests may appear, except that Securityholders may receive securities that (i) are subordinated to Senior Indebtedness and to any securities issued in exchange for Senior Indebtedness to at least the same extent as the Securities are subordinated to Senior Indebtedness and (ii) have no maturity or mandatory prepayment prior to the final maturity of any securities issued in exchange for Senior Indebtedness. For purposes of this Article 10, a distribution may consist of cash, securities or other property, by set-off or otherwise. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article 5 hereof shall not be deemed a dissolution, winding up, liquidation or reorganization, for the purposes of this Section 10.03 if the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer comply with the conditions set forth in Article 5 hereof. SECTION 10.04. DEFAULT ON SENIOR INDEBTEDNESS. The Company may not pay principal of, premium, if any, or interest on the Securities and may not make any deposit pursuant to the provisions of Article 8 hereof or acquire any Securities for cash or property if: (1) a default in the payment of the principal of, premium, if any, interest, fees or expenses on any Senior Indebtedness occurs and is continuing (a "Payment Default") and the Trustee or the Paying Agent 64 71 receives a notice of the default from a Person who may give it pursuant to Section 10.11 hereof; or (2) a default, other than a Payment Default, on any Specified Senior Indebtedness occurs and is continuing that then permits the holders (or the agent) of such Specified Senior Indebtedness to accelerate its maturity immediately and without any further notice (other than notice of such permitted acceleration) or grace periods (a "Non-Payment Default"), and such default is either the subject of judicial proceedings or the Trustee or the Paying Agent receives a notice of the default from a Person who may give it pursuant to Section 10.11 hereof. The Trustee or the Paying Agent shall resume payments (including any missed payments) on the Securities and may make any deposit pursuant to the provisions of Article 8 hereof or acquire them (i) in the case of a Payment Default, when the default is cured or waived, any such acceleration is rescinded or the Senior Indebtedness to which such default relates or which has been accelerated is discharged, or when the right under this Indenture to prevent any such payment is waived by written notice to the Trustee by or on behalf of the holders of such Senior Indebtedness, or (ii) in the case of a Non-Payment Default, at the end of the period (the "Payment Blockage Period") ending on the earlier of (a) when the default is cured or waived, the Specified Senior Indebtedness to which such default relates is discharged or such Payment Blockage Period is terminated by written notice to the Trustee by or on behalf of the holders of such Specified Senior Indebtedness, or (b) the 179th day after the receipt by the Trustee or the Paying Agent of the notice commencing such Payment Blockage Period. Not more than one Payment Blockage Period may be commenced with respect to the Securities during any period of 360 consecutive days, and there shall be a period of at least 181 consecutive days in each period of 360 consecutive days when no Payment Blockage Period is in effect. In addition, no default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Specified Senior Indebtedness and which was known to the holders (or the agent) of such Specified Senior Indebtedness on such date of commencement, shall be made the basis for the commencement of a second Payment Blockage Period by the holders (or the agent) of such Specified Senior Indebtedness whether or not within a period of 360 consecutive days unless such default shall have been cured or waived for a period of not less than 90 consecutive days. SECTION 10.05. NO SUSPENSION OF REMEDIES. Nothing contained in this Article 10 shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the 65 72 maturity of the Securities or to pursue any other rights or remedies thereunder or under applicable law; PROVIDED, HOWEVER, that all Senior Indebtedness of the Company then or thereafter due and payable, shall first be paid in full in cash or, at the option of the holders of the Senior Indebtedness, cash equivalents before the Holders shall be entitled to receive any payment of principal of, premium, if any, or interest on the Securities. Notwithstanding the foregoing, any acceleration of the maturity of the Securities or other remedies pursued hereunder or under applicable law due to the default by the Company to make a payment required by Section 6.01(1) hereof resulting from the operation of Section 10.04 hereof shall be automatically rescinded or discontinued to the extent permitted by applicable law and all Events of Default which permitted the acceleration of the Securities or the pursuit of other remedies hereunder or under applicable law shall be deemed to be automatically and permanently cured to the extent permitted by applicable law if (i) the payment or payments the omission of which gave rise to the Event of Default is or are made within 179 days after the date on which the Trustee or the Paying Agent received notice of the default or defaults on the Senior Indebtedness and (ii) at the time of such automatic rescission no other Event of Default or Default shall have occurred and be continuing. Such automatic rescission shall be effective as of the date the conditions specified in clauses (i) and (ii) above are satisfied. SECTION 10.06. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the Company shall make any payment to the Trustee on account of the principal of, premium, if any, or interest on the Securities at a time when such payment is prohibited by Section 10.03, 10.04 or 10.05 hereof, such payment shall be held by the Trustee, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Indebtedness (pro rata as to each of such holders on the basis of the respective amounts of Senior Indebtedness held by them) or their representative, as their respective interests may appear, for application to the payment of all Senior Indebtedness in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. If a distribution is made to Securityholders that because of this Article 10 should not have been made to them, the Securityholders who receive the distribution shall hold it in trust for holders of Senior Indebtedness (pro rata as to each of such holder on the basis of the respective amounts of Senior Indebtedness held by them) or their representative, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in accordance 66 73 with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness. SECTION 10.07. NOTICE BY THE COMPANY. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of principal of or interest on the Securities to violate this Article 10, but failure to give such notice shall not affect the subordination of the Securities to the Senior Indebtedness provided in this Article 10. Nothing in this Article 10 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. SECTION 10.08. SUBROGATION. After all Senior Indebtedness is paid in full in cash or, at the option of the holders of Senior Indebtedness, cash equivalents and until the Securities are paid in full, Securityholders shall be subrogated to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to Securityholders have been applied to the payment of Senior Indebtedness. If any payment or distribution to which the Holders would otherwise have been entitled but for the provisions of this Article 10 shall have been applied pursuant to the provisions of this Article 10 to the payment of all amounts payable in respect of the Senior Indebtedness of the Company, then and in such case, the Holders shall be entitled to receive from the holders of such Senior Indebtedness at the time outstanding any payment or distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable in respect of the Senior Indebtedness of the Company in full in cash or, at the option of the holders of Senior Indebtedness, cash equivalents. SECTION 10.09. RELATIVE RIGHTS. This Article 10 defines the relative rights of Securityholders and holders of Senior Indebtedness. Nothing in this Indenture shall: (1) impair, as between the Company and Securityholders, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest on the Securities in accordance with their terms; 67 74 (2) affect the relative rights of Securityholders and creditors of the Company other than holders of Senior Indebtedness; or (3) prevent the Trustee or any Securityholder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders of Senior Indebtedness under this Article 10. If the Company fails because of this Article 10 to pay principal of or interest on a Security on the due date, the failure is still a Default or Event of Default. The provisions of this Article 10 shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any Senior Indebtedness is rescinded or must otherwise be returned by any holder of Senior Indebtedness upon the insolvency, bankruptcy or reorganization of the Company or otherwise, all as though such payment had not been made. SECTION 10.10. NO WAIVER OF SUBORDINATION PROVISIONS. No right of any holder of Senior Indebtedness to enforce the subordination of the Indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Company or by its failure to comply with this Indenture. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities and without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article 10 or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (i) except as otherwise provided in Section 4.08 hereof, change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or an instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any person liable in any manner for the collection or payment of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company or any other person. SECTION 10.11. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their representative. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Securityholders shall be entitled to rely upon any order or 68 75 decree made by any court of competent jurisdiction or upon any certificate of such representative or of the liquidating trustee or agent or other person making any distribution to the Trustee or to the Securityholders for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. SECTION 10.12. RIGHTS OF TRUSTEE AND PAYING AGENT. The Trustee or Paying Agent shall not at any time be charged with the knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee unless and until the Trustee or Paying Agent shall have received written notice thereof from the holders (or the agent) of Senior Indebtedness; and, prior to the receipt of any such written notice, the Trustee or Paying Agent shall be entitled to assume conclusively that no such facts exist. Unless at least two Business Days prior to the date on which by the terms of this Indenture any monies are to be deposited by the Company with the Trustee or any Paying Agent (whether or not in trust) for any purpose (including, without limitation, the payment of either the principal of or the interest on any Security), the Trustee or Paying Agent shall have received with respect to such monies the notice provided for in the preceding sentence, the Trustee or Paying Agent shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such date. The foregoing shall not apply to the Paying Agent if the Company is acting as Paying Agent. The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not Trustee. SECTION 10.13. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee as attorney-in-fact for any and all purposes. SECTION 10.14. MISCELLANEOUS. (a) All rights and interests under this Article 10 of the holders of Senior Indebtedness, and all agreements and obligations of the Holders, the Trustee and the Company under this Article 10, shall remain in full force and effect irrespective of: (i) any exchange, release or non-perfection of any Lien securing Senior Indebtedness, or any release or amendment or waiver of or consent to departure from 69 76 any guaranty, for all or any of the Senior Indebtedness; or (ii) any other circumstance that might otherwise constitute a defense available to, or a discharge of the Company in respect of Senior Indebtedness or the Trustee in respect of this Indenture. (b) The provisions of this Article 10 constitute a continuing agreement and shall (i) remain in full force and effect until the Senior Indebtedness shall have been paid in full, (ii) be binding upon the holders and the Trustee, the Company and their successors and assigns, and (iii) inure to the benefit of and enforceable by each other holder of Senior Indebtedness and their successors, transferees and assigns. ARTICLE 11 MISCELLANEOUS ------------- SECTION 11.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by operation of subsection (c) of Section 318 of the TIA, the imposed duties shall control. The provisions of Sections 310 to 317, inclusive, of the TIA that impose duties on any Person (including provisions automatically deemed included in an indenture unless the indenture provides that such provisions are excluded) are a part of and govern this Indenture, except as, and to the extent, expressly excluded from this Indenture, as permitted by the TIA. SECTION 11.02. NOTICES. Any notice or communication shall be in writing and delivered in Person or mailed by first-class mail, postage prepaid, addressed as follows: if to the Company: Nortek, Inc. 50 Kennedy Plaza Providence, RI 02903-2360 Attention: Mr. Richard L. Bready if to any Subsidiary Guarantor: [Name of Guarantor] c/o Nortek Inc. 50 Kennedy Plaza Providence, RI 02903-2360 Attention: _________________ 70 77 if to the Trustee: State Street Bank and Trust Company 225 Franklin Street Boston, MA 12110 Attention: Corporate Trust Administration The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication given to a Securityholder shall be mailed to the Securityholder at the Securityholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not received by the addressee. If the Company mails a notice or communication to the Securityholders, it shall mail a copy to the Trustee and each Registrar, Paying Agent or co-registrar. SECTION 11.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar, the Paying Agent and anyone else shall have the protection of TIA Section 312(c). SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each Officers' Certificate and Opinion of Counsel with 71 78 respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that each Person making such Officers' Certificate or Opinion of Counsel has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Officers' Certificate or Opinion of Counsel are based; (3) a statement that, in the opinion of each such Person, he has made such examination or investigation as is necessary to enable such Person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement that, in the opinion of such Person, such covenant or condition has been complied with; PROVIDED, HOWEVER, that with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 11.06. SEPARABILITY CLAUSE. In case any provision in this Indenture, the Securities or any Subsidiary Guaranty shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.07. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The Trustee may make reasonable rules for action by or a meeting of Securityholders. The Registrar and Paying Agent may make reasonable rules for their functions. SECTION 11.08. LEGAL HOLIDAYS. A "Legal Holiday" is any day other than a Business Day. If any specified date (including a date for giving notice) is a Legal Holiday, the action shall be taken on the next succeeding day that is not a Legal Holiday, and, if the action to be taken on such date is a payment in respect of the Securities, no principal, premium, if any, or interest installment shall accrue for the intervening period. SECTION 11.09. GOVERNING LAW. THIS INDENTURE, THE SECURITIES AND EACH SUBSIDIARY GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. SECTION 11.10. NO RECOURSE AGAINST OTHERS. A director, officer, employee or stockholder, as such, of the 72 79 Company or any Subsidiary Guarantor shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any obligations of such Subsidiary Guarantor under its Subsidiary Guaranty or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 11.11. SUCCESSORS. All agreements of the Company and any Subsidiary Guarantor in this Indenture, the Securities and any Subsidiary Guaranties shall bind their successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 11.12. MULTIPLE ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. 73 80 SIGNATURES IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Indenture on behalf of the respective parties hereto as of the date first above written. NORTEK, INC. By: __________________________________ Name: ___________________________ Title: __________________________ STATE STREET BANK AND TRUST COMPANY By: __________________________________ Name: ___________________________ Title: __________________________ 74 81 EXHIBIT A [FORM OF FACE OF SECURITY] NORTEK, INC. ___% SENIOR SUBORDINATED NOTE DUE ________________, 2004 CUSIP NO.____ $_____ Nortek, Inc., a Delaware corporation ("the Company", which term includes any successor corporation under the Indenture hereinafter referred to), promises to pay to ______ or registered assigns, the principal amount of ______ Dollars on _________, 2004. Interest Payment Dates; ___________ and ____________, commencing ______________, 1994. Record Dates: ____________ and _____________. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers and a facsimile of its corporate seal to be affixed hereto or imprinted hereon. NORTEK, INC. By:________________________ Name: Title: [SEAL] Dated:___________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within-mentioned Indenture. [ ] By:___________________________ Authorized Officer A-1 82 [FORMS OF REVERSE SIDE OF SECURITY] ___% Senior Subordinated Note due ___________ __, 2004 1. INTEREST Nortek, Inc., a Delaware corporation ("the Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. Interest will be payable semi-annually on each interest payment date, commencing ________________, 1994. Interest on the Securities will accrue from the most recent date to which interest has been paid, or if no interest has been paid, from _____________ __, 1994; provided that, if there is no existing Event of Default in the payment of interest and no existing Event of Default in the payment of interest and if this Security is authenticated between a record date referred to on the face hereof and the next succeeding interest payment date, interest shall accrue from such interest payment date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and interest on overdue installments of interest, to the extent lawful, at 2% above the rate per annum borne by the Securities. 2. METHOD OF PAYMENT The Company will pay interest on the securities (except defaulted interest) to the persons who are registered Holders at the close of business on _____________ and _____________ immediately preceding the interest payment date even if the Security is cancelled on registration of transfer or registration of exchange (other than with respect to the purchase of Securities pursuant to an offer to purchase securities made in connection with Section 4.12 or 4.13 of the Indenture after such record date). Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and interest by its check payable in such money. It may mail an interest payment to a Securityholder's address as it appears on the Register. 3. PAYING AGENT AND REGISTRAR Initially, the Trustee will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent or Registrar without notice, other than notice to the Trustee. The Company or any Subsidiary or an Affiliate of either of them may act as Paying Agent, Registrar or coregistrar. A-2 83 4. INDENTURE The Company issued the Securities under an Indenture, dated as of ___________ __, 1994 (the "Indenture"), between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended and as in effect on the date of the Indenture (the "TIA") and as provided in the Indenture. Capitalized terms used herein and not defined herein have the meaning ascribed thereto in the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the TIA for a statement of those terms. The Securities are unsecured senior subordinated obligations of the Company limited to $[218,500,000] aggregate principal amount. 5. GUARANTIES This Security may be entitled after the date hereof to certain senior subordinated Subsidiary Guaranties made for the benefit of the Securityholders. Reference is hereby made to Section 4.15 of the Indenture and to Exhibits B and C to the Indenture for the terms of any such Subsidiary Guaranty. 6. OPTIONAL REDEMPTION The Securities are redeemable as a whole, or from time to time in part, at any time on and after ______________ __, 1999 at the option of the Company at the following redemption prices (expressed as a percentage of principal) together with accrued and unpaid interest to the Redemption Date if redeemed in the twelve-month period commencing:
______________, Redemption Price ---------------- 1999 ___________% 2000 ___________% 2001 ___________% 2002 and thereafter 100.000% -----------
7. NOTICE OF REDEMPTION Notice of redemption will be mailed at least 15 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at the Holder's registered address. Securities in denominations larger than $1,000 of principal amount may be redeemed in part but only in integral multiples of $1,000 of principal amount. A-3 84 8. REQUIREMENT THAT THE COMPANY OFFER TO PURCHASE SECURITIES UNDER CERTAIN CIRCUMSTANCES Subject to the terms and conditions of the Indenture, the Company shall become immediately obligated to offer to purchase the Securities pursuant to Section 4.12 of the Indenture after the occurrence of a Change in Control of the Company at a price equal to 101% of aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase. In addition, to the extent that there are Net Cash Proceeds from Asset Sales which are not reinvested, the Company will be obliged to offer to purchase Securities at 100% of principal amount plus accrued and unpaid interest, if any, in accordance with Section 4.13 of the Indenture. 9. SUBORDINATION The Securities are subordinated to Senior Indebtedness (as defined in the Indenture). To the extent provided in the Indenture, Senior Indebtedness must be paid before the Securities may be paid. The Company agrees, and each Securityholder by accepting a Security agrees, to such subordination and authorizes the Trustee to give it effect. 10. DENOMINATIONS; TRANSFER; EXCHANGE The Securities are in registered form, without coupons, in denominations of $1,000 of principal amount and integral multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities for a period of 15 days before selection of Securities to be redeemed. 11. PERSONS DEEMED OWNERS The registered Holder of this Security may be treated as the owner of this Security for all purposes. 12. AMENDMENT; WAIVER Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in aggregate principal amount of the Securities at the time outstanding and (ii) certain defaults or noncompliance with certain provisions may be waived with the written consent of the A-4 85 Holders of a majority in aggregate principal amount of the Securities at the time outstanding. Subject to certain exceptions set forth in the Indenture, without the consent of any Securityholder, the Company and the Trustee may amend the Indenture or the Securities to cure any ambiguity, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Securities in addition to certificated Securities, or to comply with any requirements of the Securities and Exchange Commission in connection with the qualification of the Indenture under the TIA, or to make any change that does not adversely affect the rights of any Securityholder. 13. DEFAULTS AND REMEDIES Under the Indenture, Events of Default include (i) default in payment of the principal amount, premium, if any, or interest, in respect of the Securities when the same becomes due and payable subject, in the case of interest, to the grace period contained in the Indenture; (ii) failure by the Company to comply with other agreements in the Indenture or the Securities, subject to notice and lapse of time; (iii) certain events of acceleration prior to maturity of certain indebtedness; (iv) certain final judgments which remain undischarged; (v) certain events of bankruptcy or insolvency; or (vi) certain failures of Subsidiary Guaranties. If an Event of Default occurs and is continuing, the Trustee, or the Holders of at least 25% in aggregate principal amount of the Securities at the time outstanding, may declare all the Securities to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities becoming due and payable immediately upon the occurrence of such Events of Default. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in aggregate principal amount of the Securities at the time outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing Default (except a Default in payment of amounts specified in clause (i) above) if it determines that withholding notice is in their interests. 14. TRUSTEE DEALINGS WITH THE COMPANY Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company A-5 86 or its Affiliates with the same rights it would have if it were not Trustee. 15. NO RECOURSE AGAINST OTHERS A director, officer, employee or stockholder, as such, of the Company or any Subsidiary Guarantor shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any obligations of a Subsidiary Guarantor under its Subsidiary Guaranty or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 16. AUTHENTICATION This Security shall not be valid until an authorized officer of the Trustee manually signs the Trustee's Certificate of Authentication on the other side of this Security. 17. ABBREVIATIONS Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 18. UNCLAIMED MONEY If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent will pay the money back to the Company or, if applicable, a Subsidiary Guarantor upon request. After that, Holders entitled to money must look to the Company or such Subsidiary Guarantor for payment. 19. DISCHARGE PRIOR TO MATURITY If the Company or any Subsidiary Guarantor deposits with the Trustee or Paying Agent money or U.S. Government Obligations sufficient to pay the principal of and interest on the Securities to maturity, the Company and the Subsidiary Guarantors will be discharged from the Indenture except for certain Sections thereof. 20. SUCCESSOR When a successor Person to the Company or a Subsidiary Guarantor assumes all the obligations of its predecessor under A-6 87 the Securities, a Subsidiary Guaranty and the Indenture such predecessor shall be released from those obligations. 21. GOVERNING LAW THE INDENTURE, THIS SECURITY AND ANY SUBSIDIARY GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. A-7 88 ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to: ________________________________________________________________________ (insert assignee's social security or tax I.D. number) ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ (print or type assignee's name, address and zip code) and irrevocably appoint _____________________________________ ________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Dated:_____________ Signature:____________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee:______________________________________________________ (Participant in recognized signature guarantee medallion program) OPTION OF HOLDER TO ELECT PURCHASE If you wish to elect to have all or any portion of this Security purchased by the Company pursuant to Section 4.12 ("Change of Control Offer") or Section 4.13 ("Excess Proceeds Offer") of the Indenture, check the applicable boxes: A-8 89
Change of Control Offer: Excess Proceeds Offer: in whole in whole in part in part Amount to be Amount to be purchased: $_____ purchased: $_____ Dated: _________________ Signature:______________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee:___________________________________________________ (Participant in recognized signature guarantee medallion program) Social Security Number or Taxpayer Identification Number:__________________________________
A-9 90 EXHIBIT B ARTICLE 12 GUARANTY OF SECURITIES ---------------------- SECTION 12.01. SUBSIDIARY GUARANTY. Subject to the provisions of this Article 12, each Subsidiary Guarantor hereby unconditionally guarantees to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee that: (i) the principal of, premium, if any, and interest on the Securities will be duly and punctually paid in full when due, whether at maturity, by acceleration or otherwise, and interest on the overdue principal and (to the extent permitted by law) interest, if any, on the Securities and all other obligations of the Company or the Subsidiary Guarantors to the Holders or the Trustee hereunder or thereunder (including fees and expenses) will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Securities or any such obligations with respect to the Securities, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise. This Subsidiary Guaranty is a present and continuing guaranty of payment and performance, and not of collectibility. Accordingly, failing payment when due of any amount so guaranteed, or failing performance of any other obligation of the Company to the Holders under this Indenture or the Securities, for whatever reason, each Subsidiary Guarantor shall be obligated to pay, or to perform or cause the performance of, the same immediately. Each Subsidiary Guarantor hereby agrees that its obligations under its Subsidiary Guaranty shall be absolute and unconditional, irrespective of any invalidity, irregularity or unenforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions hereof or thereof, any release of any other Subsidiary Guarantor or any other obligor under the Securities, the recovery of any judgment against the Company, any action to enforce the same, whether or not a Subsidiary Guaranty is affixed to any particular Security, or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Subsidiary Guarantor hereby waives the benefit of diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company or any other obligor under the Securities, any right to require a proceeding first against the Company or any such obligor, protest, notice and all demands whatsoever and covenants that its Subsidiary Guaranty will not be discharged except by complete performance of the obligations contained in the Securities this Indenture and its Subsidiary Guaranty. If any Holder or the Trustee is required by any court or otherwise to return to the Company or to 91 any Subsidiary Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to the Company or such Subsidiary Guarantor, any amount paid by the Company or such Subsidiary Guarantor to the Trustee or such Holder, each Subsidiary Guaranty, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Subsidiary Guarantor further agrees that, as between it, on the one hand, and the Holders of Securities and the Trustee, on the other hand, (i) subject to this Article 12, the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 hereof for the purposes of each Subsidiary Guaranty, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed by this Subsidiary Guaranty, and (ii) in the event of any acceleration of such obligations as provided in Article 6 hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by each Subsidiary Guarantor for the purpose of its Subsidiary Guaranty. Upon the effectiveness of any acceleration of the obligations guaranteed by this Subsidiary Guaranty, the Trustee shall promptly make a demand for payment of such obligations by each Subsidiary Guarantor under this Subsidiary Guaranty. The obligations of the Subsidiary Guarantors under this Subsidiary Guaranty shall be joint and several. Each Subsidiary Guaranty shall remain in full force and effect and continue to be effective should any petition be filed by or against the Company for liquidation or reorganization, should the Company become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of the Company's assets, and shall, to the fullest extent permitted by law, continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Securities are, pursuant to applicable law, rescinded, or reduced in amount, or must otherwise be restored or returned by any obligee on the Securities, whether as a "voidable preference," "fraudulent transfer" or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Securities shall, to the fullest extent permitted by law, be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. No stockholder, officer, director, employer or incorporator, past, present or future, of any Subsidiary Guarantor, as such, shall have any personal liability under such Subsidiary Guarantor's Subsidiary Guaranty by reason of his, her or its status as such stockholder, officer, director, employer or incorporator. B-2 92 The Subsidiary Guarantors shall have the right to seek contribution from any non-paying Subsidiary Guarantor so long as the exercise of such right does not impair the rights of the Holders under any Subsidiary Guaranty. Each Subsidiary Guaranty may be modified from time to time, without the consent of the Holders, to reflect such fraudulent conveyance savings provisions, net worth or maximum amount limitations as to recourse or similar provisions as are set forth in, and after giving effect to, any guaranty by any Subsidiary Guarantor of any Specified Senior Indebtedness with respect to the Company Credit Facility as such guaranty may be amended or otherwise modified from time to time, PROVIDED that no such modification of this Subsidiary Guaranty shall adversely affect the Holders in any respect or shall disadvantage the Holders relative to the holders of Guarantor Senior Indebtedness of such Subsidiary Guarantor with respect to the Company Credit Facility other than by operation of the subordination provisions of this Article 12. SECTION 12.02. EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTY. The validity and enforceability of this Subsidiary Guaranty shall not be affected by the fact that it is not affixed to any particular Security, and each Subsidiary Guarantor hereby agrees that its Subsidiary Guaranty shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Subsidiary Guaranty. If an Officer of a Subsidiary Guarantor whose signature is on the Indenture or a Subsidiary Guaranty no longer holds that office at the time the Trustee authenticates any Security or at any time thereafter, such Subsidiary Guarantor's Subsidiary Guaranty of such Security shall be valid nevertheless. The delivery by any Subsidiary Guarantor to the Trustee of any Subsidiary Guaranty as required by Section 4.15 shall constitute due delivery of such Subsidiary Guaranty on behalf of such Subsidiary Guarantor to and for the benefit of all Holders of the Securities. SECTION 12.03. ADDITIONAL GUARANTORS. Any person may become a guarantor of the Securities by executing and delivering to the Trustee (i) a supplemental indenture in form and substance satisfactory to the Trustee, which subjects such person to the provisions of this Indenture as a guarantor of the Securities, and (ii) an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized and executed by such person and constitutes the legal, valid, binding and enforceable obligation of such person (subject to such customary exceptions concerning fraudulent conveyance laws, creditors' rights and equitable principles as may be acceptable to the Trustee in its discretion). B-3 93 SECTION 12.04. RELEASE OF SUBSIDIARY GUARANTOR. Notwithstanding anything to the contrary contained in this Indenture, in the event that a Subsidiary Guarantor is released from all obligations which pursuant to Section 4.15 hereof obligate it to become a Subsidiary Guarantor, such Subsidiary Guarantor shall be deemed automatically and unconditionally released from all obligations under its Subsidiary Guaranty without any further action required on the part of the Trustee or any Holder, PROVIDED that the provisions of Section 4.15 hereof shall apply anew in the event that such Subsidiary Guarantor subsequent to being released incurs any obligations that pursuant to Section 4.15 hereof obligate it to become a Subsidiary Guarantor. In addition, upon the sale or other disposition of all of the Capital Stock of a Subsidiary Guarantor by the Company or a Subsidiary of the Company to, or upon the consolidation or merger of a Subsidiary Guarantor with or into, any person other than the Company or an Affiliate of the Company or any of its Subsidiaries, such Subsidiary Guarantor shall be deemed automatically and unconditionally released from all obligations under its Subsidiary Guaranty without any further action required on the part of the Trustee or any Holder, PROVIDED that such sale or other disposition, or consolidation or merger is made in accordance with the terms of this Indenture, including Sections 4.13 and 5.01 hereof; PROVIDED, HOWEVER, that the foregoing proviso shall not apply to the sale or disposition of a Subsidiary Guarantor or of the Capital Stock thereof in a foreclosure proceeding (whether or not judicial) to the extent that such proviso would be inconsistent with the requirements of the Uniform Commercial Code. Notwithstanding the immediately preceding sentence, upon receipt of a request of the Company accompanied by an Officers' Certificate certifying as to the compliance with this Section 12.04, the Trustee shall deliver an appropriate instrument evidencing the release of such Subsidiary Guarantor. Any Subsidiary Guarantor not so released or the entity surviving such Subsidiary Guarantor, as applicable, shall remain or be liable under its Subsidiary Guaranty as provided in this Article 12. SECTION 12.05. AGREEMENT TO SUBORDINATE. Each Subsidiary Guarantor agrees, and each Securityholder by accepting a Security agrees, that all payments pursuant to the Subsidiary Guaranty made by such Subsidiary Guarantor (including principal, premium, if any, and interest) are subordinated in right of payment, to the extent and in the manner provided in this Article 12, to the prior payment in full of all Guarantor Senior Indebtedness of such Subsidiary Guarantor, and that the subordination is for the benefit of the holders of such Guarantor Senior Indebtedness. B-4 94 SECTION 12.06. CERTAIN DEFINITIONS. "Guarantor Senior Indebtedness" means, with respect to any Subsidiary Guarantor, the principal of, premium, if any, and interest on any Indebtedness of such Subsidiary Guarantor, whether outstanding on the issue date of the Securities or thereafter created, incurred, assumed or guaranteed (unless, in the case of any particular Indebtedness, the instrument under which such Indebtedness is created, incurred, assumed or guaranteed expressly provides that such Indebtedness shall not be senior or superior in right of payment to the Subsidiary Guaranty of such Subsidiary Guarantor), including, without limiting the generality of the foregoing, the principal of, premium, if any, and interest (including interest accruing after the commencement of any proceeding under Bankruptcy Law, whether or not such interest is an allowable claim) on, and all other obligations in respect of, Specified Guarantor Senior Indebtedness but excluding (i) Indebtedness evidenced by the Subsidiary Guaranty of such Subsidiary Guarantor; (ii) any Indebtedness of such Subsidiary Guarantor to any of its Subsidiaries or other Affiliates; (iii) any Indebtedness incurred by such Subsidiary Guarantor that is contractually subordinated in right of payment to any Guarantor Senior Indebtedness; (iv) amounts owed for goods, materials or services purchased in the ordinary course of business or for compensation to employees; (v) any Indebtedness in respect of any Capital Lease Obligation created, incurred, assumed or guaranteed prior to or, unless designated in the instrument evidencing such Capital Lease Obligation as "Senior Indebtedness", after the effective date of the Subsidiary Guaranty of such Subsidiary Guarantor; (vi) Indebtedness represented by Redeemable Stock of such Subsidiary Guarantor; and (vii) Indebtedness which when incurred is without recourse to such Subsidiary Guarantor. "Specified Guarantor Senior Indebtedness" means, with respect to any Subsidiary Guarantor, any Guarantor Senior Indebtedness of such Subsidiary Guarantor which consists of a guaranty of any Specified Senior Indebtedness and all fees, expenses, indemnities and other monetary obligations with respect to such Guarantor Senior Indebtedness. SECTION 12.07. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any (i) bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to a Subsidiary Guarantor or its property, (ii) assignment for the benefit of creditors or any marshalling of the assets and liabilities of such Subsidiary Guarantor or (iii) distribution to creditors of such Subsidiary Guarantor in a liquidation or dissolution of such Subsidiary Guarantor: (1) holders of Guarantor Senior Indebtedness of such Subsidiary Guarantor shall be entitled to receive payment in full in cash or, at the option of the B-5 95 holders of such Guarantor Senior Indebtedness, cash equivalents of such Guarantor Senior Indebtedness (including, in the case of Guarantor Senior Indebtedness which also constitutes Specified Guarantor Senior Indebtedness, interest accruing after the commencement of any such proceeding at the rate specified in the instrument evidencing the applicable Specified Guarantor Senior Indebtedness, whether or not a claim therefor is allowed, to the date of payment of such Specified Guarantor Senior Indebtedness) before Securityholders shall be entitled to receive any payment pursuant to the Subsidiary Guaranty of such Subsidiary Guarantor on account of principal of, premium, if any, or interest on the Securities; and (2) until the Guarantor Senior Indebtedness (as provided in subsection (1) above) is paid in full in cash or, at the option of the holders of such Guarantor Senior Indebtedness, cash equivalents, any distribution to which Securityholders would be entitled but for this Article 12 shall be made to holders of such Guarantor Senior Indebtedness, as their interests may appear, except that Securityholders may receive securities that (i) are subordinated to Guarantor Senior Indebtedness and to any securities issued in exchange for Guarantor Senior Indebtedness to at least the same extent as the Securities are subordinated to Guarantor Senior Indebtedness and (ii) have no maturity or mandatory prepayment prior to the final maturity of any securities issued in exchange for Guarantor Senior Indebtedness. For purposes of this Article 12, a distribution may consist of cash, securities or other property, by set-off or otherwise. The consolidation of a Subsidiary Guarantor with, or the merger of a Subsidiary Guarantor into, another corporation upon the terms and conditions set forth in Article 5 hereof shall not be deemed a dissolution, winding up, liquidation or reorganization, for the purposes of this Section 12.07 if the corporation formed by such consolidation or into which the Company is merged, as the case may be, shall, as part of such consolidation or merger comply with the conditions set forth in Article 5 hereof. SECTION 12.08. DEFAULT ON GUARANTOR SENIOR INDEBTEDNESS. No Subsidiary Guarantor may make any payment, pursuant to its Subsidiary Guaranty or otherwise, on account of principal of, premium, if any, or interest on the Securities, make any deposit pursuant to the provisions of Article 8 hereof or acquire any Securities for cash or property if: B-6 96 (i) a default in the payment of the principal of, premium, if any, or interest on, (a) any Guarantor Senior Indebtedness or (b) any Senior Indebtedness with respect to which such Subsidiary Guarantor is an obligor or guarantor occurs and is continuing (a "Guarantor Payment Default") and the Trustee or the Paying Agent receives a notice of the default from a Person who may give it pursuant to Section 12.15 or Section 10.11 hereof, as the case may be; or (ii) a Payment Blockage Period is in effect with respect to Specified Senior Indebtedness which is guaranteed by such Subsidiary Guarantor pursuant to Specified Guarantor Senior Indebtedness of such Subsidiary Guarantor. Such Subsidiary Guarantor shall resume making any and all required payments in respect of obligations under its Subsidiary Guaranty (i) in the case of a Guarantor Payment Default, when the default is cured or waived, any such acceleration is rescinded or the Guarantor Senior Indebtedness to which such default relates or which has been accelerated is discharged, or when the right under this Indenture to prevent any such payment is waived by written notice to the Trustee by or on behalf of the holders of such Guarantor Senior Indebtedness, or (ii) in the case of such a Payment Blockage Period referred to in clause (ii) above, at the end of such Payment Blockage Period. SECTION 12.09. NO SUSPENSION OF REMEDIES. Nothing contained in this Article 12 shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the maturity of the Securities or to pursue any other rights or remedies thereunder or under any Subsidiary Guaranty or applicable law; PROVIDED, HOWEVER, that all Guarantor Senior Indebtedness of any Subsidiary Guarantor then or thereafter due and payable shall first be paid in full in cash or, at the option of the holders of such Guarantor Senior Indebtedness, cash equivalents before the Holders shall be entitled to receive any payment in respect of the Subsidiary Guaranty of such Subsidiary Guarantor. SECTION 12.10. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that any Subsidiary Guarantor shall make any payment to the Trustee on account of its Subsidiary Guaranty at a time when such payment is prohibited by Section 12.07, 12.08 or 12.09 hereof, such payment shall be held by the Trustee, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Guarantor Senior Indebtedness (pro rata as to each of such holders on the basis of the respective amounts of Guarantor Senior Indebtedness held by them) or their representative, as their respective interests may appear, for application to the payment of all Guarantor Senior Indebtedness in full in accordance with their terms, after giving B-7 97 effect to any concurrent payment or distribution to or for the holders of Guarantor Senior Indebtedness. If a distribution is made to Securityholders that because of this Article 12 should not have been made to them, the Securityholders who receive the distribution shall hold it in trust for holders of Guarantor Senior Indebtedness (pro rata as to each of such holder on the basis of the respective amounts of Guarantor Senior Indebtedness held by them) or their representative, as their respective interests may appear, for application to the payment of all Guarantor Senior Indebtedness remaining unpaid to the extent necessary to pay all Guarantor Senior Indebtedness in full in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of Guarantor Senior Indebtedness. With respect to the holders of Guarantor Senior Indebtedness, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 12, and no implied covenants or obligations with respect to the holders of Guarantor Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Guarantor Senior Indebtedness. SECTION 12.11. NOTICE BY COMPANY OR SUBSIDIARY GUARANTOR. Each of the Company and the Subsidiary Guarantors shall promptly notify the Trustee and the Paying Agent of any facts known to it that would cause a payment of any obligations in respect of such Subsidiary Guarantor's Subsidiary Guaranty to violate this Article 12, but failure to give such notice shall not affect the subordination of any Subsidiary Guaranty to Guarantor Senior Indebtedness provided in this Article 12. Nothing in this Article 12 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. SECTION 12.12. SUBROGATION WITH RESPECT TO SUBSIDIARY GUARANTOR. After all Guarantor Senior Indebtedness of any Subsidiary Guarantor is paid in full in cash or, at the option of the holders of such Guarantor Senior Indebtedness, cash equivalents and until the Securities are paid in full, Securityholders shall be subrogated to the rights of holders of such Guarantor Senior Indebtedness to receive distributions applicable to such Guarantor Senior Indebtedness to the extent that distributions otherwise payable to Securityholders have been applied to the payment of such Guarantor Senior Indebtedness. If any payment or distribution to which the Holders would otherwise have been entitled but for the provisions of this Article 12 shall have been applied pursuant to the provisions of this Article 12 to the payment of all amounts payable in respect of the Guarantor Senior Indebtedness of any Subsidiary Guarantor, B-8 98 then and in such case, the Holders shall be entitled to receive from the holders of such Guarantor Senior Indebtedness at the time outstanding any payment or distributions received by such holders of Guarantor Senior Indebtedness in excess of the amount sufficient to pay all amounts payable in respect of the Guarantor Senior Indebtedness of such Subsidiary Guarantor in full in cash or, at the option of the holders of such Guarantor Senior Indebtedness, cash equivalents. SECTION 12.13. RELATIVE RIGHTS. This Article 12 defines the relative rights of Securityholders and holders of Guarantor Senior Indebtedness. Nothing in this Indenture shall: (1) impair, as between any Subsidiary Guarantor and Securityholders, the obligations of such Subsidiary Guarantor under its Subsidiary Guaranty in accordance with its terms, which obligations are absolute and unconditional; (2) affect the relative rights against such Subsidiary Guarantor of Securityholders and creditors of such Subsidiary Guarantor other than holders of Guarantor Senior Indebtedness of such Subsidiary Guarantor; or (3) prevent the Trustee or any Securityholder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders of Guarantor Senior Indebtedness of any Subsidiary Guarantor under this Article 12. If any Subsidiary Guarantor fails because of this Article 12 to make a payment in respect of its obligations under its Subsidiary Guaranty, the failure is still a Default or Event of Default. The provisions of this Article 12 shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any Guarantor Senior Indebtedness is rescinded or must otherwise be returned by any holder of Guarantor Senior Indebtedness upon the insolvency, bankruptcy or reorganization of a Subsidiary Guarantor or otherwise, all as though such payment had not been made. SECTION 12.14. NO WAIVER OF SUBORDINATION PROVISIONS. No right of any holder of Guarantor Senior Indebtedness of any Subsidiary Guarantor to enforce the subordination of the Indebtedness evidenced by the Subsidiary Guaranty of such Subsidiary Guarantor shall be impaired by any act or failure to act by such Subsidiary Guarantor or by its failure to comply with this Indenture. The holders of Guarantor Senior Indebtedness may, at any time and from time to time, without the consent of or notice B-9 99 to the Trustee or the Holders of the Securities and without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article 12 or the obligations hereunder of the Holders of the Securities to the holders of Guarantor Senior Indebtedness, do any one or more of the following: (i) except as otherwise provided in Section 4.08 hereof, change the manner, place or terms of payment or extend the time of payment of, or renew or alter, any Guarantor Senior Indebtedness or any Senior Indebtedness to which such Guarantor Senior Indebtedness relates, or the instruments evidencing the same or any agreements under which such Guarantor Senior Indebtedness or Senior Indebtedness, as the case may be, is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing any Guarantor Senior Indebtedness or any Senior Indebtedness to which such Guarantor Senior Indebtedness relates; (iii) release any person liable in any manner for the collection or payment of any Guarantor Senior Indebtedness or any Senior Indebtedness to which such Guarantor Senior Indebtedness relates; and (iv) exercise or refrain from exercising any rights against any Subsidiary Guarantor or any other person. SECTION 12.15. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Guarantor Senior Indebtedness, the distribution may be made and the notice given to their representative. Upon any payment or distribution of assets of any Subsidiary Guarantor referred to in this Article 12, the Trustee and the Securityholders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such representative or of the liquidating trustee or agent or other person making any distribution to the Trustee or to the Securityholders for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Guarantor Senior Indebtedness and other Indebtedness of such Subsidiary Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 12. SECTION 12.16. RIGHTS OF TRUSTEE AND PAYING AGENT. The Trustee or Paying Agent shall not at any time be charged with the knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee relating to a Subsidiary Guarantor's Subsidiary Guaranty unless and until the Trustee or Paying Agent shall have received written notice thereof from the holders (or the agent) of Guarantor Senior Indebtedness; and, prior to the receipt of any such written notice, the Trustee or Paying Agent shall be entitled to assume conclusively that no such facts exist. Unless at least two Business Days prior to the date on which by the terms of this Indenture any monies are to be deposited by a Subsidiary Guarantor with the Trustee or any Paying Agent (whether or not in B-10 100 trust) for any purpose (including, without limitation, the payment of either the principal of or the interest on any Security), the Trustee or Paying Agent shall have received with respect to such monies the notice provided for in the preceding sentence, the Trustee or Paying Agent shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such date. The foregoing shall not apply to the Paying Agent if the Company is acting as Paying Agent. The Trustee in its individual or any other capacity may hold Guarantor Senior Indebtedness with the same rights it would have if it were not Trustee. SECTION 12.17. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 12, and appoints the Trustee as attorney-in-fact for any and all purposes. SECTION 12.18. MISCELLANEOUS. (a) All rights and interests under this Article 12 of the holders of Guarantor Senior Indebtedness, and all agreements and obligations of the Holders, the Trustee, the Company and any Subsidiary Guarantor under this Article 12, shall remain in full force and effect irrespective of: (i) any exchange, release or non-perfection of any Lien securing Guarantor Senior Indebtedness, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Guarantor Senior Indebtedness; or (ii) any other circumstance that might otherwise constitute a defense available to, or a discharge of any Subsidiary Guarantor in respect of Guarantor Senior Indebtedness or the Trustee in respect of this Indenture. (b) The provisions of this Article 12 constitute a continuing agreement and shall (i) remain in full force and effect until the Guarantor Senior Indebtedness of each Subsidiary Guarantor shall have been paid in full, (ii) be binding upon the holders and the Trustee, the Company and each Subsidiary Guarantor and their respective successors and assigns, and (iii) inure to the benefit of and enforceable by each other holder of Guarantor Senior Indebtedness and its successors, transferees and assigns. B-11 101 EXHIBIT C SENIOR SUBORDINATED GUARANTY ---------------------------- For value received, the undersigned hereby unconditionally guarantees to the holder of a Security (as that term is defined in the Indenture dated as of _________, 1994 (the "Indenture"), between Nortek, Inc. (the "Company") and State Street Bank and Trust Company, as trustee (the "Trustee")) and the Trustee, the payments of principal of, premium, if any, and interest on such Security in the amounts and at the time when due and interest on the overdue principal, premium, if any, and interest, if any, of such Security, if lawfully, and the payments or performance of all other obligations of the Company under the Indenture or the Securities, all in accordance with and subject to the terms and limitations of such Security, Article 12 of the Indenture and this Guaranty. This Guaranty shall become effective in accordance with Article 12 of the Indenture. The validity and enforceability of this Guaranty shall not be affected by the fact that it is not affixed to any particular Security. The obligations of the undersigned to the holders of Securities and to the Trustee pursuant to this Guaranty and the Indenture are expressly set forth in Article 12 of the Indenture and reference is hereby made to the Indenture for the precise terms of this Guaranty and all of the other provisions of the Indenture to which this Guaranty relates. The Indebtedness (as defined in the Indenture) evidenced by this Guaranty is, to the extent and in the manner provided in the Indenture, subordinate and subject in right of payment to the prior payment in full in cash or cash equivalents of all Guarantor Senior Indebtedness (as defined in the Indenture). Each holder of a Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee, on behalf of such holder, to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Indenture and (c) appoints the Trustee attorney-in-fact of such holder for such purpose; PROVIDED, HOWEVER, that such subordination provisions shall cease to affect amounts deposited in accordance with the defeasance provisions of the Indenture upon the terms and conditions set forth therein. This Guaranty is subject to release upon the terms set forth in the Indenture. [NAME OF SUBSIDIARY GUARANTOR] By: _________________________ Name: Title: EX-11 4 CALCULATION OF SHARES 1 EXHIBIT 11 NORTEK, INC. AND SUBSIDIARIES CALCULATION OF SHARES USED IN DETERMINING EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- PRO FORMA 1988 1989 1990 1991 1992 1992 --------- --------- --------- --------- --------- --------- CALCULATION OF THE NUMBER OF SHARES TO BE USED IN COMPUTING PRIMARY NET EARNINGS PER SHARE: Weighted average common and special common shares issued during the period............... 16,429,660 16,510,966 16,514,312 16,514,312 16,542,132 16,542,132 Less average common and special common shares held in the Treasury.......................... (2,010,530) (2,791,894) (3,048,837) (3,053,842) (3,965,771) (3,965,771) ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of common and special common shares outstanding during the period... 14,419,130 13,719,072 13,465,475 13,460,470 12,576,361 12,576,361 Dilutive effect of common stock options considered common stock equivalents computed based on the treasury stock method under the average price during the period............... 156,323 63,327 19,902 -- 69,043 69,043 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period........................................ 14,575,453 13,782,399 13,485,377 13,460,470 12,645,404 12,645,404 ========== ========== ========== ========== ========== ========== CALCULATION OF THE NUMBER OF SHARES TO BE USED IN COMPUTING FULLY DILUTED EARNINGS PER SHARE: Weighted average common and special common shares outstanding during the period.......... 14,419,130 13,719,072 13,465,475 13,460,470 12,576,361 12,576,361 Diluted effect of stock options considered common stock equivalents computed under the treasury stock method using the greater of the price at the end of the period or the average price during the period....................... 195,875 63,327 19,902 -- 78,552 78,552 Dilutive effect of assuming conversion of the Company's 7 1/2% convertible debentures................. 4,205,526 1,618,786 794,666 794,666 755,971 755,971 9% convertible debentures..................... 266,014 200,342 127,283 56,697 -- -- ---------- ---------- ---------- ---------- ---------- ---------- 19,086,545 15,601,527 14,407,326 14,311,833 13,410,884 13,410,884 ========== ========== ========== ========== ========== ========== 39 WEEKS ENDED ----------------------------------- PRO FORMA SEPT. 26, OCT. 2, OCT. 2, 1992 1993 1993 --------- --------- --------- < CALCULATION OF THE NUMBER OF SHARES TO BE USED IN COMPUTING PRIMARY NET EARNINGS PER SHARE: Weighted average common and special common shares issued during the period............... 16,528,567 16,597,180 16,597,180 Less average common and special common shares held in the Treasury.......................... (3,935,522) (4,066,602) (4,066,602) ---------- ---------- ---------- Weighted average number of common and special common shares outstanding during the period... 12,593,045 12,530,578 12,530,578 Dilutive effect of common stock options considered common stock equivalents computed based on the treasury stock method under the average price during the period............... 96,961 73,969 73,969 ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period........................................ 12,690,006 12,604,547 12,604,547 =========== ========== ========== CALCULATION OF THE NUMBER OF SHARES TO BE USED IN COMPUTING FULLY DILUTED EARNINGS PER SHARE: Weighted average common and special common shares outstanding during the period.......... 12,593,045 12,530,578 12,530,578 Diluted effect of stock options considered common stock equivalents computed under the treasury stock method using the greater of the price at the end of the period or the average price during the period....................... 96,961 79,813 79,813 Dilutive effect of assuming conversion of the Company's 7 1/2% convertible debentures................. 764,244 721,117 721,117 9% convertible debentures..................... -- -- -- ---------- ---------- ---------- 13,454,250 13,331,508 13,331,508 =========== ========== ========== - --------------- Note: For purposes of computing fully diluted earnings per share in 1988, actual interest expense and amortization of issue costs of the convertible debentures, net of tax benefits, were added to net earnings. Earnings (loss) per share calculations for the years ended December 31, 1989, 1990, 1991 and 1992 and for the 39 weeks ended September 26, 1992 and October 2, 1993 do not include the effect of common stock equivalents or convertible debentures (and the reduction in related expense) because the assumed exercise and conversion is anti-dilutive for the net loss amount.
EX-12 5 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 NORTEK, INC. AND SUBSIDIARIES CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- PRO FORMA 1988 1989 1990 1991 1992 1992 ------- -------- -------- -------- -------- --------- Earnings (loss) from continuing operations......... $ 200 $(42,500) $(41,400) $(34,700) $(21,000) $(18,300) Provision (credit) for income taxes................ 3,400 (17,000) (18,950) (11,000) 3,000 4,400 ------- -------- -------- -------- -------- --------- "Earnings"......................................... 3,600 (59,500) (60,350) (45,700) (18,000) (13,900) ------- -------- -------- -------- -------- --------- Fixed Charges: Interest expense including amortization of deferred debt expense and debt discount...... 58,809 63,901 48,949 39,184 29,232 25,100 Interest on indebtedness of a former subsidiary guaranteed by the Company.................... -- -- -- -- 826 826 Interest factor of non-capitalized leases...... 3,138 3,596 4,385 3,730 3,188 3,188 ------- -------- -------- -------- -------- --------- "Fixed Charges".................................... 61,947 67,497 53,334 42,914 33,246 29,114 ------- -------- -------- -------- -------- --------- Earnings available (deficient) for fixed charges... $65,547 $ 7,997 $ (7,016) $ (2,786) $ 15,246 $ 15,214 ======= ======== ======== ======== ======== ========= Ratio of Earnings to Fixed Charges................. 1.06 N/A N/A N/A N/A N/A ==== ==== ==== ==== ==== ===== 39 WEEKS ENDED --------------------------------------- PRO FORMA SEPT. 26, OCTOBER 2, OCTOBER 2, 1992 1993 1993 --------- ---------- ---------- Earnings (loss) from continuing operations......... $(19,600 ) $(12,800) $(11,600) Provision (credit) for income taxes................ 1,300 (1,500) (900) --------- ---------- ---------- "Earnings"......................................... (18,300 ) (14,300) (12,500) --------- ---------- ---------- Fixed Charges: Interest expense including amortization of deferred debt expense and debt discount...... 22,387 20,165 18,400 Interest on indebtedness of a former subsidiary guaranteed by the Company.................... 619 619 619 Interest factor of non-capitalized leases...... 2,391 2,391 2,391 --------- ---------- ---------- "Fixed Charges".................................... 25,397 23,175 21,410 --------- ---------- ---------- Earnings available (deficient) for fixed charges... $ 7,097 $ 8,875 $ 8,910 ========= ========== ========== Ratio of Earnings to Fixed Charges................. N/A N/A N/A ===== ===== =====
N/A % Not applicable, since ratio is less than 1.0:1. EX-24.1 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 24.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Nortek, Inc.: As independent public accountants, we hereby consent to the use of our reports dated March 26, 1993 and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN & CO. Boston, Massachusetts January 20, 1994 EX-24.3 7 CONSENT OF MANUFACTURED HOUSING INSTITUTE 1 EXHIBIT 24.3 November 8, 1993 Nortek, Inc. 50 Kennedy Plaza Providence, Rhode Island 02903-2360 Dear Sir or Madam: By this letter, we hereby consent to the use of our name, and the attribution of certain market statistics to our name, in connection with your Prospectus and Registration Statement to be filed with the Securities and Exchange Commission. MANUFACTURED HOUSING INSTITUTE \s\ William J. Owens By: William J. Owens Title: Vice President, Finance EX-24.4 8 CONSENT OF F.W. DODGE/MCGRAW HILL 1 EXHIBIT 24.4 November 8, 1993 Nortek, Inc. 50 Kennedy Plaza Providence, Rhode Island 02903-2360 Dear Sir or Madam: By this letter, we hereby consent to the use of our name, and the attribution to us of statistics that we have provided to you (including statistics as to the amount of non-residential construction in various periods), in connection with your Prospectus and Registration Statement to be filed with the Securities and Exchange Commission relating to your public offering of certain debt securities. F.W. DODGE/MCGRAW HILL \s\ David M. Schmidt By: David M. Schmidt Title: Director, Construction Statistics and Forecasts EX-26 9 FORM T-1 STATE STREET BANK AND TRUST 1 EXHIBIT 26 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________ FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2)____ STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip code) Robert J. Malley, Esq. General Counsel and Corporate Secretary 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3104 (Name, address and telephone number of agent for service) ____________________ NORTEK, INC. (Exact name of obligor 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, Rhode Island 02903 (Address of principal executive offices) (Zip code) ______________________ % Senior Subordinated Notes due 2004 (Title of indenture securities) 2 GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. The trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See Note on page 6.) ITEM 3. VOTING SECURITIES OF THE TRUSTEE. FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF VOTING SECURITIES OF THE TRUSTEE: As of:
Col. A Col. B Title of Class Amount outstanding
Not applicable. ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES. IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, FURNISH THE FOLLOWING INFORMATION: (A) TITLE OF THE SECURITIES OUTSTANDING UNDER EACH SUCH OTHER INDENTURE. Not applicable. (B) A BRIEF STATEMENT OF THE FACTS RELIED UPON AS A BASIS FOR THE CLAIM THAT NO CONFLICTING INTEREST WITHIN THE MEANING OF SECTION 310(B)(1) OF THE ACT ARISES AS A RESULT OF THE TRUSTEESHIP UNDER ANY SUCH OTHER INDENTURE, INCLUDING A STATEMENT AS TO HOW THE INDENTURE SECURITIES WILL RANK AS COMPARED WITH THE SECURITIES ISSUED UNDER SUCH OTHER INDENTURE. Not applicable. 1 3 ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR UNDERWRITERS. IF THE TRUSTEE OR ANY OF THE DIRECTORS OR EXECUTIVE OFFICERS OF THE TRUSTEE IS A DIRECTOR, OFFICER, PARTNER, EMPLOYEE, APPOINTEE OR REPRESENTATIVE OF THE OBLIGOR OR OF ANY UNDERWRITER FOR THE OBLIGOR, IDENTIFY EACH SUCH PERSON HAVING ANY SUCH CONNECTION AND STATE THE NATURE OF EACH SUCH CONNECTION. Not applicable. ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY THE OBLIGOR AND EACH DIRECTOR, PARTNER AND EXECUTIVE OFFICER OF THE OBLIGOR: As of:
Col. A Col. B Col. C Col. D Name of Title of Amount owned Percentage of owner class beneficially voting securities represented by amount given in Col. C
Not applicable. ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY EACH UNDERWRITER FOR THE OBLIGOR AND EACH DIRECTOR, PARTNER AND EXECUTIVE OFFICER OF EACH SUCH UNDERWRITER: As of:
Col. A Col. B Col. C Col. D Name of Title of Amount owned Percentage of owner class beneficially voting securities represented by amount given in Col. C
Not applicable. ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE. FURNISH THE FOLLOWING INFORMATION AS TO SECURITIES OF THE OBLIGOR OWNED BENEFICIALLY OR HELD AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT BY THE TRUSTEE: 2 4 As of:
Col. A Col. B Col. C Col. D Title of Whether Amount owned Percent of class the securities beneficially class repre- are voting or or held as sented by non-voting collateral security amount given securities for obligations in Col. C in default
Not applicable. ITEM 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF AN UNDERWRITER FOR THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH UNDERWRITER ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE: As of:
Col. A Col. B Col. C Col. D Title of Amount Amount owned Percent of issuer outstanding beneficially class represented and title or held as by amount of class collateral security given in Col. C for obligations in default by trustee
Not applicable. ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT VOTING SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE (1) OWNS 10 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR OR (2) IS AN AFFILIATE, OTHER THAN A SUBSIDIARY, OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF SUCH PERSON: As of:
Col. A Col. B Col. C Col. D Title of Amount Amount owned Percent of issuer outstanding beneficially class represented and title or held as by amount of class collateral security given in Col. C for obligations in default by trustee
Not applicable. ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE, OWNS 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH PERSON ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE: 3 5 As of:
Col. A Col. B Col. C Col. D Title of Amount Amount owned Percent of issuer outstanding beneficially class represented and title or held as by amount of class collateral security given in Col. C for obligations in default by trustee
Not applicable. ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE. EXCEPT AS NOTED IN THE INSTRUCTIONS, IF THE OBLIGOR IS INDEBTED TO THE TRUSTEE, FURNISH THE FOLLOWING INFORMATION: As of:
Col. A Col. B Col. C Nature of Amount Date due indebtedness outstanding
Not applicable. ITEM 13. DEFAULTS BY THE OBLIGOR. (A) STATE WHETHER THERE IS OR HAS BEEN A DEFAULT WITH RESPECT TO THE SECURITIES UNDER THIS INDENTURE. EXPLAIN THE NATURE OF ANY SUCH DEFAULT. Not applicable. (B) IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, OR IS A TRUSTEE FOR MORE THAN ONE OUTSTANDING SERIES OF SECURITIES UNDER THE INDENTURE, STATE WHETHER THERE HAS BEEN A DEFAULT UNDER ANY SUCH INDENTURE OR SERIES, IDENTIFY THE INDENTURE OR SERIES AFFECTED, AND EXPLAIN THE NATURE OF ANY SUCH DEFAULT. To the best of the knowledge of the Trustee, there has not been a default under any such indenture or series. ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS. IF AN UNDERWRITER IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. Not applicable. ITEM 15. FOREIGN TRUSTEE. IDENTIFY THE ORDER OR RULE PURSUANT TO WHICH THE FOREIGN TRUSTEE IS AUTHORIZED TO ACT AS SOLE TRUSTEE UNDER INDENTURES QUALIFIED OR TO BE QUALIFIED UNDER THE ACT. Not applicable. 4 6 ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2) ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the By-Laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4, IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF THE UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(B) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. 5 7 8. A COPY OF ANY ORDER PURSUANT TO WHICH THE FOREIGN TRUSTEE IS AUTHORIZED TO ACT AS SOLE TRUSTEE UNDER INDENTURES QUALIFIED OR TO BE QUALIFIED UNDER THE ACT. Not applicable. 9. FOREIGN TRUSTEES ARE REQUIRED TO FURNISH A CONSENT TO SERVICE OF PROCESS. Not applicable. NOTE The answers to this statement insofar as such answers relate to persons who are affiliates of the obligors are based upon information furnished to the trustee by the obligors. While the trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Quincy and The Commonwealth of Massachusetts, on the 20th day of January, 1994. STATE STREET BANK AND TRUST COMPANY By______________________________________ Gerald R. Wheeler Vice President 6 8 EXHIBIT 6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939 in connection with the proposed issuance by Nortek, Inc. of its % Senior Subordinated Notes due 2004, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By______________________________________ Gerald R. Wheeler Vice President Dated: January 20, 1994 7 9 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company of Boston, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business June 30, 1993, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of dollars ASSETS Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin $1,133,470 Interest-bearing balances 5,281,227 Securities 4,633,741 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge subsidiary 3,212,178 Loan and lease financing receivables: Loans and leases, net of unearned income $2,463,550 Allowance for loan and lease losses 55,734 Loans and leases, net of unearned income and allowance 2,407,816 Assets held in trading accounts 236,849 Premises and fixed assets 302,937 Other real estate owned 13,084 Investments in unconsolidated subsidiaries 20,755 Customers' liability to this bank on acceptances outstanding 19,508 Intangible assets 32,678 Other assets 973,293 ----------- Total assets $18,267,536 ------------ ------------ LIABILITIES Deposits: In domestic offices $ 6,865,217 Noninterest-bearing $4,801,186 Interest-bearing 2,064,031 In foreign offices and Edge subsidiary 4,707,584 Noninterest-bearing 29,318 Interest-bearing 4,678,266 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary 4,294,263 Demand notes issued to the U.S. Treasury 175,000 Other borrowed money 744,883 Bank's liability on acceptances executed and outstanding 20,024 Notes and debentures subordinated to deposits 18,211 Other liabilities 445,424 ----------- Total liabilities $17,270,606 ----------- EQUITY CAPITAL Common Stock 28,043 Surplus 149,361 Undivided profits 819,526 ----------- Total equity capital 996,930 ----------- Total liabilities and equity capital $18,267,536 ----------- -----------
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Nader F. Darahshori -----END PRIVACY-ENHANCED MESSAGE-----