e424b3
Filed
Pursuant to Rule 424(b)(3)
Registration No. 333-178716
PROSPECTUS
NORTEK, INC.
OFFER TO EXCHANGE
$500,000,000
aggregate principal amount of its 8.5% Senior Notes due
2021, the issuance of which has
been registered under the Securities Act of 1933, as amended,
for
all of its outstanding 8.5% Senior Notes due 2021
We are offering to exchange, upon the terms and subject to the
conditions set forth in this prospectus and the accompanying
letter of transmittal, all of our new 8.5% Senior Notes due
2021 (the exchange notes) for all of our outstanding
8.5% Senior Notes due 2021 (the outstanding
notes and collectively with the exchange notes, the
notes). We are also offering the subsidiary
guarantees of the exchange notes, which are described in this
prospectus. The terms of the exchange notes are substantially
identical to the terms of the outstanding notes except that the
issuance of the exchange notes has been registered pursuant to
an effective registration statement under the Securities Act of
1933, as amended (the Securities Act). We will pay
interest on the notes on April 15 and October 15 of
each year. The notes will mature on April 15, 2021.
The principal features of the exchange offer are as follows:
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We will exchange all outstanding notes that are validly tendered
and not validly withdrawn prior to the expiration of the
exchange offer for an equal principal amount of exchange notes.
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You may withdraw tendered outstanding notes at any time prior to
the expiration of the exchange offer.
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The exchange offer expires at 5:00 p.m., New York City
time, on January 31, 2012, unless extended. We do not
currently intend to extend the expiration date.
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The exchange of outstanding notes for exchange notes pursuant to
the exchange offer will not be a taxable event for
U.S. federal income tax purposes.
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We will not receive any proceeds from the exchange offer.
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We do not intend to apply for listing of the exchange notes on
any securities exchange or automated quotation system.
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All untendered outstanding notes will continue to be subject to
the restrictions on transfer set forth in the outstanding notes
and in the indenture. In general, the outstanding notes may not
be offered or sold except in a transaction registered under the
Securities Act or pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable
state securities laws. Other than in connection with the
exchange offer, we do not currently anticipate that we will
register the outstanding notes under the Securities Act.
You should consider carefully the risk factors beginning on
page 14 of this prospectus before participating in the
exchange offer.
Each broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge that it
will deliver a prospectus in connection with any resale of such
exchange notes. The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an
underwriter within the meaning of the Securities
Act. This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with
resales of exchange notes received in exchange for outstanding
notes where such outstanding notes were acquired by such
broker-dealer as a result of market-making activities or other
trading activities. We have agreed that, for a period of
180 days after the expiration date (as defined herein), we
will make this prospectus available to any broker-dealer for use
in connection with any such resale. See Plan of
Distribution.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
You should rely only on the information contained in this
prospectus. We have not authorized any person to provide you
with any information or represent anything about us or the
exchange offer that is not contained in this prospectus. If
given or made, any such other information or representation
should not be relied upon as having been authorized by us. We
are offering to exchange the outstanding notes for the exchange
notes only in places where the exchange offer is permitted. You
should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the
front cover of this prospectus.
The date of this prospectus is December 30, 2011.
TABLE OF
CONTENTS
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ii
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F-1
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II-1
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This prospectus contains summaries of the terms of several
material documents. These summaries include the terms that we
believe to be material, but we urge you to review these
documents in their entirety. We will provide without charge to
each person to whom a copy of this prospectus is delivered, upon
written or oral request of that person, a copy of any and all of
this information. Written or oral requests should be directed to
Kevin W. Donnelly, Esq., Senior Vice President, General
Counsel and Secretary, Nortek, Inc., 50 Kennedy Plaza,
Providence, Rhode Island
02903-2360.
Our telephone number is
(401) 751-1600.
You should request this information at least five business days
in advance of the date on which you expect to make your decision
with respect to the exchange offer. In any event, you must
request this information prior to January 23, 2012, in
order to receive the information prior to the expiration of the
exchange offer.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We and the guarantors have filed with the Securities and
Exchange Commission, or the SEC, a registration statement on
Form S-4
under the Securities Act with respect to the exchange notes
being offered hereby. This prospectus, which forms a part of the
registration statement, does not contain all of the information
set forth in the registration statement. For further information
with respect to us, the guarantors or the exchange notes, we
refer you to the registration statement. We are subject to the
requirements of
Section 13(a)
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and prior to November 14, 2011 had been
subject to the informational requirements of the Exchange Act.
In accordance therewith, we file reports and other information
with the SEC. The registration statement, such reports and other
information can be inspected and copied at the Public Reference
Room of the SEC located at 100 F Street, N.E.,
Washington D.C. 20549. Copies of such materials, including
copies of all or any portion of the registration statement, can
be obtained from the Public Reference Room of the SEC at
prescribed rates. You can call the SEC at
1-800-SEC-0330
to obtain information about the Public Reference Room. Such
materials may also be accessed electronically by means of the
SECs home page on the Internet
(http://www.sec.gov).
In addition, you may obtain these materials on the
Companys website
(http://www.nortek-inc.com).
The contents of our website have not been, and shall not be
deemed to be incorporated by reference into this registration
statement.
Under the terms of the indenture relating to the notes, we have
agreed that, whether or not we are required to do so by the
rules and regulations of the SEC, for so long as any of the
notes remain outstanding, we will furnish to the trustee and
holders of the notes the information specified therein in the
manner specified therein. See Description of Exchange
Notes.
COMPARABILITY
OF CONSOLIDATED FINANCIAL STATEMENTS
On December 17, 2009 (the Effective Date), the
Company emerged from bankruptcy proceedings under
Chapter 11 of the United States Bankruptcy Code
(Chapter 11). In connection with its emergence
from bankruptcy, the Company adopted fresh-start reporting
pursuant to the provisions of Accounting Standards Codification
(ASC) 852, Reorganization (ASC 852). The
Company selected December 19, 2009 as the fresh-start
reporting date since it was the closest fiscal week-end to the
Effective Date of December 17, 2009 and the effect of using
December 19, 2009, instead of December 17, 2009, was
not material to the Companys financial condition or
results of operations for the periods presented. Under
fresh-start reporting, a new reporting entity is deemed to be
created and the assets and liabilities of the entity are
reflected at their fair values. As a result of the application
of fresh-start accounting on December 19, 2009, and in
accordance with ASC 852, our post-emergence financial
results (for all periods ending after December 19,
2009) are presented as the Successor and our
pre-emergence financial results (for all periods ending through
December 19, 2009) are presented as the
Predecessor. Financial statements prepared under
accounting principles generally accepted in the United States
(GAAP) do not straddle the Effective Date because in
effect the Successor represents a new entity. Accordingly, the
consolidated financial statements for the Company subsequent to
emergence from Chapter 11 are not comparable to the
consolidated financial statements for the Company prior to
emergence from Chapter 11.
NON-GAAP FINANCIAL
MEASURES
Consolidated Cash Flow (CCF), Earnings Before
Interest, Taxes, Depreciation and Amortization, less Gain on
Reorganization Items, plus loss from debt retirement
(EBITDA), Adjusted Consolidated Cash Flow
(ACCF) and Adjusted Earnings Before Interest, Taxes,
Depreciation and Amortization, less Gain on Reorganization Items
(Adjusted EBITDA) as presented or incorporated by
reference in this prospectus, are supplemental measures of our
performance that are not required by, or presented in accordance
with, GAAP. They are not measurements of our financial
performance under GAAP and should not be considered as
alternatives to net income or any other performance measures
derived in accordance with GAAP.
We define CCF and EBITDA as net earnings
(loss) before interest, income taxes, depreciation,
amortization, loss from debt retirement and the effects of our
emergence from bankruptcy as a reorganized
ii
company on December 17, 2009, pursuant to prepackaged plans
of reorganization, including the effects of fresh-start
accounting. We define ACCF and Adjusted EBITDA as
CCF and EBITDA, respectively, in each case further adjusted to
exclude certain cash and non-cash, non-recurring items and to
include the pro forma effect of acquisitions as if each
acquisition had occurred on the first day of the four-quarter
reference period. We caution investors that amounts presented in
accordance with our definitions of CCF, EBITDA, ACCF and
Adjusted EBITDA may not be comparable to similar measures
disclosed by other issuers, because not all issuers and analysts
calculate CCF, EBITDA, ACCF or Adjusted EBITDA in the same
manner. We present CCF and EBITDA because we consider them
important supplemental measures of our performance and believe
they are frequently used by securities analysts, investors and
other interested parties in the evaluation of companies in our
industry. We present ACCF and Adjusted EBITDA as further
supplemental measures of our performance. CCF, EBITDA, ACCF and
Adjusted EBITDA have several limitations that are discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources Consolidated Cash Flow and
Adjusted Consolidated Cash Flow included elsewhere herein,
where we also include a quantitative reconciliation of CCF,
EBITDA, ACCF and Adjusted EBITDA to the most directly comparable
GAAP financial performance measure, which we believe is net
earnings (loss) from continuing operations.
The SEC has adopted rules to regulate the use in filings with
the SEC and public disclosures and press releases of non-GAAP
financial measures, such as CCF, EBITDA, ACCF and Adjusted
EBITDA, that are derived on the basis of methodologies other
than in accordance with GAAP. The non-GAAP financial measures
presented in this prospectus may not comply with these rules.
For more information on CCF and ACCF, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources Consolidated Cash Flow and
Adjusted Consolidated Cash Flow.
NOTICE TO
NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN
APPLICATION FOR A LICENSE HAS BEEN FILED UNDER
CHAPTER 421-B
OF THE NEW HAMPSHIRE REVISED STATUTES ANNOTATED, 1955, AS
AMENDED, WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE
SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED
UNDER
RSA 421-B
IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR
THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS
PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR
RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
FORWARD-LOOKING
STATEMENTS
This prospectus may contain forward-looking statements within
the meaning of Section 27A of the Securities Act, and
Section 21E of the Exchange Act. Although we believe that,
in making any such statements, our expectations are based on
reasonable assumptions, any such statement may be influenced by
factors that could cause actual outcomes and results to be
materially different from those projected.
These forward-looking statements include statements relating to
our anticipated financial performance and business prospects
and/or
statements preceded by, followed by or that include the words
believe, anticipate, intend,
estimate, expect, project,
could, plans, seeks and
similar expressions. These forward-looking statements speak only
as of the date stated and we do not undertake any obligation to
update or revise publicly any forward-looking statements,
whether as a result of new information, future events or
otherwise, even if experience or future events make it clear
that any expected results expressed or implied by these
forward-looking statements will not be realized. Although we
believe that the expectations reflected in these forward-
iii
looking statements are reasonable, these expectations may not
prove to be correct or we may not achieve the financial results,
savings or other benefits anticipated in the forward-looking
statements. These forward-looking statements are necessarily
estimates reflecting the best judgment of our senior management
and involve a number of risks and uncertainties, some of which
may be beyond our control, that could cause actual results to
differ materially from those suggested by the forward-looking
statements, including, without limitation:
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our substantial indebtedness and lease obligations and potential
additional future indebtedness,
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restrictions in our debt agreements that limit our flexibility
in operating our business,
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our ability to generate cash to service our indebtedness,
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interest rate risk relating to our variable rate indebtedness,
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global economic conditions,
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the levels of residential and non-residential remodeling,
replacement and construction activity,
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the availability and cost of certain raw materials (including,
among others, steel, motors, compressors, copper, packaging
material, aluminum, plastics, glass and various chemicals and
paints) and purchased components,
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increased freight costs,
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weather fluctuations,
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our ability to acquire and successfully integrate businesses
into our operations,
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competitive market conditions,
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foreign currency fluctuations,
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consumer spending levels,
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exposure to foreign economies,
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a decline in our relations with key distributors and dealers,
loss of major customers or failures or delays in collecting
payments from major customers,
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varying international business practices,
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labor disruptions or cost increases,
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the impact of certain environmental, health and safety laws and
regulations,
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product and warranty liability claims and product recalls or
reworks,
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our ability to retain key personnel and other qualified team
members,
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our ability to protect our intellectual property rights,
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the impact of our adoption of fresh-start accounting, and
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other factors as set forth in this prospectus, particularly
under the heading Risk Factors.
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The list of factors above is illustrative, but by no means
exhaustive. All forward-looking statements should be evaluated
with the understanding of their inherent uncertainty. We
encourage you to read those descriptions carefully. We caution
investors not to place substantial reliance on the
forward-looking statements contained in this prospectus. These
statements, like all statements in this prospectus, speak only
as of the date of this prospectus (unless another date is
indicated), and we undertake no obligation to update or revise
the statements in light of future developments.
MARKET
AND INDUSTRY DATA
Market data and other statistical information used throughout
this prospectus are based on independent industry publications,
government publications, reports by market research firms or
other published independent sources. Some data are also based on
good faith estimates by our management, which are derived from
iv
their review of internal surveys, as well as the independent
sources listed above. Although we believe these sources are
reliable, we have not independently verified the information and
cannot guarantee its accuracy and completeness.
TRADEMARKS
AND SERVICE MARKS
We own or have rights to trademarks, service marks and trade
names that we use in connection with the operation of our
business. Other trademarks, service marks and trade names
appearing in this prospectus are the property of their
respective owners. We will assert, to the fullest extent under
applicable law, our rights to these trademarks, service marks
and trade names.
v
SUMMARY
This summary contains basic information about us and the
exchange offer. Because it is a summary, it does not contain all
of the information that may be important to you. You should read
this entire prospectus carefully, including the section entitled
Risk Factors and our consolidated financial
statements and the related notes included elsewhere in this
prospectus, before participating in the exchange offer. Except
as otherwise required by the context, in this prospectus,
the Company, we, us and
our refer to Nortek, Inc. and its subsidiaries, and
the Issuer or Nortek refers to Nortek,
Inc., exclusive of its subsidiaries.
General
Nortek was founded in 1967 and is headquartered in Providence,
Rhode Island. The Company is incorporated in the State of
Delaware.
We are a diversified manufacturer of innovative, branded
residential and commercial building products, operating within
four reporting segments:
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the Residential Ventilation Products (RVP) segment,
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the Technology Products (TECH) segment,
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the Residential Air Conditioning and Heating Products
(R-HVAC) segment, and
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the Commercial Air Conditioning and Heating Products
(C-HVAC) segment.
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Through these segments, we manufacture and sell, primarily in
the United States, Canada and Europe, a wide variety of products
for the remodeling and replacement markets, the residential and
commercial new construction markets, the manufactured housing
market and the personal and enterprise computer markets.
For the nine months ended October 1, 2011 and fiscal year
ended December 31, 2010, we generated net sales of
$1,605.3 million and $1,899.3 million, respectively,
operating earnings of $36.7 million and $70.6 million,
respectively, and Adjusted EBITDA of $143.6 and
$209.1 million, respectively.
The
Companys Business Segments
Residential
Ventilation Products Segment
Our RVP segment primarily manufactures and distributes room and
whole house ventilation and other products primarily for the
professional remodeling and replacement markets, residential new
construction market and do-it-yourself (DIY) market.
The principal products of the segment, which are sold under the
Broan®,
NuTone®,
Venmar®,
Best®
and
Zephyr®
brand names, among others, are:
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kitchen range hoods,
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exhaust fans (such as bath fans and fan, heater and light
combination units), and
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indoor air quality products.
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Based on internal research and industry knowledge, we believe
that we are one of the worlds largest suppliers of
residential range hoods and exhaust fans, and are the largest
supplier of these products in North America, in each case,
based on revenues. We also believe, based on internal research
and industry knowledge, that we are one of the leading suppliers
in Europe of luxury Eurostyle range hoods based on
revenues. Our kitchen range hoods expel grease, smoke, moisture
and odors from the cooking area and are offered under an array
of price points and styles from economy to upscale models. The
exhaust fans we offer are primarily used in bathrooms to remove
humidity and odors and include combination units, which may have
lights, heaters or both. Our range hood and exhaust fan products
are differentiated on the basis of air movement as measured in
cubic feet per minute and sound output as measured in sones. The
Home Ventilating Institute in the United States certifies our
range hood and exhaust fan products, as well as our indoor air
quality products.
Our sales of kitchen range hoods and exhaust fans accounted for
approximately 14.1% and 10.3%, respectively, of consolidated net
sales in 2010, 14.2% and 10.3%, respectively, of consolidated
net sales in 2009 and approximately 15.0% and 10.2%,
respectively, of consolidated net sales in 2008.
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We believe we are one of the largest suppliers in North America
of indoor air quality products, which include air exchangers, as
well as heat or energy recovery ventilators (HRVs or ERVs,
respectively) that provide whole house ventilation, based on
revenues. These systems bring in fresh air from the outdoors
while exhausting stale air from the home. Both HRVs and ERVs
moderate the temperature of the fresh air by transferring heat
from one air stream to the other. In addition, ERVs also modify
the humidity content of the fresh air. We also sell powered
attic ventilators, which alleviate heat built up in attic areas
and reduce deterioration of roof structures.
Since the late 1970s, homes have been built more airtight and
insulated in order to increase energy efficiency. According to
published studies, this trend correlates with an increased
incidence of respiratory problems such as asthma and allergies
in individuals. In addition, excess moisture, which may be
trapped in a home, has the potential to cause significant
deterioration to the structure and interiors of the home. Proper
intermittent ventilation in high concentration areas, such as
kitchens and baths, as well as whole house ventilation help to
mitigate these problems.
We sell other products in this segment, including, among others,
door chimes, medicine cabinets, trash compactors, ceiling fans
and central vacuum systems, by leveraging our strong brand names
and distribution network.
We sell the products in our RVP segment to distributors and
dealers of electrical and lighting products, kitchen and bath
dealers, retail home centers and private label customers under
the
Broan®,
NuTone®,Venmar®,Best®
and
Zephyr®
brand names, among others. Private label customers accounted for
approximately 17.4% of the net sales of this segment in 2010.
A key component of our operating strategy for this segment is
the introduction of new products and innovations, which
capitalize on the strong brand names and the extensive
distribution system of the segments businesses. New
product development efforts are focused on improving the style,
performance, cost, and energy efficiency of the products. In
this segment, we have recently introduced a line of upscale
range hoods encompassing the latest in style and functionality.
Also offered in this segment is a full line of
EnergyStar®
compliant ventilation fans including heavy-duty models ideal for
light commercial installations and offices, recessed fan/lights,
as well as 35 different models in the Ultra
Silenttm
Series. We believe that the variety of product offerings and new
product introductions help us to maintain and improve our market
position for our principal products. At the same time, we
believe that our status as a low-cost producer provides the
segment with a competitive advantage.
Our primary residential ventilation products compete with many
products supplied by domestic and international companies in
various markets. We compete with suppliers of competitive
products primarily on the basis of quality, distribution,
delivery and price. Although we believe we compete favorably
with other suppliers of residential ventilation products, some
of our competitors have greater financial and marketing
resources than this segment of our business.
Product manufacturing in the RVP segment generally consists of
fabrication from coil and sheet steel and formed metal utilizing
stamping, pressing and welding methods, assembly with components
and subassemblies purchased from outside sources (principally
motors, fan blades, heating elements, wiring harnesses,
controlling devices, glass, mirrors, lighting fixtures,
polyethylene components and electronic components) and painting,
finishing and packaging.
Over the past several years, we have moved the production of
certain of our product lines from facilities in the U.S., Canada
and Italy to regions with lower labor costs, such as China,
Poland and Mexico. In addition to these moves, in 2008, we
consolidated the production of medicine cabinets from our
facilities in Los Angeles, California and Union, Illinois to our
facility in Cleburne, Texas, which was previously used to
manufacture range hoods.
This segments primary products compete globally with
products supplied by many domestic and international suppliers
in various markets. In the range hood market, this
segments primary global competitors are Elica Group, Faber
S.p.A. and Cata Electrodomesticas S.L.
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Our RVP segment had 12 manufacturing plants and employed
approximately 2,600 full-time people as of October 1,
2011, of which approximately 200 are covered by collective
bargaining agreements which expire in 2011 and approximately 100
are covered by collective bargaining agreements which expire in
2013. We believe that our relationships with the employees in
this segment are satisfactory.
Technology
Products Segment
Our TECH segment, formerly known as the Home Technology Products
(HTP) segment, manufactures and distributes a broad
array of products designed to provide convenience and security
for residential and certain commercial applications. The
principal product categories sold in this segment are:
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audio/video distribution and control equipment,
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security and access control products, and
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digital display mounting and mobility products.
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The segments audio/video distribution and control
equipment products include whole-house audio/video systems,
video signal transmission and conversion devices, home
integration systems as well as certain accessories often used
with these systems such as structured wiring, power conditioners
and surge protectors. Whole-house audio/video systems include
multi-room/multisource controllers and amplifiers, home theater
receivers, intercom systems, speakers, and control devices such
as keypads, remote controls and volume controls. The
segments speakers are primarily built-in (in-wall or
in-ceiling) and are primarily used in multi-room or home theater
applications. These products are sold under the
Niles®,
Elan®,
ATONtm,
SpeakerCraft®,
Proficient Audio
Systems®,
Sunfire®,
and
Xantech®
brand names, among others. The segments video signal
transmission and conversion devices allow conversion of video
signals into various formats as well as the transmission of
video signals to multiple display screens. In addition to
residential home theater applications, these products are often
used in non-residential applications such as retail outlets,
airports and casinos and are sold under the
Magentatm
and
Gefen®
brand names. The segments home integration systems include
software and hardware that facilitate the control of third-party
residential subsystems such as home theater, whole-house audio,
climate control, lighting, security and irrigation. These
products are sold under the Home
Logic®
and Elan
g!®
brand names. A specific application for lighting control is sold
by the segment under the
LiteTouch®
brand name. Other products in this segment include power
conditioners and surge protectors sold under the
Panamax®
and
Furman®
brand names and structured wiring products sold under the
OpenHouse®
and Channel
Plus®
brand names.
The segments security and access control products include
residential and certain commercial intrusion protection systems,
components for closed circuit television systems (camera
housings), garage and gate operators and devices to gain entry
to buildings and gated properties such as radio transmitters,
wireless window and door contacts, control panels, keypads and
telephone entry systems. These products are sold under the
Linear®,
SecureWireless,
GTO/PRO®,
Mighty
Mule®,
OSCO®,
Aigis®,
AllStar®,
IEI®,
Luxor and certain private label brand names, as well as
Westinghouse®,
which is licensed.
The segments digital display mounting and mobility
products primarily are designed with ergonomic features and
include wall mounts, desk mounts, arms, carts, workstations and
stands that attach to a variety of display devices such as
computer monitors, notebook computers and flat panel displays.
These products are sold under the
Ergotron®
and
OmniMount®
brand names as well as certain original equipment manufacturer
brand names in the personal computer industry.
We sell the products in our TECH segment to distributors,
professional installers, electronics retailers and original
equipment manufacturers. Sales in this segment are primarily
driven by replacement applications, new installations in
existing properties and purchases of high-priced audio/video
equipment such as flat panel televisions and displays and to a
lesser extent new construction activity. Sales of digital
display mounting and mobility products are primarily driven by
personal computer and I.T. spending, as well as from the sale of
other products for which a mounting solution is needed. In
addition, a portion of the sales in this segment is driven by
sales to customers in the non-residential market.
The segment offers a broad array of products under
widely-recognized brand names with various features and price
points, which we believe allows it to expand its distribution in
the professional installation and retail
3
markets. Another key component of our operating strategy is the
introduction of new products and innovations, which capitalize
on our well-known brand names and strong customer relationships.
The segments primary products compete with products
supplied by many domestic and international suppliers in various
markets. The segment competes with several portfolio companies
of Duchossois Industries, Inc., including Chamberlain
Corporation, Milestone AV Technologies and AMX LLC. The segment
also competes with Crestron Electronics, Inc., among others. The
segment competes with suppliers of competitive products
primarily on the basis of quality, distribution, delivery and
price. Although we believe we compete favorably with other
suppliers of home technology products, some of our competitors
have greater financial and marketing resources than this segment
of our business. In addition, certain products are sourced from
low cost Asian suppliers based on our specifications. We believe
that our Asian sourcing provides us with a competitive cost
advantage.
In this segment, we have several administrative and distribution
facilities in the United States and a significant amount of our
products are manufactured at our facilities located in China.
Our TECH segment had 11 manufacturing plants and employed
approximately 3,600 full-time people as of October 1,
2011. We believe that our relationships with the employees in
this segment are satisfactory.
Residential
Air Conditioning and Heating Products Segment
Our R-HVAC segment principally manufactures and sells
split-system and packaged air conditioners and heat pumps, air
handlers, furnaces and related equipment, accessories and parts
for the residential and certain commercial markets. For
site-built homes and certain commercial structures, the segment
markets its products under the licensed brand names
Frigidaire®,
Tappan®,
Philco®,
Kelvinator®,
Gibson®,
Westinghouse®
and
Maytag®.
The segment also supplies products to certain of its customers
under the
Broan®,
NuTone®,
Mammoth®
and several private label brand names. Within the residential
market, we are one of the largest suppliers of HVAC products for
manufactured homes in the United States and Canada. In the
manufactured housing market, the segment markets its products
under the
Intertherm®
and
Miller®
brand names.
Demand for replacing and modernizing existing equipment, the
level of housing starts and manufactured housing shipments are
the principal factors that affect the market for the
segments residential HVAC products. We anticipate that the
demand by the replacement market will continue to exceed the
demand for products by the new installation market as a large
number of previously installed heating and cooling products
become outdated or reach the end of their useful lives. The
demand for residential cooling products is also affected by
spring and summer temperatures, although the seasonal effects
are less dramatic than those experienced in the window air
conditioning market which we do not sell into. We believe that
our ability to offer both heating and cooling products helps
offset the effects of seasonality on this segments sales.
The segment sells its manufactured housing products to builders
of manufactured housing and, through distributors, to
manufactured housing retailers and owners. The majority of sales
to builders of manufactured housing consist of furnaces designed
and engineered to meet or exceed certain standards mandated by
the U.S. Department of Housing and Urban Development, or
HUD, and other 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 and replacement furnaces. We
believe that we have one major competitor in the manufactured
housing furnace market, York by Johnson Controls, which markets
its products primarily under the Coleman name. The
segment competes with most major industry manufacturers in the
manufactured housing air conditioning market.
The segment sells residential HVAC products for use in
site-built homes through independently owned distributors who
sell to HVAC contractors. The site-built residential HVAC market
is very competitive. In this market, the segment competes with,
among others, Carrier Corporation (a subsidiary of United
Technologies Corporation), Rheem Manufacturing Company, Lennox
Industries, Inc., Trane, Inc. (a subsidiary of Ingersoll-Rand
Company), York by Johnson Controls and Goodman Global, Inc.
During 2010, we estimate that approximately 54% of this
segments sales of residential HVAC products were
attributable to the replacement market, which tends to be less
cyclical than the new construction market.
4
In addition, the segment sells residential HVAC products outside
of North America, with sales concentrated primarily in Latin
America and the Middle East. International sales consist of not
only the segments manufactured products, but also products
manufactured to specification by outside sources. The products
are sold under the
Westinghouse®
licensed brand name, the segments own
Miller®
brand name, as well as other private label brand names.
The segment competes in both the site-built and manufactured
housing markets on the basis of breadth and quality of its
product line, distribution, product availability and price.
Although we believe that we compete favorably with respect to
certain of these factors, most of the segments competitors
have greater financial and marketing resources and the products
of certain competitors may enjoy greater brand awareness than
our residential HVAC products.
Our R-HVAC segment had 4 manufacturing plants and employed
approximately 1,200 full-time people as of October 1,
2011. We believe that our relationships with our employees in
this segment are satisfactory.
Commercial
Air Conditioning and Heating Products Segment
Our C-HVAC segment manufactures and sells HVAC systems that are
custom-designed to meet customer specifications primarily for
hospitals, educational facilities, as well as commercial
offices, manufacturing facilities, retail stores, clean rooms
and governmental buildings. These systems are designed primarily
to operate on building rooftops (including large self-contained
walk-in units), or on individual floors within a building, and
to have cooling capacities ranging from 40 tons to 600 tons. The
segment markets its commercial HVAC products under the
Governair®,
Mammoth®,
Temtrol®,
Venmar
CESTM,
Ventrol®,
WebcoTM,
Huntair®,
CleanpakTM
and
Fanwall®
brand names. Based on replacing large fans in air handlers with
a modular array of smaller fans,
Fanwall®
technology allows for major improvements in reliability, energy
efficiency, sound attenuation, footprint, and operating costs,
and also is ideal for retrofit applications.
Our subsidiary, Eaton-Williams Group Limited, manufactures and
markets custom and standard air conditioning and humidification
equipment throughout Western Europe under the
Vapac®,
Cubit®,
Qualitair®,
Edenaire®,
ColmanTM
and
ModucelTM
brand names.
The market for commercial HVAC equipment is divided into
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, standard equipment suppliers generally
have a larger share of the overall commercial HVAC market than
custom-designed equipment suppliers, such as us. However,
because of certain building designs, shapes or other
characteristics, we believe there are many applications for
which custom-designed equipment is required or is more cost
effective over the life of the building. Unlike standard
equipment, the segments commercial HVAC equipment can be
designed to match a customers exact space, capacity and
performance requirements. The segments packaged rooftop
and self-contained walk-in equipment rooms maximize a
buildings rentable floor space because this equipment is
located outside the building. In addition, the manner of
construction and timing of installation of commercial HVAC
equipment can often favor custom-designed over standard systems.
As compared with site-built and factory built HVAC systems, the
segments systems are factory assembled according to
customer specifications and then installed by the customer or
third parties, rather than assembled on site, permitting
extensive testing prior to shipment. As a result, the
segments commercial systems can be installed later in the
construction process than site-built systems, thereby saving the
owner or developer construction and labor costs. The segment
sells its commercial HVAC products primarily to contractors,
owners and developers of commercial office buildings,
manufacturing and educational facilities, hospitals, retail
stores, clean rooms and governmental buildings. The segment
seeks to maintain, as well as establish and develop, strong
relationships nationwide with design engineers, owners and
developers, and the persons who are most likely to value the
benefits and long-term cost efficiencies of its custom-designed
equipment.
During 2010, we estimate that approximately 38% of our air
conditioning and heating product commercial sales came from
replacement and retrofit activity, which typically is less
cyclical than new construction activity and generally commands
higher margins. The segment continues to develop products and
marketing programs to increase penetration in the growing
replacement and retrofit market.
5
The segments commercial HVAC products are marketed through
independent manufacturers representatives, as well as
other sales, marketing and engineering professionals. The
independent representatives are typically HVAC engineers, a
factor which is significant in marketing the segments
commercial products because of the design-intensive nature of
the market segment in which we compete.
We believe that we are among the largest suppliers of
custom-designed commercial HVAC products in the United States.
The segments four largest competitors in the commercial
HVAC market are Carrier Corporation, York by Johnson Controls,
McQuay International (a subsidiary of OYL Corporation) and
Trane, Inc. (a subsidiary of Ingersoll-Rand Company). The
segment competes primarily on the basis of engineering support,
quality, design and construction flexibility and total installed
system cost. Although we believe that we compete favorably with
respect to some of these factors, most of our competitors have
greater financial and marketing resources than this segment of
our business and enjoy greater brand awareness. However, we
believe that our ability to produce equipment that meets the
performance characteristics required by the particular product
application provides us with an advantage that some of our
competitors do not enjoy.
Our C-HVAC segment had 9 manufacturing plants and employed
approximately 2,200 full-time people at October 1,
2011, of which approximately 200 were covered by a collective
bargaining agreement which expires in 2012. We believe that our
relationships with our employees in this segment are
satisfactory.
Recent
Developments
2012
Short-Term Cash Incentive Plan
On December 15, 2011, the Board of Directors of the Company
(the Board) approved, based upon the recommendation
of the Boards Compensation Committee, the Nortek, Inc.
2012 Short-Term Cash Incentive Plan for Nortek Executives (under
the Nortek, Inc. 2009 Omnibus Incentive Plan) (the 2012
Plan). The Board has selected the following named
executive officers of the Company for participation in the 2012
Plan: Michael J. Clarke, the Companys President and Chief
Executive Officer, Almon C. Hall, the Companys Senior Vice
President and Chief Financial Officer, Kevin W. Donnelly, the
Companys Senior Vice President, General Counsel and
Secretary, and Edward J. Cooney, the Companys Senior Vice
President and Treasurer. The target bonus amount under the Plan
for Mr. Clarke is 100% of annual base salary as in effect
on December 31, 2012, and for each of Messrs. Hall,
Donnelly and Cooney the target bonus is 75% of the
executives respective annual base salary as in effect for
December 31, 2012. The actual amount of an executives
bonus will be determined based on the achievement of Company and
individual performance goals. The Company performance goal is
based on the Companys Consolidated Cash Flow
as defined in the indenture governing the notes (Adjusted
EBITDA) and 70% of the bonus will be based on the
Companys achievement of the Adjusted EBITDA goals
established by the Board. A participant in the 2012 Plan is
eligible to earn up to 200% of the portion of the bonus that is
based on the Companys achievement of the Adjusted EBITDA
goal if 120% of such goal is attained. The Compensation
Committee will establish individual performance goals for each
Plan participant, and 30% of the bonus will be based on the
executives achievement of his personal goals. No bonus
will be paid under the Plan if Adjusted EBITDA for fiscal year
2012 is below a certain minimum amount established by the Board.
New
President and Chief Executive Officer
On December 20, 2011, the Company announced that the Board
of Directors of the Company appointed Michael J. Clarke, 57, as
the Companys President and Chief Executive Officer,
commencing on December 30, 2011. Mr. Clarke will also
serve as a Director of the Company commencing on
December 30, 2011. He will serve on no committees of the
Board of Directors. From January 2006 until his appointment as
the Companys Chief Executive Officer, Mr. Clarke
served as President, FlexInfrastructure and Group President of
Integrated Network Solutions of Flextronics International, Ltd,
a publicly traded provider of design and electronics
manufacturing services to original equipment manufacturers.
Prior to Mr. Clarkes position at Flextronics
International, he served as a President and General Manager of
Sanmina-SCI Corporation, an electronic manufacturing services
provider, from October 1999 to December 2005. Previously,
Mr. Clarke held senior positions with international
companies including Devtek Corporation Ltd., an aerospace,
defense, telecommunications and aftermarket automotive company,
Hawker Siddeley Group Ltd., an aerospace, defense and
6
industrial company, and Cementation (Pty) Ltd. (Africa), a
mining and industrial equipment company. Mr. Clarke has
over 25 years of senior executive, business development and
hands-on operational experience managing global companies in
major industries including electronics, telecommunications,
aerospace, defense, automotive and industrial.
In connection with his appointment, the Company and
Mr. Clarke entered into an Employment Agreement (the
Employment Agreement) effective December 30,
2011 (the Effective Date), which provides for an
initial term of three years, subject to automatic one year
renewals thereafter unless terminated by either party in
accordance with the terms of the Employment Agreement. Pursuant
to the terms of the Employment Agreement, Mr. Clarke is
entitled to receive an annual base salary of $925,000 and is
eligible for an annual bonus based on the achievement of
performance objectives established by the Board or the
Compensation Committee of the Board. The target amount of the
annual bonus is 100% of Mr. Clarkes base salary. For
2012, Mr. Clarke will participate in the 2012 Plan as
described above, but his annual bonus payout will be guaranteed
at 50% of his base salary. In addition to the annual bonus,
Mr. Clarke will be entitled to receive a one-time signing
bonus upon commencement of his employment in an amount equal to
$500,000. Mr. Clarke will also be entitled to receive a
retention bonus in an amount equal to $500,000 on the first
anniversary of the Effective Date, generally subject to his
remaining employed on this date (the Retention
Bonus). The Employment Agreement further provides that
Mr. Clarke will be entitled to reimbursement of reasonable
costs, up to a maximum amount of $150,000, incurred in
connection with his relocation to the Providence, Rhode Island
area, together with a tax
gross-up for
any taxes related to such relocation costs.
The Employment Agreement provides that on or as soon as
practicable following the Effective Date, Mr. Clarke will
be granted an option to purchase 200,000 shares of the
Companys common stock under the Companys 2009
Omnibus Incentive Plan (the 2009 Plan). The shares
subject to the option will vest in 20% installments on each of
the first five anniversaries of the date of grant, subject to
his remaining employed on each such vesting date.
Mr. Clarke will also be granted an award of 50,000
restricted shares of the Companys common stock under the
2009 Plan that will vest in 20% installments on each of the
first five anniversaries of the date of grant, subject to his
remaining employed on each such vesting date. In addition, he
will be granted an award of 100,000 restricted shares of the
Companys common stock under the 2009 Plan, which will vest
in five annual installments subject to the attainment of
performance goals to be established by the Board or the
Compensation Committee and further subject to his remaining
employed at the time of each such vesting date. The stock option
and time-based restricted share awards will vest in full upon a
change in control, and the performance-based restricted share
award will vest as to 50% of the then unvested shares underlying
the award upon such an event.
If Mr. Clarkes employment is terminated by the
Company without cause or by him for good
reason (as such terms are defined in the Employment
Agreement), Mr. Clarke will be entitled to receive, subject
to the execution of a release of claims and continued compliance
with the restrictive covenants contained in the Employment
Agreement, base salary and medical benefit continuation (subject
to certain conditions) for twenty-four (24) and eighteen
(18) months, respectively, and, if such termination occurs
prior to the first anniversary of the Effective Date, the
Retention Bonus. If Mr. Clarkes employment is
terminated due to his death or disability, he will be entitled
to a pro-rata bonus for the year in which such termination
occurs, determined based on actual performance, and, if such
termination occurs prior to the first anniversary of the
Effective Date, subject to the execution of a release of claims,
the Retention Bonus. Mr. Clarke will be subject to
non-competition and non-solicitation restrictions for a period
of twenty-four (24) months following the termination of his
employment.
As of the Effective Date, J. David Smith has resigned as Interim
Chief Executive Officer of the Company in connection with the
appointment of Mr. Clarke as the President and Chief
Executive Officer of the Company. Under the terms of
Mr. Smiths Interim Chief Executive Officer Agreement,
he will receive no termination compensation; however,
Mr. Smith will be eligible to receive an annual incentive
bonus for 2011, based upon the achievement of performance
metrics and pro-rated to reflect Mr. Smiths period of
employment with the Company in 2011. Mr. Smith will remain
as a Director of the Company following his resignation.
7
Corporate
Information
Norteks corporate headquarters is located at 50 Kennedy
Plaza, Providence, Rhode Island
02903-2360.
Our telephone number is
(401) 751-1600.
Our website is www.nortek-inc.com. The information on our
website is not deemed to be part of this prospectus, and you
should not rely on it in connection with your decision whether
or not to participate in the exchange offer.
8
The
Exchange Offer
On April 26, 2011, we completed a private offering of
the outstanding notes. Concurrently with the private offering,
we entered into a registration rights agreement (the
Registration Rights Agreement) with UBS Securities
LLC, as the initial purchaser named in the Purchase Agreement
(as defined in the Registration Rights Agreement). Pursuant to
the Registration Rights Agreement, we agreed, among other
things, to file the registration statement of which this
prospectus is a part. The following is a summary of the exchange
offer. For more information please see The Exchange
Offer. The Description of Exchange Notes
section of this prospectus contains a more detailed description
of the terms and conditions of the exchange notes.
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General |
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The form and terms of the exchange notes are the same as the
form and terms of the outstanding notes except that: |
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the issuance and sale of the exchange notes have
been registered pursuant to an effective registration statement
under the Securities Act; and
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the holders of the exchange notes will not be
entitled to the additional interest provisions of the
Registration Rights Agreement, which permits an increase in the
interest rate on the outstanding notes in some circumstances
relating to the timing of the exchange offer. See The
Exchange Offer.
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The Exchange Offer |
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We are offering to exchange $500,000,000 aggregate principal
amount of 8.5% Senior Notes due 2021 that have been
registered under the Securities Act for all of our outstanding
8.5% Senior Notes due 2021. |
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The exchange offer will remain in effect for a limited time. We
will accept any and all outstanding notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on
January 31, 2012. Holders may tender some or all of their
outstanding notes pursuant to the exchange offer. However, the
outstanding notes may be tendered only in a denomination equal
to $2,000 and any integral multiples of $1,000 in excess of
$2,000. |
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Resale |
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Based upon interpretations by the Staff of the SEC set forth in
no-action letters issued to unrelated third-parties, we believe
that the exchange notes may be offered for resale, resold or
otherwise transferred by you without compliance with the
registration and prospectus delivery requirements of the
Securities Act, unless you: |
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are an affiliate of ours within the
meaning of Rule 405 under the Securities Act;
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are a broker-dealer that purchased the notes
directly from us for resale under Rule 144A,
Regulation S or any other available exemption under the
Securities Act;
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acquired the exchange notes other than in the
ordinary course of your business;
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have an arrangement with any person to engage in the
distribution of the exchange notes; or
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are prohibited by law or policy of the SEC from
participating in the exchange offer.
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However, we have not obtained a no-action letter, and there can
be no assurance that the SEC will make a similar determination
with respect to the exchange offer. Furthermore, in order to
participate in the exchange offer, you must make the
representations set forth in the letter of transmittal that we
are sending you with this prospectus. |
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Expiration Date |
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The exchange offer will expire at 5:00 p.m., New York City
time, on January 31, 2012, unless we decide to extend it.
We do not currently intend to extend the expiration date. |
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Conditions to the Exchange Offer |
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The exchange offer is subject to certain customary conditions,
some of which may be waived by us. See The Exchange
Offer Conditions to the Exchange Offer. |
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Procedures for Tendering Outstanding Notes |
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To participate in the exchange offer, you must properly complete
and duly execute a letter of transmittal, which accompanies this
prospectus, and transmit it, along with all other documents
required by such letter of transmittal, to the exchange agent on
or before the expiration date at the address provided on the
cover page of the letter of transmittal. |
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In the alternative, you can tender your outstanding notes by
following the automatic tender offer program, or ATOP,
procedures established by The Depository Trust Company, or
DTC, for tendering notes held in book-entry form, as described
in this prospectus, whereby you will agree to be bound by the
letter of transmittal and we may enforce the letter of
transmittal against you. |
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If a holder of outstanding notes desires to tender such notes
and the holders outstanding notes are not immediately
available, or time will not permit the holders outstanding
notes or other required documents to reach the exchange agent
before the expiration date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be
effected pursuant to the guaranteed delivery procedures
described in this prospectus. |
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For more details, please read The Exchange
Offer Procedures for Tendering, The
Exchange Offer Book-Entry Transfer and
The Exchange Offer Guaranteed Delivery
Procedures. |
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Special Procedures for Beneficial Owners |
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If you are a beneficial owner of outstanding notes that are
registered in the name of a broker, dealer, commercial bank,
trust company or other nominee, and you wish to tender those
outstanding notes in the exchange offer, you should contact the
registered holder promptly and instruct the registered holder to
tender those outstanding notes on your behalf. If you wish to
tender on your own behalf, you must, prior to completing and
executing the letter of transmittal and delivering your
outstanding notes, either make appropriate arrangements to
register ownership of the outstanding notes in your name or
obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take
considerable time and may not be able to be completed prior to
the expiration date. |
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Withdrawal Rights |
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You may withdraw your tender of outstanding notes at any time
prior to 5:00 p.m., New York City time, on the expiration
date of the exchange offer. Please read The Exchange
Offer Withdrawal of Tenders. |
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Acceptance of Outstanding Notes and Delivery of Exchange
Notes |
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Subject to customary conditions, we will accept outstanding
notes that are properly tendered in the exchange offer and not
withdrawn prior to the expiration date. The exchange notes will
be delivered promptly following the expiration date. |
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Consequences of Failure to Exchange Outstanding Notes |
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If you do not exchange your outstanding notes in the exchange
offer, you will no longer be able to require us to register the
outstanding notes under the Securities Act, except in the
limited circumstances provided under the Registration Rights
Agreement. In addition, you will not be able to resell, offer to
resell or otherwise transfer the outstanding notes unless we
have registered the outstanding notes under the Securities Act,
or unless you resell, offer to resell or otherwise transfer them
under an exemption from the registration requirements of, or in
a transaction not subject to, the Securities Act. |
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Dissenters Rights |
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Holders of outstanding notes do not have any appraisal or
dissenters rights in connection with the exchange offer.
We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act and the rules and
regulations of the SEC. |
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Interest on the Exchange Notes and the Outstanding Notes |
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The exchange notes will bear interest from the most recent
interest payment date on which interest has been paid on the
outstanding notes. Holders whose outstanding notes are accepted
for exchange will be deemed to have waived the right to receive
interest accrued on the outstanding notes. |
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Broker-Dealers |
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Each broker-dealer that receives exchange notes for its own
account in exchange for outstanding notes, where such
outstanding notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See Plan of
Distribution. |
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Certain U.S. Federal Income Tax Consequences |
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The holders receipt of exchange notes in exchange for
outstanding notes will not constitute a taxable event for U.S.
federal income tax purposes. Please read Certain U.S.
Federal Income Tax Considerations. |
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Exchange Agent |
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U.S. Bank National Association, the trustee under the indenture
governing the notes, or the indenture, is serving as exchange
agent in connection with the exchange offer. |
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Use of Proceeds |
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The issuance of the exchange notes will not provide us with any
new proceeds. We are making the exchange offer solely to satisfy
certain of our obligations under the Registration Rights
Agreement. |
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Fees and Expenses |
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We will bear all expenses related to the exchange offer. Please
read The Exchange Offer Fees and
Expenses. |
The
Exchange Notes
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Issuer |
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Nortek, Inc. |
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Notes Offered |
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Up to $500,000,000 in aggregate principal amount of
8.5% Senior Notes due 2021. The exchange notes and the
outstanding notes will be considered to be a single class for
all purposes under the indenture, including waivers, amendments,
redemptions and offers to purchase. |
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Maturity Dates |
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The exchange notes will mature on April 15, 2021. |
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Interest Rate |
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Interest on the exchange notes will be payable in cash and will
accrue at a rate of 8.5% per annum. |
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Interest Payment Dates |
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April 15 and October 15, commencing April 15,
2012. |
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Guarantees |
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The exchange notes will be unconditionally guaranteed, jointly
and severally, on a senior unsecured basis by each of our
current and future subsidiaries that guarantee our obligations
under our senior secured credit facility. See Description
of Exchange Notes Note Guarantees. |
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Ranking |
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The exchange notes will be general senior unsecured obligations
of the Issuer and each guarantor and will: |
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rank equally in right of payment to all our and each
guarantors existing and future senior unsecured debt;
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rank senior in right of payment to our and each
guarantors future debt that is expressly subordinated in
right of payment to the notes and the guarantees; and
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be effectively subordinated to our and each
guarantors secured indebtedness, including indebtedness
under the senior secured credit facilities, to the extent of the
value of the collateral securing such indebtedness.
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At October 1, 2011, we had approximately
$432.2 million of secured indebtedness outstanding
(excluding $15.7 million of letters of credit outstanding
under our $300.0 million asset-based revolving credit facility
(the ABL Facility). Based on the borrowing base
calculation as of December 9, 2011, at December 16,
2011 we had excess availability of approximately
$189.0 million under the ABL Facility. |
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In addition, at October 1, 2011 our non-guarantor
subsidiaries would have had approximately $182.8 million of
liabilities, including trade payables, but excluding
intercompany obligations. |
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Optional Redemption |
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The notes will be redeemable, in whole or in part, at any time
on or after April 15, 2016 on the redemption dates and at
the redemption prices specified under Description of
Exchange Notes Optional Redemption. Prior to
such date, we may redeem some or all of the notes at a
redemption price of 100% of the principal amount, plus accrued
and unpaid interest, if any, to the redemption date, plus a
make-whole premium. In addition, we may redeem |
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up to 35% of the notes before April 15, 2014 with the net
cash proceeds from certain equity offerings. |
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Change of Control |
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If we experience certain kinds of changes of control, we must
offer to purchase the exchange notes at 101% of their principal
amount, plus accrued and unpaid interest. For more details, see
Description of Exchange Notes Repurchase at
the Option of Holders Change of Control. |
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Certain Covenants |
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The indenture contains covenants that limit, among other things,
our ability and the ability of our subsidiaries to: |
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incur additional indebtedness;
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pay dividends or make other distributions or
repurchase or redeem our stock;
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sell assets;
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make loans and investments;
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enter into transactions with affiliates;
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incur certain liens;
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impose restrictions on the ability of a subsidiary
to pay dividends or make payments to us and our restricted
subsidiaries; and
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consolidate, merge or sell all or substantially all
of our assets.
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These covenants are subject to important exceptions, limitations
and qualifications as described in Description of Exchange
Notes Certain Covenants. |
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No Public Market |
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The exchange notes will be freely transferable but will be new
securities for which there will not initially be a market.
Accordingly, we cannot assure you whether a market for the
exchange notes will develop or as to the liquidity of any market. |
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Risk Factors |
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See Risk Factors and the other information in
this prospectus for a discussion of some of the factors you
should carefully consider before participating in the exchange
offer. |
13
RISK
FACTORS
You should carefully consider the risks described below
before participating in the exchange offer. The risks described
below are not the only ones facing the Company. Additional risks
and uncertainties not currently known to us or that we currently
deem to be immaterial may also materially and adversely affect
our business or results of operations in the future. Any of the
following risks could materially adversely affect our business,
financial condition or results of operations. In such case, you
may lose all or part of your original investment in the
notes.
Risks
Related to Our Indebtedness and Certain Other
Obligations
You
may have difficulty selling the outstanding notes that you do
not exchange.
If you do not exchange your outstanding notes for exchange notes
in the exchange offer, you will continue to be subject to the
restrictions on transfer of your outstanding notes described in
the legend on your outstanding notes. The restrictions on
transfer of your outstanding notes arise because we issued the
outstanding notes under exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, you may only
offer or sell the outstanding notes if they are registered under
the Securities Act and applicable state securities laws, or
offered and sold under an exemption from these requirements.
Except as required by the Registration Rights Agreement, we do
not intend to register the outstanding notes under the
Securities Act. The tender of outstanding notes under the
exchange offer will reduce the principal amount of the currently
outstanding notes. Due to the corresponding reduction in
liquidity, this may have an adverse effect upon, and increase
the volatility of, the market price of any currently outstanding
notes that you continue to hold following completion of the
exchange offer.
Our
substantial debt could negatively impact our business, prevent
us from fulfilling outstanding debt obligations and adversely
affect our financial condition and our ability to meet our
obligations under the notes.
We have a substantial amount of debt. At October 1, 2011,
we had approximately $1.2 billion of total debt
outstanding. The terms of our outstanding debt, including the
exchange notes, the outstanding notes, the 10% Senior Notes due
2018 (the 10% Notes), our ABL Facility, and our Term
Loan Facility limit, but do not prohibit, us from incurring
additional debt. If additional debt is added to current debt
levels, the related risks described below could intensify. See
also the discussion in Description of Other
Indebtedness concerning the terms and conditions of our
debt covenants.
Our substantial debt has or could have important adverse
consequences to you, including the following:
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our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, refinancing indebtedness or
other purposes could be impaired;
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a substantial portion of our cash flow from operations will be
dedicated to paying principal and interest on our debt, thereby
reducing funds available for expansion or other purposes;
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we are more leveraged than some of our competitors, which may
result in a competitive disadvantage;
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we are vulnerable to interest rate increases, as certain of our
borrowings, including those under the ABL Facility and the Term
Loan Facility, are at variable rates;
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our failure to comply with the restrictions in our financing
agreements would have a material adverse effect on us and our
ability to meet our obligations under the notes and certain of
our borrowings;
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we are more vulnerable to changes in general economic conditions
than companies with less or no debt;
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we face limitations on our ability to make strategic
acquisitions, invest in new products or capital assets or take
advantage of business opportunities; and
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we are limited in our flexibility in planning for, or reacting
to, changes in our business and the industries in which we
operate.
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14
The
terms of our debt covenants impose restrictions on how we
conduct our business and could limit our ability to raise
additional funds.
The agreements that govern the terms of our debt, including the
respective indentures that govern the outstanding notes and the
exchange notes and our 10% Notes, and the credit agreements
that govern our ABL Facility and Term Loan Facility, contain
covenants that restrict our ability and the ability of our
subsidiaries to:
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incur additional indebtedness;
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pay dividends or make other distributions;
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make loans or investments;
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incur certain liens;
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enter into transactions with affiliates; and
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consolidate, merge or sell assets.
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There are limitations on our ability to incur the full
$300.0 million of commitments under the ABL Facility.
Availability is limited to the lesser of the borrowing base
under the ABL Facility and $300.0 million. As of
December 16, 2011, we had approximately $52.0 million
in outstanding borrowings and approximately $14.7 million
in outstanding letters of credit under the ABL Facility. Based
on the borrowing base calculations as of December 9, 2011,
at December 16, 2011 we had excess availability of
approximately $189.0 million under the ABL Facility and
approximately $150.6 million of excess availability before
triggering the cash deposit requirements. See Description
of Other Indebtedness Senior Secured Asset-Based
Revolving Credit Facility.
We will be required to deposit cash from our material deposit
accounts (including all concentration accounts) daily in
collection accounts maintained with the administrative agent
under the ABL Facility, which will be used to repay outstanding
loans and cash collateralized letters of credit if,
(i) excess availability (as defined in the ABL Facility)
falls below the greater of $35.0 million or 15% of the
borrowing base or (ii) an event of default has occurred and
is continuing. In addition, under the ABL Facility, if
(i) excess availability falls below the greater of
$30.0 million or 12.5% of the borrowing base or
(ii) an event of default has occurred and is continuing, we
will be required to satisfy and maintain a consolidated fixed
charge coverage ratio measured on a trailing four quarter basis
of not less than 1.1 to 1.0. Our ability to meet the required
consolidated fixed charge coverage ratio can be affected by
events beyond our control. A breach of any of these covenants
could result in a default under the ABL Facility.
A breach of the covenants under the indentures that govern the
exchange notes and the outstanding notes and our 10% Notes
or the credit agreements that govern the ABL Facility and the
Term Loan Facility could result in an event of default under the
applicable indebtedness. Such default may allow the creditors to
accelerate the related debt and may result in the acceleration
of any other debt to which a cross-acceleration or cross-default
provision applies. In addition, an event of default under the
ABL Facility would permit the lenders under the ABL Facility to
terminate all commitments to extend further credit under that
facility. Furthermore, if we were unable to repay the amounts
due and payable under our ABL Facility or Term Loan Facility,
the lenders to the ABL Facility or the Term Loan Facility,
respectively could proceed against the collateral granted to
them to secure that indebtedness. In the event our noteholders
or lenders accelerate the repayment of our borrowings, we can
provide no assurances that we and our subsidiaries would have
sufficient assets to repay such indebtedness. As a result of
these restrictions, we may be:
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limited in how we conduct our business;
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unable to raise additional debt or equity financing to operate
during general economic or business downturns;
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unable to compete effectively or to take advantage of new
business opportunities; or
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grow in accordance with our plans.
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15
Despite
current indebtedness levels, we and our subsidiaries may still
be able to incur substantially more debt. This could further
exacerbate the risks associated with our substantial
leverage.
We and our subsidiaries may be able to incur substantial
additional indebtedness in the future. The terms of the credit
agreements governing the ABL Facility and the Term Loan Facility
and the indentures governing the 10% Notes and the outstanding
notes include limitations on our ability and the ability of our
subsidiaries to incur additional indebtedness, but permit us to
incur additional indebtedness, including additional secured
indebtedness. The indenture governing the exchange notes offered
hereby will permit additional secured debt in certain
circumstances, and those borrowings would rank effectively
senior to the exchange notes and the note guarantees, to the
extent of the value of the collateral securing such borrowings.
The indenture governing the exchange notes offered hereby will
permit additional unsecured debt, and such borrowings would
effectively rank equally with the notes and the note guarantees
to the extent of the value of the collateral securing such
borrowings. If new debt is added to our subsidiaries
currently anticipated debt levels, the related risks that we and
they now face could increase. See Description of Other
Indebtedness and Description of Exchange
Notes Certain Covenants Incurrence of
Indebtedness and Issuance of Preferred Stock.
We may
be unable to generate sufficient cash to service all of our
indebtedness, including the notes, and other liquidity
requirements and may be forced to take other actions to satisfy
such requirements, which may not be successful.
We will be required to repay all amounts outstanding under our
ABL Facility in 2015, our Term Loan Facility in 2017, our
10% Notes by 2018 and all amounts outstanding under the
outstanding notes and the exchange notes offered hereby in 2021.
We will be required to make scheduled quarterly payments each
equal to 0.25% of the original principal amount of the Term Loan
Facility, with the balance due in 2017. At October 1, 2011,
we had outstanding borrowings under these obligations of
approximately $1.2 billion (excluding unamortized debt
discount of approximately $14.8 million), including
outstanding borrowings under the outstanding notes of
approximately $500.0 million. In addition, we are currently
obligated to make periodic principal and interest payments under
the 10% Notes, the Term Loan Facility, the ABL Facility,
the outstanding notes, as well as other indebtedness, and,
following the consummation of this exchange offer, we will be
obligated to make periodic principal and interest payments under
the exchange notes semi-annually. Our ability to make payments
on and to refinance our indebtedness and to fund planned capital
expenditures will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control.
We expect that we will need to access the capital markets in the
future in order to refinance all amounts outstanding under the
10% Notes, the ABL Facility, the Term Loan Facility, the
outstanding notes and the exchange notes offered hereby, as we
do not anticipate generating sufficient cash flow from
operations to repay such amounts in full. We cannot assure you
that funds will be available to us in the capital markets,
together with cash generated from operations, in an amount
sufficient to enable us to pay our indebtedness or to fund our
other liquidity needs. We cannot assure you that we will be able
to refinance any of our indebtedness, including the
10% Notes, the Term Loan Facility, the ABL Facility, the
outstanding notes and the exchange notes offered hereby, on
commercially reasonable terms or at all. If we cannot service
our indebtedness, we may have to take actions such as selling
assets, seeking additional equity or reducing or delaying
capital expenditures, strategic acquisitions, investments and
alliances. We cannot assure you that any such actions, if
necessary, could be effected on commercially reasonable terms or
at all.
For further information regarding our yearly contractual
obligations and sources of liquidity, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
16
Your
right to receive payments on the notes is effectively junior to
those lenders who have a security interest in our
assets.
Our obligations under the notes and our guarantors
obligations under their guarantees of the notes are unsecured,
but our obligations and the obligations of each guarantor under
the Term Loan Facility are secured by a first-priority lien on
substantially all of our domestic subsidiaries tangible
and intangible assets, except those assets securing the ABL
Facility on a first-priority basis. The Term Loan Facility has a
second-priority lien on the ABL Facilitys first-priority
collateral. Obligations under the U.S. facility under our
ABL Facility are unconditionally guaranteed by substantially all
existing and future, direct and indirect, wholly-owned domestic
subsidiaries and in any event by all subsidiaries that guarantee
the exchange notes offered hereby. All obligations under our ABL
Facility, and the guarantees of those obligations, are secured,
subject to certain exceptions, by substantially all of our
assets and the assets of the guarantors, including a
first-priority security interest in personal property consisting
of accounts receivable, inventory, cash, deposit accounts, and
certain related assets and proceeds of the foregoing, and a
second-priority security interest in, and mortgages on,
substantially all of our material owned real property and
equipment and all assets that secure the Term Loan Facility on a
first-priority basis. The obligations of our Canadian
subsidiaries that are borrowers of the Canadian
sub-facility
under the ABL Facility are secured by a first-priority security
interest in personal property consisting of accounts receivable
and inventory of certain Canadian subsidiaries. Therefore,
claims of the lenders under the ABL facility and the lenders
under the Term Loan Facility will have priority with respect to
the assets securing their indebtedness over the claims of
holders of the notes offered hereby to the extent of the value
of the assets securing such other indebtedness.
If we are declared bankrupt or insolvent, or if we default under
the ABL Facility or under the Term Loan Facility, the lenders
under each such facility could accelerate the related debt,
which may result in the acceleration of any other debt to which
a cross-acceleration or cross-default provision applies. If we
were unable to repay such indebtedness, the lenders under either
such facility could foreclose on the pledged assets to the
exclusion of holders of the notes offered hereby, even if an
event of default exists under the indenture governing the
exchange notes offered hereby at such time. Holders of the
exchange notes offered hereby will participate ratably with all
holders of our unsecured indebtedness that is deemed to be of
the same class as the notes and the note guarantees, and
potentially with all of our other general creditors, based upon
the respective amounts owed to each holder or creditor, in the
remaining assets. As a result, holders of the notes may receive
less, ratably, than lenders under the ABL Facility or the Term
Loan Facility, to the extent of the value of property and assets
securing such indebtedness.
Furthermore, if the lenders foreclose and sell the pledged
equity interests in any subsidiary guarantor under the notes,
then that guarantor will be released from its guarantee of the
notes automatically and immediately upon such sale. In any such
event, because the notes will not be secured by any of our
assets or the equity interests in subsidiary guarantors, it is
possible that there would be no assets remaining from which your
claims could be satisfied or, if any assets remained, they might
be insufficient to satisfy your claims fully. See
Description of Other Indebtedness. At
October 1, 2011, we have total secured indebtedness of
approximately $432.2 million.
If we
are unable to access funds generated by our subsidiaries, we may
not be able to meet our financial obligations.
Because we conduct our operations through our subsidiaries, we
depend on those entities for dividends, distributions and other
payments to generate the funds necessary to meet our financial
obligations. Legal restrictions in the United States and foreign
jurisdictions applicable to our subsidiaries and contractual
restrictions in certain agreements governing current and future
indebtedness of our subsidiaries, as well as the financial
condition and operating requirements of our subsidiaries, may
limit our ability to obtain cash from our subsidiaries. All of
our subsidiaries are separate and independent legal entities and
have no obligation whatsoever to pay any dividends,
distributions or other payments to us.
17
If we
default on our obligations to pay our indebtedness, we may not
be able to make payments on the notes.
Our ability to make payments on, and to refinance, our
indebtedness, including the notes, and to fund planned capital
expenditures, will depend on our ability to generate cash in the
future which, in turn, is subject to general economic,
financial, competitive, regulatory and other factors, many of
which are beyond our control. Any default under the agreements
governing our indebtedness, including a default under the ABL
Facility or Term Loan Facility, that is not waived by the
required lenders, and the remedies sought by the holders of such
indebtedness, could prevent us from paying principal, premium,
if any, and interest on the notes and substantially decrease the
market value of the notes. If we are unable to generate
sufficient cash flow and are otherwise unable to obtain funds
necessary to meet required payments of principal, premium, if
any, and interest on our indebtedness, or if we otherwise fail
to comply with the various covenants, including financial and
operating covenants, in the instruments governing our
indebtedness (including covenants in the ABL Facility, the Term
Loan Facility and the indentures governing the outstanding notes
and the exchange notes and the 10% Notes), we could be in
default under the terms of the agreements governing such
indebtedness. In the event of such default, the holders of such
indebtedness could elect to declare all the funds borrowed
thereunder to be due and payable, together with accrued and
unpaid interest, the lenders under the ABL Facility or Term Loan
Facility could elect to terminate their commitments thereunder,
cease making further loans and institute foreclosure proceedings
against our assets, and we could be forced into bankruptcy or
liquidation. If our operating performance declines, we may in
the future need to obtain waivers from the required lenders
under ABL Facility or Term Loan Facility to avoid being in
default. If we breach our covenants under the ABL Facility or
Term Loan Facility and seek a waiver, we may not be able to
obtain a waiver from the required lenders. If this occurs, we
would be in default under the ABL Facility or Term Loan
Facility, the lenders could exercise their rights, as described
above, and we could be forced into bankruptcy or liquidation.
We may
not be able to satisfy our obligations to holders of the notes
upon a change of control.
Upon the occurrence of a change of control, as
defined in the indenture that governs the notes, each holder of
the notes will have the right to require us to purchase the
notes at a price equal to 101% of the principal amount thereof.
Our failure to purchase, or give notice of purchase of, the
notes would be a default under the indenture. In addition, a
change of control may constitute an event of default under the
ABL Facility and the Term Loan Facility and would also require
us to offer to purchase the outstanding notes and the
10% Notes at 101% of the principal amount thereof, together
with accrued and unpaid interest. A default under the ABL
Facility or the Term Loan Facility would result in an event of
default under the indentures governing the outstanding notes and
the exchange notes and the 10% Notes if the lenders
accelerate the debt under the ABL Facility or the Term Loan
Facility.
If a change of control occurs, we may not have enough assets to
satisfy all obligations under the ABL Facility, the Term Loan
Facility and the indentures governing the outstanding notes and
the notes offered hereby and the 10% Notes. Upon the
occurrence of a change of control, we could seek to refinance
the indebtedness under the ABL Facility, the Term Loan Facility,
the 10% Notes, the outstanding notes and the notes offered
hereby or obtain a waiver from the lenders under the ABL
Facility and the Term Loan Facility, and from the holders of the
10% Notes and the outstanding notes and you as a holder of
the exchange notes. We cannot assure you, however, that we would
be able to obtain a waiver or refinance our indebtedness on
commercially reasonable terms, if at all.
Holders
of the notes may not be able to determine when a change of
control giving rise to their right to have the notes repurchased
has occurred following a sale of substantially all
of our assets.
The definition of change of control in the indenture governing
the outstanding notes and exchange notes includes a phrase
relating to the sale of all or substantially all of
our assets. There is no precise established definition of the
phrase substantially all under applicable law.
Accordingly, the ability of a holder of notes to require us to
repurchase its notes as a result of a sale of less than all our
assets to another person may be uncertain.
18
Because
each guarantors liability under its guarantees may be
reduced to zero, voided or released under certain circumstances,
you may not receive any payments from some or all of the
guarantors.
You have the benefit of the guarantees of the subsidiary
guarantors. However, the guarantees by the subsidiary guarantors
are limited to the maximum amount that the subsidiary guarantors
are permitted to guarantee under applicable law. As a result, a
subsidiary guarantors liability under its guarantee could
be reduced to zero, depending upon the amount of other
obligations of such subsidiary guarantor. Further, under the
circumstances discussed more fully below, a court under federal
and state fraudulent conveyance and transfer statutes could void
the obligations under a guarantee or further subordinate it to
all other obligations of the guarantor. See
Under certain circumstances a court could
cancel the exchange notes or the related guarantees under
fraudulent conveyance laws. In addition, you will lose the
benefit of a particular guarantee if it is released under
certain circumstances described under Description of
Exchange Notes Note Guarantees.
Under
certain circumstances a court could cancel the exchange notes or
the related guarantees under fraudulent conveyance
laws.
Federal and state fraudulent transfer and conveyance statutes
may apply to the issuance of the exchange notes and the
incurrence of the guarantees. Under federal bankruptcy law and
comparable provisions of state fraudulent transfer or conveyance
laws, which may very from state to state, the exchange notes or
guarantees could be voided as a fraudulent transfer or
conveyance if (1) we or any of the guarantors, as
applicable, issued the exchange notes or incurred the guarantees
with the intent of hindering, delaying or defrauding creditors
or (2) we or any of the guarantors, as applicable, received
less than reasonably equivalent value or fair consideration in
return for either issuing the exchange notes or incurring the
guarantees and, in the case of (2) only, one of the
following is also true at the time thereof.
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we or any of the guarantors, as applicable, were insolvent or
rendered insolvent by reason of the issuance of the exchange
notes or the incurrence of the guarantees;
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the issuance of the exchange notes or the incurrence of the
guarantees left us or any of the guarantors, as applicable, with
an unreasonably small amount of capital to carry on the business;
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we or any of the guarantors intended to, or believed that we or
such guarantor would, incur debts beyond our or such
guarantors ability to pay as they mature; or
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we or any of the guarantors was a defendant in an action for
money damages, or had a judgment for money damages docketed
against us or such guarantor if, in either case, after final
judgment, the judgment is unsatisfied.
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If a court were to find that the issuance of the exchange notes
or the incurrence of the guarantee was a fraudulent transfer or
conveyance, the court could void the payment obligations under
the exchange notes or such guarantee or further subordinate the
exchange notes or such guarantee to presently existing and
future indebtedness of ours or of the related guarantor, or
require the holders of the exchange notes to repay any amounts
received with respect to such guarantee. In the event of a
finding that a fraudulent transfer or conveyance occurred, you
may not receive any repayment on the exchange notes. Further,
the voidance of the exchange notes could result in an event of
default with respect to our and our subsidiaries other
debt that could result in acceleration of such debt.
As a general matter, value is given for a transfer or an
obligation if, in exchange for the transfer or obligation,
property is transferred or an antecedent debt is secured or
satisfied. A debtor will generally not be considered to have
received value in connection with a debt offering if the debtor
uses the proceeds of that offering to make a dividend payment or
otherwise retire or redeem equity securities issued by the
debtor. We cannot be certain as to the standards a court would
use to determine whether or not we or the guarantors were
solvent at the relevant time or, regardless of the standard that
a court uses, that the issuance of the guarantees would not be
further subordinated to our or any of our guarantors other
debt.
19
A
lowering or withdrawal of the ratings assigned to our debt
securities by rating agencies may increase our future borrowing
costs and reduce our access to capital.
Our debt currently has a non-investment grade rating, and there
can be no assurances that any rating assigned will remain for
any given period of time or that a rating will not be lowered or
withdrawn entirely by a rating agency if, in that rating
agencys judgment, future circumstances relating to the
basis of the rating, such as adverse changes, so warrant. Credit
ratings are not recommendations to purchase, hold or sell the
notes, and may be revised or withdrawn at any time.
Additionally, credit ratings may not reflect the potential
effect of risks relating to the structure or marketing of the
notes. If any credit rating initially assigned to the notes is
subsequently lowered or withdrawn for any reason, you may not be
able to resell your notes without a substantial discount.
There
is no established trading market for the notes, and you may not
be able to sell them quickly or at the price that you
paid.
The exchange notes are a new issue of securities and will be
freely transferable, but there is no established trading market
for the notes. Accordingly, we cannot assure you whether a
market for the exchange notes will develop or as to the
liquidity of any market.
We also cannot assure you that you will be able to sell your
outstanding notes or exchange notes at a particular time or that
the prices that you receive when you sell will be favorable. We
also cannot assure you as to the level of liquidity of the
trading market for the exchange notes or, in the case of any
holders of the notes that do not exchange them, the trading
market for the outstanding notes following the exchange offer.
Future trading prices of the outstanding notes and exchange
notes will depend on many factors, including:
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our operating performance and financial condition;
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our ability to complete the offer to exchange the outstanding
notes for the exchange notes;
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the interest of securities dealers in making a market; and
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the market for similar securities.
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Historically, the market for non-investment grade debt has been
subject to disruptions that have caused volatility in prices. It
is possible that the market for the outstanding notes and
exchange notes will be subject to disruptions. Any disruptions
may have a negative effect on noteholders, regardless of our
prospects and financial performance.
Claims
of holders of the notes will be structurally subordinated to
claims of creditors of certain of our subsidiaries that will not
guarantee the notes.
The exchange notes will not be guaranteed by certain of our
subsidiaries, including all of our
non-U.S. subsidiaries.
Accordingly, claims of holders of the exchange notes will be
structurally subordinated to the claims of creditors of these
non-guarantor subsidiaries, including trade creditors. All
obligations of our non-guarantor subsidiaries will have to be
satisfied before any of the assets of such subsidiaries would be
available for distribution, upon a liquidation or otherwise, to
us or a guarantor of the notes. The indenture governing the
exchange notes will permit these subsidiaries to incur certain
additional debt and will not limit their ability to incur other
liabilities that are not considered indebtedness under the
indenture.
Our non-guarantor subsidiaries accounted for approximately
$330.5 million and $350.3 million, or 20.6% and 18.4%
of our consolidated net sales (excluding intercompany sales) for
the first nine months ended October 1, 2011 and the year
ended December 31, 2010 and approximately
$1.9 million, or 5.2% of our operating earnings for the
first nine months ended October 1, 2011. Additionally,
excluding intercompany assets and liabilities, our non-guarantor
subsidiaries accounted for approximately $326.7 million and
$310.0 million, or 16.5% and 15.7% of our consolidated
total assets, and approximately $182.8 million and
$191.4 million or 9.7% and 10.6% of our total liabilities,
as of October 1, 2011 and December 31, 2010,
respectively.
20
Our
common stockholders exert significant influence over us. Their
interests may not coincide with yours and they may make
decisions with which you may disagree.
Funds affiliated with Ares Management LLC (Ares)
owned, in the aggregate, approximately 35.09% of the voting
power of our outstanding common stock as of November 15,
2011. Other stockholders, including Fidelity, Gates Capital
Management, Inc. and Capital Research and Management, also own
significant portions of our common stock. As a result, these
stockholders, acting individually or together, control
substantially all matters requiring stockholder approval,
including the election of directors and the approval of
significant corporate transactions. In addition, this
concentration of equity ownership may delay or prevent a change
in control of the Company and may make some transactions more
difficult or impossible without the support of these
stockholders. The interests of these stockholders may not always
coincide with our interests as a company or the interests of
other stockholders. Accordingly, these stockholders could cause
us to enter into transactions or agreements that you would not
approve or make decisions with which you may disagree.
In addition, several of our directors and officers are
associated with Ares. While our directors and officers have a
fiduciary duty to make decisions in our interests and the
interests of Norteks stockholders, those affiliated with
Ares may have a fiduciary duty to exercise rights in a manner
beneficial to Ares. As a result of these conflicts, the
Companys directors and officers may feel obligated to take
actions that benefit Ares as opposed to us and holders of the
notes.
Risks
Related to Our Business
Our
business is affected by global economic
conditions.
Our results of operations are directly influenced by the
conditions in the global economy. As a result of the global
economic recession, U.S. and foreign economies have
experienced and continue to experience significant declines in
employment, household wealth, property values, consumer spending
and lending. Businesses, including Nortek and many of its
customers, have faced and may continue to face weakened demand
for products and services, difficulty obtaining access to
financing, increased funding costs and barriers to expanding
operations. Our results of operations have been negatively
impacted by the global economic recession and we can provide no
assurance that our results of operations will improve.
Our
business is dependent upon the levels of remodeling and
replacement activity and new construction activity which have
been negatively impacted by the economic downturn and the
instability of the credit markets.
Critical factors affecting our future performance, including our
level of sales, profitability and cash flows are the levels of
residential and
non-residential
remodeling, replacement and construction activity. The level of
new residential and non-residential construction activity and,
to a lesser extent, the level of residential remodeling and
replacement activity are affected by seasonality and cyclical
factors such as interest rates, inflation, consumer spending,
employment levels and other macroeconomic factors, over which we
have no control. Any decline in economic activity as a result of
these or other factors typically results in a decline in new
construction and, to a lesser extent, residential remodeling and
replacement purchases, which would result in a decrease in our
sales, profitability and cash flows. Instability in the credit
and financial markets, troubles in the mortgage market, the
level of unemployment and the decline in home values have had a
negative impact on residential new construction activity,
consumer disposable income and spending on home remodeling and
repair expenditures. These challenging market conditions are
expected to continue for the foreseeable future and, in the near
term, these conditions may further deteriorate. These factors
have had an adverse effect on our operating results for the
first nine months of 2011, and the years ended December 31,
2010 and 2009 and may continue to have an adverse effect on our
operating results in future periods.
Our outlook for the remainder of 2011 is for the housing markets
to remain weak. Continued low consumer confidence, high
unemployment levels and a continued high level of foreclosures
are expected to continue to depress the housing markets. The
non-residential market, which slowed in 2010, is expected to
remain weak throughout 2011. These continued depressed market
conditions, together with commodity cost pressures, continue to
challenge our 2011 performance.
21
Fluctuations
in the cost or availability of raw materials and components and
increases in freight and other costs could have an adverse
effect on our business.
We are dependent upon raw materials and purchased components,
including, among others, steel, motors, compressors, copper,
packaging material, aluminum, plastics, glass and various
chemicals and paints that we purchase from third parties. As a
result, our results of operations, cash flows and financial
condition may be adversely affected by increases in costs of raw
materials or components, or by limited availability of raw
materials or components. We do not typically enter into
long-term supply contracts for raw materials and components. In
addition, we generally do not hedge against our supply
requirements. Accordingly, we may not be able to obtain raw
materials and components from our current or alternative
suppliers at reasonable prices in the future, or may not be able
to obtain raw materials and components on the scale and within
the time frames we require. Further, if our suppliers are unable
to meet our supply requirements, we could experience supply
interruptions
and/or cost
increases. If we are unable to find alternate suppliers or pass
along these additional costs to our customers, these
interruptions
and/or cost
increases could adversely affect our results of operations, cash
flows and financial condition.
During the first nine months of 2011, we experienced higher
material costs as a percentage of net sales as compared to the
same period of 2010 related primarily to changes in product mix,
higher prices related to the purchase of purchased components,
such as electrical components, plastics and packaging, as well
as from lower sales prices in the C-HVAC segment for jobs signed
during the second half of 2010 and delivered in the first half
of 2011. A portion of these increases was offset by strategic
sourcing initiatives and improvements in manufacturing
processes. Should these price levels continue or increase
further there can be no assurance that we will be able to
sufficiently increase sales prices to offset the adverse effect
on earnings from rising material costs.
Rising oil and other energy prices could have an adverse effect
on our freight costs. Excluding the effect of acquisitions,
freight costs remained unchanged during the third quarter of
2011 as compared to the third quarter of 2010 and increased
slightly during the first nine months of 2011 as compared to the
first nine months of 2010. This increase in freight costs during
the first nine months of 2011 is primarily due to increased fuel
costs worldwide. These increases were partially offset by a
decrease in ocean freight costs in the first nine months of 2011
due to overcapacity in the ocean market.
Continued strategic sourcing initiatives and other improvements
in manufacturing efficiency, as well as price increases, help to
mitigate fluctuations in these costs. However, there can be no
assurance that we will be able to offset any or all material or
other cost increases in any future periods.
The
availability of certain raw materials and component parts from
sole or limited sources of supply may have an adverse effect on
our business.
Sources of raw materials or component parts for certain of our
operations may be dependent upon limited or sole sources of
supply which may impact our ability to manufacture finished
product. While we continually review alternative sources of
supply, there can be no assurance that we will not face
disruptions in sources of supply which could adversely affect
our results of operations, cash flows and financial position.
Weather
fluctuations may negatively impact our business.
Weather fluctuations may adversely affect our operating results
and our ability to maintain sales volume. In our R-HVAC segment,
operations may be adversely affected by unseasonably warm
weather in the months of November to February and unseasonably
cool weather in the months of May to August, which has the
effect of diminishing customer demand for heating and air
conditioning products. In all of our segments, adverse weather
conditions at any time of the year may negatively affect overall
levels of new construction and remodeling and replacement
activity, which in turn may lead to a decrease in sales. Many of
our operating expenses are fixed and cannot be reduced during
periods of decreased demand for our products. Accordingly, our
results of operations and cash flows will be negatively impacted
in quarters with lower sales due to weather fluctuations.
22
If we
fail to identify suitable acquisition candidates or successfully
integrate the businesses we have acquired or will acquire in the
future, our business could be negatively impacted.
Historically, we have engaged in a significant number of
acquisitions, and those acquisitions have contributed
significantly to our growth in sales and operating results.
However, we cannot provide assurance that we will continue to
locate and secure acquisition candidates on terms and conditions
that are acceptable to us. If we are unable to identify
attractive acquisition candidates, our growth could be impaired.
Acquisitions involve numerous risks, including:
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the difficulty and expense that we incur in connection with the
acquisition, including those acquisitions that we pursue but do
not ultimately consummate;
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the difficulty and expense that we incur in the subsequent
integration of the operations of the acquired company into our
operations;
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adverse accounting consequences of conforming the acquired
companys accounting policies to our accounting policies;
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the difficulties and expense of developing, implementing and
monitoring systems of internal controls at acquired companies,
including disclosure controls and procedures and internal
controls over financial reporting;
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the difficulty in operating acquired businesses;
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the diversion of managements attention from our other
business concerns;
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the potential loss of customers or key employees of acquired
companies;
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the impact on our financial condition due to the timing of the
acquisition or the failure to meet operating expectations for
the acquired business; and
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the assumption of unknown liabilities of the acquired company.
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We cannot assure you that any acquisition we have made or may
make in the future will be successfully integrated into our
on-going operations or that we will achieve any expected cost
savings from any acquisition. If the operations of an acquired
business do not meet expectations, our profitability and cash
flows may be impaired and we may be required to restructure the
acquired business or write-off the value of some or all of the
assets of the acquired business.
Since January 1, 2010, we have consummated three
acquisitions within our TECH segment. Additionally, within the
C-HVAC segment, we acquired a forty-nine percent minority
interest in a newly formed operating joint venture. See
Note B, Acquisitions and Other Investments,
to the unaudited condensed consolidated financial statements
and Note 5, Acquisitions, to the
consolidated financial statements, included elsewhere herein.
We
continue to evaluate potential restructurings, business
shutdowns and integrations focused on improving future cash
flows of the business.
We continue to evaluate potential restructurings, business
shutdowns and integrations focused on improving future cash
flows of the business. These restructurings, business shutdowns
and integrations involve numerous risks in their implementations
including increased costs, business disruption, management
distraction and potential asset impairment among others and may
be unsuccessful. In addition, restructurings of international
operations may be more costly due to differing labor laws,
business practices and governmental restrictions, processes and
requirements.
During 2010, we announced the formation of our new audio/visual
control company within the TECH segment called The AVC Group,
LLC (The AVC Group). Upon the formation of The AVC
Group, the operations of Niles Audio Corporation, Elan Home
Systems, L.L.C. and Xantech LLC were combined to improve the
overall operational efficiencies of these companies. In
conjunction with the formation of The AVC Group, we are in the
process of consolidating and shutting down certain of our
facilities and, as a result,
23
recorded net expenses within selling, general and administrative
expense, net (SG&A) of approximately
$0.4 million for the first nine months of 2011 consisting
of severance and other expenses. During 2010, we recorded
approximately $2.8 million (of which approximately
$2.6 million was recorded within SG&A) of severance
and other expenses related to this activity, of which
approximately $0.4 million was recorded in SG&A in the
third quarter of 2010. We do not anticipate recording any
additional expenses related to severance or other costs
associated with this activity.
In February 2011, management approved an initial plan to reduce
costs and improve production efficiencies at the Companys
subsidiary, Best, and during the third quarter of 2011, our
Board of Directors approved additional plans that are expected
to further improve the overall operational efficiencies of Best.
During the third quarter and first nine months of 2011, we
recorded expenses within SG&A of the RVP segment of
approximately $0.1 million and $0.6 million,
respectively, related to severance and other costs. We also
recorded additional severance costs of approximately
$0.4 million and $1.7 million within cost of products
sold during the third quarter and first nine months of 2011,
respectively. In the fourth quarter of 2011, we transferred
certain operations from Italy to Poland in accordance with the
plan and have reached a tentative agreement with the union
regarding severance benefits, subject to the approval of 100% of
the terminated employees. We anticipate recording additional
expenses of between approximately $10 million and
$13 million related to this restructuring plan consisting
of severance and other expenses in the fourth quarter of 2011
and through 2012.
Because
we compete against competitors with substantially greater
resources, we face external competitive risks that may
negatively impact our business.
Our RVP and TECH segments compete with many domestic and
international suppliers in various markets. We compete with
suppliers of competitive products primarily on the basis of
quality, distribution, delivery and price. Some of our
competitors in these markets have greater financial and
marketing resources than that of our RVP and TECH segments.
Our R-HVAC segment competes in both the site-built and
manufactured housing markets on the basis of breadth and quality
of product line, distribution, product availability and price.
Most of our residential HVAC competitors have greater financial
and marketing resources and the products of certain of our
competitors may enjoy greater brand awareness than our
residential HVAC products.
Our C-HVAC segment competes primarily on the basis of
engineering support, quality, design and construction
flexibility and total installed system cost. Most of our
competitors in the commercial HVAC market have greater financial
and marketing resources and enjoy greater brand awareness than
we enjoy.
Competitive factors could require us to reduce prices or
increase spending on product development, marketing and sales,
either of which could adversely affect our operating results.
Because
we have substantial operations outside the United States, we are
subject to the economic and political conditions of the United
States and foreign nations.
We have manufacturing facilities in several countries outside of
the United States. In 2010, we sold products in approximately
100 countries other than the United States. Foreign net sales,
which are attributed based upon the location of our subsidiary
responsible for the sale, were approximately 22% and 20% for the
first nine months of 2011 and 2010, respectively, and were
approximately 20% of consolidated net sales for both 2010 and
2009, respectively. Our foreign operations are subject to a
number of risks and uncertainties, including the following:
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foreign governments may impose limitations on our ability to
repatriate funds;
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foreign governments may impose withholding or other taxes on
remittances and other payments to us, or the amount of any such
taxes may increase;
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an outbreak or escalation of any insurrection, armed conflict or
act of terrorism, or other forms of political, social or
economic instability, may occur;
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natural disasters may occur, and local governments may have
difficulties in responding to these events;
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the Unites States and foreign governments currently regulate
import and export of our products and those of our suppliers and
may impose additional limitations on imports or exports of our
products or the products of our suppliers;
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foreign governments may nationalize foreign assets or engage in
other forms of governmental protectionism;
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foreign governments may impose or increase investment barriers,
customs or tariffs, or other restrictions affecting our
business; and
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development, implementation and monitoring of systems of
internal controls of our international operations, including
disclosure controls and procedures and internal controls over
financial reporting, may be difficult and expensive.
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The occurrence of any of these conditions could disrupt our
business in particular countries or regions of the world, or
prevent us from conducting business in particular countries or
regions, which could reduce sales and adversely affect
profitability. In addition, we rely on dividends and other
payments or distributions from our subsidiaries, including our
foreign subsidiaries, to meet our debt obligations. If foreign
governments impose limitations on our ability to repatriate
funds or impose or increase taxes on remittances or other
payments to us, the amount of dividends and other distributions
we receive from our foreign subsidiaries could be reduced, which
could reduce the amount of cash available to us to meet our debt
obligations.
Our
foreign operations are subject to anti-corruption
laws.
Certain of our operations are located outside of the United
States, primarily in Canada, China, the United Kingdom and
Italy. We are subject to the Foreign Corrupt Practices Act
(FCPA), which generally prohibits
U.S. companies and their intermediaries from making corrupt
payments to foreign officials for the purpose of obtaining or
keeping business or otherwise obtaining favorable treatment, and
requires companies to maintain adequate record-keeping and
internal accounting practices to accurately reflect the
transactions of the company. The FCPA applies to companies,
individual directors, officers, employees and agents. Under the
FCPA, U.S. companies may be held liable for actions taken
by strategic or local partners or representatives. If we or our
intermediaries fail to comply with the requirements of the FCPA,
governmental authorities in the United States could seek to
impose civil
and/or
criminal penalties, which could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.
Fluctuations
in currency exchange rates could adversely affect our revenues,
profitability and cash flows.
Our foreign operations expose us to fluctuations in currency
exchange rates and currency devaluations. We report our
financial results in U.S. dollars, but a portion of our
sales and expenses are denominated in Euros, Canadian dollars
and other foreign currencies. As a result, if the value of the
U.S. dollar increases relative to the value of the Euro,
Canadian dollar and other currencies, our levels of revenue and
profitability will decline since the translation of a certain
number of other currencies into U.S. dollars for financial
reporting purposes will represent fewer U.S. dollars.
Conversely, if the value of the U.S. dollar decreases
relative to the value of the Euro, Canadian dollar and other
currencies, our levels of revenue and profitability will
increase since the translation of a certain number of other
currencies into U.S. dollars for financial reporting
purposes will represent additional U.S. dollars.
In certain instances, we enter into transactions that are
denominated in a currency other than the U.S. dollar. At
the date the transaction is recognized, each asset, liability,
revenue, expense, gain or loss arising from the transaction is
measured and recorded in U.S. dollars using the exchange
rate in effect at that date. At each balance sheet date,
recorded monetary balances denominated in a currency other than
the U.S. dollar are adjusted to the U.S. dollar using
the current exchange rate with gains or losses recorded in
currency translation adjustment and other, net. In addition, in
the case of sales to customers in certain locations, our sales
are denominated in U.S. dollars, Euros or Canadian dollars
but all or a substantial portion of our associated costs are
denominated in a different currency. As a result, changes in the
relative values of
25
U.S. dollars, Euros, Canadian dollars and Chinese Renminbi
and any such different currency will affect our profitability
and cash flows.
Varying
international business practices may adversely impact our
business and reputation.
We currently purchase raw materials, components and finished
products from various foreign suppliers. To the extent that any
such foreign supplier utilizes labor or other practices that
vary from those commonly accepted in the United States, our
business and reputation could be adversely affected by any
resulting litigation, negative publicity, political pressure, or
otherwise.
A
decline in our relations with key distributors and dealers, loss
of major customers or failures or delays in collecting payments
from major customers may negatively impact our
business.
Our operations depend upon our ability to maintain relations
with our independent distributors and dealers and we do not
typically enter into long-term contracts with them. If our key
distributors or dealers are unwilling to continue selling our
products, or if any of them merge with or are purchased by a
competitor, we could experience a decline in sales. If we are
unable to replace such distributors or dealers or otherwise
replace the resulting loss of sales, our business, results of
operations and cash flows could be adversely affected. For
example, an affiliated group of distributors of our residential
HVAC products has significantly reduced the amount of products
which they buy from us by approximately $29 million (or
53.6%) in the first nine months of 2011 as compared to the first
nine months of 2010. For 2010, approximately 50% of our
consolidated net sales were made through our independent
distributors and dealers, and our largest distributor or dealer
accounted for approximately 3.5% of consolidated net sales for
2010.
In addition, the loss of one or more of our other major
customers, or a substantial decrease in such customers
purchases from us, could have a material adverse effect on our
results of operations and cash flows. Because we do not
generally have binding long-term purchasing agreements with our
customers, there can be no assurance that our existing customers
will continue to purchase products from us. Our largest customer
(other than a distributor or dealer) accounted for approximately
4% of consolidated net sales for each of 2010 and 2009.
Further, a failure or delay in collecting payments due to us
from our major customers could negatively impact our business.
For example, a customer in our TECH segment that we began
shipping product to during the fourth quarter of 2009, owed us
payments of approximately $36.5 million as of
October 1, 2011 under an agreement with payment terms which
are extended beyond the normal payment terms of this segment.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources Risks and Uncertainties,
included elsewhere herein, for additional information on this
customer and the amounts involved. While we believe that we will
ultimately collect payment in full from this customer, we cannot
guarantee if or when we will receive payment. A failure to
collect payment from this customer or other major customers
could adversely affect our results of operations and cash flows.
Labor
disruptions or cost increases could adversely affect our
business.
A work stoppage at one of our facilities could cause us to lose
sales, incur increased costs and adversely affect our ability to
meet customers needs. A plant shutdown or a substantial
modification to employment terms (including the collective
bargaining agreements affecting our unionized employees) could
result in material gains or losses or the recognition of an
asset impairment. As collective bargaining agreements expire and
until negotiations are completed, it is not known whether we
will be able to negotiate collective bargaining agreements on
the same or more favorable terms as the current agreements, or
at all, without production interruptions, including labor
stoppages. At October 1, 2011, approximately 5.2% of our
employees are unionized, and from time to time the Company
experiences union organizing efforts directed at our non-union
employees. We may also experience labor cost increases or
disruptions in our non-union facilities in circumstances where
we must compete for employees with necessary skills and
experience or in tight labor markets.
26
We
must continue to innovate and improve our products to maintain
our competitive advantage.
Our ability to maintain and grow our market share depends in
part on the ability to continue to develop high quality,
innovative products. An important part of our competitive
strategy includes leveraging our distributor and dealer
relationships and our existing brands to introduce new products.
In addition, some of our HVAC products are subject to federal
minimum efficiency standards
and/or
protocols concerning the use of ozone-depleting substances that
have and are expected to continue to become more stringent over
time. We cannot assure you that our investments in product
innovation and technological development will be sufficient or
that we will be able to create and market new products to enable
us to successfully compete with new products or technologies
developed by our competitors or to meet heightened regulatory
requirements in the future.
Certain
of our operations and products are subject to environmental,
health and safety laws and regulations, which may result in
substantial compliance costs or otherwise adversely affect our
business.
Our operations are subject to numerous federal, state, local and
foreign laws and regulations relating to protection of the
environment, including those that impose limitations on the
discharge of pollutants into the air and water, establish
standards for the use, treatment, storage and disposal of solid
and hazardous materials and wastes and govern the cleanup of
contaminated sites. We have used and continue to use various
substances in our products and manufacturing operations, and
have generated and continue to generate wastes, which have been
or may be deemed to be hazardous or dangerous. As such, our
business is subject to and may be materially and adversely
affected by compliance obligations and other liabilities under
environmental, health and safety laws and regulations. These
laws and regulations affect ongoing operations and require
capital costs and operating expenditures in order to achieve and
maintain compliance. For example, the United States and other
countries have established programs for limiting the production,
importation and use of certain ozone depleting chemicals,
including HCFCs, a refrigerant used in our air conditioning and
heat pump products. Some of these chemicals have been banned
completely, and others have been phased out in the United
States. Modifications to the design of our products have been
made, and further modifications may be necessary, in order to
utilize alternative refrigerants.
We
could incur substantial costs, including cleanup costs, fines
and civil or criminal sanctions, as a result of violations of or
liabilities under environmental laws.
We could incur substantial costs, including cleanup costs, fines
and civil or criminal sanctions, and third-party property damage
or personal injury claims, as a result of violations of or
liabilities under environmental laws, or non-compliance with
environmental permits required at our facilities. Certain
environmental laws and regulations also impose liability,
without regard to knowledge or fault, relating to the existence
of contamination at or associated with properties used in our
current and former operations, or those of our predecessors, or
at locations to which current or former operations or those of
our predecessors have shipped waste for disposal. Contaminants
have been detected at certain of our former sites, and we have
been named as a potentially responsible party at several
third-party waste disposal sites. While we are not currently
aware of any such sites as to which material outstanding claims
or obligations exist, the discovery of additional contaminants
or the imposition of additional cleanup obligations at these or
other sites could result in significant liability. In addition,
we cannot be certain that identification of presently
unidentified environmental conditions, more vigorous enforcement
by regulatory agencies, enactment of more stringent laws and
regulations or other unanticipated events will not arise in the
future and give rise to material environmental liabilities or an
increase in compliance costs, which could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
We
face risks of litigation and liability claims on product
liability, workers compensation and other matters, the
extent of which exposure can be difficult or impossible to
estimate and which can negatively impact our business, financial
condition, results of operations and cash flows.
We are subject to legal proceedings and claims arising out of
our businesses that cover a wide range of matters, including
contract and employment claims, product liability claims,
warranty claims and claims for
27
modification, adjustment or replacement of component parts of
units sold. Product liability and other legal proceedings
include those related to businesses we have acquired or
properties we have previously owned or operated.
The development, manufacture, sale and use of our products
involve risks of product liability and warranty claims,
including personal injury and property damage arising from fire,
soot, mold and carbon monoxide. We currently carry insurance and
maintain reserves for potential product liability claims.
However, our insurance coverage may be inadequate if such claims
do arise, and any liability not covered by insurance could have
a material adverse effect on our business. The accounting for
self-insured plans requires that significant judgments and
estimates be made both with respect to the future liabilities to
be paid for known claims and incurred but not reported claims as
of the reporting date. To date, we have been able to obtain
insurance in amounts we believe to be appropriate to cover such
liability. However, our insurance premiums may increase in the
future as a consequence of conditions in the insurance business
generally, or our situation in particular. Any such increase
could result in lower profits or cause us to reduce our
insurance coverage. In addition, a future claim may be brought
against us, which would have a material adverse effect on us.
Any product liability claim may also include the imposition of
punitive damages, the award of which, pursuant to certain state
laws, may not be covered by insurance. Our product liability
insurance policies have limits that, if exceeded, may result in
material costs that would have an adverse effect on future
profitability. In addition, warranty claims are generally not
covered by our product liability insurance. Further, any product
liability or warranty issues may adversely affect our reputation
as a manufacturer of high-quality, safe products and could have
a material adverse effect on our business.
Product
recalls or reworks may adversely affect our financial condition,
results of operations and cash flows.
In the event we produce a product that is alleged to contain a
design or manufacturing defect, we could be required to incur
costs involved to recall or rework that product. While we have
undertaken several voluntary product recalls and reworks over
the past several years, additional product recalls and reworks
could result in material costs. Many of our products, especially
certain models of bath fans, range hoods, and residential
furnaces and air conditioners, have a large installed base, and
any recalls and reworks related to products with a large
installed base could be particularly costly. The costs of
product recalls and reworks are not generally covered by
insurance. In addition, our reputation for safety and quality is
essential to maintaining market share and protecting our brands.
Any recalls or reworks may adversely affect our reputation as a
manufacturer of high-quality, safe products and could have a
material adverse effect on our financial condition, results of
operations and cash flows. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Risks and Uncertainties, included
elsewhere herein.
Our
business operations could be significantly disrupted if we lost
members of our management team.
Our success depends to a significant degree upon the continued
contributions of our executive officers and key employees and
consultants, both individually and as a group. Our future
performance will be substantially dependent on our ability to
retain and motivate them. The loss of the services of any of our
executive officers or key employees and consultants could
prevent us from successfully executing our business strategy.
Our
business operations could be negatively impacted if we fail to
adequately protect our intellectual property rights, if we fail
to comply with the terms of our licenses or if third parties
claim that we are in violation of their intellectual property
rights.
We are highly dependent on certain of the brand names under
which we sell our products, including
Broan®
and
NuTone®
Failure to protect these brand names and other intellectual
property rights or to prevent their unauthorized use by third
parties could adversely affect our business. We seek to protect
our intellectual property rights through a combination of
trademark, copyright, patent and trade secret laws, as well as
confidentiality agreements. These protections may not be
adequate to prevent competitors from using our
28
brand names and trademarks without authorization or from copying
our products or developing products equivalent to or superior to
ours. We license several brand names from third parties. In the
event we fail to comply with the terms of these licenses, we
could lose the right to use these brand names. In addition, we
face the risk of claims that we are infringing third
parties intellectual property rights. Any such claim, even
if it is without merit, could be expensive and time-consuming;
could cause us to cease making, using, or selling certain
products that incorporate the disputed intellectual property;
could require us, if feasible, to redesign our products; could
divert management time and attention; and could require us to
enter into costly royalty or licensing arrangements.
Our
future financial condition and results of operations will not be
comparable by the adoption of fresh-start
accounting.
As a result of our bankruptcy reorganization, we have adopted
fresh-start accounting as of the Effective Date
pursuant to the Reorganizations topic of the Financial
Accounting Standards Board (the FASB) Accounting
Standards Codification (ASC). Accordingly, our
assets and liabilities have been adjusted to fair value, and
certain assets and liabilities not previously recognized in our
financial statements have been recognized under fresh-start
accounting. As a result, our financial condition and results of
operations from and after the Effective Date will not be
comparable, in various material respects, to our financial
condition and results of operations reflected in our
consolidated financial statements for the Predecessor periods.
Furthermore, the estimates and assumptions used to implement
fresh-start accounting are inherently subject to significant
uncertainties and contingencies beyond our control. Accordingly,
we cannot provide assurance that the estimates, assumptions and
values reflected in the valuations will be realized, and actual
results could vary materially, resulting in future impairment
charges. For further information about fresh-start accounting,
see Note 3, Fresh-Start Accounting
(Restated) Liabilities Subject to Compromise,
to the audited consolidated financial statements, included
elsewhere herein.
29
THE
EXCHANGE OFFER
Purpose
and Effect of the Exchange Offer
Under the Registration Rights Agreement, the Company and the
guarantors agreed to file a registration statement with respect
to an offer to exchange the outstanding notes for exchange notes
under the Securities Act within 270 days after
April 26, 2011 and to use reasonable best efforts to cause
such registration statement to be declared effective by the SEC
on or prior to 360 days after April 26, 2011. The
Company and the guarantors have also agreed to file under the
Securities Act a shelf registration statement for the resale of
the outstanding notes and guarantees if the exchange offer is
not available or cannot be effected within 390 days after
April 26, 2011. If the shelf registration statement is not
effective prior to April 20, 2012 or the exchange offer is
not consummated by May 21, 2012, additional interest on the
outstanding notes will accrue at a rate of 0.25% per annum
during the first
90-day
period and such rate shall increase by 0.25% per annum at the
end of each subsequent
90-day
period, but in no event shall additional interest exceed 1.00%
per annum.
Following the completion of the exchange offer, holders of
outstanding notes not tendered will not have any further
registration rights other than as set forth in the paragraphs
below, and, subject to certain exceptions, the outstanding notes
will continue to be subject to certain restrictions on transfer.
Subject to certain conditions, including the representations set
forth below, the exchange notes will be issued without a
restrictive legend and generally may be reoffered and resold
without registration under the Securities Act. In order to
participate in the exchange offer, a holder must represent to us
in writing, or be deemed to represent to us in writing, among
other things, that:
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the holder is not an affiliate of ours, as defined
in Rule 405 of the Securities Act;
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the holder is not engaged and does not intend to engage in, and
has no arrangement or understanding with any person to
participate in, a distribution of the exchange notes;
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the holder is acquiring the exchange notes in its ordinary
course of business;
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if such holder is a broker-dealer, such holder has acquired the
exchange notes for its own account in exchange for the
outstanding notes that were acquired as a result of
market-making activities or other trading activities (other than
outstanding notes acquired directly from us or any of its
affiliates) and that it will meet the requirements of the
Securities Act in connection with any resales of the exchange
notes (including delivery of a prospectus);
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the holder is not acting on behalf of any person who could not
truthfully and completely make the representations contained in
the foregoing bullet points.
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Under certain circumstances specified in the Registration Rights
Agreement, we may be required to file a shelf
registration statement covering resales of the outstanding notes
pursuant to Rule 415 under the Securities Act.
Based on an interpretation by the SECs staff set forth in
no-action letters issued to third parties unrelated to us, we
believe that, with the exceptions set forth below, the exchange
notes issued in the exchange offer may be offered for resale,
resold and otherwise transferred by the holder of exchange notes
without compliance with the registration and prospectus delivery
requirements of the Securities Act, unless the holder:
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is an affiliate, within the meaning of Rule 405
under the Securities Act, of ours;
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is a broker-dealer that purchased outstanding notes directly
from us for resale under Rule 144A or Regulation S or
any other available exemption under the Securities Act;
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acquired the exchange notes other than in the ordinary course of
the holders business;
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has an arrangement with any person to engage in the distribution
of the exchange notes; or
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is prohibited by any law or policy of the SEC from participating
in the exchange offer.
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Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the exchange notes cannot
rely on this interpretation by the SECs staff and must
comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer that receives
exchange notes for its own account in exchange for outstanding
notes, where such outstanding notes were acquired by such
broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange note.
See Plan of Distribution. Broker-dealers who
acquired outstanding notes directly from us and not as a result
of market-making activities or other trading activities may not
rely on the staffs interpretations discussed above, and
must comply with the prospectus delivery requirements of the
Securities Act in order to sell the exchange notes.
Terms of
the Exchange Offer
Upon the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal, we will accept any
and all outstanding notes validly tendered and not withdrawn
prior to 5:00 p.m., New York City time, on January 31,
2012, or such date and time to which we extend the exchange
offer. We will issue $1,000 in principal amount of exchange
notes in exchange for each $1,000 principal amount of
outstanding notes accepted in the exchange offer. Holders may
tender some or all of their outstanding notes pursuant to the
exchange offer. Outstanding notes may be tendered only in a
denomination equal to $2,000 and any integral multiples of
$1,000 in excess of $2,000.
The exchange notes will evidence the same debt as the
outstanding notes and will be issued under the terms of, and
entitled to the benefits of, the indenture relating to the
outstanding notes.
As of the date of this prospectus, $500.0 million in
aggregate principal amount of outstanding notes are outstanding.
This prospectus, together with the letter of transmittal, is
being sent to the registered holders of the outstanding notes.
We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act and the rules and
regulations of the SEC promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered outstanding
notes when, as and if we have given oral or written notice
thereof to U.S. Bank National Association, which is acting as
the exchange agent. The exchange agent will act as agent for the
tendering holders for the purpose of receiving the exchange
notes from us. If any tendered outstanding notes are not
accepted for exchange because of an invalid tender, the
occurrence of certain other events set forth under the heading
Conditions to the Exchange Offer, any
such unaccepted outstanding notes will be returned, without
expense, to the tendering holder of those outstanding notes
promptly after the expiration date unless the exchange offer is
extended.
Holders who tender outstanding notes in the exchange offer will
not be required to pay brokerage commissions or fees or, subject
to the instructions in the letter of transmittal, transfer taxes
with respect to the exchange of outstanding notes in the
exchange offer. We will pay all charges and expenses, other than
certain applicable taxes, applicable to the exchange offer. See
Fees and Expenses.
Expiration
Date; Extensions; Amendments
The expiration date shall be 5:00 p.m., New York City time,
on January 31, 2012, unless we, in our sole discretion,
extend the exchange offer, in which case the expiration date
shall be the latest date and time to which the exchange offer is
extended. In order to extend the exchange offer, we will notify
the exchange agent by oral or written notice prior to
9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date and will also
disseminate notice of any extension by press release or other
public announcement prior to 9:00 a.m., New York City time
on such date. Any such announcement will include the approximate
number of securities deposited as of the date of the extension.
We reserve the right, in our sole discretion:
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to delay accepting any outstanding notes, to extend the exchange
offer or, if any of the conditions set forth under
Conditions to the Exchange Offer shall
not have been satisfied, to terminate the exchange offer, by
giving oral or written notice of that delay, extension or
termination to the exchange agent; or
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to amend the terms of the exchange offer in any manner.
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Any delay in acceptance, extension, termination or amendment
will be followed as promptly as practicable by oral or written
notice to the registered holders of the outstanding notes. If we
amend the exchange offer in a manner that we determine to
constitute a material change, we will promptly disclose the
amendment in a manner reasonably calculated to inform the
holders of outstanding notes of that amendment , and it will
extend the offer period, if necessary, so that at least five
business days remain in the offer following notice of the
material change.
Procedures
for Tendering
When a holder of outstanding notes tenders, and we accept such
notes for exchange pursuant to that tender, a binding agreement
between us and the tendering holder is created, subject to the
terms and conditions set forth in this prospectus and the
accompanying letter of transmittal. Except as set forth below, a
holder of outstanding notes who wishes to tender such notes for
exchange must, on or prior to the expiration date:
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transmit a properly completed and duly executed letter of
transmittal, including all other documents required by such
letter of transmittal, to U.S. Bank National Association, which
will act as the exchange agent, at the address set forth below
under the heading Exchange Agent; or
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comply with DTCs Automated Tender Offer Program, or ATOP,
procedures described below.
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In addition, either:
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the exchange agent must receive the certificates for the
outstanding notes and the letter of transmittal;
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the exchange agent must receive, prior to the expiration date, a
timely confirmation of the book-entry transfer of the
outstanding notes being tendered, along with the letter of
transmittal or an agents message; or
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the holder must comply with the guaranteed delivery procedures
described below.
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The term agents message means a message,
transmitted to DTC and received by the exchange agent and
forming a part of a book-entry transfer, or book-entry
confirmation, which states that DTC has received an
express acknowledgement that the tendering holder agrees to be
bound by the letter of transmittal and that we may enforce the
letter of transmittal against such holder.
The method of delivery of the outstanding notes, the letters of
transmittal and all other required documents is at the election
and risk of the holders. If such delivery is by mail, we
recommend registered mail, properly insured, with return receipt
requested. In all cases, you should allow sufficient time to
assure timely delivery. No letters of transmittal or outstanding
notes should be sent directly to us.
Signatures on a letter of transmittal or a notice of withdrawal
must be guaranteed by an eligible institution unless the
outstanding notes surrendered for exchange are tendered:
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by a registered holder of the outstanding notes; or
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for the account of an eligible institution.
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An eligible institution is a firm which is a member
of a registered national securities exchange or a member of the
Financial Industry Regulatory Authority, Inc., or a commercial
bank or trust company having an office or correspondent in the
United States.
If outstanding notes are registered in the name of a person
other than the signer of the letter of transmittal, the
outstanding notes surrendered for exchange must be endorsed by,
or accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form to the exchange agent
and as determined by us in our sole discretion, duly executed by
the registered holder with the holders signature
guaranteed by an eligible institution.
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We will determine all questions as to the validity, form,
eligibility (including time of receipt) and acceptance of
outstanding notes tendered for exchange in our sole discretion.
Our determination will be final and binding. We reserve the
absolute right to:
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reject any and all tenders of any outstanding note improperly
tendered;
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refuse to accept any outstanding note if, in our judgment or the
judgment of our counsel, acceptance of the outstanding note may
be deemed unlawful; and
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waive any defects or irregularities or conditions of the
exchange offer as to any particular outstanding note based on
the specific facts or circumstances presented either before or
after the expiration date, including the right to waive the
ineligibility of any holder who seeks to tender outstanding
notes in the exchange offer.
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Notwithstanding the foregoing, we do not expect to treat any
holder of outstanding notes differently from other holders to
the extent they present the same facts or circumstances.
Our interpretation of the terms and conditions of the exchange
offer as to any particular outstanding notes either before or
after the expiration date, including the letter of transmittal
and the instructions to it, will be final and binding on all
parties. Holders must cure any defects and irregularities in
connection with tenders of outstanding notes for exchange within
such reasonable period of time as we will determine, unless we
waive such defects or irregularities.
Neither we, the exchange agent nor any other person shall be
under any duty to give notification of any defect or
irregularity with respect to any tender of outstanding notes for
exchange, nor shall any of us incur any liability for failure to
give such notification.
If trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in
a fiduciary or representative capacity sign the letter of
transmittal or any outstanding notes or any power of attorney,
these persons should so indicate when signing, and you must
submit proper evidence satisfactory to us of those persons
authority to so act unless we waive this requirement.
By tendering, each holder will represent to us that the person
acquiring exchange notes in the exchange offer, whether or not
that person is the holder, is obtaining them in the ordinary
course of its business, and at the time of the commencement of
the exchange offer neither the holder nor, to the knowledge of
such holder, that other person receiving exchange notes from
such holder has any arrangement or understanding with any person
to participate in the distribution (within the meaning of the
Securities Act) of the exchange notes issued in the exchange
offer in violation of the provisions of the Securities Act. If
any holder or any other person receiving exchange notes from
such holder is an affiliate, as defined under
Rule 405 of the Securities Act, of us, or is engaged in or
intends to engage in or has an arrangement or understanding with
any person to participate in a distribution (within the meaning
of the Securities Act) of the notes in violation of the
provisions of the Securities Act to be acquired in the exchange
offer, the holder or any other person:
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may not rely on applicable interpretations of the staff of the
SEC; and
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must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction.
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Each broker-dealer that acquired its outstanding notes as a
result of market-making activities or other trading activities,
and thereafter receives exchange notes issued for its own
account in the exchange offer, must acknowledge that it will
comply with the applicable provisions of the Securities Act
(including, but not limited to, delivering this prospectus in
connection with any resale of such exchange notes issued in the
exchange offer). The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an
underwriter within the meaning of the Securities
Act. See Plan of Distribution for a discussion of
the exchange and resale obligations of broker-dealers.
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Acceptance
of Outstanding Notes for Exchange; Delivery of Exchange Notes
Issued in the Exchange Offer
Upon satisfaction or waiver of all the conditions to the
exchange offer, we will accept, promptly after the expiration
date, all outstanding notes properly tendered and will issue
exchange notes registered under the Securities Act in exchange
for the tendered outstanding notes. For purposes of the exchange
offer, we shall be deemed to have accepted properly tendered
outstanding notes for exchange when, as and if we have given
oral or written notice to the exchange agent, with written
confirmation of any oral notice to be given promptly thereafter,
and complied with the applicable provisions of the Registration
Rights Agreement. See Conditions to the
Exchange Offer for a discussion of the conditions that
must be satisfied before we accept any outstanding notes for
exchange.
For each outstanding note accepted for exchange, the holder will
receive an exchange note registered under the Securities Act
having a principal amount equal to that of the surrendered
outstanding note. Registered holders of exchange notes issued in
the exchange offer on the relevant record date for the first
interest payment date following the consummation of the exchange
offer will receive interest accruing from the most recent date
on which interest has been paid or, if no interest has been
paid, from the issue date of the outstanding notes. Holders of
exchange notes will not receive any payment in respect of
accrued interest on outstanding notes otherwise payable on any
interest payment date, the record date for which occurs on or
after the consummation of the exchange offer. Under the
Registration Rights Agreement, we may be required to make
payments of additional interest to the holders of the
outstanding notes under circumstances relating to the timing of
the exchange offer.
In all cases, we will issue exchange notes for outstanding notes
that are accepted for exchange only after the exchange agent
timely receives:
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certificates for such outstanding notes or a timely book-entry
confirmation of such outstanding notes into the exchange
agents account at DTC;
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a properly completed and duly executed letter of transmittal or
an agents message; and
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all other required documents.
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If for any reason set forth in the terms and conditions of the
exchange offer we do not accept any tendered outstanding notes,
or if a holder submits outstanding notes for a greater principal
amount than the holder desires to exchange, we will return such
unaccepted or nonexchanged notes without cost to the tendering
holder. In the case of outstanding notes tendered by book-entry
transfer into the exchange agents account at DTC, the
nonexchanged notes will be credited to an account maintained
with DTC.
We will return the outstanding notes or have them credited to
DTC, promptly after the expiration or termination of the
exchange offer.
Book-Entry
Transfer
The participant should transmit its acceptance to DTC on or
prior to the expiration date or comply with the guaranteed
delivery procedures described below. DTC will verify the
acceptance and then send to the exchange agent confirmation of
the book-entry transfer. The confirmation of the book-entry
transfer will be deemed to include an agents message
confirming that DTC has received an express acknowledgment from
the participant that the participant has received and agrees to
be bound by the letter of transmittal and that we may enforce
the letter of transmittal against such participant. Delivery of
exchange notes issued in the exchange offer may be effected
through book-entry transfer at DTC. However, the letter of
transmittal or facsimile thereof or an agents message,
with any required signature guarantees and any other required
documents, must:
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be transmitted to and received by the exchange agent at the
address set forth below under The Exchange
Agent on or prior to the expiration date; or
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comply with the guaranteed delivery procedures described below.
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DTCs ATOP program is the only method of processing the
exchange offer through DTC. To tender outstanding notes through
ATOP, participants in DTC must send electronic instructions to
DTC through DTCs communication system. In addition, such
tendering participants should deliver a copy of the letter of
transmittal to the exchange agent unless an agents message
is transmitted in lieu thereof. DTC is obligated to communicate
those electronic instructions to the exchange agent through an
agents message. Any instruction through ATOP, such as an
agents message, is at your risk and such instruction will
be deemed made only when actually received by the exchange agent.
In order for your tender through ATOP to be valid, an
agents message must be transmitted to and received by the
exchange agent prior to the expiration date, or the guaranteed
delivery procedures described below must be complied with.
Delivery of instructions to DTC does not constitute delivery to
the exchange agent.
Guaranteed
Delivery Procedures
If a holder of outstanding notes desires to tender such notes
and the holders outstanding notes are not immediately
available, or time will not permit the holders outstanding
notes or other required documents to reach the exchange agent
before the expiration date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be
effected if:
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the holder tenders the outstanding notes through an eligible
institution;
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prior to the expiration date, the exchange agent receives from
such eligible institution a properly completed and duly executed
notice of guaranteed delivery, acceptable to us, by facsimile
transmission (receipt confirmed by telephone and an original
delivered by guaranteed overnight courier), mail or hand
delivery, setting forth the name and address of the holder of
the outstanding notes tendered, the names in which such
outstanding notes are registered, if applicable, the certificate
number or numbers of such outstanding notes and the amount of
the outstanding notes being tendered. The notice of guaranteed
delivery shall state that the tender is being made and guarantee
that within three New York Stock Exchange trading days after the
expiration date, the certificates for all physically tendered
outstanding notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, together with a properly
completed and duly executed letter of transmittal or
agents message with any required signature guarantees and
any other documents required by the letter of transmittal will
be deposited by the eligible institution with the exchange
agent; and
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the exchange agent receives the certificates for all physically
tendered outstanding notes, in proper form for transfer, or a
book-entry confirmation, as the case may be, together with a
properly completed and duly executed letter of transmittal or
agents message with any required signature guarantees and
any other documents required by the letter of transmittal,
within three New York Stock Exchange trading days after the
expiration date.
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Withdrawal
of Tenders
You may withdraw tenders of your outstanding notes at any time
prior to the expiration of the exchange offer.
For a withdrawal to be effective, you must send a written notice
of withdrawal to the exchange agent at the address set forth
below under Exchange Agent. Any such
notice of withdrawal must:
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specify the name of the person that has tendered the outstanding
notes to be withdrawn; identify the outstanding notes to be
withdrawn, including the principal amount of such outstanding
notes; and
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where certificates for outstanding notes are transmitted,
specify the name in which outstanding notes are registered, if
different from that of the withdrawing holder.
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If certificates for outstanding notes have been delivered or
otherwise identified to the exchange agent, then, prior to the
release of such certificates, the withdrawing holder must also
submit the serial numbers of the particular certificates to be
withdrawn and signed notice of withdrawal with signatures
guaranteed by an
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eligible institution unless such holder is an eligible
institution. If outstanding notes have been tendered pursuant to
the procedure for book-entry transfer described above, any
notice of withdrawal must specify the name and number of the
account at DTC, as applicable, to be credited with the withdrawn
notes and otherwise comply with the procedures of such facility.
We will determine all questions as to the validity, form and
eligibility (including time of receipt) of notices of withdrawal
and our determination will be final and binding on all parties.
Any tendered notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the exchange
offer. Any outstanding notes which have been tendered for
exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder. In
the case of outstanding notes tendered by book-entry transfer
into the exchange agents account at DTC, the outstanding
notes withdrawn will be credited to an account at the book-entry
transfer facility. The outstanding notes will be returned
promptly after withdrawal, rejection of tender or termination of
the exchange offer. Properly withdrawn outstanding notes may be
re-tendered by following one of the procedures described under
Procedures for Tendering above at any
time on or prior to 5:00 p.m., New York City time, on the
expiration date.
Conditions
to the Exchange Offer
Notwithstanding any other provision of the exchange offer, we
may (a) refuse to accept any outstanding notes and return
all tendered outstanding notes to the tendering holders,
(b) extend the exchange offer and retain all outstanding
notes tendered before the expiration of the exchange offer,
subject, however, to the rights of holders to withdraw those
outstanding notes, or (c) waive the unsatisfied conditions
with respect to the exchange offer and accept all properly
tendered outstanding notes that have not been withdrawn, if we
determine, in our reasonable judgment, that (i) the
exchange offer violates applicable laws or, any applicable
interpretation of the staff of the SEC; (ii) an action or
proceeding shall have been instituted or threatened in any court
or by any governmental agency which might materially impair our
ability to proceed with the exchange offer or a material adverse
development shall have occurred in any existing action or
proceeding with respect to us; or (iii) all governmental
approvals that we deem necessary for the consummation of the
exchange offer have not been obtained.
The foregoing conditions are for our sole benefit and may be
asserted by us regardless of the circumstances giving rise to
any such condition or may be waived by us in whole or in part at
any time and from time to time. The failure by us at any time to
exercise any of the foregoing rights shall not be deemed a
waiver of any of those rights and each of those rights shall be
deemed an ongoing right which may be asserted at any time and
from time to time.
In addition, we will not accept for exchange any outstanding
notes tendered, and no exchange notes will be issued in exchange
for those outstanding notes, if at such time any stop order
shall be threatened or in effect with respect to the
registration statement of which this prospectus constitutes a
part or the qualification of the indenture under the
Trust Indenture Act of 1939. In any of those events we are
required to use every reasonable effort to obtain the withdrawal
of any stop order at the earliest possible time.
Effect of
Not Tendering
Holders who desire to tender their outstanding notes in exchange
for exchange notes registered under the Securities Act should
allow sufficient time to ensure timely delivery. Neither the
exchange agent nor we are under any duty to give notification of
defects or irregularities with respect to the tenders of
outstanding notes for exchange.
Outstanding notes that are not tendered or are tendered but not
accepted will, following the consummation of the exchange offer,
continue to accrue interest and to be subject to the provisions
in the indenture regarding the transfer and exchange of the
outstanding notes and the existing restrictions on transfer set
forth in the legend on the outstanding notes and in the
prospectus relating to the outstanding notes. After completion
of the exchange offer, we will have no further obligation to
provide for the registration under the Securities Act of those
outstanding notes except in limited circumstances with respect
to specific types of holders of outstanding notes and we do not
intend to register the outstanding notes under the Securities
Act. In general,
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outstanding notes, unless registered under the Securities Act,
may not be offered or sold except pursuant to an exemption from,
or in a transaction not subject to, the Securities Act and
applicable state securities laws.
Exchange
Agent
All executed letters of transmittal should be directed to the
exchange agent. U.S. Bank National Association has been
appointed as exchange agent for the exchange offer. Questions,
requests for assistance and requests for additional copies of
this prospectus or of the letter of transmittal should be
directed to the exchange agent addressed as follows:
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Registered & Certified Mail
U.S. BANK NATIONAL ASSOCIATION Corporate Trust Services 60 Livingston Avenue St. Paul, MN 55107
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Regular Mail or Courier:
U.S. BANK NATIONAL ASSOCIATION Corporate Trust Services 60 Livingston Avenue St. Paul, MN 55107
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In Person by Hand Only:
U.S. BANK NATIONAL ASSOCIATION Corporate Trust Services 60 Livingston Avenue 1st Floor Bond Drop Window St. Paul, MN 55107
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For Information or
Confirmation by
Telephone:
(800) 934-6802
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Fees and
Expenses
We will not make any payments to brokers, dealers or others
soliciting acceptances of the exchange offer. The estimated cash
expenses to be incurred in connection with the exchange offer
will be paid by us and will include fees and expenses of the
exchange agent, legal, printing and related fees and expenses.
Notwithstanding the foregoing, holders of the outstanding notes
shall pay all agency fees and commissions and underwriting
discounts and commissions, if any, attributable to the sale of
such outstanding notes or exchange notes.
Accounting
Treatment
We will record the exchange notes at the same carrying value as
the outstanding notes, as reflected in our accounting records on
the date of the exchange. Accordingly, we will not recognize any
gain or loss for accounting purposes as the terms of the
exchange notes are substantially identical to those of the
outstanding notes. The expenses of the exchange offer will be
amortized over the terms of the exchange notes.
Transfer
Taxes
Holders who tender their outstanding notes in exchange for
exchange notes will not be obligated to pay any transfer taxes
in connection with that tender or exchange, except that holders
who instruct us to issue exchange notes in the name of, or
request that outstanding notes not tendered or not accepted in
the exchange offer be returned to, a person other than the
registered tendering holder will be responsible for the payment
of any applicable transfer tax on those outstanding notes. If
satisfactory evidence of payment of such taxes or exception
therefrom is not submitted with the letter of transmittal, the
amount of such transfer taxes will be billed directly to such
tendering holder. Notwithstanding the foregoing, holders of
outstanding notes shall pay transfer taxes, if any, attributable
to the sale of such outstanding notes or of any exchange notes
received in connection with this exchange offer. If a transfer
tax is imposed for any reason other than the transfer and
exchange of outstanding notes to the Company or its order
pursuant to the exchange offer, the amount of any such transfer
taxes (whether imposed on the registered holder or any other
person) will be payable by the applicable holder.
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USE OF
PROCEEDS
The exchange offer is intended to satisfy certain of our
obligations under the Registration Rights Agreement. We will not
receive any proceeds from the issuance of the exchange notes in
the exchange offer. In exchange for the exchange notes, we will
receive outstanding notes in like principal amount. We will
retire or cancel all of the outstanding notes tendered in the
exchange offer. Accordingly, issuance of the exchange notes will
not result in any change in our capitalization.
38
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On April 26, 2011, the Company successfully completed the
private placement of $500.0 million in aggregate principal
amount of 8.5% Senior Notes due 2021 (the
8.5% Notes) and also entered into a new senior
secured term loan with a final maturity in 2017 (the Term
Loan Facility). The Company borrowed $350.0 million
aggregate principal under the Term Loan Facility at a 5.25%
interest rate on April 26, 2011. The Company received
approximately $827.3 million of net proceeds in connection
with the issuance of the 8.5% Notes and Term Loan Facility,
after deducting approximately $20.9 million of underwriting
commissions and legal, accounting and other expenses incurred.
As discussed further below, the Company used approximately
$825.0 million of these net proceeds to repurchase or
redeem all of the Companys 11% Senior Secured Notes
(the 11% Notes), which included approximately
$753.3 million of aggregate outstanding principal balance,
approximately $37.8 million of tender and redemption
premiums and approximately $33.9 million of accrued but
unpaid interest as of the redemption dates. Net cash from these
debt transactions of approximately $2.3 million was
retained by the Company for general corporate purposes.
The Company used approximately $731.1 million of the net
proceeds to repurchase approximately 88.5% or approximately
$666.6 million aggregate principal amount of the
11% Notes through a tender offer in accordance with the
terms of the Companys offer to purchase and consent
solicitation statement dated April 12, 2011 (the
Tender Offer), which was completed on April 26,
2011. Pursuant to the Tender Offer holders of the 11% Notes
were entitled to receive $1,052.50 per $1,000 in principal
amount of 11% Notes tendered, plus accrued and unpaid
interest. The Company used approximately $93.9 million to
discharge its remaining obligations under the 11% Note
indenture (approximately $86.7 million aggregated principal
amount) through a deposit in trust funds sufficient to pay and
discharge all remaining indebtedness, including accrued and
unpaid interest, on the 11% Notes in conjunction with the
notices of redemption sent to the remaining holders of the
11% Notes. Under the terms of the indenture governing the
11% Notes, the Company was permitted to redeem
$75.0 million aggregate principal amount at 103%, plus
accrued and unpaid interest, and the remaining
$11.7 million aggregate principal amount at 105%, plus
accrued and unpaid interest.
The issuance of the 8.5% Notes and the Term Loan Facility
and the repurchase and redemption of the 11% Notes are
collectively referred to as the 2011 financing transactions.
As certain holders of the new 8.5% Notes and Term Loan
Facility had previously held the 11% Notes up to the time
of their repurchase or redemption, in accordance with Accounting
Standards Codification
470-50,
Debt Modifications and Extinguishments (ASC
470-50),
the Company determined that, of the total approximately
$60.5 million of original issue discounts, underwriting
commissions, legal, accounting and other expenses and tender and
redemption premiums, approximately $33.8 million should be
recorded as a loss on debt retirement and that approximately
$11.2 million and $15.5 million should be recorded as
deferred debt expense and debt discount, respectively, and
amortized over the lives of the respective debt instruments. The
approximately $11.2 million of deferred debt expense was
allocated approximately $6.3 million to the 8.5% Notes
and approximately $4.9 million to the Term Loan Facility.
The approximately $15.5 million of debt discount was
allocated approximately $7.2 million to the 8.5% Notes and
approximately $8.3 million to the Term Loan Facility.
On December 17, 2010, the Company acquired all of the
outstanding stock of Ergotron, Inc. (Ergotron) for
an estimated purchase price of approximately
$299.3 million, consisting of cash payments totaling
approximately $295.6 million, of which approximately
$5.8 million was paid in the first nine months of 2011, and
an estimated payable due to the sellers of approximately
$3.7 million related to the remaining estimated
reimbursement of federal and state tax refunds due to Ergotron
for the pre-acquisition period in 2010. The final amounts due
for the reimbursement of federal and state tax refunds will be
determined when the final pre-acquisition tax returns are filed
and the refunds are collected, which is expected to occur in the
fourth quarter of 2011.
On July 6, 2010, the Company, through its wholly-owned
subsidiary, Linear LLC, acquired all of the issued and
outstanding membership interests of Skycam, LLC
(Luxor) for approximately $9.1 million
(utilizing approximately $7.9 million of cash and issuing
an unsecured 4% subordinated note in the amount of
$1.2 million due January 2012).
39
The acquisitions of Ergotron and Luxor are collectively referred
to as the 2010 acquisitions.
The following unaudited pro forma condensed consolidated
financial statements include the unaudited pro forma condensed
consolidated statement of operations for the year ended
December 31, 2010 and the first nine months ended
October 1, 2011. The unaudited pro forma condensed
consolidated financial statements give pro forma effect, where
applicable, to the 2011 financing transactions and the 2010
acquisitions as noted above.
The unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 2010 has been
prepared by adjusting the actual results for the year ended
December 31, 2010 to give effect to the 2011 financing
transactions and the 2010 acquisitions as if those transactions
had occurred as of January 1, 2010, and they exclude
non-recurring items directly attributable to the 2011 financing
transactions and 2010 acquisitions, including the pre-tax loss
from debt retirement.
The unaudited pro forma condensed consolidated statement of
operations for the first nine months ended October 1, 2011
has been prepared by adjusting the actual results for the first
nine months ended October 1, 2011 to give effect to the
2011 financing transactions as if those transactions had
occurred on January 1, 2010. No pro forma adjustments were
necessary for the 2010 acquisitions as the results of Ergotron
and Luxor were included for the full period in the actual
results for the first nine months ended October 1, 2011.
On April 28, 2011, the Company, through wholly-owned
subsidiaries, acquired all of the stock of TV One Broadcast
Sales Corporation Barcom (UK) Holdings Limited and Barcom Asia
Holdings, LLC (collectively, TV One) for
approximately $26.0 million. The acquisition of TV One is
included in the Companys historical balance sheet as of
October 1, 2011 and the results of operations are not
material for any of the periods presented and accordingly have
not been included in the pro forma statement of operations for
the year ended December 31, 2010 or the first nine months
ended October 1, 2011 (prior to the date of acquisition).
The unaudited pro forma condensed consolidated financial
statements are presented for informational purposes only and are
not necessarily indicative of the results of operations that
would have occurred had the transactions described above taken
place on the dates indicated above, nor are they necessarily
indicative of our future results of operations. The unaudited
pro forma condensed consolidated financial statements should be
read in conjunction with our audited and unaudited consolidated
financial statements and the notes thereto included elsewhere
herein.
40
NORTEK,
INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE
YEAR ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nortek Historical
|
|
|
Pro-Forma Adjustments
|
|
|
Pro Forma
|
|
|
|
Year Ended
|
|
|
2010
|
|
|
2011 Financing
|
|
|
Year Ended
|
|
|
|
Dec. 31, 2010
|
|
|
Acquisitions
|
|
|
Transactions
|
|
|
Dec. 31, 2010
|
|
|
|
(Amounts in millions, except shares and per share data)
|
|
|
Net sales
|
|
$
|
1,899.3
|
|
|
$
|
195.3
|
(a)
|
|
$
|
|
|
|
$
|
2,094.6
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
1,391.8
|
|
|
|
129.2
|
(b)
|
|
|
|
|
|
|
1,521.0
|
|
Selling, general and administrative expense, net
|
|
|
399.9
|
|
|
|
41.4
|
(c)
|
|
|
|
|
|
|
441.3
|
|
Amortization of intangible assets
|
|
|
37.0
|
|
|
|
13.1
|
(d)
|
|
|
|
|
|
|
50.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,828.7
|
|
|
|
183.7
|
|
|
|
|
|
|
|
2,012.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
70.6
|
|
|
|
11.6
|
|
|
|
|
|
|
|
82.2
|
|
Interest expense
|
|
|
(95.7
|
)
|
|
|
(25.4
|
)(e)
|
|
|
19.1
|
(g)
|
|
|
(102.0
|
)
|
Investment income
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(25.0
|
)
|
|
|
(13.8
|
)
|
|
|
19.1
|
|
|
|
(19.7
|
)
|
(Benefit) provision for income taxes
|
|
|
(11.6
|
)
|
|
|
(6.4
|
)(f)
|
|
|
7.5
|
(i)
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(13.4
|
)
|
|
$
|
(7.4
|
)
|
|
$
|
11.6
|
|
|
$
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per Share
|
|
$
|
(0.89
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per Share
|
|
$
|
(0.89
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,000,000
|
|
|
|
|
|
|
|
|
|
|
|
15,000,000
|
|
Diluted
|
|
|
15,000,000
|
|
|
|
|
|
|
|
|
|
|
|
15,000,000
|
|
41
NORTEK,
INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE
FIRST NINE MONTHS ENDED OCTOBER 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-Forma
|
|
|
|
|
|
|
Nortek Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
1st
9 Months Ended
|
|
|
2011
|
|
|
1st
9 Months Ended
|
|
|
|
October 1, 2011
|
|
|
Transactions
|
|
|
October 1, 2011
|
|
|
|
(Amounts in millions, except shares and per share data)
|
|
|
Net sales
|
|
$
|
1,605.3
|
|
|
$
|
|
|
|
$
|
1,605.3
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
1,183.3
|
|
|
|
|
|
|
|
1,183.3
|
|
Selling, general and administrative expense, net
|
|
|
351.4
|
|
|
|
|
|
|
|
351.4
|
|
Amortization of intangible assets
|
|
|
33.9
|
|
|
|
|
|
|
|
33.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,568.6
|
|
|
|
|
|
|
|
1,568.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
36.7
|
|
|
|
|
|
|
|
36.7
|
|
Interest expense
|
|
|
(81.0
|
)
|
|
|
7.1
|
(g)
|
|
|
(73.9
|
)
|
Loss from debt retirement
|
|
|
(33.8
|
)
|
|
|
33.8
|
(h)
|
|
|
|
|
Investment income
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(78.0
|
)
|
|
|
40.9
|
|
|
|
(37.1
|
)
|
(Benefit) provision for income taxes
|
|
|
(22.9
|
)
|
|
|
16.2
|
(i)
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(55.1
|
)
|
|
$
|
24.7
|
|
|
$
|
(30.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per Share
|
|
$
|
(3.64
|
)
|
|
|
|
|
|
$
|
(2.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per Share
|
|
$
|
(3.64
|
)
|
|
|
|
|
|
$
|
(2.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,121,093
|
|
|
|
|
|
|
|
15,121,093
|
|
Diluted
|
|
|
15,121,093
|
|
|
|
|
|
|
|
15,121,093
|
|
42
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIODS PRESENTED
Pro Forma Adjustments related to the 2010 Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
|
|
Ended
|
|
|
|
|
|
Dec. 31, 2010
|
|
|
(a)
|
|
Net Sales
|
|
|
|
|
|
|
Net sales related to 2010 acquisitions for the period prior to
the Company acquiring such entities
|
|
$
|
195.3
|
|
|
|
|
|
|
|
|
(b)
|
|
Cost of products sold
|
|
|
|
|
|
|
Cost of products sold related to 2010 acquisitions for the
period prior to the Company acquiring such entities
|
|
$
|
122.8
|
|
|
|
Additional amortization of the estimated inventory fair value
adjustment recorded in connection with the purchase accounting
|
|
|
7.2
|
|
|
|
Reduction in depreciation expense related to the estimated
property, plant and equipment fair value adjustments recorded in
connection with the purchase accounting
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
129.2
|
|
|
|
|
|
|
|
|
(c)
|
|
Selling, general and administrative expense, net
(SG&A)
|
|
|
|
|
|
|
SG&A related to 2010 acquisitions for the period prior to
the Company acquiring such entities
|
|
$
|
48.1
|
|
|
|
Eliminate acquisition costs
|
|
|
(7.2
|
)
|
|
|
Record annual incentive bonuses per purchase and sales agreement
|
|
|
3.4
|
|
|
|
Eliminate royalty payment that was eliminated under terms of the
purchase and sales agreement
|
|
|
(2.4
|
)
|
|
|
Reduction in depreciation expense related to the estimated
property, plant and equipment fair value adjustments recorded in
connection with the purchase accounting
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41.4
|
|
|
|
|
|
|
|
|
(d)
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
Amortization of intangible assets related to 2010 acquisitions
for the period prior to the Company acquiring such entities
|
|
$
|
0.4
|
|
|
|
Additional estimated amortization expense related to the
estimated intangible asset fair value adjustments recorded in
connection with the purchase accounting
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13.1
|
|
|
|
|
|
|
|
|
(e)
|
|
Interest expense
|
|
|
|
|
|
|
Interest expense related to 2010 acquisitions for the period
prior to the Company acquiring such entities
|
|
$
|
(0.1
|
)
|
|
|
Additional estimated interest expense related to the November
2010 issuance of the Companys 10% Notes and
additional borrowings under its ABL Facility in conjunction with
the acquisition of Ergotron
|
|
|
(25.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(25.4
|
)
|
|
|
|
|
|
|
|
(f)
|
|
Benefit for income taxes
|
|
|
|
|
|
|
Record estimated benefit for income taxes related to the above
adjustments
|
|
$
|
(6.4
|
)
|
|
|
|
|
|
|
|
43
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIODS PRESENTED
Pro Forma Adjustments related to the 2011 Financing
Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the First
|
|
|
|
|
|
For the Year
|
|
|
Nine Months
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Dec. 31, 2010
|
|
|
October 1, 2011
|
|
|
(g)
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
Reduction in interest expense related to the assumed debt
retirement of the Companys 11% Notes
|
|
$
|
82.9
|
|
|
$
|
26.9
|
|
|
|
Additional estimated interest expense related to the issuance of
the Companys 8.5% Notes
|
|
|
(42.5
|
)
|
|
|
(13.4
|
)
|
|
|
Additional estimated interest expense related to borrowings
under the Companys Term Loan Facility
|
|
|
(18.3
|
)
|
|
|
(5.7
|
)
|
|
|
Amortization of deferred financing costs and debt discount
associated with the issuance of the Companys
8.5% Notes and borrowings under the Term Loan Facility
|
|
|
(3.0
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19.1
|
|
|
$
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
(h)
|
|
Loss from debt retirement
|
|
|
|
|
|
|
|
|
|
|
Eliminate loss from debt retirement
|
|
$
|
|
|
|
$
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
Record estimated provision for income taxes related to the above
adjustments
|
|
$
|
7.5
|
|
|
$
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
44
SELECTED
CONSOLIDATED FINANCIAL DATA
The table below summarizes our selected consolidated financial
information as of and for the periods indicated. You should read
the following selected consolidated financial data together with
our consolidated financial statements and the sections entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations, included elsewhere
herein, and Liquidity and Capital
Resources, included therein. The following selected
consolidated financial data should be read in conjunction with
our audited and unaudited consolidated financial statements and
related notes, included elsewhere herein. Our historical results
for any prior period are not necessarily indicative of results
to be expected in any future period.
Under fresh-start reporting a new reporting entity is deemed to
be created and the assets and liabilities of the entity are
reflected at their fair values (Fresh Start
Accounting). Accordingly, our consolidated financial
statements for the reporting entity subsequent to emergence from
Chapter 11 bankruptcy proceedings (Successor) are not
comparable to our consolidated financial statements for the
reporting entity prior to emergence from Chapter 11
bankruptcy proceedings (Predecessor).
As more fully described in the notes to our consolidated
financial statements, we have restated our previously issued
financial statements to reflect a change in the presentation of
the cancellation of Predecessor (as defined) stockholders
investment (deficit) resulting from the Predecessors
emergence from Chapter 11 and the application of
fresh-start accounting. All applicable financial information in
this Selected Consolidated Financial Data gives
effect to this restatement.
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Successor
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Predecessor
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Period from
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For the Year
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Period from
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Jan. 1, 2009 -
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First Nine Months Ended
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Ended
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Dec. 20, 2009 -
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Dec. 19, 2009
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For the Years Ended December 31,
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October 1, 2011
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October 2, 2010
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Dec. 31, 2010
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Dec. 31, 2009
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(Restated)
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2008
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2007
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2006
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Consolidated Summary of Operations:
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Net sales
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$
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1,605.3
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$
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1,436.5
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$
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1,899.3
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$
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44.0
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$
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1,763.9
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$
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2,269.7
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|
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$
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2,368.2
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$
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2,218.4
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Pre-petition reorganization items(1)
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(22.5
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)
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Goodwill impairment charge(2)
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|
|
|
|
|
|
|
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|
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(284.0
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)
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(710.0
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)
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Operating earnings (loss)
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36.7
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58.0
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70.6
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(1.2
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)
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|
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(203.4
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)
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|
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(610.0
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)
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185.5
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267.0
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(Loss) earnings before Gain on Reorganization Items, net
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(78.0
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)
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(11.8
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)
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(25.0
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)
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|
|
(4.8
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)
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|
|
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(338.8
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)
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|
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(753.8
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)
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65.5
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|
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153.6
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Gain on Reorganization Items, net(1)
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619.1
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Net (loss) earnings
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(55.1
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)
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(3.3
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)
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(13.4
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)
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(3.4
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)
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195.3
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(780.7
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)
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32.4
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|
|
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89.7
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(Loss) earnings per share:
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Basic(3)
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$
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(3.64
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)
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$
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(0.22
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)
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$
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(0.89
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)
|
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$
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(0.23
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)
|
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$
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65,100.00
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|
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$
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(260,233.33
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)
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$
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10,800.00
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$
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29,900.00
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Diluted(3)
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$
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(3.64
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)
|
|
$
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(0.22
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)
|
|
$
|
(0.89
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)
|
|
$
|
(0.23
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)
|
|
|
$
|
65,100.00
|
|
|
$
|
(260,233.33
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)
|
|
$
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10,800.00
|
|
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$
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29,900.00
|
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Financial Position and Other Financial Data:
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Unrestricted cash, investments and marketable securities
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$
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57.2
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$
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53.2
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|
|
$
|
57.7
|
|
|
$
|
89.6
|
|
|
|
$
|
86.7
|
|
|
$
|
182.2
|
|
|
$
|
53.4
|
|
|
$
|
57.4
|
|
Working capital(4)
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|
|
312.2
|
|
|
|
280.4
|
|
|
|
330.5
|
|
|
|
320.8
|
|
|
|
|
323.3
|
|
|
|
352.7
|
|
|
|
207.2
|
|
|
|
211.1
|
|
Total assets
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|
|
1,986.0
|
|
|
|
1,576.1
|
|
|
|
1,971.1
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|
|
|
1,618.9
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1,643.4
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|
|
|
1,980.3
|
|
|
|
2,706.8
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|
|
|
2,627.3
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Total debt
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Current
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|
|
36.0
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|
|
|
18.4
|
|
|
|
17.8
|
|
|
|
49.9
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|
|
|
|
53.8
|
|
|
|
53.9
|
|
|
|
96.4
|
|
|
|
43.3
|
|
Long-term
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|
|
1,146.9
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|
|
|
777.2
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|
|
|
1,101.8
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|
|
|
835.4
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|
|
|
|
835.4
|
|
|
|
1,545.5
|
|
|
|
1,349.0
|
|
|
|
1,362.3
|
|
Current ratio(5)
|
|
|
1.7:1
|
|
|
|
1.7:1
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|
|
|
1.9:1
|
|
|
|
1.9:1
|
|
|
|
|
1.9:1
|
|
|
|
1.8:1
|
|
|
|
1.4:1
|
|
|
|
1.4:1
|
|
Debt to equity ratio(6)
|
|
|
11.6:1
|
|
|
|
4.7:1
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|
|
|
7.1:1
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|
|
|
5.2:1
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|
|
|
|
5.2:1
|
|
|
|
|
|
|
|
2.3:1
|
|
|
|
2.5:1
|
|
Depreciation and amortization expense, including non-cash
interest
|
|
|
75.9
|
|
|
|
74.1
|
|
|
|
93.8
|
|
|
|
6.2
|
|
|
|
|
103.2
|
|
|
|
76.9
|
|
|
|
70.7
|
|
|
|
66.5
|
|
Capital expenditures
|
|
|
13.9
|
|
|
|
12.6
|
|
|
|
19.8
|
|
|
|
0.5
|
|
|
|
|
17.9
|
|
|
|
25.4
|
|
|
|
36.4
|
|
|
|
42.3
|
|
Stockholders investment (deficit)
|
|
|
101.6
|
|
|
|
169.8
|
|
|
|
158.8
|
|
|
|
170.1
|
|
|
|
|
172.0
|
|
|
|
(219.8
|
)
|
|
|
618.7
|
|
|
|
563.1
|
|
Ratio of earnings to fixed charges(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9
|
x
|
|
|
|
|
|
|
1.5
|
x
|
|
|
2.2
|
x
|
|
|
|
(1) |
|
See Note 2, Reorganization Under
Chapter 11, and Note 3, Fresh-Start
Accounting (Restated), to the consolidated financial
statements, included elsewhere herein. |
45
|
|
|
(2) |
|
Non-cash goodwill impairment charges were recognized in
consolidated operating loss and net earnings (loss) for the
Predecessor Period from January 1, 2009 to
December 19, 2009 and the year ended December 31,
2008. See Note 4, Summary of Significant
Accounting Policies, to the consolidated financial
statements, included elsewhere herein. |
|
(3) |
|
See Note D, (Loss) Earnings per Share,
to the unaudited condensed consolidated financial statements
and Note 4, Summary of Significant Accounting
Policies, to the consolidated financial statements,
included elsewhere herein. |
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(4) |
|
Working capital is computed by subtracting current liabilities
from current assets. |
|
(5) |
|
Current ratio is computed by dividing current assets by current
liabilities. |
|
(6) |
|
Debt to equity ratio is computed by dividing total debt by total
stockholders investment. |
|
(7) |
|
These ratios are computed by dividing the total earnings by the
total fixed charges. For purposes of calculating this ratio,
earnings consist of earnings from continuing
operations before provision for income taxes and fixed charges.
Fixed Charges consist of interest expense and the
estimated interest portion of rental payments on operating
leases. Earnings were insufficient to cover fixed charges for
the historical results for the first nine months ended
October 1, 2011 and October 2, 2010, the year ended
December 31, 2010, the period from December 20, 2009
to December 31, 2009 and the year ended December 31,
2008 by approximately $78.0 million, $11.8 million,
$25.0 million, $4.8 million and $753.8 million,
respectively. |
46
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive
Overview
Nortek, Inc. and its wholly-owned subsidiaries are diversified
manufacturers of innovative, branded residential and commercial
building products, operating within four reporting segments:
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the Residential Ventilation Products (RVP) segment,
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|
the Technology Products (TECH) segment,
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|
the Residential Air Conditioning and Heating Products
(R-HVAC) segment, and
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|
|
|
the Commercial Air Conditioning and Heating Products
(C-HVAC) segment.
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Through these segments, we manufacture and sell, primarily in
the United States, Canada and Europe, a wide variety of products
for the remodeling and replacement markets, the residential and
commercial new construction markets, the manufactured housing
market and the personal and enterprise computer markets.
The RVP segment manufactures and sells room and whole house
ventilation and other products primarily for the professional
remodeling and replacement markets, the residential new
construction market and the DIY market. The principal products
sold by this segment include kitchen range hoods, exhaust fans
(such as bath fans and fan, heater and light combination units)
and indoor air quality products.
The TECH segment, formerly known as the Home Technology Products
segment, manufactures and distributes a broad array of products
designed to provide convenience and security for residential and
certain commercial applications. The principal product
categories sold in this segment include audio/video distribution
and control equipment, security and access control products, and
digital display mounting and mobility products.
The R-HVAC segment manufactures and sells heating, ventilating
and air conditioning systems for site-built residential and
manufactured housing structures and certain commercial markets.
The principal products sold by the segment are split-system and
packaged air conditioners and heat pumps, air handlers, furnaces
and related equipment.
The C-HVAC segment manufactures and sells heating, ventilating
and air conditioning systems for custom-designed commercial
applications to meet customer specifications. The principal
products sold by the segment are large custom rooftop cooling
and heating products.
Basis of
Presentation
The Company operates on a calendar year and for its interim
periods operates on a 4-4-5 fiscal calendar, where each fiscal
quarter is comprised of two 4-week periods and one 5-week
period, with each week ending on a Saturday. The Companys
fiscal year always begins on January 1 and ends on
December 31. As a result, the Companys first and
fourth quarters may have more or less days included than a
traditional 4-4-5 fiscal calendar, which consists of
91 days. The third quarters ended October 1, 2011
(third quarter of 2011) and October 2, 2010
(third quarter of 2010) each include 91 days.
The first nine months ended October 1, 2011 (first
nine months of 2011) and October 2, 2010 (first
nine months of 2010) include 274 days and
275 days, respectively. Operating results for the third
quarter and first nine months of 2011 are not necessarily
indicative of the results that may be expected for other interim
periods or for the year ending December 31, 2011.
This Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) is
intended to help the reader understand Nortek, Inc., our
operations and our present business environment. MD&A is
provided as a supplement to, and should be read in conjunction
with, our consolidated financial statements and the accompanying
notes, included elsewhere herein. Unless the context requires
otherwise, the terms Nortek, Company,
we and our in this MD&A refer to
Nortek, Inc. and its wholly-owned subsidiaries.
As more fully described in the notes to our consolidated
financial statements, we have restated our previously issued
financial statements to reflect a change in the presentation of
the cancellation of Predecessor
47
(as defined) stockholders investment (deficit) resulting
from the Predecessors emergence from Chapter 11 and
the application of
fresh-start
accounting. All applicable financial information in this
MD&A gives effect to this restatement.
Second
Quarter 2011 Financing Transactions
On April 26, 2011, the Company successfully completed the
private placement of $500.0 million in aggregate principal
amount of 8.5% Senior Notes due 2021 (the
8.5% Notes) and also entered into a new senior
secured term loan with a final maturity in 2017 (the Term
Loan Facility). Under the Term Loan Facility, the Company
borrowed $350.0 million aggregate principal amount at a
5.25% interest rate on April 26, 2011. As discussed further
below in Liquidity and Capital Resources, the
Company principally used the net proceeds from the
8.5% Notes and the Term Loan Facility to repurchase or
redeem all of the Companys 11% Senior Secured Notes
due 2013 (the 11% Notes), which had an
outstanding aggregate principal balance of approximately
$753.3 million.
Based on the initial interest rate of 5.25% for the Term Loan
Facility, the Company expects that its annual cash interest
costs will be reduced by approximately $22.0 million as a
result of the debt transactions described above. Approximately
$82.9 million of annual cash interest related to the
11% Notes was eliminated and replaced by approximately
$60.9 million of annual cash interest related to the
8.5% Notes and the Term Loan Facility.
2009
Bankruptcy and Reorganization
On December 17, 2009, we successfully emerged from
bankruptcy as a reorganized company after voluntarily filing for
bankruptcy on October 21, 2009 with the United States
Bankruptcy Court for the District of Delaware (the
Bankruptcy Court), pursuant to prepackaged plans of
reorganization (the Reorganization). The purpose of
the Reorganization was to reorganize our capital structure while
allowing us to continue to operate our business. The
Reorganization was necessary because it was determined that we
would be unable to operate our business and meet our debt
obligations under our pre-Reorganization capital structure.
As a result of the Reorganization, approximately
$1.3 billion of debt was eliminated. On December 29,
2009, the Bankruptcy Court closed the bankruptcy cases for
Norteks subsidiaries and on March 31, 2010 closed the
bankruptcy case for Nortek. On December 17, 2009 (the
Effective Date), we emerged from bankruptcy as a
reorganized company with a new capital structure. See
Business Current Capital Structure,
included elsewhere herein, for a description of our capital
structure.
Adoption
of Fresh-Start Accounting
On December 19, 2009, in connection with the
Reorganization, we adopted fresh-start accounting in accordance
with ASC 852. Fresh-start accounting requires all assets
and liabilities to be recorded at fair value. As a result of the
application of fresh-start accounting, our post-emergence
financial results (for all periods ending after
December 19, 2009) are presented as the
Successor or 2009 Successor Period and
our pre-emergence financial results (for all periods ending
through December 19, 2009) are presented as the
Predecessor or 2009 Predecessor Period.
Financial statements prepared under accounting principles
generally accepted in the United States do not straddle the
Effective Date because, in effect, the Successor represents a
new entity. Due to the adoption of fresh-start accounting, the
results of the Successor Period are not comparable to
Predecessor Periods. For the readers convenience, the
Successor Period from December 20, 2009 to
December 31, 2009 and the Predecessor Period from
January 1, 2009 to December 19, 2009 have been
combined for certain purposes and are collectively referred to
as 2009 for purposes of this MD&A.
In 2009, we recognized a gain of approximately
$488.1 million for reorganization items as a result of the
bankruptcy proceedings. This gain reflects the cancellation of
our pre-petition debt, partially offset by the recognition of
certain of our new equity and debt obligations, as well as
professional fees incurred as a direct result of the bankruptcy
proceedings.
In 2009, we also recognized a net gain of approximately
$131.0 million related to the valuation of our assets and
liabilities upon emergence from Chapter 11 bankruptcy
proceedings.
48
In addition, we recognized charges of approximately
$22.5 million in the 2009 Predecessor Period as a result of
the bankruptcy proceedings.
For additional information regarding the bankruptcy proceedings,
reorganization items, and fresh-start accounting adjustments see
Note 1, Basis of Presentation,
Note 2, Reorganization Under Chapter 11 and
Current Capital Structure and Note 3,
Fresh-Start Accounting (Restated), to the
consolidated financial statements, included elsewhere herein.
Industry
Overview
Critical factors affecting our future performance, including our
level of sales, profitability and cash flows, are the levels of
residential remodeling and replacement activity and new
residential and non-residential construction activity. These
factors are affected by seasonality and cyclical factors such as
interest rates, inflation, consumer spending, employment levels
and other macroeconomic factors, over which we have no control.
Any decline in economic activity as a result of these or other
factors typically results in a decline in residential and
non-residential new construction and, to a lesser extent,
residential and non-residential remodeling and replacement
spending, which would result in a decrease in our sales,
profitability and cash flows.
Instability in the credit and financial markets, troubles in the
mortgage market, the level of unemployment and the decline in
home values have had a negative impact on residential and
non-residential new construction activity, consumer disposable
income and spending on home remodeling and repair expenditures.
These factors have had an adverse effect on our operating
results for the last three years.
Changes in key industry activity affecting our businesses in the
United States for the third quarter and first nine months of
2011, the fourth quarter of 2010 and the full years ended 2010,
2009 and 2008 as compared to the prior comparable periods were
as follows:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase (Decrease)
|
|
|
Source of
|
|
3rd Quarter
|
|
Ist 9 months
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
Data
|
|
2011
|
|
2011
|
|
2010
|
|
2010
|
|
2009
|
|
2008
|
|
Private residential construction spending
|
|
|
1
|
|
|
|
(3
|
)%
|
|
|
(3
|
)%
|
|
|
(7
|
)%
|
|
|
(3
|
)%
|
|
|
(30
|
)%
|
|
|
(29
|
)%
|
Total housing starts
|
|
|
1
|
|
|
|
6
|
%
|
|
|
(2
|
)%
|
|
|
(3
|
)%
|
|
|
6
|
%
|
|
|
(39
|
)%
|
|
|
(33
|
)%
|
New home sales
|
|
|
1
|
|
|
|
4
|
%
|
|
|
(9
|
)%
|
|
|
(21
|
)%
|
|
|
(14
|
)%
|
|
|
(23
|
)%
|
|
|
(38
|
)%
|
Existing home sales
|
|
|
2
|
|
|
|
18
|
%
|
|
|
|
%
|
|
|
(19
|
)%
|
|
|
(5
|
)%
|
|
|
5
|
%
|
|
|
(13
|
)%
|
Residential improvement spending
|
|
|
1
|
|
|
|
(4
|
)%
|
|
|
2
|
%
|
|
|
(5
|
)%
|
|
|
|
%
|
|
|
(7
|
)%
|
|
|
(14
|
)%
|
Central air conditioning and heat pump shipments
|
|
|
3
|
|
|
|
11
|
%
|
|
|
13
|
%
|
|
|
(4
|
)%
|
|
|
|
%
|
|
|
(12
|
)%
|
|
|
(9
|
)%
|
Private non-residential construction spending
|
|
|
1
|
|
|
|
6
|
%
|
|
|
|
%
|
|
|
(12
|
)%
|
|
|
(24
|
)%
|
|
|
(15
|
)%
|
|
|
10
|
%
|
Manufactured housing shipments
|
|
|
1
|
|
|
|
3
|
%
|
|
|
(7
|
)%
|
|
|
(16
|
)%
|
|
|
|
%
|
|
|
(39
|
)%
|
|
|
(14
|
)%
|
Residential fixed investment spending
|
|
|
4
|
|
|
|
2
|
%
|
|
|
(3
|
)%
|
|
|
(6
|
)%
|
|
|
(4
|
)%
|
|
|
(23
|
)%
|
|
|
(24
|
)%
|
Source of data:
|
|
|
(1) |
|
U.S. Census Bureau |
|
(2) |
|
National Association of Realtors |
|
(3) |
|
Air Conditioning and Refrigeration Institute |
|
(4) |
|
U.S. Bureau of Economic Analysis |
In addition, according to the Canada Mortgage and Housing
Corporation, Canadian housing starts increased approximately 6%
in the third quarter of 2011 as compared to the third quarter of
2010, decreased approximately 1% in the first nine months of
2011 as compared to the first nine months of 2010, increased
49
approximately 1% in the fourth quarter of 2010 as compared to
the fourth quarter of 2009, increased approximately 27% for the
full year of 2010 as compared to the full year of 2009,
decreased approximately 29% for the full year of 2009 as
compared to the full year of 2008 and decreased approximately 8%
for the full year of 2008 as compared to the full year of 2007.
In 2010 approximately 50% of consolidated net sales were made
through distributors, wholesalers and similar channels,
approximately 19% were to commercial HVAC markets, approximately
16% were to retailers (of which approximately 10% were sold to
the four largest home center retailers), approximately 10% were
private label sales and approximately 5% were to manufactured
housing original equipment manufacturers and aftermarket dealers.
Our HVAC business serving the commercial construction market was
approximately 19% and 22% of consolidated net sales for 2010 and
2009, respectively, versus approximately 23% of consolidated net
sales in 2008. The decrease in the commercial HVAC business in
2010 is due, in part, to a decrease in sales volume of air
handlers at certain U.S. subsidiaries.
During 2008, and continuing into 2009, we instituted cost
reduction measures by implementing initiatives to significantly
reduce discretionary spending and achieve reductions in
workforce across all of our businesses given the rapidly
changing and challenging economic environment. As a result of
these initiatives, we reduced expense levels by approximately
$75.7 million during 2009 as compared to 2008. Our total
selling, general and administrative expense, net
(SG&A) was approximately $86.9 million
lower, approximately $43.2 million of which was the result
of these cost reduction measures, for 2009 over 2008. Overhead
expense, including freight costs, charged to cost of products
sold was approximately $80.1 million lower, approximately
$32.5 million of which was the result of these cost
reduction measures, for 2009 over 2008. These lower expense
levels reflect both reductions in spending levels and lower
expenses, in part, as a result of a decline in sales volume.
The demand for certain of our products is seasonal, particularly
in the Northeast and Midwest regions of the United States where
inclement weather during winter months usually reduces the level
of building and remodeling activity in both home improvement and
new construction markets, thereby reducing our sales levels
during the first and fourth quarters.
We are subject to the effects of changing prices and the impact
of inflation which could have a significant adverse effect on
our results of operations. In some circumstances, market
conditions or customer expectations may prevent us from
increasing the prices of our products to offset the inflationary
pressures that may increase costs in the future. During the
first nine months of 2011, we experienced higher material costs
as a percentage of net sales as compared to the same period of
2010 related primarily to changes in product mix, higher prices
related to the purchase of purchased components, such as
electrical components, plastics and packaging, as well as from
lower sales prices in the C-HVAC segment for jobs signed during
the second half of 2010 and delivered in the first half of 2011.
A portion of these increases was offset by strategic sourcing
initiatives and improvements in manufacturing processes. Should
these price levels continue or increase further there can be no
assurance that we will be able to sufficiently increase sales
prices to offset the adverse effect on earnings from rising
material costs.
Excluding the effect of acquisitions, freight costs remained
unchanged during the third quarter of 2011 as compared to the
third quarter of 2010 and increased slightly during the first
nine months of 2011 as compared to the first nine months of
2010. This increase in freight costs during the first nine
months of 2011 is primarily due to increased fuel costs
worldwide. These increases were partially offset by a decrease
in ocean freight costs in the first nine months of 2011 due to
overcapacity in the ocean market. Continued strategic sourcing
initiatives and other cost reduction measures help mitigate
fluctuations in freight costs.
50
During the past three years, the following have been our major
purchases, expressed as a percentage of consolidated net sales,
of raw materials and purchased components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Steel
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
Motors
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
Compressors
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
Copper
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
Electrical
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Packaging
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
Plastics
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Aluminum
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Fans & Blowers
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Outlook
Our outlook for the remainder of 2011 is for the housing markets
to remain weak. Continued low consumer confidence, high
unemployment levels and a continued high level of foreclosures
are expected to continue to depress the housing markets. The
non-residential market, which slowed in 2010, is expected to
remain weak throughout 2011. These continued depressed market
conditions, together with commodity cost pressures, continue to
challenge our 2011 performance.
We are looking at our business with a long-term view and a
continued focus on our low-cost country sourcing strategy and
cost reduction initiatives. Balance sheet management is an
extremely important priority for all of our businesses in order
to maximize cash flow from operating activities. During this
challenging environment, we will fund necessary capital
investments that will improve our business operations. In 2010,
we spent approximately $19.8 million on capital
expenditures. In 2011, we expect to spend between approximately
$20.0 million and $25.0 million on capital
expenditures, of which approximately $13.9 million was
spent during the first nine months of 2011.
Acquisitions
We have made the following acquisitions since January 1,
2010:
|
|
|
|
|
|
|
Reporting Segment
|
|
Acquired Company
|
|
Acquisition Date
|
|
Primary Business of Acquired Company
|
|
TECH
|
|
Skycam, LLC (Luxor)
|
|
July 6, 2010
|
|
Distribution and sale of security cameras and digital video
recorders via the Internet.
|
TECH
|
|
Ergotron, Inc.
|
|
December 17, 2010*
|
|
Design, manufacture and sale of innovative, ergonomic mounting
and mobility products for computer monitors, notebooks and flat
panel displays in the United States and other parts of the world.
|
TECH
|
|
TV One Broadcast
Sales Corporation;
Barcom (UK)
Holdings Limited;
and Barcom Asia
Holdings, LLC
|
|
April 28, 2011
|
|
Design, manufacture, and sale of a complete range of video
signal processing products for the professional audio/video and
broadcast markets.
|
|
|
|
* |
|
We selected December 31, 2010 as the date to record the
acquisition of Ergotron, Inc. as the effect of using
December 31, 2010, instead of December 17, 2010, was
not material to our financial condition or results of |
51
|
|
|
|
|
operations for fiscal 2010. Accordingly, the accompanying
consolidated statement of operations for the year ended
December 31, 2010 does not include any activity related to
Ergotron, Inc. for the period from December 18, 2010 to
December 31, 2010. |
Critical
Accounting Policies
This MD&A is based upon our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. Certain of
our accounting policies require the application of judgment in
selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty. We periodically evaluate the
judgments and estimates used for our critical accounting
policies to ensure that such judgments and estimates are
reasonable for our interim and year-end reporting requirements.
These judgments and estimates are based upon our historical
experience, current trends and other information available, as
appropriate. If actual conditions are different from those
assumptions used in our judgments, actual results could be
materially different from our estimates. Our critical accounting
policies are discussed below.
Revenue
Recognition, Accounts Receivable and Related
Expenses
We recognize sales based upon shipment of products to customers
and have procedures in place at each of our subsidiaries to
ensure that an accurate cut-off is obtained for each reporting
period.
Allowances for cash discounts, volume rebates, other customer
incentive programs and gross customer returns, among others, are
recorded as a reduction of sales at the time of sale based upon
the estimated future outcome. Cash discounts, volume rebates and
other customer incentive programs are based upon certain
percentages agreed to with our various customers, which are
typically earned by the customer over an annual period. We
record periodic estimates for these amounts based upon the
historical results to date, estimated future results through the
end of the contract period, and the contractual provisions of
the customer agreements. For calendar year customer agreements,
we are able to adjust our periodic estimates to actual amounts
as of December 31 each year based upon the contractual
provisions of the customer agreements. For those customers who
have agreements that are not on a calendar year cycle, we record
estimates at December 31 consistent with the above described
methodology. Customers are generally not required to provide
collateral for purchases. As a result, at the end of any given
reporting period, the amounts recorded for these allowances are
based upon estimates of the likely outcome of future sales with
the applicable customers and may require adjustment in the
future if the actual outcome differs. We believe that our
procedures for estimating such amounts are reasonable.
Customer returns are recorded on an actual basis throughout the
year and also include an estimate at the end of each reporting
period for future customer returns related to sales recorded
prior to the end of the period. We generally estimate customer
returns based upon the time lag that historically occurs between
the date of the sale and the date of the return, while also
factoring in any new business conditions that might impact the
historical analysis, such as new product introduction. We
believe that our procedures for estimating such amounts are
reasonable.
Provisions for the estimated allowance for doubtful accounts are
recorded in SG&A. The amounts recorded are generally based
upon historically derived percentages while also factoring in
any new business conditions that might impact the historical
analysis such as changes in economic conditions, past due and
nonperforming accounts, bankruptcies or other events affecting
particular customers. We also periodically evaluate the adequacy
of our allowance for doubtful accounts recorded in our
consolidated balance sheet as a further test to ensure the
adequacy of the recorded provisions. The analysis for allowance
for doubtful accounts often involves subjective analysis of a
particular customers ability to pay. As a result,
significant judgment is required in determining the appropriate
amounts to record and such judgments may prove to be incorrect
in the future. We believe that our procedures for estimating
such amounts are reasonable.
52
Inventory
Valuation
We value inventories at the lower of the cost or market with
approximately 31% of our inventory at December 31, 2010
valued using the
last-in,
first-out (LIFO) method and the remainder valued
using the
first-in,
first-out (FIFO) method. On December 19, 2009,
inventories were adjusted to their fair value in connection with
the application of fresh-start accounting (see Note 3,
Fresh-Start Accounting (Restated), and
Note 4, Summary of Significant Accounting
Policies, to the consolidated financial statements
included elsewhere herein). In connection with both LIFO and
FIFO inventories, we record provisions, as appropriate, to
write-down obsolete and excess inventory to estimated net
realizable value. The process for evaluating obsolete and excess
inventory often requires us to make subjective judgments and
estimates concerning future sales levels, quantities and prices
at which such inventory will be able to be sold in the normal
course of business. Accelerating the disposal process or
incorrect estimates of future sales potential may cause the
actual results to differ from the estimates at the time such
inventory is disposed or sold. We believe that our procedures
for estimating such amounts are reasonable.
Income
Taxes
We account for income taxes using the liability method in
accordance with ASC Topic 740, Income Taxes
(ASC 740), which requires that the deferred tax
consequences of temporary differences between the amounts
recorded in our consolidated financial statements and the
amounts included in our federal, state and foreign income tax
returns to be recognized in the balance sheet. As we generally
do not file our income tax returns until well after the closing
process for the December 31 financial statements is complete,
the amounts recorded at December 31 reflect estimates of what
the final amounts will be when the actual tax returns are filed
for that fiscal year. In addition, estimates are often required
with respect to, among other things, the appropriate state
income tax rates to use in the various states that we and our
subsidiaries are required to file, the potential utilization of
operating and capital loss carry-forwards and valuation
allowances required, if any, for tax assets that may not be
realizable in the future. We require each of our subsidiaries to
submit year-end tax information packages as part of the year-end
financial statement closing process so that the information used
to estimate the deferred tax accounts at December 31 is
reasonably consistent with the amounts expected to be included
in the filed tax returns. ASC 740 requires balance sheet
classification of current and long-term deferred income tax
assets and liabilities based upon the classification of the
underlying asset or liability that gives rise to a temporary
difference. As such, we have historically had prepaid income tax
assets due principally to the unfavorable tax consequences of
recording expenses for required book reserves for such things
as, among others, bad debts, inventory valuation, insurance,
product liability and warranty that cannot be deducted for
income tax purposes until such expenses are actually paid. We
believe the procedures and estimates used in our accounting for
income taxes are reasonable and in accordance with established
tax law. The income tax estimates used have historically not
resulted in material adjustments to income tax expense in
subsequent periods when the estimates are adjusted to the actual
filed tax return amounts, although there may be
reclassifications between the current and long-term portion of
the deferred tax accounts.
In connection with the filing of our U.S. federal tax
return for the period ended December 17, 2009 in the third
quarter of 2010, we made an election to capitalize for tax
purposes research and development costs. This election resulted
in the creation of a deferred tax asset that will be amortized
over a 10 year period. As a result of this election, we
recorded a deferred tax benefit of approximately
$10.9 million, including a state tax benefit of
approximately $1.0 million, in 2010.
Goodwill
and Other Long-Lived Assets
Evaluation
of Goodwill Impairment
Our accounting for acquired goodwill and intangible assets
requires considerable judgment in the valuation of acquired
goodwill and other long-lived assets, and the ongoing evaluation
of goodwill and other long-lived assets impairment. Goodwill and
intangible assets determined to have indefinite useful lives are
not amortized. Instead, these assets are evaluated for
impairment on an annual basis, or more frequently when an event
occurs or circumstances change between annual tests that would
more likely than not reduce the fair
53
value of the reporting unit below its carrying value, including
a significant adverse change in the business climate, among
others. We have set the annual evaluation date as of the first
day of our fiscal fourth quarter. The reporting units evaluated
for goodwill impairment have been determined to be the same as
our operating segments and include RVP, TECH, R-HVAC and C-HVAC.
Subsequent to December 17, 2009, only the RVP and TECH
reporting units have goodwill and therefore are the only
reporting units that currently are required to be evaluated for
goodwill impairment.
We utilize a combination of a discounted cash flow
(DCF) approach and an earnings before interest,
taxes, depreciation and amortization (EBITDA)
multiple approach in order to value our reporting units required
to be tested for impairment. The DCF approach requires that we
forecast future cash flows of the reporting units and discount
the cash flow stream based upon a weighted average cost of
capital (WACC) that is derived, in part, from
comparable companies within similar industries. The DCF
calculations also include a terminal value calculation that is
based upon an expected long-term growth rate for the applicable
reporting unit. The EBITDA multiple approach requires that we
estimate certain valuation multiples of EBITDA derived from
comparable companies and apply those derived EBITDA multiples to
the applicable reporting unit EBITDA for the selected EBITDA
measurement periods. We then evaluate what we believe to be the
appropriate weighted average of the DCF approach and the EBITDA
multiple approach in order to arrive at our valuation conclusion.
The key assumptions used in order to determine the appropriate
WACC rates for the DCF approach for each reporting unit (only
RVP and TECH for 2010) are as follows:
|
|
|
|
|
A risk free rate based on the
20-year
Treasury bond yield.
|
|
|
|
A market risk premium based on our assessment of the additional
risk associated with equity investment that is determined, in
part, through the use of published historical equity risk
studies as adjusted for the business risk index for each
reporting unit. The business risk index is derived from
comparable companies and measures the estimated stock price
volatility. We used an overall equity risk premium of 6% for all
reporting units and periods discussed below, which was then
adjusted by multiplying the applicable reporting unit business
risk index to arrive at the market risk premium. As such,
changes in the market risk premium between periods reflect
changes in the business risk index for the reporting units.
|
|
|
|
Comparable company and market interest rate information is used
to determine the cost of debt and the appropriate long-term
capital structure in order to weight the cost of debt and the
cost of equity into an overall WACC.
|
|
|
|
A size risk premium based on the value of the reporting unit
that is determined through the use of published historical size
risk premia data.
|
|
|
|
A specific risk premium for the cost of equity, as necessary,
which factors in overall economic and stock market volatility
conditions at the time the WACC is estimated. We used a 2%
specific risk premium for all reporting units and periods
discussed below.
|
We perform the following analyses, if necessary, on an interim
basis in order to determine if events or circumstances have
changed such that it is more likely than not that the fair value
of any of our applicable reporting units are below the
respective carrying amounts:
|
|
|
|
|
We review public information from competitors and other industry
information to determine if there are any significant adverse
trends in the competitors businesses, such as significant
declines in market capitalization or significant goodwill
impairment charges that could be an indication that the goodwill
of our reporting units is potentially impaired.
|
|
|
|
We review and update, if necessary, our long-term
5-year
financial projections and compare the amounts to the prior
long-term
5-year
projections to determine if there has been a significant adverse
change that could materially lower our prior valuation
conclusions for any of the reporting units under both the DCF
approach and EBITDA multiple approach.
|
54
|
|
|
|
|
We update our analyses of the WACC rates for each reporting unit
in order to determine if there have been any significant
increases in the rates, which could materially lower our prior
valuation conclusions for any of the reporting units under the
DCF approach.
|
|
|
|
We update our analyses of comparable company EBITDA multiples in
order to determine if there have been any significant decreases
in the multiples, which could materially lower our prior
valuation conclusions for any of the reporting units under the
EBITDA multiple approach.
|
|
|
|
We determine the current carrying value for each reporting unit
as of the end of the quarter and compare it to the prior quarter
amount in order to determine if there has been any significant
increase that could impact our prior goodwill impairment
assessments.
|
|
|
|
We also, as necessary, run pro forma models substituting the new
assumption information derived from the above analyses to
determine the impact that such assumption changes would have had
on the prior valuations. These pro forma calculations assist us
in determining whether or not the new valuation assumption
information would have resulted in a significant decrease in the
fair value of any of the reporting units.
|
Based on these analyses, we would make a final determination for
any applicable reporting unit with goodwill as to whether or not
an interim Step 1 Test is required for any interim
period under ASC Topic 350, Goodwill and Other
(ASC 350). The Step 1 Test compares the estimated
fair value of each reporting unit to its carrying value. If the
estimated fair value is lower than the carrying value, there is
an indication of goodwill impairment and a Step 2
Test is required. If the estimated fair value of the
reporting unit exceeds the carrying value, no further goodwill
impairment testing is required.
October 3,
2010 Annual Impairment Test
The Company performed its annual tests of goodwill impairment as
of the first day of the fourth quarter of 2010, or
October 3, 2010, utilizing the same approaches as described
previously. The Company believes that its procedures performed
and estimates used to determine the fair value of the reporting
units as of October 3, 2010 were reasonable and consistent
with market conditions at the time of estimation. The results of
the Step 1 Tests performed as of October 3, 2010 indicated
that the fair value of the RVP and TECH reporting units exceeded
its carrying value and, as such, no additional goodwill
impairment analysis was required.
For the 2010 annual impairment test for RVP and TECH, the
Company used a similar valuation approach as we used to
determine the fair values of the reporting units in connection
with fresh-start accounting. The adoption of fresh-start
accounting in 2009 resulted in a significant reduction in
goodwill for RVP and the elimination of all remaining goodwill
for TECH, R-HVAC and C-HVAC. Prior to October 3, 2010, the
Company acquired SkyCam LLC on July 6, 2010, which resulted
in the recognition of $7.3 million of goodwill that was
included in our annual goodwill impairment testing. The Ergotron
acquisition, which resulted in estimated goodwill of
approximately $130.0 million, occurred subsequent to the
annual impairment testing and therefore was not required to be
included in the annual test. We determined that there were no
indicators of impairment as of December 31, 2010, therefore
no interim impairment testing was required for the RVP or TECH
reporting units.
For the 2010 annual impairment test for RVP, we used a weighted
average of 50% of the DCF approach and 50% for the EBITDA
approach, which we determined to be the most representative
allocation for the measurement of the long-term fair value. The
RVP valuation as of October 3, 2010 assumed a taxable
transaction with a WACC of 12.5% and EBITDA multiples in the
range of 6.5x to 7.5x for the selected measurement periods of
2009, latest twelve months through October 3, 2010 and
forecasted 2010. The fair value of RVP was lower by 1.5% as
compared to the fresh-start accounting valuation for RVP as the
net impact of the valuation assumption changes was not material.
For the 2010 annual impairment test for TECH, we used a weighted
average of 50% of the DCF approach and 50% for the EBITDA
approach, which we determined to be the most representative
allocation for the measurement of the long-term fair value. The
TECH valuation as of October 3, 2010, assumed a taxable
55
transaction with a WACC of 12.9% and EBITDA multiples in the
range of 7.5x to 9.0x for the selected measurement periods of
2009, latest twelve months through October 3, 2010 and
forecasted 2010. The fair value of TECH was higher by 17.8% as
compared to the fresh-start accounting valuation for TECH,
principally due to improved actual EBITDA and forecasted cash
flows as compared to the fresh-start reporting valuation.
We believe that our assumptions used to determine the fair value
of RVP and TECH as of October 3, 2010 were reasonable. As
discussed above, if different assumptions were used,
particularly with respect to estimating future cash flows,
weighted average costs of capital and terminal growth rates,
different estimates of fair value may have resulted. The Company
estimates that the fair value of RVP and TECH would have needed
to be reduced by approximately 31.5% and 16.9%, respectively, to
reduce the estimated fair value to an amount below the carrying
value for RVP and TECH, respectively.
July 4,
2009 Interim Impairment Test and TECH Goodwill Charge
In connection with our July 4, 2009 quarterly analyses, we
determined that interim Step 1 Testing was required for each of
the reporting units, primarily due to reductions in the
long-term
5-year
forecasts for each reporting unit as discussed further below.
The results of our interim Step 1 Testing as of July 4,
2009 indicated that there was potential impairment at our TECH
reporting unit and, in accordance with ASC 350, we recorded
an estimated $250.0 million goodwill impairment charge for
the TECH reporting unit as of July 4, 2009 based on our
interim Step 2 analysis (see below for further discussion).
We used a combination of a DCF approach weighted at 70% and an
EBITDA multiple approach weighted at 30% in order to determine
the estimated fair values under Step 1 Testing, which was
consistent with the historical valuation approach that we have
used in prior years as updated to reflect what we believed to be
the most appropriate weighting to the DCF approach and EBITDA
multiple approach.
The following is a summary of the WACC rates by reporting unit
used for the DCF approach as of July 4, 2009 and
December 31, 2008.
|
|
|
|
|
|
|
|
|
Reporting Unit
|
|
7/4/2009
|
|
12/31/2008
|
|
RVP
|
|
|
11.8
|
%
|
|
|
12.0
|
%
|
TECH
|
|
|
12.4
|
|
|
|
12.8
|
|
R-HVAC
|
|
|
17.2
|
|
|
|
18.0
|
|
C-HVAC
|
|
|
17.2
|
|
|
|
18.0
|
|
The reduction in the RVP and TECH WACC rates from
December 31, 2008 to July 4, 2009 was principally due
to a 0.3% reduction in the risk free rate assumption. The
reduction in the R-HVAC and
C-HVAC WACC
rates from December 31, 2008 to July 4, 2009 was
principally due to a 0.6% reduction in the market risk premium
as a result of a lower business risk index and the 0.3%
reduction in the risk free rate assumption. The principal
differences between the RVP and TECH WACC rates and the R-HVAC
and C-HVAC
rates were higher size risk premiums for R-HVAC and C-HVAC due
to their smaller size and a higher equity component to the
long-term capital structure.
For the EBITDA multiple approach, we performed a comparable
company analysis and determined that an EBITDA multiple of 7x
was appropriate to use for each of the reporting units for both
the 2009 forecast and 2010 forecast measurement periods (see
below for EBITDA multiples used at December 31, 2008).
As indicated above, the results of the Step 1 Tests performed as
of July 4, 2009 indicated that the carrying value of the
TECH reporting unit exceeded the estimated fair value determined
by us and, as such, a Step 2 Test was required for this
reporting unit (see below for further discussion). The estimated
fair values of the RVP, R-HVAC and C-HVAC reporting units
exceeded the carrying values so no further impairment analysis
was required for these reporting units as of July 4, 2009.
We believe that our assumptions used to determine the fair
values as of July 4, 2009 for our reporting units were
reasonable. As discussed above, if different assumptions were to
be used, particularly with respect to estimating future cash
flows, the weighted average costs of capital, terminal growth
rates, estimated
56
EBITDA and selected EBITDA multiples, different estimates of
fair value may result and there could have been the potential
that an additional impairment charge could have resulted.
The preliminary Step 2 Test for TECH for the second quarter of
2009 required us to measure the potential impairment loss by
allocating the estimated fair value of the TECH reporting unit,
as determined in Step 1, to TECHs assets and liabilities,
with the residual amount representing the implied fair value of
goodwill and, to the extent the implied fair value of goodwill
was less than the carrying value, an impairment loss was
recognized. As such, the Step 2 Test for TECH under ASC 350
required us to perform a theoretical purchase price allocation
for TECH to determine the implied fair value of goodwill as of
the evaluation date. Due to the complexity of the analysis
required to complete the Step 2 Tests, and the timing of our
determination of the goodwill impairment, we had not finalized
our Step 2 Tests at the end of the second and third quarters of
2009. In accordance with the guidance in ASC 350, we
completed a preliminary assessment of the expected impact of the
Step 2 Tests using reasonable estimates for the theoretical
purchase price allocation and recorded a preliminary goodwill
impairment charge in the second quarter of 2009 of approximately
$250.0 million for TECH.
During the fourth quarter of 2009, we completed our Step 2
Testing under ASC 350 for the TECH reporting unit by
performing the following procedures, among others:
|
|
|
|
|
Finalized the detailed appraisals used to determine the
estimated fair value of intangible assets, real estate and
machinery and equipment in accordance with methodologies for
valuing assets under ASC Topic 805, Business
Combinations (ASC 805).
|
|
|
|
Finalized the analysis to determine the estimated fair value
adjustment required for inventory.
|
|
|
|
Finalized the deferred tax analysis, which included determining
the deferred tax consequences of the theoretical purchase price
adjustments required by the Step 2 Test.
|
We believe that the procedures performed and estimates used in
the theoretical purchase price allocation for TECH required for
Step 2 Testing under ASC 350 were reasonable and in
accordance with the guidelines for acquisition accounting
included in ASC 805 to determine the theoretical fair value
of the assets and liabilities of the TECH reporting unit used in
the Step 2 Testing.
As a result of the completion of the Step 2 Testing, we recorded
a final goodwill impairment charge for the TECH reporting unit
as of July 4, 2009 of approximately $284.0 million.
This represented an increase in the goodwill impairment charge
of approximately $34.0 million, which was recorded in the
Predecessor period from October 4, 2009 to
December 19, 2009. The primary reasons for the change from
the preliminary goodwill impairment charge recorded in the
second quarter of 2009 were changes in the theoretical valuation
of intangible assets from the initial estimate used, net of the
related deferred tax impact.
October 4,
2009 Annual Impairment Test
Our long-term
5-year
forecast prepared in the second quarter of 2009 included the
following macroeconomic assumptions, among others:
|
|
|
|
|
A continued downward outlook for 2009 due to (i) tepid
demand from homebuilders, (ii) a challenging environment
for existing home sales and (iii) decreased discretionary
spending by consumers and businesses.
|
|
|
|
We expected U.S. housing starts, which is a key driver of
demand for our products, to bottom out in 2009 and achieve
growth beginning in 2010 and continue through the forecast
period.
|
|
|
|
We expected residential fixed investment to resume growth in
2010 and expected non-residential construction to decline in
2010, increase in 2011 and continue to increase through the
forecast period.
|
Although we experienced some improvement in EBITDA for 2009 over
the amounts forecasted in the second quarter of 2009 due to cost
control measures that we put in place, we determined that no
significant changes were necessary to the long-term cash flow
forecasts that we prepared in the second quarter of 2009 in
connection with the cash flow forecasts used for our annual
goodwill impairment test.
57
As a result of our bankruptcy reorganization and the related tax
consequences, we determined during our annual impairment testing
that the most likely disposal of the reporting units would be in
a taxable versus non-taxable transaction scenario, which
represented a change from prior valuations where non-taxable
transactions were assumed. The taxable transaction scenario
required that we include in the DCF approach valuation the fair
value of the estimated additional tax benefit that would be
derived from the buyer having a taxable basis in the assets in
the assumed transaction scenario under ASC 350.
For the 2009 annual impairment test, we used a weighted average
of 50% of the DCF approach and 50% for the EBITDA multiple
approach, which we determined to be the most representative
allocation for the measurement of the long-term fair value of
the reporting units. Prior to October 4, 2009, we had used
a weighted average of 70% of the DCF approach and 30% of the
EBITDA multiple approach. The adjustment to the allocation
percentages used reflected our belief that there was still
significant risk in the overall worldwide economy that could
impact the future projections used in the DCF approach and
therefore increasing the allocation to the EBITDA multiple
approach provided better balance to the shorter-term valuation
conclusions under the EBITDA multiple approach and the
longer-term valuation conclusions under the DCF approach.
The following is a summary of the WACC rates by reporting unit
used for the DCF Approach as of October 4, 2009 and
December 31, 2008.
|
|
|
|
|
|
|
|
|
Reporting Unit
|
|
10/4/2009
|
|
12/31/2008
|
|
RVP
|
|
|
12.1
|
%
|
|
|
12.0
|
%
|
TECH
|
|
|
12.2
|
|
|
|
12.8
|
|
R-HVAC
|
|
|
16.9
|
|
|
|
18.0
|
|
C-HVAC
|
|
|
16.9
|
|
|
|
18.0
|
|
The increase in the RVP WACC rate from December 31, 2008 to
October 4, 2009 was principally due to the fact that the
0.6% reduction in the risk free rate assumption was more than
offset by changes in other assumptions. The reduction in the
TECH WACC rate from December 31, 2008 to October 4,
2009 was principally due to a 0.6% reduction in the risk free
rate assumption. The reduction in the R-HVAC and
C-HVAC WACC
rates from December 31, 2008 to October 4, 2009 was
principally due to a 0.6% reduction in the market risk premium
as a result of a lower business risk index and the 0.6%
reduction in the risk free rate assumption. The principal
differences between the RVP and TECH WACC rates and the R-HVAC
and C-HVAC
rates were higher size risk premiums for R-HVAC and C-HVAC due
to their smaller size and a higher equity component to the
long-term capital structure.
The combined impact of the change in the taxable versus
non-taxable transaction scenario assumption, the WACC rates
used, and the change in the long-term forecasts as of
October 4, 2009 resulted in an approximate 14.1% increase
in the DCF approach valuation for RVP from the December 31,
2008 valuation and decreases of approximately 45.4%, 3.9% and
27.9% in the DCF approach valuations for TECH, R-HVAC and
C-HVAC, respectively, from the December 31, 2008
valuations. We believe that the assumptions used to determine
the fair value for the respective reporting units under the DCF
approach were reasonable. If different assumptions were used,
particularly with respect to estimating future cash flows,
weighted average costs of capital and terminal growth rates,
different estimates of fair value may have resulted and there
could have been the potential that an impairment charge could
have resulted for RVP, R-HVAC and C-HVAC and an additional
impairment charge may have been required for the TECH reporting
unit.
58
For the EBITDA multiple approach, we reviewed comparable company
information to determine EBITDA multiples and concluded that the
following EBITDA multiples for each reporting unit were
appropriate for the forecasted EBITDA measurement periods at
October 4, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 4, 2009
|
|
At December 31, 2008
|
Reporting Unit
|
|
2009
|
|
2010
|
|
2008
|
|
2009
|
|
RVP
|
|
|
8.0
|
x
|
|
|
7.0
|
x
|
|
|
6.5
|
x
|
|
|
6.5
|
x
|
TECH
|
|
|
8.0
|
x
|
|
|
8.0
|
x
|
|
|
8.0
|
x
|
|
|
8.0
|
x
|
R-HVAC
|
|
|
6.5
|
x
|
|
|
5.0
|
x
|
|
|
6.0
|
x
|
|
|
4.5
|
x
|
C-HVAC
|
|
|
4.0
|
x
|
|
|
5.0
|
x
|
|
|
5.0
|
x
|
|
|
5.5
|
x
|
At October 4, 2009, the valuations using forecasted 2009
and 2010 EBITDA were weighted equally in arriving at our overall
EBITDA multiple valuation conclusions that comprise 50% of the
total valuation weighting. As indicated above, the EBITDA
multiple valuations as compared to the prior valuations as of
December 31, 2008 were also impacted by changes in the
forecasted EBITDA amounts for the selected periods. The combined
impact of the change in the EBITDA multiples used and the change
in the EBITDA forecasts at October 4, 2009 resulted in
decreases of approximately 47.7% and 21.5% in the EBITDA
multiple approach valuations for TECH and C-HVAC, respectively,
from the December 31, 2008 valuations and increases of
approximately 5.4% and 7.0% in the EBITDA multiple approach
valuations for RVP and
R-HVAC,
respectively, from the December 31, 2008 valuations. We
believe that the assumptions used to determine the fair value
for the respective reporting units under the EBITDA multiple
approach were reasonable. If different assumptions were used,
particularly with respect to estimating future EBITDA and
selected EBITDA multiples, different estimates of fair value may
have resulted and there may have been the potential that an
impairment charge could have resulted for RVP, R-HVAC and C-HVAC
and an additional impairment charge may have been required for
the TECH reporting unit.
On an overall weighted basis consisting of a 50% DCF approach
and a 50% EBITDA multiple approach, the estimated fair value at
October 4, 2009 increased by 8.1% for RVP and decreased by
47.5%, 2.9% and 23.8% for TECH, R-HVAC and C-HVAC, respectively,
from the estimated fair value as of December 31, 2008. The
significant reduction in the TECH reporting unit was consistent
with our second quarter 2009 analysis discussed above, which
resulted in a $284.0 million goodwill impairment charge in
2009.
The results of the Step 1 Tests performed as of October 4,
2009 for our annual impairment test indicated that the estimated
fair values of the reporting units exceeded the carrying values
so no further impairment analysis was required.
We believe that our assumptions used to determine the fair
values as of October 4, 2009 for our reporting units were
reasonable. As discussed above, if different assumptions were to
be used, particularly with respect to estimating future cash
flows, the weighted average costs of capital, terminal growth
rates, estimated EBITDA and selected EBITDA multiples, different
estimates of fair value may have resulted and an impairment
charge could have resulted. We estimated that as of
October 4, 2009 the fair value estimates, including the
impact of the assumed long-term growth rates, for RVP, TECH,
R-HVAC and C-HVAC would have needed to be reduced by 25.3%,
22.2%, 12.0% and 5.5%, respectively, before we would have been
required to perform additional impairment analyses for these
reporting units as those decreases would have reduced the
estimated fair value to an amount below the carrying value for
these reporting units.
Fiscal
2008 Goodwill Impairment Charge
We also incurred a goodwill impairment charge during 2008 of
approximately $710.0 million, which consisted of
approximately $444.0 million for the RVP reporting unit,
approximately $77.0 million for the TECH reporting unit,
and approximately $189.0 million for the R-HVAC reporting
unit. The principal driver of the need for these impairment
charges in 2008 was reductions in the cash flow forecasts that
resulted in significantly lower fair value estimates for RVP,
TECH and R-HVAC from prior valuations. The reduced cash flow
forecasts for 2008 reflected our estimate of the impact of the
worldwide economic downturn at that time but the assumed impact
of the downturn in the prior forecasts was less severe than was
actually the case in the first half of 2009 and we had believed
that the economic turnaround would begin to occur in the second
half of 2009. The severity of the
59
downturn, and our belief at the time that the economic recovery
would not begin until 2010, particularly impacted the TECH
reporting unit and resulted in the need for a further impairment
charge in 2009.
Impact of
Fresh-start Accounting
Refer to Note 3, Fresh-Start Accounting
(Restated), and Note 4, Summary of
Significant Accounting Policies, to the consolidated
financial statements, included elsewhere herein, for a
discussion and analysis of the impact that fresh-start
accounting had on the recorded amount of goodwill subsequent to
our emergence from bankruptcy.
Although we believe that the forecast and valuation assumptions
used were reasonable, the worldwide economic situation remains
highly volatile and if the downturn persists or the recovery is
slower than anticipated then we may be required to take
additional goodwill impairment charges in the future.
Accordingly, there can be no assurance that our future
forecasted operating results will be achieved or that future
goodwill impairment charges will not need to be recorded even
after the significant reduction in goodwill that resulted from
the adoption of fresh-start accounting subsequent to the
Effective Date.
Evaluation
of the Realizability of Long-lived Assets other than
Goodwill
In accordance with ASC Topic 360, Property, Plant and
Equipment (ASC 360), we evaluate the
realizability of long-lived assets, which primarily consists of
property and equipment and definite lived intangible assets (the
ASC 360 Long-Lived Assets), when events or business
conditions warrant it, as well as, whenever an interim goodwill
impairment test is required under ASC 350, based on
expectations of nondiscounted future cash flows for each
subsidiary. ASC 350 requires that the ASC 360
impairment test be completed and any ASC 360 impairment be
recorded prior to the goodwill impairment test. As a result of
our conclusion that an interim goodwill impairment test was
required during the second quarter of 2009, we performed an
interim test for the impairment of long-lived assets under
ASC 360 in the second quarter of 2009 and determined that
there were no impairment indicators under ASC 360. We also
completed an ASC 360 evaluation as of December 19,
2009, prior to our emergence from bankruptcy and the adoption of
fresh-start accounting. As a result, we recorded an approximate
$1.2 million intangible asset impairment for a foreign
subsidiary in the TECH segment in selling, general and
administrative, net in the accompanying statement of operations.
We determined that there were no other significant impairments
under ASC 360.
The evaluation of the impairment of long-lived assets, other
than goodwill, was based on expectations of non-discounted
future cash flows compared to the carrying value of the
long-lived asset groups in accordance with ASC 360. If the
sum of the expected non-discounted future cash flows was less
than the carrying amount of the ASC 360 Long-Lived Assets,
we would recognize an impairment loss. Our cash flow estimates
were based upon historical cash flows, as well as future
projected cash flows received from subsidiary management in
connection with our annual company-wide planning process and
interim forecasting, and, if appropriate, included a terminal
valuation for the applicable subsidiary based upon an EBITDA
multiple. We estimated the EBITDA multiple by reviewing
comparable company information and other industry data. We
believe that our procedures for estimating gross future cash
flows, including the terminal valuation, were reasonable and
consistent with current market conditions for each of the dates
when impairment testing was performed.
Pensions
and Post Retirement Health Benefits
Our accounting for pensions, including supplemental executive
retirement plans and post retirement health benefit liabilities,
requires estimates of such items as the long-term average return
on plan assets, the discount rate, the rate of compensation
increase and the assumed medical cost inflation rate. We utilize
long-term investment-grade bond yields as the basis for
selecting a discount rate by which plan obligations are
measured. An analysis of projected cash flows for each plan is
performed in order to determine plan-specific duration. Discount
rates are selected based on high quality corporate bond yields
of similar durations. These estimates require a significant
amount of judgment as items such as stock market fluctuations,
changes in interest rates, plan amendments, and curtailments can
have a significant impact on the assumptions used and,
therefore, on the ultimate final actuarial determinations for a
particular year. We believe the procedures and estimates used in
our accounting for pensions and post retirement health benefits
are reasonable and consistent with acceptable actuarial
practices in accordance with U.S. generally accepted
accounting principles.
60
Warranty
We sell a number of products and offer a number of warranties
including in some instances extended warranties for which we
receive proceeds. The specific terms and conditions of these
warranties vary depending on the product sold and the country in
which the product is sold. We estimate the costs that may be
incurred under our warranties, with the exception of extended
warranties, and record a liability for such costs at the time of
sale. Deferred revenue from extended warranties is recorded at
the estimated fair value and is amortized over the life of the
warranty and reviewed to ensure that the amount recorded is
equal to or greater than estimated future costs. Factors that
affect our warranty liability include the number of units sold,
historical and anticipated rates of warranty claims, cost per
claim, and new product introduction. We periodically assess the
adequacy of our recorded reserves for warranty claims and adjust
the amounts as necessary. Warranty claims can extend far into
the future. As a result, significant judgment is required in
determining the appropriate amounts to record and such judgments
may prove to be incorrect in the future. We believe that our
procedures for estimating such amounts are reasonable.
Insurance
Liabilities, including Product Liability
We record insurance liabilities and related expenses for health,
workers compensation, product and general liability losses, and
other insurance reserves and expenses in accordance with either
the contractual terms of our policies or, if self-insured, the
total liabilities that are estimable and probable as of the
reporting date. Insurance liabilities are recorded as current
liabilities to the extent payments are expected to be made in
the succeeding year with the remaining requirements classified
as long-term liabilities. The accounting for self-insured plans
requires that significant judgments and estimates be made both
with respect to the future liabilities to be paid for known
claims, and incurred but not reported claims as of the reporting
date. We consider historical trends when determining the
appropriate insurance reserves to record. In certain cases where
partial insurance coverage exists, we must estimate the portion
of the liability that will be covered by existing insurance
policies to arrive at our net expected liability. Receivables
for insurance recoveries for product liability claims are
recorded as assets, on an undiscounted basis, in the
accompanying consolidated balance sheet as of October 1,
2011 and December 31, 2010. These recoveries are estimated
based on the contractual arrangements with vendors and other
third parties and historical trends. Prior to 2010, these
amounts, which we have determined to be immaterial to the
accompanying December 31, 2009 consolidated balance sheet,
were recorded as a reduction of the estimated liabilities. We
believe that our procedures for estimating such amounts are
reasonable.
Contingencies
We are subject to contingencies, including legal proceedings and
claims arising out of our business that cover a wide range of
matters including, among others, environmental matters, contract
and employment claims, worker compensations claims, product
liability, warranty and modification, adjustment or replacement
of component parts of units sold, and product recalls. Product
liability, environmental and other legal proceedings also
include matters with respect to businesses previously owned.
We provide accruals for direct costs, including legal costs,
associated with the estimated resolution of contingencies at the
earliest date at which it is deemed probable that a liability
has been incurred and the amount of such liability can be
reasonably estimated. Costs accrued have been estimated based
upon an analysis of potential results, assuming a combination of
litigation and settlement strategies and outcomes. Legal costs
for other than probable contingencies are expensed when services
are performed.
While it is impossible to ascertain the ultimate legal and
financial liability with respect to contingent liabilities,
including lawsuits, we believe that the aggregate amount of such
liabilities, if any, in excess of amounts provided or covered by
insurance, will not have a material adverse effect on our
consolidated financial position or results of operations. It is
possible, however, that future results of operations for any
particular future period could be materially affected by changes
in our assumptions or strategies related to these contingencies,
or changes out of our control. See Note H,
Commitments and Contingencies, to the
unaudited condensed consolidated financial statements and
Note 11, Commitments and Contingencies,
to the consolidated financial statements, included elsewhere
herein.
61
Results
of Operations for the third quarter and first nine months ended
October 1, 2011 and October 2, 2010
The following table presents the financial information for our
reporting segments for the third quarter of 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Third Quarter of
|
|
|
Net Change
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
146.5
|
|
|
$
|
146.0
|
|
|
$
|
0.5
|
|
|
|
0.3
|
%
|
Technology products
|
|
|
196.1
|
|
|
|
139.7
|
|
|
|
56.4
|
|
|
|
40.4
|
|
Residential HVAC products
|
|
|
98.0
|
|
|
|
119.0
|
|
|
|
(21.0
|
)
|
|
|
(17.6
|
)
|
Commercial HVAC products
|
|
|
111.2
|
|
|
|
91.9
|
|
|
|
19.3
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
551.8
|
|
|
$
|
496.6
|
|
|
$
|
55.2
|
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
4.1
|
|
|
$
|
13.4
|
|
|
$
|
(9.3
|
)
|
|
|
(69.4
|
)%
|
Technology products
|
|
|
13.6
|
|
|
|
13.9
|
|
|
|
(0.3
|
)
|
|
|
(2.2
|
)
|
Residential HVAC products
|
|
|
|
|
|
|
4.4
|
|
|
|
(4.4
|
)
|
|
|
(100.0
|
)
|
Commercial HVAC products
|
|
|
4.9
|
|
|
|
0.7
|
|
|
|
4.2
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
22.6
|
|
|
|
32.4
|
|
|
|
(9.8
|
)
|
|
|
(30.2
|
)
|
Executive retirement
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
*
|
|
Unallocated, net
|
|
|
(8.4
|
)
|
|
|
(5.7
|
)
|
|
|
(2.7
|
)
|
|
|
(47.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating earnings
|
|
$
|
14.0
|
|
|
$
|
26.7
|
|
|
$
|
(12.7
|
)
|
|
|
(47.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
7.2
|
|
|
$
|
8.0
|
|
|
$
|
(0.8
|
)
|
|
|
(10.0
|
)%
|
Technology products
|
|
|
7.9
|
|
|
|
4.3
|
|
|
|
3.6
|
|
|
|
83.7
|
|
Residential HVAC products
|
|
|
3.0
|
|
|
|
3.8
|
|
|
|
(0.8
|
)
|
|
|
(21.1
|
)
|
Commercial HVAC products
|
|
|
3.2
|
|
|
|
3.0
|
|
|
|
0.2
|
|
|
|
6.7
|
|
Unallocated
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization expense
|
|
$
|
21.4
|
|
|
$
|
19.2
|
|
|
$
|
2.2
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
|
2.8
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
Technology products
|
|
|
6.9
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
Residential HVAC products
|
|
|
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
Commercial HVAC products
|
|
|
4.4
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
2.6
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense as a % of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
|
4.9
|
%
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
Technology products
|
|
|
4.0
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
Residential HVAC products
|
|
|
3.1
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
Commercial HVAC products
|
|
|
2.9
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
3.9
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
not meaningful or not applicable |
62
The following table presents the financial information for our
reporting segments for the first nine months of 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the First Nine Months of
|
|
|
Net Change
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
447.9
|
|
|
$
|
453.1
|
|
|
$
|
(5.2
|
)
|
|
|
(1.1
|
)%
|
Technology products
|
|
|
534.0
|
|
|
|
349.4
|
|
|
|
184.6
|
|
|
|
52.8
|
|
Residential HVAC products
|
|
|
306.7
|
|
|
|
361.3
|
|
|
|
(54.6
|
)
|
|
|
(15.1
|
)
|
Commercial HVAC products
|
|
|
316.7
|
|
|
|
272.7
|
|
|
|
44.0
|
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
1,605.3
|
|
|
$
|
1,436.5
|
|
|
$
|
168.8
|
|
|
|
11.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
22.9
|
|
|
$
|
43.2
|
|
|
$
|
(20.3
|
)
|
|
|
(47.0
|
)%
|
Technology products
|
|
|
34.3
|
|
|
|
10.4
|
|
|
|
23.9
|
|
|
|
*
|
|
Residential HVAC products
|
|
|
4.7
|
|
|
|
18.6
|
|
|
|
(13.9
|
)
|
|
|
(74.7
|
)
|
Commercial HVAC products
|
|
|
5.1
|
|
|
|
5.3
|
|
|
|
(0.2
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
67.0
|
|
|
|
77.5
|
|
|
|
(10.5
|
)
|
|
|
(13.5
|
)
|
Executive retirement
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
(8.7
|
)
|
|
|
*
|
|
Unallocated, net
|
|
|
(21.6
|
)
|
|
|
(19.5
|
)
|
|
|
(2.1
|
)
|
|
|
(10.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating earnings
|
|
$
|
36.7
|
|
|
$
|
58.0
|
|
|
$
|
(21.3
|
)
|
|
|
(36.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
21.6
|
|
|
$
|
26.3
|
|
|
$
|
(4.7
|
)
|
|
|
(17.9
|
)%
|
Technology products
|
|
|
31.5
|
|
|
|
20.4
|
|
|
|
11.1
|
|
|
|
54.4
|
|
Residential HVAC products
|
|
|
9.3
|
|
|
|
12.4
|
|
|
|
(3.1
|
)
|
|
|
(25.0
|
)
|
Commercial HVAC products
|
|
|
9.2
|
|
|
|
13.4
|
|
|
|
(4.2
|
)
|
|
|
(31.3
|
)
|
Unallocated
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization expense
|
|
$
|
71.8
|
|
|
$
|
72.7
|
|
|
$
|
(0.9
|
)
|
|
|
(1.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
|
5.1
|
%
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
Technology products
|
|
|
6.4
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
Residential HVAC products
|
|
|
1.5
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
Commercial HVAC products
|
|
|
1.6
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
2.3
|
%
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense as a % of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
|
4.8
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
Technology products
|
|
|
5.9
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
Residential HVAC products
|
|
|
3.0
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
Commercial HVAC products
|
|
|
2.9
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
4.5
|
%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
not meaningful or not applicable |
63
The following table presents our financial information for the
third quarter of 2011 and 2010. The results of operations for
the third quarter of 2011 are not necessarily indicative of the
results of operations to be expected for any other interim
period or the full year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change
|
|
|
|
For the Third Quarter of
|
|
|
in Earnings
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net Sales
|
|
$
|
551.8
|
|
|
$
|
496.6
|
|
|
$
|
55.2
|
|
|
|
11.1
|
%
|
Cost of products sold
|
|
|
409.6
|
|
|
|
361.4
|
|
|
|
(48.2
|
)
|
|
|
(13.3
|
)
|
Selling, general and administrative expense, net
|
|
|
117.1
|
|
|
|
100.1
|
|
|
|
(17.0
|
)
|
|
|
(17.0
|
)
|
Amortization of intangible assets
|
|
|
11.1
|
|
|
|
8.4
|
|
|
|
(2.7
|
)
|
|
|
(32.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
14.0
|
|
|
|
26.7
|
|
|
|
(12.7
|
)
|
|
|
(47.6
|
)
|
Interest expense
|
|
|
(24.6
|
)
|
|
|
(22.9
|
)
|
|
|
(1.7
|
)
|
|
|
(7.4
|
)
|
Investment income
|
|
|
|
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before benefit from income taxes
|
|
|
(10.6
|
)
|
|
|
3.9
|
|
|
|
(14.5
|
)
|
|
|
*
|
|
Benefit from income taxes
|
|
|
(8.5
|
)
|
|
|
(5.9
|
)
|
|
|
2.6
|
|
|
|
44.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(2.1
|
)
|
|
$
|
9.8
|
|
|
$
|
(11.9
|
)
|
|
|
*
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Net
|
|
|
|
|
|
|
Sales for
|
|
|
|
|
|
|
the Third Quarter of
|
|
|
Net Change
|
|
|
|
2011
|
|
|
2010
|
|
|
in Percentage
|
|
|
Net Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
%
|
Cost of products sold
|
|
|
74.2
|
|
|
|
72.8
|
|
|
|
(1.4
|
)
|
Selling, general and administrative expense, net
|
|
|
21.2
|
|
|
|
20.2
|
|
|
|
(1.0
|
)
|
Amortization of intangible assets
|
|
|
2.0
|
|
|
|
1.6
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
2.6
|
|
|
|
5.4
|
|
|
|
(2.8
|
)
|
Interest expense
|
|
|
(4.5
|
)
|
|
|
(4.6
|
)
|
|
|
0.1
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before benefit from income taxes
|
|
|
(1.9
|
)
|
|
|
0.8
|
|
|
|
(2.7
|
)
|
Benefit from income taxes
|
|
|
(1.5
|
)
|
|
|
(1.2
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
(0.4
|
)%
|
|
|
2.0
|
%
|
|
|
(2.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The following table presents our financial information for the
first nine months of 2011 and 2010. The results of operations
for the first nine months of 2011 are not necessarily indicative
of the results of operations to be expected for any other
interim period or the full year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change
|
|
|
|
For the First Nine Months of
|
|
|
in Earnings
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net Sales
|
|
$
|
1,605.3
|
|
|
$
|
1,436.5
|
|
|
$
|
168.8
|
|
|
|
11.8
|
%
|
Cost of products sold
|
|
|
1,183.3
|
|
|
|
1,051.5
|
|
|
|
(131.8
|
)
|
|
|
(12.5
|
)
|
Selling, general and administrative expense, net
|
|
|
351.4
|
|
|
|
298.0
|
|
|
|
(53.4
|
)
|
|
|
(17.9
|
)
|
Amortization of intangible assets
|
|
|
33.9
|
|
|
|
29.0
|
|
|
|
(4.9
|
)
|
|
|
(16.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
36.7
|
|
|
|
58.0
|
|
|
|
(21.3
|
)
|
|
|
(36.7
|
)
|
Interest expense
|
|
|
(81.0
|
)
|
|
|
(69.9
|
)
|
|
|
(11.1
|
)
|
|
|
(15.9
|
)
|
Loss from debt retirement
|
|
|
(33.8
|
)
|
|
|
|
|
|
|
(33.8
|
)
|
|
|
*
|
|
Investment income
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(78.0
|
)
|
|
|
(11.8
|
)
|
|
|
(66.2
|
)
|
|
|
*
|
|
Benefit from income taxes
|
|
|
(22.9
|
)
|
|
|
(8.5
|
)
|
|
|
14.4
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(55.1
|
)
|
|
$
|
(3.3
|
)
|
|
$
|
(51.8
|
)
|
|
|
*
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Net
|
|
|
|
|
|
|
Sales for
|
|
|
|
|
|
|
the First Nine Months of
|
|
|
Net Change
|
|
|
|
2011
|
|
|
2010
|
|
|
in Percentage
|
|
|
Net Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
%
|
Cost of products sold
|
|
|
73.7
|
|
|
|
73.2
|
|
|
|
(0.5
|
)
|
Selling, general and administrative expense, net
|
|
|
21.9
|
|
|
|
20.7
|
|
|
|
(1.2
|
)
|
Amortization of intangible assets
|
|
|
2.1
|
|
|
|
2.0
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
2.3
|
|
|
|
4.1
|
|
|
|
(1.8
|
)
|
Interest expense
|
|
|
(5.0
|
)
|
|
|
(4.9
|
)
|
|
|
(0.1
|
)
|
Loss from debt retirement
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
(2.1
|
)
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(4.8
|
)
|
|
|
(0.8
|
)
|
|
|
(4.0
|
)
|
Benefit from income taxes
|
|
|
(1.4
|
)
|
|
|
(0.6
|
)
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3.4
|
)%
|
|
|
(0.2
|
)%
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our reporting segments sell a significant number of different
products across a wide range of price points and numerous
distribution channels that do not always allow meaningful
quantitative analysis to be performed with respect to the effect
on net sales of changes in units sold or the price per unit
sold. However, whenever the underlying causes of material
increases or decreases in consolidated net sales can be
adequately analyzed and quantified, we attempt to make
appropriate disclosure of such reasons, including changes in
price, volume and the mix of products sold.
Third
quarter and first nine months ended October 1, 2011 as
compared to the third quarter and first nine months ended
October 2, 2010
Net Sales. As discussed further in the
following paragraphs, net sales for the third quarter of 2011
increased by approximately $55.2 million, or 11.1%, as
compared to the third quarter of 2010 and for the first nine
months of 2011, increased approximately $168.8 million, or
11.8%, as compared to the first nine months of 2010. The effect
of acquisitions and changes in foreign currency exchange rates
increased net sales by
65
approximately $58.8 million and $4.1 million,
respectively, in the third quarter of 2011 and increased net
sales by approximately $169.3 million and
$15.1 million, respectively, in the first nine months of
2011. Excluding the effect of acquisitions and changes in
foreign currency exchange rates, net sales for the third quarter
and first nine months of 2011 decreased by approximately
$7.7 million and $15.6 million, respectively as
compared to the same periods of 2010.
In the RVP segment, net sales for the third quarter of 2011
increased approximately $0.5 million, or 0.3%, as compared
to the third quarter of 2010 and decreased approximately
$5.2 million, or 1.1% for the first nine months of 2011 as
compared to the first nine months of 2010. Net sales in the RVP
segment for the third quarter and first nine months of 2011
reflect an increase of approximately $2.7 million and
$9.4 million, respectively, attributable to the effect of
changes in foreign currency exchange rates. Excluding the effect
of changes in foreign currency exchange rates, net sales in the
RVP segment for the third quarter and first nine months of 2011
decreased approximately $2.2 million and
$14.6 million, respectively, as compared to the same
periods of 2010. Excluding the effect of changes in foreign
currency exchange rates, the change in net sales for the third
quarter and first nine months of 2011 is primarily the result of
a decrease in the RVP segments Canadian business of
approximately $1.4 million and $8.4 million,
respectively, and to a lesser extent a decrease in the RVP
segments United States business of approximately
$0.9 million and $6.1 million, respectively. These
declines in North American sales are primarily attributable to
industry wide declines in residential remodeling activities, new
housing starts, as well as new and existing home sales during
the first nine months of 2011. Excluding the effect of changes
in foreign currency exchange rates, the RVP segments
European range hood business declined slightly in the third
quarter and first nine months of 2011 as compared to the same
periods of 2010. Kitchen range hoods and bathroom exhaust fans
are the largest product categories sold in the RVP segment,
accounting for approximately 79% of the RVP segments total
sales for both the third quarter of 2011 and 2010, respectively,
as well as for both the first nine months of 2011 and 2010,
respectively.
In the TECH segment, net sales for the third quarter of 2011
increased approximately $56.4 million, or 40.4%, as
compared to the third quarter of 2010 and increased
approximately $184.6 million, or 52.8% in the first nine
months of 2011 as compared to the first nine months of 2010.
These increases are primarily related to the effect of
acquisitions which contributed approximately $58.8 million
and $169.3 million of net sales in the third quarter and
first nine months of 2011, respectively. Increased sales of
security and access control products, including the addition of
a new customer to the segment in 2010, also contributed to the
overall increase in net sales in the TECH segment for the first
nine months of 2011. This new customer contributed approximately
$1.5 million and $16.7 million in additional net sales
during the third quarter and first nine months of 2011,
respectively, as compared to the same periods of 2010. See
Liquidity and Capital Resources Risks
and Uncertainties. Partially offsetting these increases in
net sales were slight declines in sales of audio/video
distribution and control products.
Sales of security and access control products accounted for
approximately 37% and 52% of total TECH segment net sales in the
third quarter of 2011 and 2010, respectively, and accounted for
approximately 32% and 45% of total TECH segment net sales in the
first nine months of 2011 and 2010, respectively. Sales of
audio/video distribution and control products accounted for
approximately 27% and 36% of total TECH segment net sales in the
third quarter of 2011 and 2010, respectively, and accounted for
approximately 29% and 43% of total TECH segment net sales in the
first nine months of 2011 and 2010, respectively. Digital
display mounting and mobility products accounted for
approximately 36% and 12% of total TECH segment net sales in the
third quarter of 2011 and 2010, respectively, and accounted for
approximately 39% and 12% of total TECH segment net sales in the
first nine months of 2011 and 2010, respectively. The increase
in sales for digital display mounting and mobility products is
primarily the result of the acquisition of Ergotron in late 2010.
In the R-HVAC segment, net sales for the third quarter of 2011
decreased approximately $21.0 million, or 17.6%, as
compared to the third quarter of 2010 and decreased
approximately $54.6 million, or 15.1%, in the first nine
months of 2011 as compared to the first nine months of 2010.
This decrease was primarily driven by lower demand due to
overall economic conditions and the continued depressed housing
market, as well as substantially lower shipments to certain
customers during the third quarter and first nine months of 2011
as
66
compared to the same periods of 2010. We believe that this
decrease in the first nine months of 2011 was also driven
largely by air conditioning sales during the last four months of
2010 to customers serving the residential site-built market for
use as replacement products due to uncertainty of product
availability subsequent to January 1, 2011. As a result of
these sales, we believe the segment experienced lower shipments
in the first half of 2011 as these customers worked down their
inventory levels. In addition, we estimate that other shipments
of between approximately $3.5 million and $5.0 million
were shipped to customers in the fourth quarter of 2010 that
would have otherwise been shipped during the first quarter of
2011 primarily due to announced price increases effective
January 1, 2011. These decreases were partially offset by
the effect of increased sales prices effective January 1,
2011 and June 15, 2011.
In the C-HVAC segment, net sales for the third quarter of 2011
increased approximately $19.3 million, or 21.0%, as
compared to the third quarter of 2010 and increased
approximately $44.0 million, or 16.1%, in the first nine
months of 2011 as compared to the first nine months of 2010. Net
sales in the C-HVAC segment for the third quarter and first nine
months of 2011 reflect an increase of approximately
$1.4 million and $5.7 million, respectively,
attributable to the effect of changes in foreign currency
exchange rates. Excluding the effect of changes in foreign
currency exchange rates, net sales in the C-HVAC segment for the
third quarter and first nine months of 2011 increased
approximately $17.9 million and $38.3 million,
respectively. This increase in net sales is primarily the result
of increased shipment levels of air handlers in the
U.S. market, net of lower prices on contracts negotiated in
the second half of 2010 and delivered in the first quarter of
2011. In the second and third quarters of 2011, delivery of
contracts with expanded margins over the margins in the first
quarter of 2011 was also a factor. Backlog for C-HVAC products
was approximately $246.2 million at October 1, 2011,
approximately $179.8 million at December 31, 2010 and
approximately $167.9 million at October 2, 2010. This
increase in backlog, since December 31, 2010, reflects an
increase in orders and improved pricing during the first nine
months of 2011 principally for jobs expected to be delivered
during the remainder of 2011 and the first half of 2012.
Foreign net sales, which are attributed based on the location of
our subsidiary responsible for the sale, were approximately
21.7% and 19.9% of consolidated net sales for the third quarter
of 2011 and 2010, respectively, and were approximately 22.0% and
20.2% of consolidated net sales for the first nine months of
2011 and 2010, respectively. Net sales from our Canadian
subsidiaries were approximately 10.5% of consolidated net sales
for both the third quarter and first nine months of 2011 and
were approximately 11.6% of consolidated net sales for both the
third quarter and first nine months of 2010. Net sales from our
Canadian subsidiaries include net sales from the RVP and C-HVAC
segments. Net sales from our European subsidiaries were
approximately 7.7% and 5.7% of consolidated net sales for the
third quarter of 2011 and 2010, respectively, and were
approximately 7.9% and 6.3% of consolidated net sales for the
first nine months of 2011 and 2010, respectively. Net sales from
our European subsidiaries include net sales from the RVP, TECH
and C-HVAC segments.
Cost of Products Sold. Consolidated cost of
products sold (COGS) for the third quarter of 2011
was approximately $409.6 million as compared to
approximately $361.4 million for the third quarter of 2010
and was approximately $1,183.3 million for the first nine
months of 2011 as compared to approximately
$1,051.5 million for the first nine months of 2010. These
changes are primarily due to the factors described above and
below.
For the third quarter and first nine months of 2011, COGS
includes, among others, (1) approximately
$34.8 million and $107.0 million, respectively,
related to acquisitions made in 2011 and 2010 within the TECH
segment (including approximately $7.5 million in non-cash
charges related to the amortization of fair value allocated to
inventory in the first nine months of 2011), (2) an
increase of approximately $3.4 million and
$12.5 million, respectively, related to the effect of
changes in foreign currency exchange rates,
(3) approximately $5.3 million recorded during the
third quarter of 2011 relating to additional warranty expense
within the TECH segment related to a certain customer,
(4) a decrease in depreciation expense of approximately
$1.3 million and $4.5 million, respectively, as
compared to the same periods of 2010 related to operations other
than acquisitions made subsequent to October 2, 2010, and
(5) approximately $0.8 million and $2.3 million,
respectively, of severance and other charges relating primarily
to exit and disposal activities. For the third quarter and first
nine months of 2010, COGS includes, among others,
(1) approximately
67
$0.3 million and $12.3 million, respectively, in
non-cash charges related to the amortization of fair value
allocated to inventory, (2) a gain of approximately
$5.0 million and $3.0 million, respectively, related
to the reversal of previously provided loss contingency reserves
related to one of our subsidiaries in our TECH segment and
(3) a reduction in warranty reserves of approximately
$4.5 million due to the Companys change in estimate
of expected warranty claims within the RVP and C-HVAC segments.
COGS as a percentage of net sales increased from approximately
72.8% for the third quarter of 2010 to approximately 74.2% for
the third quarter of 2011 and increased slightly from
approximately 73.2% for the first nine months of 2010 to
approximately 73.7% for the first nine months of 2011.
We continually review the costs of our product lines and look
for opportunities to help offset the rising costs of raw
materials and transportation when possible.
Overall, consolidated material costs for the third quarter of
2011 were approximately $271.3 million, or 49.2% of net
sales, as compared to approximately $248.5 million, or
50.1% of net sales, for the third quarter of 2010. Consolidated
material costs for the first nine months of 2011 were
approximately $772.9 million, or 48.1% of net sales, as
compared to approximately $684.6 million, or 47.7% of net
sales, for the first nine months of 2010. During the first nine
months of 2011, we experienced higher material costs as a
percentage of net sales as compared to the same period of 2010
related primarily to changes in product mix, higher prices
related to the purchase of purchased components, such as
electrical components, plastics and packaging, as well as from
lower sales prices in the C-HVAC segment for jobs signed during
the second half of 2010 and delivered in the first quarter of
2011. A portion of these increases was offset by strategic
sourcing initiatives and improvements in manufacturing
processes. Should these price levels continue or increase
further there can be no assurance that we will be able to
sufficiently increase sales prices to offset the adverse effect
on earnings from rising material costs.
Direct labor costs for the third quarter of 2011 were
approximately $30.5 million, or 5.5% of net sales, as
compared to approximately $28.3 million, or 5.7% of net
sales, for the third quarter of 2010. Direct labor costs for the
first nine months of 2011 were approximately $92.7 million,
or 5.8% of net sales, as compared to approximately
$82.0 million, or 5.7% of net sales, for the first nine
months of 2010. Excluding the effect of acquisitions, direct
labor costs as a percentage of net sales for the third quarter
and first nine months of 2011 increased to approximately 6.0%
and 6.2%, respectively, as compared to approximately 5.7% for
the third quarter and first nine months of 2010, respectively.
This increase in direct labor costs, as a percentage of net
sales, for the first nine months of 2011 is primarily the result
of lower sales prices in the C-HVAC segment for jobs signed
during the second half of 2010 and delivered in the first
quarter of 2011.
Overhead and other costs, including freight, for the third
quarter of 2011 were approximately $107.8 million, or 19.5%
of net sales, as compared to approximately $84.6 million,
or 17.0% of net sales, for the third quarter of 2010. Overhead
and other costs, including freight, for the first nine months of
2011 were approximately $317.7 million, or 19.8% of net
sales, as compared to approximately $284.9 million, or
19.8% of net sales, for the first nine months of 2010. Overhead
and other costs for the third quarter and first nine months of
2011 includes, among others, approximately $8.4 million and
$29.9 million, respectively, related to acquisitions made
in 2011 and 2010 within the TECH segment (including
approximately $7.5 million in non-cash charges related to
the amortization of fair value allocated to inventory in the
first nine months of 2011) and approximately
$5.3 million recorded during the third quarter of 2011
relating to additional warranty expense within the TECH segment
related to a certain customer. For the third quarter and first
nine months of 2010, COGS includes, among others,
(1) approximately $0.3 million and $12.3 million,
respectively, in non-cash charges related to the amortization of
fair value allocated to inventory, (2) a gain of
approximately $5.0 million and $3.0 million,
respectively, related to the reversal of previously provided
loss contingency reserves related to one of our subsidiaries in
our TECH segment and (3) a reduction in warranty reserves
of approximately $4.5 million due to the Companys
change in estimate of expected warranty claims within the RVP
and C-HVAC segments.
Freight costs were approximately 4.7% and 4.5% of net sales for
the third quarter of 2011 and 2010, respectively, and were
approximately 5.0% and 4.7% of net sales for the first nine
months of 2011 and 2010, respectively. Excluding the effect of
acquisitions, freight costs remained unchanged during the third
quarter of
68
2011 as compared to the third quarter of 2010 and increased
slightly during the first nine months of 2011 as compared to the
first nine months of 2010. This increase in freight costs during
the first nine months of 2011 is primarily due to increased fuel
costs worldwide. These increases were partially offset by a
decrease in ocean freight costs in the first nine months of 2011
due to overcapacity in the ocean market. Continued strategic
sourcing initiatives and other cost reduction measures help
mitigate fluctuations in freight costs.
Overall, changes in COGS (including material, direct labor,
overhead and freight costs) as a percentage of net sales for one
period as compared to another period may reflect a number of
factors including changes in the relative mix of products sold,
the effect of changes in sales prices and material costs, as
well as changes in productivity levels.
In the RVP segment, COGS for the third quarter of 2011 was
approximately $109.1 million, or 74.5% of the
segments net sales, as compared to approximately
$103.9 million, or 71.2% of the segments net sales,
for the third quarter of 2010. In the RVP segment, COGS for the
first nine months of 2011 was approximately $330.8 million,
or 73.9% of the segments net sales, as compared to
approximately $320.2 million, or 70.7% of the
segments net sales, for the first nine months of 2010. The
increase in the percentage of COGS to net sales in the third
quarter and first nine months of 2011 primarily reflects an
increase in material costs as a percentage of net sales
resulting primarily from higher prices related to the purchase
of steel and certain component parts, such as motors, electrical
components and packaging, and to a lesser extent, also reflects
an increase in overhead and other costs as a percentage of net
sales primarily related to a decrease in sales volume without a
proportionate decrease in overhead costs. In the RVP segment,
overhead and other costs, including freight, for the third
quarter of 2011 were approximately $36.6 million, or 25.0%
of the segments net sales, as compared to approximately
$35.8 million, or 24.5% of the segments net sales,
for the third quarter of 2010. In the RVP segment, overhead and
other costs, including freight, for the first nine months of
2011 were approximately $113.6 million, or 25.4% of the
segments net sales, as compared to approximately
$112.4 million, or 24.8% of the segments net sales,
for the first nine months of 2010. COGS in the RVP segment for
the third quarter and first nine months of 2011 also reflects
(1) an increase of approximately $2.3 million and
$7.7 million, respectively, related to the effect of
changes in foreign currency exchange rates, (2) a decrease
in depreciation expense of approximately $0.6 million and
$2.1 million, respectively, as compared to the same periods
of 2010, and (3) approximately $0.5 million and
$2.0 million, respectively, of severance and other charges
relating primarily to exit and disposal activities. Overhead and
other costs for the first nine months of 2010 includes, among
others, approximately $1.4 million in non-cash charges
related to the amortization of fair value allocated to inventory
and a reduction in warranty reserves of approximately
$3.5 million due to a change in estimate resulting from
favorable experience related to claims management improvements.
In the TECH segment, COGS for the third quarter of 2011 was
approximately $128.6 million, or 65.6% of the
segments net sales, as compared to approximately
$84.0 million, or 60.1% of the segments net sales,
for the third quarter of 2010. In the TECH segment, COGS for the
first nine months of 2011 was approximately $338.2 million,
or 63.3% of the segments net sales, as compared to
approximately $219.6 million, or 62.9% of the
segments net sales, for the first nine months of 2010.
COGS for the third quarter and first nine months of 2011
includes approximately $34.8 million and
$107.0 million, respectively, related to acquisitions made
in 2011 and 2010, including approximately $7.5 million in
non-cash charges related to the amortization of fair value
allocated to inventory in the first half of 2011 and
approximately $5.3 million recorded during the third
quarter of 2011 relating to additional warranty expense related
to a certain customer. The increase in the percentage of COGS to
net sales for the third quarter of 2011 was primarily the result
of an increase in overhead costs as a percentage of net sales
principally as a result of additional warranty expense recorded
in the third quarter and first nine months of 2011 as noted
above coupled with gains recorded in the third quarter and first
nine months of 2010 as discussed in the following paragraph,
partially offset by a decrease in material costs as a percentage
of net sales primarily due to acquisitions. In the TECH segment,
overhead and other costs, including freight, for the third
quarter of 2011 were approximately $28.2 million, or 14.4%
of the segments net sales, as compared to approximately
$9.2 million, or 6.6% of the segments net sales, for
the third quarter of 2010. In the TECH segment, overhead and
other costs, including freight, for the first nine months of
2011 were approximately $76.0 million, or 14.2% of the
segments net
69
sales, as compared to approximately $46.0 million, or 13.2%
of the segments net sales, for the first nine months of
2010.
In the TECH segment, overhead and other costs within COGS for
the third quarter and first nine months of 2010 also includes
(1) approximately $0.1 million and $9.2 million,
respectively, in non-cash charges related to the amortization of
fair value allocated to inventory and (2) a gain of
approximately $5.0 million and $3.0 million,
respectively, related to the reversal of previously provided
loss contingency reserves related to one of our subsidiaries
within segment.
In the R-HVAC segment, COGS for the third quarter of 2011 was
approximately $84.0 million, or 85.7% of the segments
net sales, as compared to approximately $99.6 million, or
83.7% of the segments net sales, for the third quarter of
2010. In the R-HVAC segment, COGS for the first nine months of
2011 was approximately $260.1 million, or 84.8% of the
segments net sales, as compared to approximately
$300.7 million, or 83.2% of the segments net sales,
for the first nine months of 2010. The increase in COGS as a
percentage of net sales for the third quarter and first nine
months of 2011 primarily reflects an increase in material costs
as a percentage of net sales as discussed further below, and in
the third quarter of 2011, also reflects an increase in overhead
costs as a percentage of net sales. In the R-HVAC segment,
overhead and other costs, including freight, for the third
quarter of 2011 were approximately $19.0 million, or 19.4%
of the segments net sales, as compared to approximately
$22.3 million, or 18.7% of the segments net sales,
for the third quarter of 2010. In the R-HVAC segment, overhead
and other costs, including freight, for the first nine months of
2011 were approximately $57.9 million, or 18.9% of the
segments net sales, as compared to approximately
$68.8 million, or 19.0% of the segments net sales,
for the first nine months of 2010. Overhead costs in the R-HVAC
segment for the third quarter and first nine months of 2011
included a decrease in depreciation expense of approximately
$0.7 million and $2.4 million, respectively, as
compared to the same periods of 2010. Overhead costs in the
R-HVAC segment for the third quarter and first nine months of
2010 included non-cash charges related to the amortization of
fair value allocated to inventory of approximately
$0.2 million and $1.0 million, respectively, with no
corresponding charges in 2011. Material costs in this segment
are generally higher as a percentage of net sales than our other
segments and were approximately 63.0% and 62.5% for the third
quarter and first nine months of 2011, respectively, as compared
to approximately 61.5% and 60.6% for the third quarter and first
nine months of 2010, respectively. The increase in material
costs as a percentage of net sales is primarily the result of a
change in the mix of products sold partly due to the expiration
of certain energy efficiency tax credits that drove sales to
higher efficiency units that have higher margins and higher
costs. This increase in material costs as a percentage of net
sales was partially offset by increased sales prices effective
January 1, 2011 and June 15, 2011.
In the C-HVAC segment, COGS for the third quarter of 2011 was
approximately $87.9 million, or 79.0% of the segments
net sales, as compared to approximately $73.9 million, or
80.4% of the segments net sales, for the third quarter of
2010. In the C-HVAC segment, COGS for the first nine months of
2011 was approximately $254.2 million, or 80.3% of the
segments net sales, as compared to approximately
$211.0 million, or 77.4% of the segments net sales,
for the first nine months of 2010. The decrease in COGS as a
percentage of net sales for the third quarter of 2011 primarily
reflects higher prices on contracts negotiated during the first
and second quarters of 2011. The increase in COGS as a
percentage of net sales for the first nine months of 2011
primarily reflects an increase in material and labor costs as a
percentage of net sales due to lower sales prices negotiated on
jobs in the second half of 2010 and delivered in the first
quarter of 2011. Direct labor costs in this segment are
generally higher as a percentage of net sales than our other
segments and were approximately 14.9% and 15.1% for the third
quarter and first nine months of 2011, respectively, as compared
to approximately 15.0% and 14.2% for the third quarter and first
nine months of 2010, respectively. The increase in direct labor
as a percentage of net sales in the first nine months of 2011 is
due, in part, to lower sales prices as noted above. In the
C-HVAC segment, overhead and other costs, including freight, for
the third quarter of 2011 were approximately $24.0 million,
or 21.6% of the segments net sales, as compared to
approximately $17.3 million, or 18.8% of the segments
net sales, for the third quarter of 2010. In the C-HVAC segment,
overhead and other costs, including freight, for the first nine
months of 2011 were approximately $70.2 million, or 22.2%
of the segments net sales, as compared to approximately
$57.7 million, or 21.2% of the segments net sales,
for the first nine months of 2010. In the C-HVAC segment, COGS
for the
70
third quarter and first nine months of 2011 also includes an
increase of approximately $1.1 million and
$4.8 million, respectively, related to the effect of
changes in foreign currency exchange rates. For the third
quarter and first nine months of 2010, COGS in the C-HVAC
segment includes (1) a reduction in warranty reserves in
the third quarter of 2010 of approximately $1.0 million due
to the Companys change in estimate of expected warranty
claims and (2) approximately $0.7 million in non-cash
charges related to the amortization of fair value allocated to
inventory recorded in the first nine months of 2010 with no
corresponding charge in the first nine months of 2011.
Selling, General and Administrative Expense,
Net. Consolidated selling, general and
administrative expense, net (SG&A) was
approximately $117.1 million for the third quarter of 2011
as compared to approximately $100.1 million for the third
quarter of 2010 and was approximately $351.4 million for
the first nine months of 2011 as compared to approximately
$298.0 for the first nine months of 2010. SG&A as a
percentage of net sales increased from approximately 20.2% for
the third quarter of 2010 to approximately 21.2% for the third
quarter of 2011 and increased from approximately 20.7% for the
first nine months of 2010 to approximately 21.9% for the first
nine months of 2011. SG&A for the third quarter and first
nine months of 2011 reflects (1) approximately
$0.2 million and $8.7 million, respectively, of
severance expense related to the retirement of a Company
executive, (2) approximately $13.4 million and
$39.6 million, respectively, related to acquisitions made
in 2011 and 2010 within the TECH segment, (3) approximately
$0.5 million and $3.1 million, respectively, of
severance and other charges relating primarily to exit and
disposal activities, and (4) an increase of approximately
$1.0 million and $3.2 million, respectively, related
to the effect of changes in foreign currency exchange rates.
SG&A for the third quarter and first nine months of 2010
reflects approximately $0.9 million and $1.5 million,
respectively, of severance and other charges related to the
closure of certain facilities in the TECH segment.
Amortization of Intangible
Assets. Amortization of intangible assets,
including developed technology and backlog, increased from
approximately $8.4 million for the third quarter of 2010 to
approximately $11.1 million for the third quarter of 2011
and increased from approximately $29.0 million for the
first nine months of 2010 to approximately $33.9 million
for the first nine months of 2011. This increase in the third
quarter and first nine months of 2011 as compared to the same
periods of 2010 relates primarily to an increase of
approximately $3.2 million and $10.6 million,
respectively, related to acquisitions made in 2011 and 2010
within the TECH segment, partially offset by a decrease
primarily related to the amortization of backlog for the C-HVAC
segment as a result of the application of fresh-start accounting.
Operating Earnings. Operating earnings
decreased approximately $12.7 million from approximately
$26.7 million for the third quarter of 2010 to
approximately $14.0 million for the third quarter of 2011
and decreased approximately $21.3 million from
approximately $58.0 for the first nine months of 2010 to
approximately $36.7 for the first nine months of 2011. Operating
earnings for the third quarter and first nine months of 2011
includes, among others, (1) approximately $0.2 million
and $8.7 million, respectively, of severance expense
related to the retirement of a Company executive,
(2) operating earnings of approximately $7.4 million
(which includes depreciation and amortization of approximately
$4.3 million) and $12.1 million (which includes
depreciation and amortization of approximately
$20.8 million, including approximately $7.5 million
relating to the amortization of fair value allocated to
inventory), respectively, related to acquisitions made in 2011
and 2010 within the TECH segment, (3) approximately
$1.3 million and $5.4 million, respectively, of
severance and other charges relating primarily to exit and
disposal activities, (4) approximately $5.3 million
recorded during the third quarter of 2011 relating to additional
warranty expense within the TECH segment related to a certain
customer, and (5) approximately $2.1 million and
$21.7 million, respectively, of decreased depreciation and
amortization expense related to operations other than
acquisitions made subsequent to October 2, 2010. Operating
earnings for the third quarter and first nine months of 2010
includes, among others, (1) non-cash charges related to the
amortization of fair value allocated to inventory of
approximately $0.3 million and $12.3 million,
respectively, (2) a gain of approximately $5.0 million
and $3.0 million, respectively, related to the reversal of
previously provided loss contingency reserves related to one of
our subsidiaries in our TECH segment, (3) approximately
$0.9 million and $1.5 million, respectively, of
severance and other charges related to the closure of certain
facilities in the
71
TECH segment, and (4) a reduction in warranty reserves of
approximately $4.5 million due to the Companys change
in estimate of expected warranty claims within the RVP and
C-HVAC segments.
Changes in operating earnings between the third quarter and
first nine months of 2011 and 2010 are primarily due to the
factors discussed above and the following operating segment
specific factors.
In the RVP segment, operating earnings for the third quarter of
2011 were approximately $4.1 million as compared to
approximately $13.4 million for the third quarter of 2010
and were approximately $22.9 million for the first nine
months of 2011 as compared to approximately $43.2 million
for the first nine months of 2010. The decrease in the RVP
segments operating earnings for the third quarter and
first nine months of 2011 is primarily the result of decreased
sales volume in the segments North American business and
an increase in material costs and overhead costs as a percentage
of net sales. Operating earnings for the RVP segment for the
third quarter and first nine months of 2011 also reflects
(1) approximately $0.8 million and $4.7 million,
respectively, of decreased depreciation and amortization expense
and (2) approximately $0.5 million and
$2.9 million, respectively, related to severance and other
charges relating to exit and disposal activities. Operating
earnings for the RVP segment for the third quarter and first
nine months of 2010 also reflects a reduction in warranty
reserves of approximately $3.5 million due to a change in
estimate resulting from favorable experience related to claims
management improvements.
In the TECH segment, operating earnings for the third quarter of
2011 were approximately $13.6 million as compared to
approximately $13.9 million for the third quarter of 2010.
In the TECH segment, operating earnings for the first nine
months of 2011 were approximately $34.3 million as compared
to approximately $10.4 million for the first nine months of
2010. Operating earnings for the TECH segment for the third
quarter and first nine months of 2011 reflects an increase of
approximately $7.4 million (which includes depreciation and
amortization of approximately $4.3 million) and
$12.1 million (which includes depreciation and amortization
of approximately $20.8 million, including approximately
$7.5 million relating to the amortization of fair value
allocated to inventory), respectively, related to acquisitions
made in 2011 and 2010. Excluding the impact of acquisitions, the
decrease in operating earnings for the third quarter of 2011
primarily reflects an increase in overhead costs as a percentage
of net sales, partially offset by a decrease in material costs
as a percentage of net sales. Excluding the impact of
acquisitions, the increase in operating earnings for the first
nine months of 2011 is primarily the result of increased sales
volume of security and access control products and a decrease in
material costs as a percentage of net sales. Operating earnings
for the TECH segment for the first nine months of 2011 also
includes approximately $1.1 million of severance and other
charges relating to exit and disposal activities and
approximately $5.3 million recorded during the third
quarter of 2011 relating to additional warranty expense related
to a certain customer. The operating results for the TECH
segment for the third quarter and first nine months of 2010 also
includes (1) approximately $0.1 million and
$9.2 million, respectively, in non-cash charges related to
the amortization of fair value allocated to inventory,
(2) a gain of approximately $5.0 million and
$3.0 million, respectively, related to the reversal of
previously provided loss contingency reserves related to one of
our subsidiaries within the segment, and (3) approximately
$0.9 million and $1.5 million, respectively, of
severance and other charges related to the closure of certain
facilities within the segment.
In the R-HVAC segment, operating earnings for the third quarter
of 2011 were break even as compared to approximately
$4.4 million for the third quarter of 2010 and were
approximately $4.7 million for the first nine months of
2011 as compared to approximately $18.6 million for the
first nine months of 2010. The decrease in the R-HVAC
segments operating earnings for the third quarter and
first nine months of 2011 is primarily a result of a decrease in
sales volume and increased material costs as a percentage of net
sales, partially offset by increased sales prices. Operating
earnings for the third quarter and first nine months of 2011 for
the R-HVAC segment also includes a decrease of approximately
$0.8 million and $3.1 million, respectively, in
depreciation and amortization expense. Operating earnings for
the third quarter and first nine months of 2010 for the R-HVAC
segment included non-cash charges related to the amortization of
fair value allocated to inventory of approximately
$0.2 million and $1.0 million, respectively, with no
corresponding charges in 2011.
In the C-HVAC segment, operating earnings for the third quarter
of 2011 were approximately $4.9 million as compared to
approximately $0.7 million for the third quarter of 2010
and were approximately $5.1 million
72
for the first nine months of 2011 as compared to approximately
$5.3 million for the first nine months of 2010. This
increase in operating earnings for the third quarter of 2011
primarily reflects higher prices on contracts negotiated during
the first and second quarters of 2011. In the second and third
quarters of 2011, delivery of contracts with expanded margins
over the margins in the first quarter of 2011 was also a factor.
Operating earnings for the first nine months of 2011 for the
C-HVAC segment also includes a decrease of approximately
$4.2 million in depreciation and amortization expense. For
the third quarter and first nine months of 2010, operating
earnings for the C-HVAC segment includes a reduction in warranty
reserves in the third quarter of 2010 of approximately
$1.0 million due to the Companys change in estimate
of expected warranty claims.
Operating earnings (loss) of foreign operations, consisting
primarily of the results of operations of our Canadian and
European subsidiaries, were approximately (2.1)% and (10.0)% of
consolidated operating earnings (before unallocated and
corporate expenses) for the third quarter of 2011 and 2010,
respectively, and were approximately 9.4% and (1.5)% of
consolidated operating earnings (before unallocated and
corporate expenses) for the first nine months of 2011 and 2010,
respectively. Foreign operating earnings of acquisitions
contributed approximately $4.3 million and
$12.0 million to the increase in the third quarter and
first nine months of 2011, respectively, as compared to the same
periods of 2010. Net sales and earnings derived from
international markets are subject to economic, political and
currency risks, among others.
Interest Expense. Interest expense increased
approximately $1.7 million, or approximately 7.4%, during
the third quarter of 2011 as compared to the third quarter of
2010 and increased approximately $11.1 million, or
approximately 15.9%, during the first nine months of 2011 as
compared to the first nine months of 2010. This increase is
primarily due to the issuance of our 10% Senior Notes due
2018 on November 23, 2010 (the 10% Notes),
partially offset by a decrease in interest expense from the
redemption of the 11% Senior Secured Notes due 2013 (the
11% Notes) through the issuance of
$500.0 million in aggregate principal amount of
8.5% Senior Notes due 2021 (the
8.5% Notes) and entering into a new senior
secured term loan with initial borrowings of $350.0 million.
Loss from Debt Retirement. On April 26,
2011, we successfully completed the private placement of the
8.5% Notes and entered into a new senior secured term loan
with a final maturity in 2017 and optional interest rates at the
election of the Company, including LIBOR, as defined in the
agreement, plus 4.0% with a LIBOR floor of 1.25% (the Term
Loan Facility). We borrowed $350.0 million aggregate
principal under the Term Loan Facility at a 5.25% interest rate
on April 26, 2011, which resulted in net proceeds of
approximately $348.2 million, after deducting an original
issue discount of approximately $1.8 million. We received
approximately $827.3 million of net proceeds in connection
with the issuance of the 8.5% Notes and Term Loan Facility,
after deducting approximately $20.9 million of underwriting
commissions and legal, accounting and other expenses incurred.
We used approximately $825.0 million of these net proceeds
to repurchase or redeem all of the 11% Notes, which
included approximately $753.3 million of aggregate
outstanding principal balance, approximately $37.8 million
of tender and redemption premiums and approximately
$33.9 million of accrued but unpaid interest as of the
redemption dates. In accordance with
ASC 470-50,
the redemption of the 11% Notes resulted in a pre-tax loss
of approximately $33.8 million in the second quarter of
2011.
Benefit from Income Taxes. The benefit from
income taxes for the third quarter of 2011 was approximately
$8.5 million as compared to approximately $5.9 million
for the third quarter of 2010. The benefit from income taxes for
the first nine months of 2011 was approximately
$22.9 million as compared to approximately
$8.5 million for the first nine months of 2010. The
effective income tax rate of a benefit of approximately 29.4%
for the first nine months of 2011 differs from the expected
United States federal statutory rate of a benefit of 35%
principally as a result of an increase in the valuation
allowances related to deferred tax assets and the effect of
foreign activities, partially offset by changes in the state
income tax benefit, net of federal income tax effect. The
effective income tax rate of a benefit of approximately 72.0%
for the first nine months of 2010 differs from the expected
United States federal statutory rate of 35% principally as a
result of a tax benefit for capitalized research and development
costs and a decrease in FIN 48 reserves, including
interest, partially offset by an increase in the valuation
allowances on certain foreign entities and the effect of foreign
operations.
73
Results
of Operations for 2010, 2009 and 2008
For purposes of this MD&A, the Successor year ended
December 31, 2010 (2010) has been compared to
the combined year ended December 31, 2009 Successor and
Predecessor Periods and the combined year ended
December 31, 2009 Successor and Predecessor Periods have
been compared to the Predecessor year ended December 31,
2008 (2008). Any references below to the year ended
December 31, 2009 (2009) refers to the combined
periods.
The table below presents the financial information for our
reporting segments for the 2009 Predecessor, 2009 Successor and
combined year ended December 31, 2009 periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Combined
|
|
|
|
Jan. 1, 2009 -
|
|
|
Dec. 20, 2009 -
|
|
|
Year Ended
|
|
|
|
Dec. 19, 2009
|
|
|
Dec. 31, 2009
|
|
|
Dec. 31, 2009
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
567.9
|
|
|
$
|
15.1
|
|
|
$
|
583.0
|
|
Technology products
|
|
|
387.5
|
|
|
|
13.3
|
|
|
|
400.8
|
|
Residential HVAC products
|
|
|
417.3
|
|
|
|
8.9
|
|
|
|
426.2
|
|
Commercial HVAC products
|
|
|
391.2
|
|
|
|
6.7
|
|
|
|
397.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
1,763.9
|
|
|
$
|
44.0
|
|
|
$
|
1,807.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
53.3
|
|
|
$
|
0.7
|
|
|
$
|
54.0
|
|
Technology products
|
|
|
(275.0
|
)
|
|
|
1.0
|
|
|
|
(274.0
|
)
|
Residential HVAC products
|
|
|
16.0
|
|
|
|
(0.8
|
)
|
|
|
15.2
|
|
Commercial HVAC products
|
|
|
41.7
|
|
|
|
(2.0
|
)
|
|
|
39.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(164.0
|
)
|
|
|
(1.1
|
)
|
|
|
(165.1
|
)
|
Unallocated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-petition reorganization items
|
|
|
(22.5
|
)
|
|
|
|
|
|
|
(22.5
|
)
|
Loss contingency related to the Companys indemnification
of a lease guarantee
|
|
|
3.9
|
|
|
|
|
|
|
|
3.9
|
|
Unallocated, net
|
|
|
(20.8
|
)
|
|
|
(0.1
|
)
|
|
|
(20.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating loss
|
|
$
|
(203.4
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(204.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products(1)
|
|
$
|
20.1
|
|
|
$
|
2.0
|
|
|
$
|
22.1
|
|
Technology products(2)
|
|
|
16.0
|
|
|
|
1.8
|
|
|
|
17.8
|
|
Residential HVAC products(3)
|
|
|
10.7
|
|
|
|
0.8
|
|
|
|
11.5
|
|
Commercial HVAC products(4)
|
|
|
10.5
|
|
|
|
1.6
|
|
|
|
12.1
|
|
Unallocated
|
|
|
0.4
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57.7
|
|
|
$
|
6.2
|
|
|
$
|
63.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
|
9.4
|
%
|
|
|
4.6
|
%
|
|
|
9.3
|
%
|
Technology products
|
|
|
(71.0
|
)
|
|
|
7.5
|
|
|
|
(68.4
|
)
|
Residential HVAC products
|
|
|
3.8
|
|
|
|
(9.0
|
)
|
|
|
3.6
|
|
Commercial HVAC products
|
|
|
10.7
|
|
|
|
(29.9
|
)
|
|
|
10.0
|
|
Consolidated
|
|
|
(11.5
|
)%
|
|
|
(2.7
|
)%
|
|
|
(11.3
|
)%
|
Depreciation and amortization expense as a % of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products(1)
|
|
|
3.5
|
%
|
|
|
13.2
|
%
|
|
|
3.8
|
%
|
Technology products(2)
|
|
|
4.1
|
|
|
|
13.5
|
|
|
|
4.4
|
|
Residential HVAC products(3)
|
|
|
2.6
|
|
|
|
9.0
|
|
|
|
2.7
|
|
Commercial HVAC products(4)
|
|
|
2.7
|
|
|
|
23.9
|
|
|
|
3.0
|
|
Consolidated
|
|
|
3.3
|
%
|
|
|
14.1
|
%
|
|
|
3.5
|
%
|
74
|
|
|
(1) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $0.4 million, $0.9 million, and
$1.3 million for the 2009 Predecessor, 2009 Successor, and
the combined year ended December 31, 2009 periods,
respectively. |
|
(2) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $1.2 million for both the 2009 Successor
and the combined year ended December 31, 2009 periods. |
|
(3) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $0.1 million, $0.2 million, and
$0.3 million for the 2009 Predecessor, 2009 Successor, and
the combined year ended December 31, 2009 periods,
respectively. |
|
(4) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $0.8 million for both the 2009 Successor
and the combined year ended December 31, 2009 periods. |
The following table presents the financial information for our
reporting segments for 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
Predecessor
|
|
|
Net Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2010 to 2009
|
|
|
2009 to 2008
|
|
|
|
2010
|
|
|
2009(a)
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
602.7
|
|
|
$
|
583.0
|
|
|
$
|
715.9
|
|
|
$
|
19.7
|
|
|
|
3.4
|
%
|
|
$
|
(132.9
|
)
|
|
|
(18.6
|
)%
|
Technology products
|
|
|
463.6
|
|
|
|
400.8
|
|
|
|
514.1
|
|
|
|
62.8
|
|
|
|
15.7
|
|
|
|
(113.3
|
)
|
|
|
(22.0
|
)
|
Residential HVAC products
|
|
|
470.5
|
|
|
|
426.2
|
|
|
|
524.5
|
|
|
|
44.3
|
|
|
|
10.4
|
|
|
|
(98.3
|
)
|
|
|
(18.7
|
)
|
Commercial HVAC products
|
|
|
362.5
|
|
|
|
397.9
|
|
|
|
515.2
|
|
|
|
(35.4
|
)
|
|
|
(8.9
|
)
|
|
|
(117.3
|
)
|
|
|
(22.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
1,899.3
|
|
|
$
|
1,807.9
|
|
|
$
|
2,269.7
|
|
|
$
|
91.4
|
|
|
|
5.1
|
%
|
|
$
|
(461.8
|
)
|
|
|
(20.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
56.1
|
|
|
$
|
54.0
|
|
|
$
|
(391.9
|
)
|
|
$
|
2.1
|
|
|
|
3.9
|
%
|
|
$
|
445.9
|
|
|
|
*
|
%
|
Technology products
|
|
|
12.1
|
|
|
|
(274.0
|
)
|
|
|
(39.2
|
)
|
|
|
286.1
|
|
|
|
*
|
|
|
|
(234.8
|
)
|
|
|
*
|
|
Residential HVAC products
|
|
|
23.6
|
|
|
|
15.2
|
|
|
|
(176.8
|
)
|
|
|
8.4
|
|
|
|
55.3
|
|
|
|
192.0
|
|
|
|
*
|
|
Commercial HVAC products
|
|
|
5.7
|
|
|
|
39.7
|
|
|
|
34.2
|
|
|
|
(34.0
|
)
|
|
|
(85.6
|
)
|
|
|
5.5
|
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
97.5
|
|
|
|
(165.1
|
)
|
|
|
(573.7
|
)
|
|
|
262.6
|
|
|
|
*
|
|
|
|
408.6
|
|
|
|
71.2
|
|
Unallocated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-petition reorganization items
|
|
|
|
|
|
|
(22.5
|
)
|
|
|
|
|
|
|
22.5
|
|
|
|
100.0
|
|
|
|
(22.5
|
)
|
|
|
*
|
|
Loss contingency related to the Companys indemnification
of a lease guarantee
|
|
|
|
|
|
|
3.9
|
|
|
|
(6.4
|
)
|
|
|
(3.9
|
)
|
|
|
(100.0
|
)
|
|
|
10.3
|
|
|
|
*
|
|
Unallocated, net
|
|
|
(26.9
|
)
|
|
|
(20.9
|
)
|
|
|
(29.9
|
)
|
|
|
(6.0
|
)
|
|
|
(28.7
|
)
|
|
|
9.0
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating earnings (loss)
|
|
$
|
70.6
|
|
|
$
|
(204.6
|
)
|
|
$
|
(610.0
|
)
|
|
$
|
275.2
|
|
|
|
*
|
%
|
|
$
|
405.4
|
|
|
|
66.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products(1)
|
|
$
|
34.6
|
|
|
$
|
22.1
|
|
|
$
|
25.0
|
|
|
$
|
12.5
|
|
|
|
56.6
|
%
|
|
$
|
(2.9
|
)
|
|
|
(11.6
|
)%
|
Technology products(2)
|
|
|
24.3
|
|
|
|
17.8
|
|
|
|
19.3
|
|
|
|
6.5
|
|
|
|
36.5
|
|
|
|
(1.5
|
)
|
|
|
(7.8
|
)
|
Residential HVAC products(3)
|
|
|
16.1
|
|
|
|
11.5
|
|
|
|
11.3
|
|
|
|
4.6
|
|
|
|
40.0
|
|
|
|
0.2
|
|
|
|
1.8
|
|
Commercial HVAC products(4)
|
|
|
16.5
|
|
|
|
12.1
|
|
|
|
12.1
|
|
|
|
4.4
|
|
|
|
36.4
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.9
|
|
|
|
(0.2
|
)
|
|
|
(50.0
|
)
|
|
|
(0.5
|
)
|
|
|
(55.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91.7
|
|
|
$
|
63.9
|
|
|
$
|
68.6
|
|
|
$
|
27.8
|
|
|
|
43.5
|
%
|
|
$
|
(4.7
|
)
|
|
|
(6.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
Predecessor
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2010
|
|
|
2009(a)
|
|
|
2008
|
|
|
Operating (loss) earnings margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
|
9.3
|
%
|
|
|
9.3
|
%
|
|
|
(54.7
|
)%
|
Technology products
|
|
|
2.6
|
|
|
|
(68.4
|
)
|
|
|
(7.6
|
)
|
Residential HVAC products
|
|
|
5.0
|
|
|
|
3.6
|
|
|
|
(33.7
|
)
|
Commercial HVAC products
|
|
|
1.6
|
|
|
|
10.0
|
|
|
|
6.6
|
|
Consolidated
|
|
|
3.7
|
%
|
|
|
(11.3
|
)%
|
|
|
(26.9
|
)%
|
Depreciation and amortization expense as a % of net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products(1)
|
|
|
5.7
|
%
|
|
|
3.8
|
%
|
|
|
3.5
|
%
|
Technology products(2)
|
|
|
5.2
|
|
|
|
4.4
|
|
|
|
3.8
|
|
Residential HVAC products(3)
|
|
|
3.4
|
|
|
|
2.7
|
|
|
|
2.2
|
|
Commercial HVAC products(4)
|
|
|
4.6
|
|
|
|
3.0
|
|
|
|
2.3
|
|
Consolidated
|
|
|
4.8
|
%
|
|
|
3.5
|
%
|
|
|
3.0
|
%
|
|
|
|
* |
|
Not applicable or not meaningful. |
|
(a) |
|
Represents the combined Successor period from December 20,
2009 to December 31, 2009 and the Predecessor period from
January 1, 2009 to December 19, 2009. |
|
(1) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $1.4 million and $1.3 million for
2010 and 2009, respectively. |
|
(2) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $9.3 million and $1.2 million for
2010 and 2009, respectively. |
|
(3) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $0.8 million, $0.3 million and
$0.2 million for 2010, 2009 and 2008, respectively. |
|
(4) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $0.7 million and $0.8 million for
2010 and 2009, respectively. |
76
The table below presents our financial information for the 2009
Predecessor, 2009 Successor and combined year ended
December 31, 2009 periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
Combined
|
|
|
|
Jan. 1, 2009 -
|
|
|
Successor
|
|
|
Year Ended
|
|
|
|
Dec. 19, 2009
|
|
|
Dec. 20, 2009 -
|
|
|
Dec. 31, 2009
|
|
|
|
(Restated)
|
|
|
Dec. 31, 2009
|
|
|
(Restated)
|
|
|
|
(Amounts in millions)
|
|
|
Net sales
|
|
$
|
1,763.9
|
|
|
$
|
44.0
|
|
|
$
|
1,807.9
|
|
Cost of products sold
|
|
|
1,266.0
|
|
|
|
35.2
|
|
|
|
1,301.2
|
|
Selling, general and administrative expense, net
|
|
|
372.6
|
|
|
|
8.5
|
|
|
|
381.1
|
|
Pre-petition reorganization items
|
|
|
22.5
|
|
|
|
|
|
|
|
22.5
|
|
Goodwill impairment charge
|
|
|
284.0
|
|
|
|
|
|
|
|
284.0
|
|
Amortization of intangible assets
|
|
|
22.2
|
|
|
|
1.5
|
|
|
|
23.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(203.4
|
)
|
|
|
(1.2
|
)
|
|
|
(204.6
|
)
|
Interest expense
|
|
|
(135.6
|
)
|
|
|
(3.6
|
)
|
|
|
(139.2
|
)
|
Investment income
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before gain on reorganization items, net
|
|
|
(338.8
|
)
|
|
|
(4.8
|
)
|
|
|
(343.6
|
)
|
Gain on reorganization items, net
|
|
|
619.1
|
|
|
|
|
|
|
|
619.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before provision (benefit) for income taxes
|
|
|
280.3
|
|
|
|
(4.8
|
)
|
|
|
275.5
|
|
Provision (benefit) for income taxes
|
|
|
85.0
|
|
|
|
(1.4
|
)
|
|
|
83.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
195.3
|
|
|
$
|
(3.4
|
)
|
|
$
|
191.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Net Sales
|
|
|
|
Predecessor
|
|
|
|
|
|
Combined
|
|
|
|
Jan. 1, 2009 -
|
|
|
Successor
|
|
|
Year Ended
|
|
|
|
Dec. 19, 2009
|
|
|
Dec. 20, 2009 -
|
|
|
Dec. 31, 2009
|
|
|
|
(Restated)
|
|
|
Dec. 31, 2009
|
|
|
(Restated)
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of products sold
|
|
|
71.8
|
|
|
|
80.0
|
|
|
|
72.0
|
|
Selling, general and administrative expense, net
|
|
|
21.1
|
|
|
|
19.3
|
|
|
|
21.1
|
|
Pre-petition reorganization items
|
|
|
1.3
|
|
|
|
|
|
|
|
1.2
|
|
Goodwill impairment charge
|
|
|
16.1
|
|
|
|
|
|
|
|
15.7
|
|
Amortization of intangible assets
|
|
|
1.2
|
|
|
|
3.4
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(11.5
|
)
|
|
|
(2.7
|
)
|
|
|
(11.3
|
)
|
Interest expense
|
|
|
(7.7
|
)
|
|
|
(8.2
|
)
|
|
|
(7.7
|
)
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before gain on reorganization items, net
|
|
|
(19.2
|
)
|
|
|
(10.9
|
)
|
|
|
(19.0
|
)
|
Gain on reorganization items, net
|
|
|
35.1
|
|
|
|
|
|
|
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before provision (benefit) for income taxes
|
|
|
15.9
|
|
|
|
(10.9
|
)
|
|
|
15.2
|
|
Provision (benefit) for income taxes
|
|
|
4.8
|
|
|
|
(3.2
|
)
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
|
11.1
|
%
|
|
|
(7.7
|
)%
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
The following table presents our financial information for 2010,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
Percentage Change
|
|
|
|
|
|
|
2009(a)
|
|
|
|
|
|
2010 to
|
|
|
2009 to
|
|
|
|
2010
|
|
|
(Restated)
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net Sales
|
|
$
|
1,899.3
|
|
|
$
|
1,807.9
|
|
|
$
|
2,269.7
|
|
|
|
5.1
|
%
|
|
|
(20.3
|
)%
|
Cost of products sold
|
|
|
1,391.8
|
|
|
|
1,301.2
|
|
|
|
1,673.5
|
|
|
|
(7.0
|
)
|
|
|
22.2
|
|
Selling, general and administrative expense, net
|
|
|
399.9
|
|
|
|
381.1
|
|
|
|
468.0
|
|
|
|
(4.9
|
)
|
|
|
18.6
|
|
Pre-petition reorganization items
|
|
|
|
|
|
|
22.5
|
|
|
|
|
|
|
|
100.0
|
|
|
|
*
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
284.0
|
|
|
|
710.0
|
|
|
|
100.0
|
|
|
|
60.0
|
|
Amortization of intangible assets
|
|
|
37.0
|
|
|
|
23.7
|
|
|
|
28.2
|
|
|
|
(56.1
|
)
|
|
|
16.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
|
|
70.6
|
|
|
|
(204.6
|
)
|
|
|
(610.0
|
)
|
|
|
*
|
|
|
|
66.5
|
|
Interest expense
|
|
|
(95.7
|
)
|
|
|
(139.2
|
)
|
|
|
(134.7
|
)
|
|
|
31.2
|
|
|
|
(3.3
|
)
|
Loss from debt retirement
|
|
|
|
|
|
|
|
|
|
|
(9.9
|
)
|
|
|
|
|
|
|
100.0
|
|
Investment income
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
(50.0
|
)
|
|
|
(75.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before gain on reorganization items, net
|
|
|
(25.0
|
)
|
|
|
(343.6
|
)
|
|
|
(753.8
|
)
|
|
|
92.7
|
|
|
|
54.4
|
|
Gain on reorganization items, net
|
|
|
|
|
|
|
619.1
|
|
|
|
|
|
|
|
(100.0
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(25.0
|
)
|
|
|
275.5
|
|
|
|
(753.8
|
)
|
|
|
*
|
|
|
|
*
|
|
(Benefit) provision for income taxes
|
|
|
(11.6
|
)
|
|
|
83.6
|
|
|
|
26.9
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(13.4
|
)
|
|
$
|
191.9
|
|
|
$
|
(780.7
|
)
|
|
|
*
|
%
|
|
|
*
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Net Sales
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
Change in Percentage
|
|
|
|
|
|
|
2009(a)
|
|
|
|
|
|
2010 to
|
|
|
2009 to
|
|
|
|
2010
|
|
|
(Restated)
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
%
|
|
|
|
%
|
Cost of products sold
|
|
|
73.3
|
|
|
|
72.0
|
|
|
|
73.7
|
|
|
|
(1.3
|
)
|
|
|
1.7
|
|
Selling, general and administrative expense, net
|
|
|
21.1
|
|
|
|
21.1
|
|
|
|
20.6
|
|
|
|
|
|
|
|
(0.5
|
)
|
Pre-petition reorganization items
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
1.2
|
|
|
|
(1.2
|
)
|
Goodwill impairment charge
|
|
|
|
|
|
|
15.7
|
|
|
|
31.3
|
|
|
|
15.7
|
|
|
|
15.6
|
|
Amortization of intangible assets
|
|
|
1.9
|
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
|
|
3.7
|
|
|
|
(11.3
|
)
|
|
|
(26.9
|
)
|
|
|
15.0
|
|
|
|
15.6
|
|
Interest expense
|
|
|
(5.0
|
)
|
|
|
(7.7
|
)
|
|
|
(5.9
|
)
|
|
|
2.7
|
|
|
|
(1.8
|
)
|
Loss from debt retirement
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
0.4
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before gain on reorganization items, net
|
|
|
(1.3
|
)
|
|
|
(19.0
|
)
|
|
|
(33.2
|
)
|
|
|
17.7
|
|
|
|
14.2
|
|
Gain on reorganization items, net
|
|
|
|
|
|
|
34.2
|
|
|
|
|
|
|
|
(34.2
|
)
|
|
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(1.3
|
)
|
|
|
15.2
|
|
|
|
(33.2
|
)
|
|
|
(16.5
|
)
|
|
|
48.4
|
|
(Benefit) provision for income taxes
|
|
|
(0.6
|
)
|
|
|
4.6
|
|
|
|
1.2
|
|
|
|
(5.2
|
)
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
(0.7
|
)%
|
|
|
10.6
|
%
|
|
|
(34.4
|
)%
|
|
|
(11.3
|
)%
|
|
|
45.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Not applicable or not meaningful. |
|
(a) |
|
Represents the combined Successor period from December 20,
2009 to December 31, 2009 and the Predecessor period from
January 1, 2009 to December 19, 2009. |
78
Year
ended December 31, 2010 as compared to the combined year
ended December 31, 2009 (Restated)
Net Sales. As discussed further in the
following paragraphs, net sales for 2010 increased by
approximately $91.4 million, or 5.1%, as compared to 2009.
The effect of changes in foreign currency exchange rates and
acquisitions increased net sales by approximately
$16.5 million and $4.2 million, respectively, in 2010.
Excluding the effect of changes in foreign currency exchange
rates and acquisitions, net sales for 2010 increased by
approximately $70.7 million as compared to 2009.
In the RVP segment, net sales for 2010 increased approximately
$19.7 million, or 3.4%, as compared to 2009. Net sales in
the RVP segment for 2010 reflect an increase of approximately
$9.1 million attributable to the effect of changes in
foreign currency exchange rates. Excluding the effect of changes
in foreign currency exchange rates, net sales in the RVP segment
for 2010 increased approximately $10.6 million as compared
to the same period of 2009. Excluding the effect of changes in
foreign currency exchange rates, the change in net sales for
2010 is primarily the result of an increase in the RVP
segments Canadian business of approximately
$7.5 million, and to a lesser extent an increase in the RVP
segments United States business of approximately
$2.8 million. The increase in the North American business
for 2010 is, in part, the result of an increase in total housing
starts in both Canada and the United States of approximately 27%
and 6%, respectively. An increase in residential remodeling and
replacement activity also contributed to the increase in 2010.
We estimate that shipments of between approximately
$2.5 million and $3.0 million were shipped to a
customer in the fourth quarter of 2010 that were higher than the
fourth quarter of 2009. We estimate that shipments to this
customer in the first quarter of 2011 will be approximately
$2.5 million to $3.0 million lower than the first
quarter of 2010. Excluding the effect of changes in foreign
currency exchange rates, the RVP segments European range
hood business was relatively flat in 2010 as compared to 2009.
Kitchen range hoods and bathroom exhaust fans are the largest
product categories sold in the RVP segment, accounting for
approximately 79% of the RVP segments total sales for both
2010 and 2009, respectively.
In the TECH segment, net sales for 2010 increased approximately
$62.8 million, or 15.7%, as compared to 2009. This increase
is primarily related to a new customer, which contributed
approximately $52.1 million to net sales for the segment
during 2010, and the effect of an acquisition which contributed
approximately $4.2 million of net sales in 2010.
In the R-HVAC segment, net sales for 2010 increased
approximately $44.3 million, or 10.4%, as compared to 2009.
This increase was driven largely by air conditioning sales of
approximately $25.0 million (of which we believe
approximately $4.0 million to $7.0 million were due to
uncertainty of product availability subsequent to
January 1, 2011) to customers serving the residential
site-built market for use as replacement products, and which
contributed to favorable fourth quarter 2010 performance as
compared to 2009. As a result, a portion of these shipments are
contributing to lower shipments in the first quarter of 2011 as
these customers work down their inventory levels. In addition,
we estimate that other shipments of between approximately
$3.5 million and $5.0 million were shipped to
customers in the fourth quarter of 2010 that would have
otherwise been shipped during the first quarter of 2011
primarily due to announced price increases effective
January 1, 2011. Federal tax credits for high efficiency
products are believed to have also contributed favorably to the
mix of products sold during 2010. Our net sales to customers
serving the manufactured housing markets, principally consisting
of air conditioners and furnaces, demonstrated modest growth
spurred by first time home buyer tax credits and certain state
funds directed toward replacing and upgrading the efficiency of
HVAC equipment in existing homes principally in the first half
of 2010.
In the C-HVAC segment, net sales for 2010 decreased
approximately $35.4 million, or 8.9%, as compared to 2009.
Net sales in the C-HVAC segment for 2010 reflect an increase of
approximately $7.4 million attributable to the effect of
changes in foreign currency exchange rates. Excluding the effect
of changes in foreign currency exchange rates, net sales in the
C-HVAC segment for 2010 decreased approximately
$42.8 million. This decrease is primarily the result of a
decline in the non-residential construction and retro-fit
markets, and lower prices on contracts negotiated in 2009 and
2010 and delivered in 2010. The decrease in 2010 is also the
result of the effect of approximately $3.9 million of net
sales recognized as revenue upon the resolution and collection
of retainage in the first quarter of 2009 without any associated
costs or expenses. Backlog for C-HVAC products was approximately
$179.8 million at December 31, 2010 as compared to
79
approximately $150.7 million at December 31, 2009.
This increase in backlog reflects an increase in orders during
the second half of 2010 (at prices lower than 2009 or the first
half of 2010) principally for jobs expected to be delivered
during the first half of 2011.
Foreign net sales, which are attributed based on the location of
our subsidiary responsible for the sale, were approximately
20.0% and 19.9% of consolidated net sales for 2010 and 2009,
respectively. Net sales from our Canadian subsidiaries were
approximately 11.5% and 11.0% of consolidated net sales for 2010
and 2009, respectively. Net sales from our Canadian subsidiaries
include net sales from the RVP and C-HVAC segments. Net sales
from our European subsidiaries were approximately 6.4% and 6.8%
of consolidated net sales for 2010 and 2009, respectively. Net
sales from our European subsidiaries include net sales primarily
from the RVP and C-HVAC segments.
Cost of Products Sold. Consolidated COGS for
2010 was approximately $1,391.8 million as compared to
approximately $1,301.2 million for 2009.
For 2010, COGS includes, among others:
(1) an increase of approximately $11.9 million related
to the effect of changes in foreign currency exchange rates,
(2) an increase in non-cash charges related to the
amortization of fair value allocated to inventory of
approximately $8.6 million as compared to 2009,
(3) an increase in depreciation expense of approximately
$6.2 million as compared to 2009,
(4) a reduction in warranty reserves of approximately
$4.8 million due to the Companys change in estimate
of expected warranty claims within the RVP and C-HVAC segments,
(5) a gain of approximately $3.0 million related to
the reversal of a loss contingency reserve that was previously
provided in 2009 related to one of our subsidiaries in our TECH
segment,
(6) an increase of approximately $2.0 million related
to an acquisition within the TECH segment during the third
quarter of 2010,
(7) a decrease in product liability expense of
approximately $2.9 million as compared to 2009, and
(8) a charge of approximately $1.9 million related to
a product safety upgrade program within the RVP segment.
For 2009, COGS includes, among others, (1) a loss
contingency reserve of approximately $3.0 million related
to one of our subsidiaries in our TECH segment and
(2) approximately $1.6 million of severance charges
related to certain reduction in workforce initiatives
implemented in all four segments. Excluding the effect of these
items, COGS for 2010 increased approximately $75.3 million
as compared to the same period of 2009.
COGS as a percentage of net sales increased from approximately
72.0% for 2009 to approximately 73.3% for 2010. These changes
are primarily due to the factors described above and below.
We continually review the costs of our product lines and look
for opportunities to help offset the rising costs of raw
materials and transportation when possible.
Overall, consolidated material costs for 2010 were approximately
$903.9 million, or 47.6% of net sales, as compared to
approximately $819.5 million, or 45.3% of net sales, for
2009. During 2010, we experienced higher material costs as a
percentage of net sales as compared to 2009 related primarily to
changes in product mix, as well as from higher prices related to
the purchases of copper, steel, aluminum, and purchased
components, such as compressors. A portion of these increases
was offset by strategic sourcing initiatives and improvements in
manufacturing processes.
As noted previously, in 2010, the Company experienced higher
commodity prices as compared to 2009 primarily related to the
purchase of copper, steel, and aluminum, as well as certain
purchased components, such as compressors. The Company
anticipates that commodity prices for 2011 will continue to
increase as
80
compared to 2010. Should these price levels continue or increase
further there can be no assurance that we will be able to
sufficiently increase sales prices to offset the adverse effect
on earnings from rising material costs.
Direct labor costs for 2010 were approximately
$110.2 million, or 5.8% of net sales, as compared to
approximately $107.7 million, or 6.0% of net sales, for
2009. The decrease in direct labor costs, as a percentage of net
sales, in 2010 as compared to 2009 is primarily the result of
changes in product mix, partially offset by lower sales prices
within the C-HVAC segment. Changes in production efficiencies
also impacted the change in direct labor costs as a percentage
of net sales in 2010 as compared to 2009.
Overhead and other costs, including freight, for 2010 were
approximately $377.7 million, or 19.9% of net sales, as
compared to approximately $374.0 million, or 20.7% of net
sales, for 2009. Overhead and other costs for 2010 includes,
among others, (1) approximately $12.2 million in
non-cash charges related to the amortization of fair value
allocated to inventory, (2) approximately $6.2 million
of increased depreciation expense, mostly due to fresh-start
accounting, as compared to 2009, (3) a reduction in
warranty reserves of approximately $4.8 million due to the
Companys change in estimate of expected warranty claims
within the RVP and C-HVAC segments, (4) a gain of
approximately $3.0 million related to the reversal of a
loss contingency reserve that was previously provided in 2009
related to one of our subsidiaries in our TECH segment,
(5) a decrease in product liability expense of
approximately $2.9 million as compared to 2009 and
(6) a charge of approximately $1.9 million related to
a product safety upgrade program within the RVP segment.
Overhead and other costs for 2009 includes, among others,
(1) approximately $3.6 million in non-cash charges
related to the amortization of fair value allocated to inventory
and (2) a loss contingency reserve of approximately
$3.0 million related to one of our subsidiaries in our TECH
segment. The remaining decrease in the percentage of overhead
and other costs to net sales for 2010 is primarily the result of
an increase in net sales without a proportionate increase in
costs, primarily related to the fixed nature of certain overhead
costs.
Freight costs were approximately 4.8% and 4.4% of net sales for
2010 and 2009, respectively. During 2010, we experienced
increased freight costs due to increased ocean freight costs, as
well as increased diesel fuel costs, as compared to the
comparable period of 2009. Continued strategic sourcing
initiatives and other cost reduction measures help mitigate
fluctuations in freight costs.
Overall, changes in COGS (including material, direct labor,
overhead and freight costs) as a percentage of net sales for one
period as compared to another period may reflect a number of
factors including changes in the relative mix of products sold,
the effect of changes in sales prices and material costs, as
well as changes in productivity levels.
In the RVP segment, COGS for 2010 was approximately
$427.1 million, or 70.9% of the segments net sales,
as compared to approximately $425.5 million, or 73.0% of
the segments net sales, for 2009. The decrease in the
percentage of COGS to net sales in 2010 primarily reflects a
decrease in overhead costs as a percentage of net sales, and to
a lesser extent a decrease in material costs as a percentage of
net sales, mostly in the first half of 2010, resulting primarily
from lower prices, in part from strategic sourcing initiatives,
related to the purchase of certain component parts. In the RVP
segment, overhead and other costs, including freight, for 2010
were approximately $148.8 million, or 24.7% of the
segments net sales, as compared to approximately
$151.2 million, or 25.9% of the segments net sales,
for 2009. The decrease in overhead costs as a percentage of net
sales for 2010 over 2009 primarily relates to increased sales
without a proportionate increase in overhead costs, partially
offset by higher freight costs.
COGS in the RVP segment for 2010 also reflects (1) an
increase of approximately $5.6 million related to the
effect of changes in foreign currency exchange rates, (2) a
reduction in warranty reserves of approximately
$4.1 million due to a change in estimate resulting from
favorable experience related to claims management improvements,
(3) an increase in depreciation expense of approximately
$3.1 million as compared to 2009, primarily as a result of
fresh-start accounting, (4) a decrease in product liability
expense of approximately $2.1 million as compared to 2009,
(5) a charge of approximately $1.9 million related to
a product safety upgrade program, and (6) approximately
$1.4 million in non-cash charges related to the
amortization of fair value allocated to inventory. COGS in the
RVP segment for 2009 also reflects (1) approximately
$1.3 million in non-cash charges related to the
amortization of fair value allocated to inventory and
(2) approximately
81
$1.1 million of severance charges related to certain
reduction in workforce initiatives implemented within the
segment.
In the TECH segment, COGS for 2010 was approximately
$289.1 million, or 62.4% of the segments net sales,
as compared to approximately $238.1 million, or 59.4% of
the segments net sales, for 2009. The increase in the
percentage of COGS to net sales for 2010 was primarily the
result of an increase in material costs as a percentage of net
sales primarily due to a change in product mix, partially offset
by a decrease in overhead costs as a percentage of net sales. In
the TECH segment, overhead and other costs, including freight,
for 2010 were approximately $60.7 million, or 13.1% of the
segments net sales, as compared to approximately
$58.0 million, or 14.5% of the segments net sales,
for 2009. The decrease in the percentage of overhead costs to
net sales for 2010 reflects an increase in net sales without a
proportionate increase in overhead costs and is net of the
effect of certain items as discussed below.
In the TECH segment, COGS for 2010 also includes
(1) approximately $9.3 million in non-cash charges
related to the amortization of fair value allocated to
inventory, (2) a gain of approximately $3.0 million
related to the reversal of a loss contingency reserve that was
previously provided in 2009 related to one of our subsidiaries
in the segment and (3) an increase of approximately
$2.0 million related to an acquisition during the third
quarter of 2010. In the TECH segment, COGS for 2009 also
includes (1) a loss contingency reserve of approximately
$3.0 million related to one of our subsidiaries in the
segment and (2) approximately $1.2 million in non-cash
charges related to the amortization of fair value allocated to
inventory.
In the R-HVAC segment, COGS for 2010 was approximately
$389.9 million, or 82.9% of the segments net sales,
as compared to approximately $354.4 million, or 83.2% of
the segments net sales, for 2009. The decrease in COGS as
a percentage of net sales for 2010 primarily reflects a decrease
in overhead costs as a percentage of net sales as a result of an
increase in sales without a proportionate increase in overhead
costs. In the R-HVAC segment, overhead and other costs,
including freight, for 2010 were approximately
$89.0 million, or 18.9% of the segments net sales, as
compared to approximately $83.6 million, or 19.6% of the
segments net sales, for 2009. Overhead costs in the R-HVAC
segment for 2010 also includes (1) an increase in non-cash
charges related to the amortization of fair value allocated to
inventory of approximately $0.5 million as compared to
2009, (2) an increase in depreciation expense of
approximately $3.6 million as compared to 2009 and
(3) a decrease in product liability expense of
approximately $1.3 million as compared to 2009. The
decrease in COGS as a percentage of net sales for 2010 was
partially offset by an increase in material costs as a
percentage of net sales resulting from a change in the mix of
products sold and higher prices related primarily to the
purchases of copper and certain purchased components. Material
costs in this segment are generally higher as a percentage of
net sales than our other segments and were approximately 60.4%
and 59.8% for 2010 and 2009, respectively.
In the C-HVAC segment, COGS for 2010 was approximately
$285.7 million, or 78.8% of the segments net sales,
as compared to approximately $283.2 million, or 71.2% of
the segments net sales, for 2009. The increase in COGS as
a percentage of net sales for 2010 primarily reflects lower
sales prices and an increase in material costs as a percentage
of net sales resulting from higher prices related to the
purchases of steel, copper and aluminum. The increase in COGS as
a percentage of net sales for 2010 also reflects the effect of
approximately $3.9 million of net sales recognized as
revenue upon the resolution and collection of retainage in the
first quarter of 2009 without any associated costs or expenses.
Direct labor costs in this segment are generally higher as a
percentage of net sales than our other segments and were
approximately 14.5% and 12.9% for 2010 and 2009, respectively.
The increase in direct labor as a percentage of net sales is
due, in part, to lower sales prices and lower production
efficiencies. In the C-HVAC segment, overhead and other costs,
including freight, for 2010 were approximately
$79.2 million, or 21.8% of the segments net sales, as
compared to approximately $81.2 million, or 20.4% of the
segments net sales, for 2009. The increase in overhead
costs as a percentage of net sales for 2010 is primarily due to
a decrease in sales volume and lower sales prices without a
proportionate decrease in overhead costs. In the C-HVAC segment,
COGS for 2010 also includes an increase of approximately
$6.3 million related to the effect of changes in foreign
currency exchange rates.
82
Selling, General and Administrative Expense,
Net. Consolidated selling, general and
administrative expense, net (SG&A) was
approximately $399.9 million for 2010 as compared to
approximately $381.1 million for 2009. SG&A as a
percentage of net sales remained unchanged at approximately
21.1% for 2010 and 2009. SG&A for 2010 reflects
(1) approximately $4.3 million of severance and other
charges related to the closure of certain facilities in the TECH
segment, (2) an increase of approximately $2.9 million
related to the effect of changes in foreign currency exchange
rates, (3) non-cash share-based compensation expense of
approximately $2.8 million, (4) a gain of
approximately $2.7 million relating to the reversal of a
portion of a loss contingency reserve provided in prior periods,
(5) approximately $2.2 million of fees and expenses
associated with the acquisition of Ergotron, and (6) an
increase of approximately $1.9 million related to an
acquisition within the TECH segment during the third quarter of
2010.
SG&A for 2009 includes, among others, (1) a gain of
approximately $3.9 million related to our revised estimate
of a loss contingency related to an indemnification of a lease
guarantee, (2) approximately $3.0 million of severance
charges related to certain reduction in workforce initiatives
implemented in all four segments, (3) valuation reserves of
approximately $2.8 million related to certain assets of a
foreign subsidiary that we shutdown in 2010 in the TECH segment,
(4) approximately $1.5 million of expense related to
early lease termination charges, (5) a gain of
approximately $0.7 million related to the favorable
settlement of litigation and (6) a gain of approximately
$0.6 million related to the sale of assets related to one
of our foreign subsidiaries.
Pre-Petition Reorganization Items. During
2009, we retained financial and legal advisors to assist us in
the analysis of our capital structure in light of economic
conditions. As a result, we incurred approximately
$22.5 million of advisory and other fees related to the
reorganization of our capital structure.
Goodwill Impairment Charge. During 2009, we
recorded an approximate $284.0 million non-cash impairment
charge to reduce the carrying amount of the TECH reporting
units goodwill to the estimated fair value based upon the
results of our goodwill impairment testing. See Note 4,
Summary of Significant Accounting Policies,
to the consolidated financial statements included elsewhere
herein.
Amortization of Intangible
Assets. Amortization of intangible assets,
including developed technology and backlog, increased from
approximately $23.7 million for 2009 to approximately
$37.0 million for 2010. This increase in 2010 as compared
to 2009 is primarily as a result of the effect of fair value
adjustments to intangible assets as a result of the application
of fresh-start accounting in December 2009.
Operating Earnings (Loss). Operating earnings
increased approximately $275.2 million from an operating
loss of approximately $204.6 million for 2009 to operating
earnings of approximately $70.6 million for 2010. The
operating loss for 2009 includes a non-cash goodwill impairment
charge of approximately $284.0 million related to the TECH
segment, as described above.
Operating earnings for 2010 includes, among others,
(1) approximately $27.8 million (of which
approximately $8.6 million relates to the change in
non-cash charges related to the amortization of fair value
allocated to inventory) of increased depreciation and
amortization expense related primarily to the effect of fair
value adjustments to inventory, property and equipment, and
intangible assets as a result of the application of fresh-start
accounting in December 2009,
(2) approximately $4.5 million of severance and other
charges related to the closure of certain facilities within the
TECH segment,
(3) a reduction in warranty reserves of approximately
$4.8 million due to the Companys change in estimate
of expected warranty claims within the RVP and C-HVAC segments,
(4) a gain of approximately $3.0 million related to
the reversal of a loss contingency reserve that was previously
provided in 2009 related to one of our subsidiaries in our TECH
segment,
(5) a decrease in product liability expense of
approximately $2.9 million as compared to 2009,
(6) non-cash share-based compensation expense of
approximately $2.8 million,
83
(7) a gain of approximately $2.7 million relating to
the reversal of a portion of a loss contingency reserve provided
in prior periods,
(8) approximately $2.2 million of fees and expenses
associated with the acquisition of Ergotron,
(9) charge of approximately $1.9 million related to a
product safety upgrade program within the RVP segment, and
(10) a gain of approximately $1.7 million related to
the effect of changes in foreign currency exchange rates.
Operating loss for 2009 includes, among others,
(1) advisory fees of approximately $22.5 million
related to the analysis of our capital structure in light of
economic conditions during 2009,
(2) approximately $4.6 million of severance charges
related to certain reduction in workforce initiatives
implemented in all four segments,
(3) a gain of approximately $3.9 million related to
our revised estimate of a loss contingency related to an
indemnification of a lease guarantee,
(4) a loss contingency reserve of approximately
$3.0 million related to one of our subsidiaries in our TECH
segment,
(5) valuation reserves of approximately $2.8 million
related to certain assets of a foreign subsidiary that we
shutdown in 2010 in the TECH segment,
(6) approximately $1.5 million of expense related to
early lease termination charges,
(7) a gain of approximately $0.7 million related to
the favorable settlement of litigation, and
(8) a gain of approximately $0.6 million related to
the sale of assets related to one of our foreign subsidiaries.
The remaining changes in operating earnings (loss) between 2010
as compared to 2009 are primarily due to the factors discussed
above and that follow.
In the RVP segment, operating earnings for 2010 were
approximately $56.1 million as compared to approximately
$54.0 million for 2009. The increase in the RVP
segments operating earnings for 2010 is primarily the
result of increased sales volume in the segments North
American business and a decrease in material and overhead costs
as a percentage of net sales.
Operating earnings for the RVP segment for 2010 also reflects
(1) approximately $12.5 million of increased
depreciation and amortization expense related primarily to the
effect of fair value adjustments to inventory, property and
equipment, and intangible assets as a result of the application
of fresh-start accounting in December 2009, (2) a reduction
in warranty reserves of approximately $4.1 million due to a
change in estimate resulting from favorable experience related
to claims management improvements, (3) a decrease in
product liability expense of approximately $2.1 million as
compared to 2009, (4) an increase of approximately
$2.0 million related to changes in foreign currency
exchange rates and (5) a charge of approximately
$1.9 million related to a product safety upgrade program.
Operating earnings for the RVP segment for 2009 also reflects
approximately $1.9 million of severance charges related to
certain reduction in workforce initiatives implemented within
the segment.
In the TECH segment, operating earnings for 2010 were
approximately $12.1 million as compared to an operating
loss of approximately $274.0 million for 2009. The TECH
operating loss for 2009 includes a non-cash goodwill impairment
charge of approximately $284.0 million. Operating earnings
for the TECH segment for 2010 includes (1) an increase in
non-cash charges related to the amortization of fair value
allocated to inventory of approximately $8.1 million as
compared to 2009, (2) approximately $4.5 million of
severance and other charges related to the closure of certain
facilities within the segment and (3) a gain of
approximately $3.0 million related to the reversal of a
loss contingency reserve that was previously provided in 2009
related
84
to one of our subsidiaries in the segment. The operating loss
for the TECH segment for 2009 also includes (1) a loss
contingency reserve of approximately $3.0 million related
to one of our subsidiaries and (2) valuation reserves of
approximately $2.8 million related to certain assets of a
foreign subsidiary that we shutdown in 2010. Excluding the
effect of these charges in 2010 and 2009, operating earnings
increased approximately $5.9 million for 2010 as compared
to 2009. This increase is primarily the result of a new
customer, which contributed approximately $52.1 million of
increased net sales, as noted previously, during 2010 partially
offset by an increase in material costs as a percentage of net
sales.
In the R-HVAC segment, operating earnings for 2010 were
approximately $23.6 million as compared to approximately
$15.2 million for 2009. The increase in the R-HVAC
segments operating earnings for 2010 is primarily a result
of an increase in sales volume and to a lesser extent, a
decrease in overhead and other costs as a percentage of net
sales, partially offset by an increase in material costs as a
percentage of net sales. Operating earnings for 2010 for the
R-HVAC segment also includes (1) approximately
$4.6 million (of which approximately $0.5 million
relates to the increase in non-cash charges related to the
amortization of fair value allocated to inventory) of increased
depreciation and amortization expense related primarily to the
effect of fair value adjustments to inventory, property and
equipment, and intangible assets as a result of the application
of fresh-start accounting in December 2009 and (2) a
decrease in product liability expense of approximately
$1.3 million as compared to 2009.
In the C-HVAC segment, operating earnings for 2010 were
approximately $5.7 million as compared to approximately
$39.7 million for 2009. This decrease in operating earnings
is primarily the result of a decrease in sales volume and
prices, increases in material costs as a percentage of net sales
primarily related to the purchase of steel, copper and aluminum,
and also includes the effect of approximately $3.9 million
of net sales recognized as revenue upon the resolution and
collection of retainage in the first quarter of 2009 without any
associated costs or expenses. Operating earnings for the C-HVAC
segment for 2010 also reflects (1) approximately
$4.7 million of increased amortization expense related
primarily to the effect of fair value adjustments to intangible
assets as a result of the application of fresh-start accounting
in December 2009 and (2) a reduction in warranty reserves
of approximately $0.7 million due to the Companys
change in estimate of expected warranty claims. Operating
earnings for the C-HVAC segment for 2009 also reflects
(1) approximately $1.3 million of expense related to
early lease termination charges, (2) approximately
$1.1 million of severance charges related to certain
reduction in workforce initiatives implemented within the
segment and (3) a gain of approximately $0.6 million
related to the sale of assets related to one of our foreign
subsidiaries.
Operating losses of foreign operations, consisting primarily of
the results of operations of our Canadian and European
subsidiaries, were approximately 5.8% of operating earnings
(before unallocated and corporate expenses) for 2010. Excluding
the non-cash goodwill impairment charge recorded in 2009,
operating earnings of foreign operations, consisting primarily
of the results of operations of our Canadian and European
subsidiaries, were approximately 5.9% of operating earnings
(before unallocated and corporate expenses) for 2009. Net sales
and earnings derived from international markets are subject to
economic, political and currency risks, among others.
Interest Expense. Interest expense decreased
approximately $43.5 million, or approximately 31.2%, during
2010 as compared to 2009. This decrease is primarily due to a
substantial reduction in total outstanding indebtedness as a
result of the cancellation of our 10% Senior Secured Notes
due 2013,
81/2% Senior
Subordinated Notes due 2014 and
97/8% Senior
Subordinated Notes due 2011 in connection with our bankruptcy
proceedings under Chapter 11, partially offset by the
effect of higher interest rates under our $300.0 million
asset-based revolving credit facility (the ABL
Facility) and from the issuance of our 11% Senior
Secured Notes due 2013 (the 11% Notes) in
conjunction with our reorganization under Chapter 11 during
2009. The decrease in interest expense was also offset by
interest expense from the issuance of our 10% Notes on
November 23, 2010.
Gain on Reorganization Items, net. In
conjunction with our emergence from bankruptcy in 2009, we
recorded a pre-tax gain on reorganization items, net of
approximately $619.1 million related to our
85
reorganization proceedings and the impact of adopting
fresh-start accounting. A summary of this restated net pre-tax
gain for the period ended December 19, 2009 is as follows
(amounts in millions):
|
|
|
|
|
Pre-tax reorganization items:
|
|
|
|
|
Gain on settlement of liabilities subject to compromise
|
|
$
|
539.9
|
|
Elimination of Predecessor deferred debt expense and debt
discount
|
|
|
(33.9
|
)
|
Elimination of deferred debt expense related to the Predecessor
ABL Facility
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
497.3
|
|
Post-petition professional fees and other reorganization costs
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
488.1
|
|
Non-cash pre-tax fresh-start accounting adjustments
|
|
|
131.0
|
|
|
|
|
|
|
Pre-tax gain on Reorganization Items, net
|
|
$
|
619.1
|
|
|
|
|
|
|
(Benefit) Provision for Income Taxes. The
benefit from income taxes for 2010 was approximately
$11.6 million as compared to a provision for income taxes
of approximately $83.6 million for 2009. The effective
income tax rate of a benefit of approximately 46.4% for 2010
differs from the expected United States federal statutory rate
of a benefit of 35% principally as a result of a tax benefit for
capitalized research and development costs and a decrease in
FIN 48 reserves, including interest, partially offset by an
increase in the valuation allowances on certain foreign
entities, nondeductible expenses and the effect of foreign
operations. In connection with the filing of our
U.S. federal tax return for the period ended
December 17, 2009 in the third quarter of 2010, we made an
election to capitalize for tax purposes research and development
costs. This election resulted in the creation of a deferred tax
asset that will be amortized over a 10 year period. As a
result of this election, we recorded a deferred tax benefit of
approximately $10.9 million, including a state tax benefit
of approximately $1.0 million, in 2010. The effective
income tax rate of approximately 30.3% for 2009 differs from the
expected United States federal statutory rate of 35% principally
as a result of the exclusion, from taxable income, of income
related to the discharge of indebtedness, and the reversal of
prior period valuation allowances against income recognized as a
result of fresh-start accounting adjustments, offset by the
non-deductibility of goodwill impairment charges.
In the third quarter of 2010, we reached a settlement related to
an income tax and VAT audit. The total amount that we paid in
connection with this settlement was approximately
$1.7 million, of which approximately $0.9 million
related to income taxes and approximately $0.8 million
related to VAT. The approximate $0.8 million related to VAT
was recorded within selling, general and administrative expense,
net in the accompanying 2010 consolidated statement of
operations. We had previously established income tax reserves
for these uncertain income tax positions totaling approximately
$2.3 million, including interest.
The change in the effective income tax rates between 2010 and
2009 is principally due to the fact that, as a result of our
reorganization in late 2009 and the related fresh-start
accounting adjustments, we are able to recognize the tax benefit
of our losses, and as such, additional valuation allowances are
not required. See Note 7, Income Taxes,
to the consolidated financial statements included elsewhere
herein.
Combined
year ended December 31, 2009 (Restated) as compared to the
year ended December 31, 2008
Net Sales. As discussed further in the
following paragraphs, net sales for 2009 decreased by
approximately $461.8 million, or 20.3%, as compared to
2008. The effect of changes in foreign currency exchange rates
reduced net sales by approximately $24.0 million in 2009.
Excluding the effect of changes in foreign currency exchange
rates, net sales for 2009 decreased approximately
$437.8 million as compared to 2008.
In the RVP segment, net sales for 2009 decreased approximately
$132.9 million or 18.6% as compared to 2008. Net sales in
the RVP segment for 2009 reflect a decrease of approximately
$11.8 million attributable to the effect of changes in
foreign currency exchange rates. Excluding the effect of changes
in foreign currency exchange rates, net sales in the RVP segment
for 2009 decreased approximately $121.1 million as compared
to 2008. The decrease is primarily a result of the decline in
residential new construction activity and to a lesser extent, a
decline in residential remodeling and replacement activity in
the United States and Canada. In 2009,
86
housing starts declined by approximately 39% and 29% in the
United States and Canada, respectively. The segments sales
to the remodeling and replacement market were adversely impacted
by tight availability of home equity loans which consumers often
use to finance such projects. Local currency net sales of our
European range hood business also declined due to the global
economic downturn. Kitchen range hoods and bathroom exhaust fans
are the largest product categories sold in the RVP segment,
accounting for approximately 79.3% of the RVP segments
total sales for 2009. Sales of range hoods and bathroom exhaust
fans for the RVP segments domestic subsidiaries decreased
approximately 12.7% in 2009, and excluding the effect of changes
in foreign currency exchange rates, sales of range hoods and
bathroom exhaust fans for the RVP segments foreign
subsidiaries decreased approximately 23.1% in 2009.
In the TECH segment, net sales for 2009 decreased approximately
$113.3 million or 22.0% as compared to 2008 primarily due
to a significant decline in volume due to the overall decline in
the residential and light-commercial construction and retro-fit
markets, as well as overall lower levels of consumer spending on
high-end electronic and home entertainment products. Net sales
in the TECH segment for 2009 include a decrease of approximately
$0.5 million attributable to the effect of changes in
foreign currency exchange rates. Excluding the effect of changes
in foreign currency exchange rates, net sales in the TECH
segment for 2009 decreased approximately $112.8 million.
In the R-HVAC segment, net sales for 2009 decreased
approximately $98.3 million or 18.7% as compared to 2008.
This decrease is primarily the result of lower sales volume of
HVAC products sold to residential site built and manufactured
housing customers driven largely by the sharp downturn in
residential construction activity and the overall economy.
Consistent with the industry, the majority of our products sold
in this segment are used in replacement applications. During the
economic downturn, we have seen a trend whereby consumers have
opted to repair existing units or use cheaper solutions for
cooling purposes in order to save money in the short-run rather
than purchase replacement units. Our net sales to customers
serving the manufactured housing markets, principally consisting
of air conditioners and furnaces, constituted approximately 4.7%
of our consolidated net sales for each of 2009 and 2008.
In the C-HVAC segment, net sales for 2009 decreased
approximately $117.3 million or 22.8% as compared to 2008.
Net sales in the C-HVAC segment for 2009 include a decrease of
approximately $11.7 million attributable to the effect of
changes in foreign currency exchange rates. Excluding the effect
of changes in foreign currency exchange rates, net sales in the
C-HVAC segment for 2009 decreased approximately
$105.6 million. The decrease is partly due to the fact that
the segment sold approximately $72.7 million related to a
large project in Saudi Arabia in 2008, with only minimal
follow-up
sales in 2009. This decline was partially offset by the
recognition of approximately $3.9 million of net sales
deferred in 2008 on this project which was recognized upon the
resolution and collection of retainage in the first quarter of
2009. The remaining decline in net sales for the segment is a
result of a decline in the non-residential construction and
retro-fit markets particularly in the second half of 2009.
Backlog for C-HVAC products was approximately
$150.7 million at December 31, 2009 and approximately
$202.0 million at December 31, 2008. The decrease in
backlog at December 31, 2009 as compared to
December 31, 2008 reflects a decrease in orders during the
final several months of 2009 for jobs expected to be delivered
during the first half of 2010.
Foreign net sales, which are attributed based on the location of
our subsidiary responsible for the sale, were approximately
19.9% and 21.2% of consolidated net sales for 2009 and 2008,
respectively. Net sales from our Canadian subsidiaries were
approximately 11.0% and 9.7% of consolidated net sales for 2009
and 2008, respectively. Net sales from our Canadian subsidiaries
include net sales from the RVP and C-HVAC segments. Net sales
from our European subsidiaries were approximately 6.8% and 8.9%
of consolidated net sales for 2009 and 2008, respectively. Net
sales from our European subsidiaries include net sales primarily
from the RVP and C-HVAC segments and to a lesser extent the TECH
segment.
Cost of Products Sold. Consolidated COGS for
2009 was approximately $1,301.2 million as compared to
approximately $1,673.5 million for 2008. COGS decreased in
2009 as compared to 2008, in part, due to a reduction in sales
levels, cost reduction measures initiated in 2008 and 2009 of
approximately $32.5 million, and a decrease of
approximately $18.7 million related to the effect of
changes in foreign currency exchange
87
rates. COGS as a percentage of net sales decreased from
approximately 73.7% for 2008 to approximately 72.0% for 2009
primarily due to the factors described below.
We continually review the costs of our product lines and seek
opportunities to increase prices to help offset the rising costs
of raw materials and transportation when possible. During 2008,
we implemented certain price increases, which carried over into
2009, in each of our four segments to help offset higher costs.
Overall, consolidated material costs for 2009 were approximately
$819.5 million, or 45.3% of net sales, as compared to
approximately $1,081.7 million, or 47.7% of net sales, for
2008. During 2009, we experienced lower material costs as
compared to 2008 related primarily to purchases of steel,
copper, aluminum, and related purchased components, such as
compressors, and fans/blowers. Strategic sourcing initiatives
and improvements in manufacturing processes also contributed to
the decrease in material costs in 2009 as compared to 2008.
In the second half of 2009, the price of certain commodities
(steel, copper, and aluminum) began to increase over price
levels experienced in the first half of 2009.
Direct labor costs for 2009 were approximately
$107.7 million, or 6.0% of net sales, as compared to
approximately $137.7 million or 6.1% of net sales, for
2008. The decrease in direct labor costs in 2009 as compared to
2008 is primarily the result of headcount reductions that
occurred during 2009.
Overhead costs, including freight, for 2009 were approximately
$374.0 million, or 20.7% of net sales, as compared to
approximately $454.1 million, or 20.0% of net sales, for
2008. The increase in the percentage of overhead costs to net
sales for 2009 is due, in part, to a decrease in sales volume
which results in lower absorption rates due, in part, to the
fixed nature of certain overhead costs.
Freight costs were approximately 4.4% and 5.4% of net sales for
2009 and 2008, respectively. During 2009, we experienced
decreased freight costs primarily due to decreased fuel
surcharges as compared to 2008. Continued strategic sourcing
initiatives and other cost reduction measures also help to
mitigate fluctuations in freight costs. These cost reduction
measures reduced the overall effect of freight costs on cost of
goods sold as a percentage of net sales for 2009 as compared to
2008.
Overall, changes in the COGS (including material, direct labor,
overhead and freight costs) as a percentage of net sales for one
period as compared to another period may reflect a number of
factors including changes in the relative mix of products sold,
the effect of changes in sales prices and material costs, as
well as changes in productivity levels.
In the RVP segment, COGS for 2009 was approximately
$425.5 million or 73.0% of the segments net sales, as
compared to approximately $546.3 million, or 76.3% of the
segments net sales for 2008. The decrease in the
percentage of COGS to net sales in 2009 reflects a decrease in
material costs as a percentage of net sales and to a lesser
extent, a decrease in direct labor costs as a percentage of net
sales. COGS in the RVP segment for 2009 also reflects (1) a
decrease of approximately $9.2 million related to the
effect of changes in foreign currency exchange rates, and
(2) an increase in product liability expense of
approximately $6.2 million as compared to 2008. COGS in the
RVP segment for 2008 includes costs and expenses incurred in
connection with the start up of a range hood facility in Mexico
of approximately $4.5 million.
In the TECH segment, COGS for 2009 was approximately
$238.1 million or 59.4% of the segments net sales, as
compared to approximately $286.8 million, or 55.8% of the
segments net sales for 2008. The increase in the
percentage of COGS to net sales is primarily as a result of an
increase in material costs as a percentage of net sales, and to
a lesser extent, an increase in overhead costs as a percentage
of net sales due to the fixed nature of certain overhead costs.
COGS in the TECH segment for 2009 also reflects a loss
contingency reserve of approximately $3.0 million related
to one of our subsidiaries in the segment and a decrease of
approximately $0.3 million related to the effect of changes
in foreign currency exchange rates.
In the R-HVAC segment, COGS for 2009 was approximately
$354.4 million, or 83.2% of the segments net sales,
as compared to approximately $448.0 million, or 85.4% of
the segments net sales, for 2008. The decrease in COGS as
a percentage of net sales for 2009 primarily reflects a decrease
in material costs as a percentage of net sales resulting
primarily from the purchase of steel, copper and aluminum, and
to a lesser
88
extent, a decrease in direct labor costs as a percentage of net
sales. Material costs in this segment are generally higher as a
percentage of net sales than our other segments and were
approximately 59.8% and 61.6% for 2009 and 2008, respectively.
In the C-HVAC segment, COGS for 2009 was approximately
$283.2 million, or 71.2% of the segments net sales,
as compared to approximately $392.4 million, or 76.2% of
the segments net sales, for 2008. Direct labor costs in
this segment are generally higher as a percentage of net sales
than our other segments and were approximately 12.9% and 11.8%
in 2009 and 2008, respectively. The decrease in COGS as a
percentage of net sales for 2009 primarily reflects a decrease
in material costs resulting primarily from the purchase of
steel, copper and aluminum, and to a lesser extent, from price
increases implemented in 2008, and also reflects the effect of
approximately $3.9 million of net sales deferred in 2008,
under a large contract, and recognized as revenue upon the
resolution and collection of retainage in the first quarter of
2009 without any associated costs. In the C-HVAC segment, COGS
for 2009 also includes a decrease of approximately
$9.2 million related to the effect of changes in foreign
currency exchange rates.
Selling, General and Administrative Expense,
Net. Consolidated selling, general and
administrative expense, net (SG&A) was
approximately $381.1 million for 2009 as compared to
approximately $468.0 million for 2008. SG&A decreased
in 2009 as compared to 2008, in part, due to cost reduction
measures initiated in 2008 and 2009 of approximately
$43.2 million and a decrease of approximately
$5.8 million related to the effect of changes in foreign
currency exchange rates. SG&A as a percentage of net sales
increased from approximately 20.6% for 2008 to approximately
21.1% for 2009 primarily as a result of the decline in net
sales, partially offset by the effect of certain expense
reduction measures as noted above.
Pre-Petition Reorganization Items. During
2009, we retained financial and legal advisors to assist us in
the analysis of our capital structure in light of economic
conditions. As a result, we incurred approximately
$22.5 million of advisory and other fees related to the
reorganization of our capital structure.
Goodwill Impairment Charge. During 2009, we
recorded an approximate $284.0 million non-cash impairment
charge to reduce the carrying amount of the TECH reporting
units goodwill to the estimated fair value based upon the
results of our goodwill impairment testing. During 2008, we
recorded an approximate $710.0 million non-cash impairment
charge to reduce the carrying amount of our goodwill to the
estimated fair value based upon the results of our goodwill
impairment testing. See Note 4, Summary of
Significant Accounting Policies, to the consolidated
financial statements included elsewhere herein.
Operating Earnings (Loss). Consolidated
operating loss decreased approximately $405.4 million from
approximately $610.0 million for 2008 to approximately
$204.6 million for 2009. During 2008, we recorded a
non-cash goodwill impairment charge of approximately
$710.0 million, and in 2009, we recorded a non-cash
goodwill impairment charge of approximately $284.0 million.
The operating loss for 2009 also includes approximately
$22.5 million of pre-petition reorganization items related
to the restructuring of our capital structure and a decrease of
approximately $0.6 million related to the effect of changes
in foreign currency exchange rates. Excluding the effect of
these non-cash goodwill impairment charges, pre-petition
reorganization items, and changes in foreign currency exchange
rates, operating earnings increased approximately
$1.3 million for 2009 as compared to 2008. The remaining
changes in operating loss are primarily due to the factors
discussed above and that follow.
For 2009, the RVP segment had operating earnings of
approximately $54.0 million as compared to an operating
loss of approximately $391.9 million for 2008. During 2008,
we recorded a non-cash impairment charge of approximately
$444.0 million to reduce the carrying amount of the RVP
segments goodwill to its estimated fair value based upon
the results of our goodwill impairment testing. Excluding the
effect of this non-cash goodwill impairment charge in 2008,
operating earnings increased approximately $1.9 million for
2009 as compared to 2008. The remaining increase in the RVP
segments operating earnings for 2009 is primarily a result
of a decrease in material and direct labor costs and expense
reductions, partially offset by lower sales volume. Operating
earnings for the RVP segment also reflects a decrease of
approximately $0.4 million related to changes in foreign
currency exchange rates.
89
For 2009, the TECH segment had an operating loss of
approximately $274.0 million as compared to an operating
loss of approximately $39.2 million for 2008. During 2009
and 2008, we recorded non-cash impairment charges of
approximately $284.0 million and $77.0 million,
respectively, to reduce the carrying amount of the TECH
segments goodwill to its estimated fair value based upon
the results of our goodwill impairment testing. Excluding the
effect of these non-cash goodwill impairment charges, operating
earnings decreased approximately $27.8 million for 2009 as
compared to 2008. In addition, we provided a valuation reserve
of approximately $2.8 million related to certain assets of
a foreign subsidiary in the TECH segment that was shut down in
2010. The remaining decrease is primarily the result of
decreased sales volume without a proportionate decrease in
overhead costs, and increased material costs, partially offset
by expense reductions. The 2009 operating loss for the TECH
segment also includes a loss contingency reserve of
approximately $3.0 million related to one of our
subsidiaries in the segment and was reduced by approximately
$0.7 million related to changes in foreign currency
exchange rates.
For 2009, the R-HVAC segment had operating earnings of
approximately $15.2 million as compared to an operating
loss of approximately $176.8 million for 2008. During 2008,
we recorded a non-cash impairment charge of approximately
$189.0 million to reduce the carrying amount of the R-HVAC
segments goodwill to its estimated fair value based upon
the results of our goodwill impairment testing. Excluding the
effect of this non-cash goodwill impairment charge in 2008,
operating earnings increased approximately $3.0 million for
2009 as compared to 2008. The remaining increase in the R-HVAC
segments operating earnings for 2009 is primarily a result
of a decrease in material costs, expense reductions, and to a
lesser extent direct labor costs, partially offset by lower
sales volume.
For 2009, the C-HVAC segment had operating earnings of
approximately $39.7 million as compared to approximately
$34.2 million for 2008. This increase is primarily the
result of a decrease in material costs relating to the purchase
of steel, copper and aluminum and to a lesser extent,
approximately $3.9 million of net sales deferred in 2008,
under a large contract, and recognized as revenue upon the
resolution and collection of retainage in the first quarter of
2009 without any associated costs or expenses. Operating
earnings for the C-HVAC segment also reflects an increase of
approximately $0.3 million related to changes in foreign
currency exchange rates.
Excluding the non-cash goodwill impairment charges recorded in
2009 and 2008, operating earnings of foreign operations,
consisting primarily of the results of operations of our
Canadian subsidiaries, were approximately 5.9% and 8.8% of
operating earnings (before unallocated and corporate expenses)
for 2009 and 2008, respectively. Net sales and earnings derived
from international markets are subject to the risks of currency
fluctuations, among others.
Interest Expense. Interest expense increased
approximately $4.5 million, or approximately 3.3%, during
2009 as compared to 2008. This increase is the net result of the
impact of higher interest rates of approximately
$6.8 million as a result of our 10% Notes and the
Predecessor ABL Facility, both of which were consummated on
May 20, 2008, and the impact of higher average principal
balances of approximately $9.1 million. In addition, our
interest expense increased approximately $1.7 million in
2009 due to increased amortization of deferred debt expense
related to the additional deferred financing costs associated
with the Predecessor 10% Notes and the Predecessor ABL
Facility. These increases were partially offset by a reduction
in interest expense of approximately $12.6 million related
to the Chapter 11 proceedings and the related elimination
of certain of our debt during 2009.
Loss from Debt Retirement. On May 20,
2008, we sold $750.0 million of our Predecessor
10% Notes and also entered into the Predecessor ABL
Facility. The net proceeds from the Predecessor 10% Notes
and the Predecessor ABL Facility were used to repay all of the
outstanding indebtedness under our then existing senior secured
credit facility, which included approximately
$675.5 million outstanding under our senior secured term
loan and approximately $80.0 million outstanding under the
revolving portion of the senior secured credit facility. The
redemption of our senior secured term loan resulted in a pre-tax
loss of approximately $9.9 million in the second quarter of
2008, primarily as a result of writing off unamortized deferred
debt expense.
Gain on Reorganization Items, net. In
conjunction with our emergence from bankruptcy in 2009, we
recorded a pre-tax gain on reorganization items, net of
approximately $619.1 million related to our
90
reorganization proceedings and the impact of adopting
fresh-start accounting. A summary of this restated net pre-tax
gain for the period ended December 19, 2009 is as follows
(amounts in millions):
|
|
|
|
|
Pre-tax reorganization items:
|
|
|
|
|
Gain on settlement of liabilities subject to compromise
|
|
$
|
539.9
|
|
Elimination of Predecessor deferred debt expense and debt
discount
|
|
|
(33.9
|
)
|
Elimination of deferred debt expense related to the Predecessor
ABL Facility
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
497.3
|
|
Post-petition professional fees and other reorganization costs
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
488.1
|
|
Non-cash pre-tax fresh-start accounting adjustments
|
|
|
131.0
|
|
|
|
|
|
|
Pre-tax gain on Reorganization Items, net
|
|
$
|
619.1
|
|
|
|
|
|
|
Provision for Income Taxes. The provision for
income taxes for 2009 was approximately $83.6 million as
compared to approximately $26.9 million for 2008. The
effective income tax rate of approximately 30.3% for 2009
differs from the expected United States federal statutory rate
of 35% principally as a result of the exclusion, from taxable
income, of income related to the discharge of indebtedness, and
the reversal of prior period valuation allowances against income
recognized as a result of fresh-start accounting adjustments,
offset by the non-deductibility of goodwill impairment charges.
The effective income tax rate of approximately (3.6)% for 2008
differs from the expected United States federal statutory rate
of 35% principally as a result of the estimated non-cash
goodwill impairment charge recorded in 2008, non-deductible
expenses, increases in valuation allowances against deferred tax
assets, state income tax provisions, the effect of foreign
operations and interest on uncertain tax positions. The change
in the effective income tax rates between 2009 and 2008 is
principally due to the tax effects of fresh-start accounting
adjustments. See Note 7, Income Taxes,
to the consolidated financial statements included elsewhere
herein.
During the third quarter of 2008, we evaluated the realizability
of our domestic deferred tax assets as a result of economic
conditions, our operating results and our revised forecast,
including the increase in future interest expense as a result of
the debt refinancing that occurred in May 2008. As a result of
this analysis during the third quarter of 2008, we established a
valuation allowance of approximately $14.6 million against
domestic deferred tax assets in existence at December 31,
2007. In addition, for the year ended December 31, 2008, we
recorded a valuation allowance against certain tax assets
related to domestic and foreign operating losses generated in
2008 of approximately $40.9 million. During 2009, prior to
the Effective Date, we provided an additional federal, foreign
and state valuation allowance of approximately
$57.0 million. In assessing the need for a valuation
allowance, we assessed the available means of recovering our
deferred tax assets, including the ability to carry back net
operating losses, available deferred tax liabilities, tax
planning strategies and projections of future taxable income. At
the time of the evaluation, we concluded that it was more likely
than not, based upon all available evidence, that a valuation
allowance was required for substantially all of our net domestic
deferred tax assets, and certain foreign deferred tax assets and
net operating losses.
As of December 31, 2009, as a result of income and related
deferred tax liabilities recognized through fresh-start
accounting, we have determined that a valuation allowance is no
longer required for most of our domestic deferred tax assets. We
have sufficient reversing deferred tax liabilities available so
that it is more likely than not that our deferred tax assets
will be realized. We continue to maintain a valuation allowance
for foreign net operating loss carryforwards and for certain
deferred tax assets that, if recognized, would result in capital
losses.
During 2009, we received a report of proposed audit adjustments
related to one of our foreign subsidiaries. In the report, the
taxing authorities proposed adjustments resulting in additional
income tax related penalties and interest up to a maximum amount
of approximately $5.0 million. We reviewed the report and
the related proposed adjustments. Based upon our review of the
audit report and related proposed adjustments, approximately
$1.5 million of additional taxes, interest and penalties
were recorded in 2009
91
related to these uncertain tax positions. At December 31,
2009, we had accrued a total of approximately $2.3 million
of tax, penalties and interest related to these proposed
adjustments (including approximately $0.8 million that had
been accrued in previous years).
Liquidity
and Capital Resources
Our primary liquidity needs are to fund general business
requirements, including working capital requirements, capital
expenditures, interest payments and debt repayments. Our
principal sources of liquidity are cash flows from subsidiaries,
existing unrestricted cash and cash equivalents, and the use of
borrowings under the ABL Facility. The indentures related to our
10% Notes, 8.5% Notes, the credit agreements governing
our ABL Facility and Term Loan Facility, and other agreements
governing our indebtedness and the indebtedness of our
subsidiaries contain certain restrictive financial and operating
covenants, including covenants that restrict our ability and the
ability of our subsidiaries to complete acquisitions, pay
dividends, incur indebtedness, make investments, sell assets,
and take certain other corporate actions. See Note 8,
Notes, Mortgage Notes and Obligations Payable
to the consolidated financial statements and Note G,
Notes, Mortgage Notes and Obligations Payable
to the unaudited condensed consolidated financial statements
included elsewhere herein and Debt Covenant
Compliance below.
We believe that our unrestricted cash and cash equivalents as of
December 31, 2010, our estimated cash flows from our
subsidiaries and borrowings available under our ABL Facility
will be sufficient to fund our operations, anticipated capital
expenditures and debt repayment obligations through at least the
next twelve months based on our current operating plan.
We believe that our primary long-term capital requirements
relate to servicing and repaying our indebtedness. At
October 1, 2011, we had aggregate principal outstanding of
$250.0 million under the 10% Notes,
$500.0 million in aggregate principal outstanding under the
8.5% Notes (excluding approximately $7.0 million of
unamortized debt discount), $348.3 million in aggregate
principal outstanding under the Term Loan Facility (excluding
approximately $7.8 million of unamortized debt discount)
and approximately $77.0 million under the ABL Facility. We
are currently obligated to make periodic principal and interest
payments under the 10% Notes, the 8.5% Notes, the ABL
Facility, the Term Loan Facility, as well as other indebtedness.
Additionally, we will be required to repay amounts outstanding
under the ABL Facility in 2015, under our 10% Notes in 2018
and under our 8.5% Notes in 2021. We will be required to
make scheduled quarterly payments each equal to 0.25% of the
original principal amount of the Term Loan Facility, with the
balance due in 2017. See Contractual
Obligations below for detail on our payment obligations
under our indebtedness.
Our ability to make payments on our indebtedness and to fund
planned capital expenditures will depend on our ability to
generate cash in the future and to access the capital markets.
Our ability to generate cash in the future will be dependent
upon, among other things, the performance of our operating
segments, and general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control.
Our ability to repay our outstanding indebtedness will also
depend on our ability to access the capital markets in order to
refinance all amounts outstanding under the 10% Notes, the
8.5% Notes, the ABL Facility and the Term Loan Facility as
we do not anticipate generating sufficient cash flow from
operations to repay such amounts in full. We cannot assure you
that funds will be available to us in the capital markets,
together with cash generated from operations, in an amount
sufficient to enable us to pay our indebtedness or to fund our
other liquidity needs. We cannot assure you that we will be able
to refinance any of our indebtedness, including the
10% Notes, the 8.5% Notes, the ABL Facility and the
Term Loan Facility, on commercially reasonable terms or at all.
If we cannot service our indebtedness, we may have to take
actions such as selling assets, seeking additional equity or
reducing or delaying capital expenditures, strategic
acquisitions, investments and alliances. We cannot assure you
that any such actions, if necessary, could be effected on
commercially reasonable terms or at all.
Second
Quarter 2011 Debt Transactions
On April 26, 2011, the Company successfully completed the
private placement of $500.0 million in aggregate principal
amount of the 8.5% Notes. The Company also entered into the
Term Loan Facility. The Company borrowed $350.0 million
aggregate principal under the Term Loan Facility at a 5.25%
interest rate
92
on April 26, 2011, which resulted in net debt to the
Company of approximately $348.2 million, after deducting an
original issue discount of approximately $1.8 million. The
Company received approximately $827.3 million of net
proceeds in connection with the issuance of the 8.5% Notes
and Term Loan Facility, after deducting approximately
$20.9 million of underwriting commissions and legal,
accounting and other expenses incurred. As discussed further
below, the Company used approximately $825.0 million of
these net proceeds to repurchase or redeem all of the
Companys 11% Senior Secured Notes, which included
approximately $753.3 million of aggregate outstanding
principal balance, approximately $37.8 million of tender
and redemption premiums and approximately $33.9 million of
accrued but unpaid interest as of the redemption dates. Net cash
from these debt transactions of approximately $2.3 million
was retained by the Company for general corporate purposes.
The following is a summary of sources and uses in the second
quarter of 2011 related to these debt transactions:
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Sources:
|
|
|
|
|
Proceeds from issuance of the 8.5% Notes
|
|
$
|
500.0
|
|
Proceeds from Term Loan Facility after deducting original issue
discount of approximately $1.8 million
|
|
|
348.2
|
|
|
|
|
|
|
Total sources
|
|
|
848.2
|
|
|
|
|
|
|
Uses:
|
|
|
|
|
Repurchase or redemption of 11% Notes
|
|
|
(753.3
|
)
|
Tender and redemption premiums for 11% Notes
|
|
|
(37.8
|
)
|
Accrued and unpaid interest through the date of tender or
redemption
|
|
|
(33.9
|
)
|
|
|
|
|
|
Subtotal11% Notes repurchase or redemption
|
|
|
(825.0
|
)
|
Underwriting commissions and legal, accounting and other expenses
|
|
|
(20.9
|
)
|
|
|
|
|
|
Total uses
|
|
|
(845.9
|
)
|
|
|
|
|
|
Net cash to Nortek
|
|
$
|
2.3
|
|
|
|
|
|
|
During the second quarter of 2011, the Company used
approximately $731.1 million of the net proceeds to
repurchase approximately 88.5% or approximately
$666.6 million aggregate principal amount of the
11% Notes through a tender offer in accordance with the
terms of the Companys purchase and consent solicitation
statement dated April 12, 2011 (the Tender
Offer), which was completed on April 26, 2011. The
Tender Offer entitled the holders of the 11% Notes to
receive $1,052.50 per $1,000 in principal amount, plus accrued
and unpaid interest, and resulted in a supplemental indenture to
the 11% Notes, which substantially eliminated all
affirmative and restrictive covenants and certain events of
default under the indenture and provided for a shorter notice
period in connection with a voluntary redemption. The Company
used approximately $93.9 million to discharge its remaining
obligations under the 11% Note indenture (approximately
$86.7 million aggregated principal amount) through a
deposit in trust funds sufficient to pay and discharge all
remaining indebtedness, including accrued and unpaid interest,
on the 11% Notes in conjunction with the notices of
redemption sent to the remaining holders of the 11% Notes.
Under the terms of the supplemental indenture to the
11% Notes, the Company was permitted to redeem
$75.0 million aggregate principal amount at 103%, plus
accrued and unpaid interest, and the remaining
$11.7 million aggregate principal amount at 105%, plus
accrued and unpaid interest.
As certain holders of the new 8.5% Notes and Term Loan
Facility had previously held the 11% Notes up to the time
of their repurchase or redemption, in accordance with Accounting
Standards Codification
470-50,
Debt Modifications and Extinguishments
(ASC
470-50),
the Company determined that, of the total approximately
$60.5 million of original issue discounts, underwriting
commissions, legal, accounting and other expenses and tender and
redemption premiums, approximately $33.8 million should be
recorded as a loss on debt retirement and that approximately
$11.2 million and $15.5 million should be recorded as
deferred debt expense and debt discount, respectively, and
amortized over the lives of the respective debt instruments. The
93
approximately $11.2 million of deferred debt expense was
allocated approximately $6.3 million to the 8.5% Notes
and approximately $4.9 million to the Term Loan Facility.
The approximately $15.5 million of debt discount was
allocated approximately $7.2 million to the 8.5% Notes
and approximately $8.3 million to the Term Loan Facility.
Based on the initial interest rate of 5.25% for the Term Loan
Facility, the Company expects that its annual cash interest
costs will be reduced by approximately $22.0 million as a
result of the debt transactions described above. Approximately
$82.9 million of annual cash interest related to the
11% Notes will be eliminated and replaced by approximately
$60.9 million of annual cash interest related to the
8.5% Notes and the Term Loan Facility.
Cash
Flows
Net cash provided by operating activities decreased by
approximately $40.7 million from approximately
$74.5 million for the first nine months of 2010 to
approximately $33.8 million for the first nine months of
2011. This change was primarily the result of a decrease in net
earnings (after the exclusion of non-cash items, including loss
from debt retirement of approximately $33.8 million) of
approximately $17.5 million combined with an increase in
working capital needs of approximately $24.8 million
primarily related to sales expected to occur in the fourth
quarter of 2011.
For fiscal year 2010, net cash provided by operating activities
increased approximately $18.7 million from approximately
$28.2 million for 2009 to approximately $46.9 million
for 2010. This change was primarily the net result of an
increase in net earnings (after the exclusion of non-cash items)
of approximately $40.4 million, partially offset by an
increase in working capital needs of approximately
$22.3 million.
Net cash used in investing activities increased approximately
$29.0 million from approximately $20.1 million for the
first nine months of 2010 to approximately $49.1 million
for the first nine months of 2011. This increase was primarily
the result of an increase in net cash paid for businesses
acquired of approximately $21.7 million, an investment in a
joint venture of approximately $5.3 million and an increase
in capital expenditures of approximately $1.3 million.
Capital expenditures were approximately $13.9 million and
$12.6 million for the first nine months of 2011 and 2010,
respectively. Capital expenditures were approximately
$19.8 million for the year ended December 31, 2010 and
are expected to be between approximately $20.0 million and
$25.0 million for 2011.
For fiscal year 2010, net cash used in investing activities
increased approximately $269.4 million from approximately
$34.0 million for 2009 to approximately $303.4 million
for 2010. This increase was primarily the result of an increase
in payments for acquisitions of approximately
$271.1 million and an increase in capital expenditures of
approximately $1.4 million. Capital expenditures were
approximately $19.8 million for 2010 as compared to
approximately $18.4 million for 2009.
Net cash from financing activities increased by approximately
$105.6 million from net cash used in financing activities
of approximately $90.8 million for the first nine months of
2010 to net cash provided by financing activities of
approximately $14.8 million for the first nine months of
2011. This change is primarily the result of the second quarter
2011 debt transactions as noted above of approximately
$36.0 million, an increase in borrowings of approximately
$32.7 million and a decrease in payments relating to
outstanding borrowings of approximately $38.7 million.
For fiscal year 2010, net cash from financing activities
increased by approximately $311.4 million from net cash
used in financing activities of approximately $86.8 million
for 2009 to net cash provided by financing activities of
approximately $224.6 million for 2010. This change is
primarily the result of an increase in net borrowings of
approximately $316.9 million, including the issuance of our
10% Notes in November 2010, partially offset by fees
incurred related to our 10% Notes and ABL Facility of
approximately $9.5 million.
As discussed earlier, we generally use cash flows from
operations, and where necessary borrowings, to finance our
capital expenditures and strategic acquisitions, to meet the
service requirements of existing indebtedness and for working
capital and other general corporate purposes.
94
Outstanding
Indebtedness
We had consolidated debt at October 1, 2011 and
December 31, 2010 of approximately $1,182.9 and
$1,119.6 million, respectively, consisting of the following:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2011
|
|
|
December 31, 2010
|
|
|
|
(Amounts in millions)
|
|
|
11% Notes
|
|
$
|
|
|
|
$
|
753.3
|
|
8.5% Notes, net of discount
|
|
|
493.0
|
|
|
|
|
|
Term Loan Facility, net of discount
|
|
|
340.5
|
|
|
|
|
|
10% Notes
|
|
|
250.0
|
|
|
|
250.0
|
|
ABL Facility
|
|
|
77.0
|
|
|
|
85.0
|
|
Long-term notes, mortgage notes and other indebtedness, net
|
|
|
20.3
|
|
|
|
22.7
|
|
Short-term bank obligations
|
|
|
2.1
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,182.9
|
|
|
$
|
1,119.6
|
|
|
|
|
|
|
|
|
|
|
During the first nine months of 2011, we had a net increase in
our debt of approximately $63.3 million resulting primarily
from the second quarter 2011 debt transactions as noted
previously, which resulted in a net increase in outstanding
borrowings of approximately $81.2 million, partially offset
by a net decrease in borrowings under our ABL Facility of
approximately $8.0 million, quarterly payments related to
the Term Loan Facility of approximately $1.7 million and
net payments relating to subsidiary debt of approximately
$9.0 million. The remaining increase of approximately
$0.8 million relates to the effect of changes in foreign
currency exchange rates and debt discount amortization. Our debt
to equity ratio increased from approximately 7.1:1 at
December 31, 2010 to approximately 11.6:1 at
October 1, 2011 primarily as a result of the net increase
in indebtedness as noted above and a decrease in
stockholders investment, primarily related to the net loss
for the first nine months of 2011. On October 28, 2011, we
voluntarily repaid $25.0 million of outstanding borrowings
under our ABL Facility and accordingly have classified such
amount as current maturities of long-term debt in the
accompanying unaudited condensed consolidated balance sheet as
of October 1, 2011.
During 2010, we had a net increase in our debt of approximately
$234.3 million resulting from:
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Issuance of 10% Notes
|
|
$
|
250.0
|
|
Payments, net of borrowings, under our ABL Facility
|
|
|
(5.0
|
)
|
Additional borrowings related primarily to our foreign
subsidiaries
|
|
|
43.1
|
|
Issuance of unsecured notes related to acquisitions in 2010
|
|
|
1.2
|
|
Other principal payments
|
|
|
(54.1
|
)
|
Changes in foreign currency exchange rates and other
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
$
|
234.3
|
|
|
|
|
|
|
At October 1, 2011 and December 31, 2010, our
subsidiary, Best, was not in compliance with certain maintenance
covenants with respect to one of its loan agreements with
borrowings outstanding of approximately $0.8 million and
$1.4 million at October 1, 2011 and December 31,
2010, respectively. As a result, we reclassified the long-term
portion of outstanding borrowings under this agreement of
approximately $0.6 million as a current liability on our
consolidated balance sheet at December 31, 2010. The lender
has not taken any action related to the covenant noncompliance
at this time. The next measurement date for the maintenance
covenant is for the year ended December 31, 2011 and we
believe it is probable that Best will not be in compliance with
such covenants at such time. No assurances can be given that the
lender will continue to not take any action and accordingly, we
could be required to repay this outstanding borrowing if
non-compliance is not cured or waived, as the case may be. In
the event this lender accelerates this loan, additional
indebtedness of Best under a different loan agreement with
borrowings outstanding of approximately $1.1 million and
$1.7 million at October 1, 2011 and December 31,
2010, respectively, could also become immediately due and
payable if such cross-default is not waived. As a result, we
have also reclassified the
95
long-term portion of this additional indebtedness of
approximately $0.2 million and $0.9 million as a
current liability on our consolidated balance sheet at
October 1, 2011 and December 31, 2010, respectively.
Contractual
Obligations
The following is a summary of our estimated future cash
obligations at December 31, 2010, including those of our
subsidiaries, under debt obligations (excluding approximately
$17.5 million in debt discount), interest expense (based
upon interest rates in effect at the time of the preparation of
this summary), capital lease obligations, minimum annual rental
obligations primarily for non-cancelable lease obligations
(operating leases), acquisition agreements, purchase
obligations, other long-term liabilities and other obligations.
Debt and interest payments in the table below reflect the
financing transactions during 2010 as previously described (see
Note 8, Notes, Mortgage Notes and Obligations
Payable, and Note 11, Commitments and
Contingencies, to the consolidated financial
statements included elsewhere herein) and has further been
updated from the amounts presented in our
Form 10-K
for the year ended December 31, 2010 to reflect the
following:
|
|
|
|
|
All payments related to the 11% Notes have been excluded to
reflect the impact of the repurchase and redemption discussed
above.
|
|
|
|
The estimated impact of the 8.5% Notes due 2021 with a
first interest payment of October 15, 2011 has been added.
|
|
|
|
The estimated impact of the Term Loan Facility has been added
and includes the quarterly principal payments of $875,000
through maturity on April 26, 2017 at the initial interest
rate of 5.25%.
|
|
|
|
The impact of the net decrease in amounts borrowed under the ABL
Facility of approximately $8.0 million in the first nine
months of 2011 and the change in the maturity of the ABL
Facility from 2013 to 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
2011
|
|
|
2012 & 2013
|
|
|
2014 & 2015
|
|
|
2016 & Thereafter
|
|
|
Total
|
|
|
|
(Amounts in millions)
|
|
|
Notes, mortgage notes and obligations payable(1)
|
|
$
|
10.4
|
|
|
$
|
9.0
|
|
|
$
|
84.7
|
|
|
$
|
1,084.5
|
|
|
$
|
1,188.6
|
|
Interest payments(2)(3)(4)
|
|
|
63.3
|
|
|
|
184.9
|
|
|
|
184.5
|
|
|
|
336.1
|
|
|
|
768.8
|
|
Capital lease obligations
|
|
|
2.1
|
|
|
|
6.8
|
|
|
|
3.8
|
|
|
|
0.3
|
|
|
|
13.0
|
|
Operating lease obligations
|
|
|
19.8
|
|
|
|
26.5
|
|
|
|
12.7
|
|
|
|
3.7
|
|
|
|
62.7
|
|
Other purchase obligations
|
|
|
9.8
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
9.9
|
|
Other liabilities(5)
|
|
|
7.9
|
|
|
|
39.3
|
|
|
|
34.9
|
|
|
|
96.9
|
|
|
|
179.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
113.3
|
|
|
$
|
266.6
|
|
|
$
|
320.6
|
|
|
$
|
1,521.5
|
|
|
$
|
2,222.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes notes payable and other short-term obligations of
approximately $8.6 million. |
|
(2) |
|
Based upon interest rates in effect at December 31, 2010 or
in the case of our 8.5% Notes and Term Loan Facility, based
upon the initial interest rates in effect on April 26, 2011. |
|
(3) |
|
Subsidiary debt used for working capital purposes such as lines
of credit are estimated to continue through December 31,
2018 in the above table. |
|
(4) |
|
Includes interest payments on the ABL Facility which are
estimated to continue through 2015 in the above table. |
|
(5) |
|
Includes pension, profit sharing and other post-retirement
benefits (see Note 10, Pension, Profit Sharing and
Other Post-Retirement Benefits, to the consolidated
financial statements included elsewhere herein). |
Nortek, its subsidiaries, affiliates or significant shareholders
may from time to time, in their sole discretion, purchase,
repay, refinance, redeem or retire any of our outstanding debt,
in privately negotiated or open market transactions, by tender
offer or otherwise, which may be subject to restricted payment
limitations.
96
Adequacy
of Liquidity Sources
At October 1, 2011, we had approximately $57.2 million
of unrestricted cash and cash equivalents to fund our cash flow
needs for the remainder of 2011. During 2011, we expect that it
is reasonably likely that the following major cash requirements
will occur as compared to 2010:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2011
|
|
2010
|
|
|
(Amounts in millions)
|
|
Interest payments, net
|
|
$
|
63.3
|
|
|
$
|
86.6
|
|
Principal payments, net
|
|
|
10.4
|
|
|
|
146.7
|
|
Capital lease obligations
|
|
|
2.1
|
|
|
|
2.4
|
|
Completed acquisitions and contingent earn out payments
|
|
|
0.4
|
|
|
|
285.2
|
|
Capital expenditures
|
|
|
25.0
|
|
|
|
19.8
|
|
Operating lease and other rental payments
|
|
|
27.7
|
|
|
|
32.2
|
|
Defined benefit pension plan and other post-retirement benefit
plan contributions
|
|
|
7.9
|
|
|
|
4.3
|
|
With the exception of net interest and principal payments as
described previously, there have been no significant changes to
these cash requirements since December 31, 2010 and
accordingly the above table has not been updated for items other
than interest and principal payments as of October 1, 2011.
In addition, cash requirements for income tax payments will be
dependent on our level of earnings. In the first nine months of
2011 we received net tax refunds of approximately
$5.5 million and the full year of 2010, we made income tax
payments, net of refunds, of approximately $18.4 million.
Our ABL Facility consists of a $280.0 million
U.S. facility (with a $60.0 million sublimit for the
issuance of U.S. standby letters of credit and a
$20.0 million sublimit for U.S. swingline loans) and a
$20.0 million Canadian facility. As of December 16,
2011, we had approximately $52.0 million in outstanding
borrowings and approximately $14.7 million in outstanding
letters of credit under the ABL Facility. Based on the borrowing
base calculations as of December 9, 2011, at
December 16, 2011 we had excess availability of
approximately $189.0 million under the ABL Facility and
approximately $150.6 million of excess availability before
triggering the cash deposit requirements as discussed further
below.
As noted previously, the indenture and other agreements
governing our indebtedness and the indebtedness of our
subsidiaries, contain certain restrictive financial and
operating covenants, including covenants that restrict our
ability and the ability of our subsidiaries to complete
acquisitions, pay dividends, incur indebtedness, make
investments, sell assets, and take certain other corporate
actions. As of October 1, 2011, we had the capacity to make
certain payments, including dividends, under the 10% Notes
of approximately $25.0 million.
From time to time, we have evaluated and expect to continue to
evaluate possible acquisition transactions and possible
dispositions of certain of our businesses and at any given time
may be engaged in discussions or negotiations with respect to
possible acquisitions or dispositions.
On April 28, 2011, through wholly-owned subsidiaries, we
acquired all of the stock of TV One Broadcast Sales Corporation,
Barcom (UK) Holdings Limited and Barcom Asia Holdings, LLC
(collectively, TV One) for approximately
$26.0 million. In connection with the acquisition of TV One
in the second quarter of 2011, we also incurred approximately
$0.8 million of fees and expenses, which have been recorded
in selling, general and administrative expense, net in the
accompanying unaudited condensed consolidated statement of
operations. TV One sells a complete range of video signal
processing products for the professional audio/video and
broadcast markets.
On December 17, 2010, we acquired all of the outstanding
stock of Ergotron, Inc. (Ergotron). Ergotron is a
designer, manufacturer and marketer of innovative, ergonomic
mounting and mobility products for computer monitors, notebooks
and flat panel displays in the United States and other parts of
the world. The
97
estimated purchase price was approximately $299.3 million,
consisting of cash payments totaling approximately
$295.6 million, of which approximately $5.8 million
was paid in the first nine months of 2011, and an estimated
payable to the sellers of approximately $3.7 million
related to the remaining estimated reimbursement of federal and
state tax refunds due to Ergotron for the pre-acquisition period
in 2010. The final amounts due for the reimbursement of federal
and state tax refunds will be determined when the final
pre-acquisition tax returns are filed and the refunds are
collected, which is expected to occur in the fourth quarter of
2011.
On July 6, 2010, through our wholly-owned subsidiary,
Linear LLC, we acquired all of the issued and outstanding
membership interests of Skycam, LLC (Luxor) for
approximately $9.1 million (utilizing approximately
$7.9 million of cash and issuing an unsecured
4% subordinated note in the amount of $1.2 million due
January 2012). Luxor is an online retailer and distributor of
security cameras and digital video recorders.
Contingent consideration of approximately $1.3 million
related to the acquisition of certain entities was accrued for
at December 31, 2009, and was paid in February 2010. We do
not anticipate paying any further contingent consideration for
completed acquisitions as of October 1, 2011.
Working
Capital
Our working capital and current ratio decreased from
approximately $330.5 million and 1.9:1 at December 31,
2010 to approximately $312.2 million and 1.7:1 at
October 1, 2011. The decrease in working capital is
primarily the result of an increase in current maturities of
long-term debt due to the voluntary repayment of
$25.0 million in outstanding borrowings under the ABL
Facility in October 2011 and the April 2011 debt refinancing and
the effect of changes in accrued expenses and taxes, net as
described further below, partially offset by the effect of
changes in other working capital accounts as described further
below.
Our working capital increased from approximately
$320.8 million at December 31, 2009 to approximately
$330.5 million at December 31, 2010, while our current
ratio remained unchanged from December 31, 2009 to
December 31, 2010 at approximately 1.9:1. The change in
working capital is primarily the net result of a decrease in
current maturities of long-term debt and other short-term
obligations of approximately $32.1 million and the effect
of changes in accounts receivable and inventories as described
further below, partially offset by a decrease in unrestricted
cash and cash equivalents of approximately $31.9 million
and the effect of changes in accounts payable and accrued
expenses and taxes, net as described further below.
Refer to Cash Flows, Contractual
Obligations and Adequacy of Liquidity Sources
above for further discussions on the Companys working
capital and future uses of cash.
Unrestricted cash and cash equivalents decreased from
approximately $57.7 million at December 31, 2010 to
approximately $57.2 million at October 1, 2011. We
have classified as restricted, in the accompanying unaudited
condensed consolidated balance sheet, certain cash and cash
equivalents that are not fully available for use in our
operations. At October 1, 2011, approximately
$2.3 million (of which approximately $2.2 million is
included in long-term assets) of cash and cash equivalents were
held primarily as collateral to fund certain benefit obligations
relating to supplemental executive retirement plans.
Unrestricted cash and cash equivalents decreased from
approximately $89.6 million at December 31, 2009 to
approximately $57.7 million at December 31, 2010. We
have classified as restricted, in the accompanying consolidated
balance sheet, certain cash and cash equivalents that are not
fully available for use in our operations. At December 31,
2010, approximately $2.5 million (of which approximately
$2.4 million is included in long-term assets) of cash and
cash equivalents were held primarily as collateral to fund
certain benefit obligations relating to supplemental executive
retirement plans.
Accounts receivable, less allowances, increased approximately
$4.3 million, or approximately 1.5%, between
December 31, 2010 and October 1, 2011, while net sales
increased approximately $89.0 million, or approximately
19.2%, in the third quarter of 2011 as compared to the fourth
quarter of 2010. The change in accounts receivable includes a
decrease of approximately $1.8 million related to the
effect of changes in foreign currency exchange rates and an
increase of approximately $2.5 million related to
acquisitions made in 2011. Accounts receivable at
December 31, 2010 included approximately $22.1 million
of accounts receivable
98
related to Ergotron. As Ergotron was accounted for as if it had
been acquired on December 31, 2010, no net sales were
included in the fourth quarter of 2010. Excluding the effect of
changes in foreign currency exchange rates and acquisitions made
in 2011 from the October 1, 2011 accounts receivable
balance and Ergotron receivables from the December 31, 2010
accounts receivable balance, accounts receivable increased
approximately $25.7 million between December 31, 2010
and October 1, 2011 and primarily relates to increased
sales in the C-HVAC segment. The rate of change in accounts
receivable in certain periods may be different than the rate of
change in sales in such periods principally due to the timing of
net sales, as well as collections from our customers. Increases
or decreases in net sales near the end of any period generally
result in significant changes in the amount of accounts
receivable on the date of the balance sheet at the end of such
period. Accounts receivable from customers related to foreign
operations increased by approximately $6.0 million, or
approximately 7.2%, between December 31, 2010 and
October 1, 2011.
Accounts receivable, less allowances, increased approximately
$31.7 million, or approximately 12.7%, between
December 31, 2009 and December 31, 2010, while net
sales increased approximately $33.5 million, or
approximately 7.8%, in the fourth quarter of 2010 as compared to
the fourth quarter of 2009. The acquisition of Ergotron during
the fourth quarter of 2010 contributed approximately
$22.1 million to this increase in accounts receivable. The
remaining increase of approximately $9.6 million is
primarily the result of increases within the TECH and R-HVAC
segments due to increased sales in the fourth quarter of 2010 as
compared to the fourth quarter of 2009. The rate of change in
accounts receivable in certain periods may be different than the
rate of change in sales in such periods principally due to the
timing of net sales, as well as collections from our customers.
Increases or decreases in net sales near the end of any period
generally result in significant changes in the amount of
accounts receivable on the date of the balance sheet at the end
of such period. Excluding approximately $16.4 million of
Ergotrons foreign accounts receivable, accounts receivable
from customers related to foreign operations decreased by
approximately $0.6 million, or approximately 1.0%, between
December 31, 2009 and December 31, 2010.
Inventories increased approximately $15.5 million, or
approximately 4.9%, between December 31, 2010 and
October 1, 2011. The change in inventories includes a
reduction of approximately $7.5 million related to non-cash
amortization of the fair value of inventories, a decrease of
approximately $1.0 million related to the effect of changes
in foreign currency exchange rates and an increase of
approximately $2.9 million related to acquisitions made in
2011. Excluding the effect of non-cash amortization, changes in
foreign currency exchange rates and acquisitions, inventories
increased approximately $21.1 million between
December 31, 2010 and October 1, 2011 and primarily
relates to increased purchases in the C-HVAC segment in
anticipation of higher sales levels in the fourth quarter of
2011.
Inventories increased approximately $40.3 million, or
approximately 14.8%, between December 31, 2009 and
December 31, 2010. The change in inventories includes the
effect of the Ergotron and Luxor acquisitions during 2010 of
approximately $27.9 million and a reduction of
approximately $12.2 million related to non-cash
amortization of the fair value of inventories. Excluding the
effect of acquisitions and non-cash amortization, inventories
increased approximately $24.6 million between
December 31, 2009 and December 31, 2010 and primarily
relates to increased purchases in the TECH segment mostly to
support shipments in the first part of 2011 to a significant new
customer in 2010.
Other current assets increased approximately $16.7 million,
or approximately 121.0%, between December 31, 2010 and
October 1, 2011. This increase is primarily related to an
increase in the cost basis of inventory shipped of approximately
$16.5 million relating to a customer in the TECH segment in
which we have determined that cash basis accounting treatment is
appropriate for revenue recognition under the customer
agreement. See Risks and Uncertainties.
Accounts payable decreased approximately $5.1 million, or
2.9%, between December 31, 2010 and October 1, 2011
primarily due to decreases in the RVP and TECH segments related
to decreased purchases, partially offset by increases in the
C-HVAC segment related to increased purchasing in anticipation
of higher sales levels in the fourth quarter of 2011. The change
in accounts payable at October 1, 2011 also reflects a
decrease of approximately $0.5 million related to the
effect of changes in foreign currency exchange rates and an
increase of approximately $1.7 million related to
acquisitions made in 2011.
99
Accounts payable increased approximately $51.2 million, or
41.1%, between December 31, 2009 and December 31, 2010
and includes the effect of the Ergotron and Luxor acquisitions
during 2010 of approximately $29.8 million. Excluding the
effect of acquisitions, accounts payable increased approximately
$21.4 million between December 31, 2009 and
December 31, 2010 and primarily relates to increased
purchasing in the TECH segment mostly to support shipments in
the first part of 2011 to a significant new customer in 2010.
The change in accounts payable at December 31, 2010 also
reflects a decrease of approximately $1.1 million related
to the effect of changes in foreign currency exchange rates.
Accrued expenses and taxes, net increased approximately
$37.1 million, or approximately 19.2%, between
December 31, 2010 and October 1, 2011 primarily as a
result of an increase in accrued interest related to upcoming
interest payments on the Companys senior indebtedness, as
well as, an increase in accrued severance related to the
retirement of a Company executive.
Accrued expenses and taxes, net increased approximately
$17.1 million, or approximately 9.8%, between
December 31, 2009 and December 31, 2010 primarily as a
result of the acquisition of Ergotron which contributed
approximately $17.5 million to the change in accrued
expenses and taxes, net. This increase was partially offset by
the effect of accrued contingent consideration of approximately
$1.3 million at December 31, 2009 that was paid in
February 2010.
Changes in certain working capital accounts, as noted above,
between December 31, 2010 and October 1, 2011 and
between December 31, 2009 and 2010 differ from the changes
reflected in our consolidated statement of cash flows for such
period as a result of the specific items mentioned in the
preceding paragraphs and from other non-cash items, including
among others, the effect of changes in foreign currency exchange
rates.
Debt
Covenant Compliance
The agreements that govern the terms of our outstanding debt,
including the indentures that govern the 8.5% Notes and the
10% Notes, and the credit agreements that govern the ABL
Facility and Term Loan Facility, contain covenants that restrict
our ability and the ability of certain of our subsidiaries to,
among other things:
|
|
|
|
|
consolidate, merge or sell assets;
|
|
|
|
pay dividends or make other restricted payments;
|
|
|
|
incur additional indebtedness;
|
|
|
|
make loans or investments;
|
|
|
|
incur certain liens;
|
|
|
|
enter into transactions with affiliates; and
|
|
|
|
agree to dividend payment restrictions affecting certain of our
subsidiaries.
|
Additionally, pursuant to the terms of the ABL Facility, we will
be required to deposit cash from our material deposit accounts
(including all concentration accounts) daily in collection
accounts maintained with the administrative agent under the ABL
Facility, which will be used to repay outstanding loans and cash
collateralized letters of credit, if (i) excess
availability (as defined in the ABL Facility) falls below the
greater of $35.0 million or 15% of the borrowing base or
(ii) an event of default has occurred and is continuing. In
addition, under the ABL Facility, if (i) excess
availability falls below the greater of $30.0 million or
12.5% of the borrowing base or (ii) an event of default has
occurred and is continuing, we will be required to satisfy and
maintain a consolidated fixed charge coverage ratio measured on
a trailing four quarter basis of not less than 1.1 to 1.0. The
ABL Facility also restricts our ability to prepay our other
indebtedness, including the 10% Notes, the 8.5% Notes
and the Term Loan Facility, or designate any other indebtedness
as senior debt.
In addition, the indentures that govern our 8.5% Notes and
10% Notes and the credit agreement that governs the Term
Loan Facility contain certain covenants that limit our ability
to designate any of our
100
subsidiaries as unrestricted subsidiaries or permit any
restricted subsidiaries that are not guarantors under the
indenture from guaranteeing our debt or the debt of any of our
other restricted subsidiaries. The indentures governing our
8.5% Notes and 10% Notes and the credit agreement that
governs the Term Loan Facility also restrict our ability to
incur certain additional indebtedness (but does not restrict our
ability to incur indebtedness under the ABL Facility or certain
other forms of permitted debt) if the fixed charge coverage
ratio (FCCR) measured on a trailing four quarter
basis falls below 2.0 to 1.0. The FCCR is the ratio of the
Adjusted Consolidated Cash Flow, (ACCF, as described
in greater detail below) to Fixed Charges (as defined by the
8.5% Notes, 10% Notes and the Term Loan Facility), and
for such trailing four quarter period. As of October 1,
2011, under the 8.5% Notes, the FCCR was approximately 2.03
to 1.0.
A breach of the covenants under the indentures that govern our
8.5% Notes and 10% Notes or the credit agreements that
govern the ABL Facility and Term Loan Facility could result in
an event of default under the applicable indebtedness. Such a
default may allow the creditors to accelerate the related debt
and may result in the acceleration of any other debt to which a
cross-acceleration or cross-default provision applies. In
addition, an event of default under the ABL Facility would
permit the lenders under the ABL Facility to terminate all
commitments to extend further credit under that facility.
Furthermore, if we were unable to repay the amounts due and
payable under our ABL Facility, those lenders could proceed
against the collateral granted to them to secure that
indebtedness. In the event our lenders or noteholders accelerate
the repayment of our borrowings, we cannot provide assurance
that we and our subsidiaries would have sufficient assets to
repay such indebtedness.
As of October 1, 2011, we were in compliance with all
covenants under the indenture that governs the 8.5% Notes
and the credit agreements that govern the ABL Facility and Term
Loan Facility.
On October 21, 2011, the Company notified the Trustee for
the 10% Notes of the existence of a default, as defined in
the related indenture, resulting from the Companys failure
to timely provide a current report on
Form 8-K
including certain financial statements required by
Item 9.01 of
Form 8-K
related to the Companys acquisition of Ergotron. The
Company has subsequently filed an amendment to the
Form 8-K
relating to the Ergotron acquisition, which includes such
financial statements, on November 10, 2011. Accordingly,
there was no Event of Default, as defined in the indenture, and
the Company is in compliance with the terms, covenants and
conditions set forth in the indenture relating to the
10% Notes.
Consolidated
Cash Flow and Adjusted Consolidated Cash Flow
Consolidated Cash Flow (CCF) represents net earnings
(loss) before interest, income taxes, depreciation,
amortization, loss from debt retirement and the effects of the
Reorganization, including the effects of fresh-start accounting.
The ACCF is defined as the CCF further adjusted to exclude
certain cash and non-cash, non-recurring items. CCF and ACCF are
not defined terms under GAAP. Neither CCF nor ACCF should be
considered an alternative to operating income or net earnings
(loss) as a measure of operating results. There are material
limitations associated with making the adjustments to our
earnings to calculate CCF and ACCF and using these non-GAAP
financial measures as compared to the most directly comparable
GAAP financial measures. For instance, CCF and ACCF do not
include:
|
|
|
|
|
interest expense, and, because we have borrowed money in order
to finance our operations, interest expense is a necessary
element of our costs and ability to generate revenue;
|
|
|
|
depreciation and amortization expense, and, because we use
capital assets, depreciation and amortization expense is a
necessary element of our costs and ability to generate revenue;
|
|
|
|
income tax expense, and because the payment of taxes is part of
our operations, tax expense is a necessary element of our costs
and ability to operate; or
|
|
|
|
certain cash and non-cash, non-recurring items, and, because
such non-recurring items can, at times, affect our operating
results, the exclusion of such items is a material limitation.
|
We present CCF because we consider it an important supplemental
measure of our performance and believe it is frequently used by
our investors and other interested parties, as well as by our
management, in the
101
evaluation of companies in our industry, many of which present
CCF when reporting their results. In addition, CCF provides
additional information used by our management and Board of
Directors to facilitate internal comparisons to historical
operating performance of prior periods. Further, management
believes that CCF facilitates operating performance comparisons
from period to period because it excludes potential differences
caused by variations in capital structure (affecting interest
expense), tax positions (such as the impact of changes in
effective tax rates or net operating losses) and the age and
book depreciation of facilities and equipment (affecting
depreciation expense).
We believe that the inclusion of supplementary adjustments to
CCF applied in presenting ACCF are appropriate to provide
additional information to investors about the performance of the
business, and we are required to reconcile net earnings (loss)
to ACCF to demonstrate compliance with debt covenants. While the
determination of appropriate adjustments in the calculation of
ACCF is subject to interpretation under the terms of the
8.5% Notes, management believes the adjustments described
below are in accordance with the covenants in the
8.5% Notes.
The following table reconciles net earnings (loss) to CCF and
ACCF for the trailing four quarters ended October 1, 2011
and October 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
Trailing Four Quarters Ended
|
|
|
|
Year Ended
|
|
|
For the First Nine Months of
|
|
|
(1)+(2)−(3)
|
|
|
|
Oct. 2, 2010
|
|
|
|
Dec. 31 2010
|
|
|
2011
|
|
|
2010
|
|
|
Oct. 1, 2011
|
|
|
|
(Restated)
|
|
|
|
(Dollar amounts in millions)
|
|
Net (loss) earnings
|
|
$
|
(13.4
|
)
|
|
$
|
(55.1
|
)
|
|
$
|
(3.3
|
)
|
|
$
|
(65.2
|
)
|
|
|
$
|
479.1
|
|
(Benefit) provision for income taxes
|
|
|
(11.6
|
)
|
|
|
(22.9
|
)
|
|
|
(8.5
|
)
|
|
|
(26.0
|
)
|
|
|
|
71.5
|
|
Gain on reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(619.1
|
)
|
Loss from debt retirement
|
|
|
|
|
|
|
33.8
|
|
|
|
|
|
|
|
33.8
|
|
|
|
|
|
|
Interest expense
|
|
|
95.7
|
|
|
|
81.0
|
|
|
|
69.9
|
|
|
|
106.8
|
|
|
|
|
95.4
|
|
Investment income
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
(0.1
|
)
|
Depreciation and amortization expense
|
|
|
91.7
|
|
|
|
71.8
|
|
|
|
72.7
|
|
|
|
90.8
|
|
|
|
|
90.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Cash Flow
|
|
$
|
162.3
|
|
|
$
|
108.5
|
|
|
$
|
130.7
|
|
|
$
|
140.1
|
|
|
|
$
|
117.6
|
|
Pre-petition reorganization items(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.1
|
|
Investment income
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
0.1
|
|
Non-recurring cash charges(b)
|
|
|
2.4
|
|
|
|
0.6
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
0.4
|
|
Gross run-rate cost savings and synergies(c)
|
|
|
4.2
|
|
|
|
17.8
|
|
|
|
|
|
|
|
22.0
|
|
|
|
|
|
|
Run-rate adjustment(d)
|
|
|
(4.2
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
(4.7
|
)
|
|
|
|
|
|
Other non-recurring items(e)
|
|
|
(3.0
|
)
|
|
|
8.7
|
|
|
|
(3.0
|
)
|
|
|
8.7
|
|
|
|
|
2.9
|
|
Non-cash impairment charges(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.2
|
|
Share-based compensation expense
|
|
|
2.8
|
|
|
|
0.4
|
|
|
|
1.9
|
|
|
|
1.3
|
|
|
|
|
1.9
|
|
Net foreign exchange (gains) losses(g)
|
|
|
(0.3
|
)
|
|
|
1.1
|
|
|
|
(0.4
|
)
|
|
|
1.2
|
|
|
|
|
(0.8
|
)
|
Restructuring(h)
|
|
|
5.2
|
|
|
|
6.0
|
|
|
|
2.0
|
|
|
|
9.2
|
|
|
|
|
3.0
|
|
Pro-forma effect of acquisitions(i)
|
|
|
39.6
|
|
|
|
0.9
|
|
|
|
30.6
|
|
|
|
9.9
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Consolidated Cash Flow
|
|
$
|
209.1
|
|
|
$
|
143.6
|
|
|
$
|
161.9
|
|
|
$
|
190.8
|
|
|
|
$
|
176.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Relates to pre-petition advisory and other fees related to the
reorganization of our capital structure. |
|
(b) |
|
Relates to miscellaneous non-recurring cash items which are
limited by the covenants as defined in the indenture governing
the 8.5% Notes. |
102
|
|
|
(c) |
|
Relates to the gross amount of run-rate cost savings and
synergies as defined in the indenture governing the
8.5% Notes. |
|
(d) |
|
Per the indenture governing the 8.5% Notes, the amount of
run-rate synergies taken within any trailing four quarter period
shall not exceed 10% of adjusted consolidated cash flow, as
defined, prior to giving effect to such run-rate synergies. |
|
(e) |
|
For the trailing four quarters ended October 1, 2011
includes severance expense of approximately $8.7 million
related to the retirement of a Company executive. |
|
|
|
For the trailing four quarters ended October 2, 2010
includes (1) a reserve of approximately $1.6 million
related to certain assets of our foreign subsidiaries and
(2) approximately $1.3 million of expense related to
an early lease termination charge. |
|
(f) |
|
Includes non-cash goodwill impairment charges as well as
non-cash write-downs of certain of our foreign subsidiaries. |
|
(g) |
|
Non-cash foreign exchange gains related to intercompany debt not
indefinitely invested in our subsidiaries. |
|
(h) |
|
Includes severance charges associated with reduction in
workforce initiatives and charges related to the closure of
certain of our facilities. |
|
(i) |
|
Includes the pro-forma effect of our acquisitions of Ergotron,
Luxor and TV One as if each acquisition had occurred on the
first day of the four-quarter reference period. |
As noted previously, under the ABL Facility, if (i) excess
availability falls below the greater of $30.0 million or
12.5% of the borrowing base, or (ii) an event of default
has occurred and is continuing, we will be required to satisfy
and maintain a consolidated fixed charge coverage ratio measured
on a trailing four quarter basis of not less than 1.1 to 1.0. At
October 1, 2011, excess availability for purposes of
compliance with a covenant trigger event under the ABL Facility
was approximately $170.6 million (based upon the August
2011 borrowing base calculation), which exceeded
$30.0 million and 12.5% of the borrowing base. Our FCCR
under the ABL Facility at October 1, 2011 was 1.33 to 1.0.
Similar to the 8.5% Notes, the FCCR under the ABL Facility
is the ratio of the ACCF to Fixed Charges; however, in addition
to other differences, the ACCF under the ABL Facility is further
reduced by the aggregate amount of all capital expenditures for
the trailing four quarters and income taxes paid or payable in
cash for the trailing four quarters, and Fixed Charges under the
ABL Facility are further increased by mandatory principal
payments during the period. As a result, ACCF under the ABL
Facility at October 1, 2011 was approximately
$143.1 million.
Risks
and Uncertainties
In the fourth quarter of 2009, two of the Companys
subsidiaries in the TECH segment began shipping security
products to a new customer under an agreement to manufacture and
sell these security products. Under this agreement, the Company
recognized net sales of approximately $35.7 million and
$62.5 million during the third quarter and first nine
months of 2011, respectively. The Company recognized net sales
of approximately $34.2 million and $45.8 million
relating to this customer during the third quarter and first
nine months of 2010, respectively. The agreement includes
payment terms which are extended beyond the subsidiaries
normal payment terms. The Company has determined that cash basis
accounting treatment is appropriate for revenue recognition
under this agreement. Accordingly, the Company has deferred
revenue recognition on approximately $36.5 million and
$9.2 million of net sales at October 1, 2011 and
December 31, 2010, respectively, and recorded the cost
basis of related inventory shipped of approximately
$23.0 million and $6.5 million at October 1, 2011
and December 31, 2010, respectively, in other current
assets in the accompanying unaudited condensed consolidated
balance sheet. In addition, included in inventory is
approximately $6.7 million and $6.1 million at
October 1, 2011 and December 31, 2010, respectively,
of inventory related to this customer. As only limited cash
collection history was available in periods prior to
December 31, 2009, the Company recorded loss contingency
reserves of approximately $2.0 million as a reduction to
other current assets during the first nine months of 2010.
The customer has made approximately $27.3 million of
payments through December 5, 2011 in the fourth quarter of
2011, including approximately $13.3 million of delinquent
payments that were scheduled to be received in the third quarter
of 2011. In the fourth quarter, the customer notified the
Company of a product recall issue related to certain products
that the Company provided to the customer who in turn sold such
103
products to third parties. The Company is in the process of
negotiating a resolution of this and other contractual terms in
the customer agreement. These negotiations have not been
completed and, accordingly, the Company has recorded a warranty
reserve of approximately $6.0 million, representing the
Companys best estimate of the amount that may be
ultimately due for the product recall as of October 1,
2011. The Company made an approximate $2.9 million progress
payment to the customer for the product recall in the fourth
quarter of 2011.
Although the customer has continued to make payments, the
customer failed to make scheduled payments totaling
approximately $6.0 million through December 5, 2011,
with an additional $3.1 million of payments scheduled for
the remainder of the fourth quarter 2011. The customer has
indicated that failure to make scheduled payments was due to a
delay in the receipt of payments owed to them from their major
customer. The Companys customer has been formally notified
of the delinquent payments, and it is the Companys belief
that there is no dispute by the customer over the amounts due
based on the Companys correspondence and discussions with
the customer. The customer has since made a payment in the
fourth quarter of 2011 of approximately $7.1 million and
has withheld approximately $1.3 million of payments pending
resolution of amounts owed by the Company for the product recall
issue noted above. The Company has collected all remaining
amounts recorded in the consolidated balance sheet as of
October 1, 2011.
There can be no assurances that the Company will be able to
complete its negotiations with this customer or that the
customer will bring its account current and resume making
payments according to terms if the negotiations are not
completed. As such, it is possible that the Company may be
required to record additional reserves and may have reduced
sales and cost of sales from what would have otherwise been
recorded in the fourth quarter of 2011 related to this customer
relationship. The Company will continue to closely monitor the
situation with this customer.
As the Company records revenue on the cash basis of accounting
for this customer, the failure of the Company to receive
scheduled payments resulted in a corresponding reduction to
revenue and cost of goods sold in the Companys third
quarter 2011 operating results. If the customer brings its
account current and makes all other scheduled payments in the
fourth quarter of 2011, then sales and cost of sales will be
higher than what would otherwise have been recorded in the
fourth quarter of 2011.
In February 2011, management approved an initial plan to reduce
costs and improve production efficiencies at the Companys
subsidiary, Best, and during the third quarter of 2011, our
Board of Directors approved additional plans that are expected
to further improve the overall operational efficiencies of Best.
During the third quarter and first nine months of 2011, the
Company recorded expenses within SG&A of the RVP segment of
approximately $0.1 million and $0.6 million,
respectively, related to severance and other costs. The Company
also recorded additional severance costs of approximately
$0.4 million and $1.7 million within cost of products
sold (COGS) during the third quarter and first nine
months of 2011, respectively. In the fourth quarter of 2011, the
Company transferred certain operations from Italy to Poland in
accordance with the plan and has reached a tentative agreement
with the union regarding severance benefits, subject to the
approval of 100% of the terminated employees. The Company
anticipates recording additional expenses of between
approximately $10 million and $13 million related to
this restructuring plan consisting of severance and other
expenses in the fourth quarter of 2011 and through 2012.
Inflation,
Trends and General Considerations
From time to time, we have evaluated and expect to continue to
evaluate possible acquisition transactions and the possible
dispositions of certain of our businesses and at any given time
may be engaged in discussions or negotiations with respect to
possible acquisitions or dispositions.
The demand for our products is seasonal, particularly in the
Northeast and Midwest regions of the United States where
inclement weather during the winter months usually reduces the
level of building and remodeling activity in both the home
improvement and new construction markets. Our lower sales levels
usually occur during the first and fourth quarters. Since a high
percentage of our manufacturing overhead and operating expenses
are relatively fixed throughout the year, operating income and
net earnings tend to be lower
104
in quarters with lower sales levels. In addition, the demand for
cash to fund the working capital of our subsidiaries is greater
from late in the first quarter until early in the fourth quarter.
We are subject to the effects of changing prices and the impact
of inflation which could have a significant adverse effect on
our results of operations. In some circumstances, market
conditions or customer expectations may prevent us from
increasing the prices of our products to offset the inflationary
pressures that may increase costs in the future. During the
first nine months of 2011, we experienced higher material costs
as a percentage of net sales as compared to the same period of
2010 related primarily to changes in product mix, higher prices
related to the purchase of purchased components, such as
electrical components, plastics and packaging, as well as from
lower sales prices in the C-HVAC segment for jobs signed during
the second half of 2010 and delivered in the first half of 2011.
A portion of these increases was offset by strategic sourcing
initiatives and improvements in manufacturing processes. Should
these price levels continue or increase further there can be no
assurance that we will be able to sufficiently increase sales
prices to offset the adverse effect on earnings from rising
material costs.
Additionally, excluding the effect of acquisitions, freight
costs remained unchanged during the third quarter of 2011 as
compared to the third quarter of 2010 and increased slightly
during the first nine months of 2011 as compared to the first
nine months of 2010. This increase in freight costs during the
first nine months of 2011 is primarily due to increased fuel
costs worldwide. These increases were partially offset by a
decrease in ocean freight costs in the first nine months of 2011
due to overcapacity in the ocean market. Continued strategic
sourcing initiatives and other cost reduction measures help
mitigate fluctuations in freight costs.
As of October 1, 2011, December 31, 2010 and
December 31, 2009, approximately 5.2%, 5.3% and 6.5%,
respectively, of our workforce was subject to various collective
bargaining agreements.
A work stoppage at one of our facilities could cause us to lose
sales, incur increased costs and adversely affect our ability to
meet customers needs. A plant shutdown or a substantial
modification to a collective bargaining agreement could result
in material gains or losses or the recognition of an asset
impairment. As agreements expire and until negotiations are
completed, we do not know whether we will be able to negotiate
collective bargaining agreements on the same or more favorable
terms as the current agreements or at all and without production
interruptions, including labor stoppages.
Market
Risk
As discussed more specifically below, we are exposed to market
risks related to changes in interest rates, foreign currencies
and commodity pricing. We do not use derivative financial
instruments, except on a limited basis to periodically mitigate
certain economic exposures. We do not enter into derivative
financial instruments or other financial instruments for trading
purposes.
We are exposed to market risk from changes in interest rates
primarily through our investing and borrowing activities. In
addition, our ability to finance future acquisition transactions
may be impacted if we are unable to obtain appropriate financing
at acceptable interest rates.
Our investing strategy, to manage interest rate exposure, is to
invest in short-term, highly liquid investments and marketable
securities. Short-term investments primarily consist of federal
agency discount notes, treasury bills and bank issued money
market instruments with original maturities of 90 days or
less. At October 1, 2011 and December 31, 2010 and
2009, the fair value of our unrestricted and restricted
investments and marketable securities was not materially
different from their cost basis.
We manage our borrowing exposure to changes in interest rates by
optimizing the use of fixed rate debt with extended maturities.
At October 1, 2011, December 31, 2010 and
December 31, 2009, approximately 63.7%, 91.8% and 88.3%,
respectively, of the carrying value of our long-term debt was at
fixed interest rates. The remaining portion of our long-term
debt was at variable interest rates. Based upon interest rates
in effect at October 1, 2011, an overall unfavorable change
in interest rates of 100 basis points would result in an
additional charge to interest expense of approximately
$1.1 million for the remainder of 2011.
105
See the table set forth in item D (Long-term Debt) below,
Note 8, Notes, Mortgage Notes and Obligations
Payable, to the consolidated financial statements
included elsewhere herein and Note G, Notes, Mortgage
Notes and Obligations Payable, to the unaudited
condensed consolidated financial included elsewhere herein for
further disclosure of the terms of our debt.
Our results of operations are affected by fluctuations in the
value of the U.S. dollar as compared to the value of
currencies in foreign markets primarily related to changes in
the Euro, the Canadian Dollar and the British Pound. In the
third quarter and first nine months of 2011, and the full years
of 2010 and 2009, the net impact of changes in foreign currency
exchange rates was not material to our financial condition or
results of operations. The impact of changes in foreign currency
exchange rates related to translation resulted in a decrease in
stockholders investment of approximately $3.7 million
and $0.9 million for the third quarter and first nine
months of 2011, respectively; for the third quarter and first
nine months of 2010, resulted in an increase to
stockholders investment of approximately $3.2 million
and $1.1 million, respectively; and for 2010 and the 2009
Successor and Predecessor periods, resulted in an increase to
stockholders investment of approximately
$1.6 million, $0.7 million and $8.0 million,
respectively. The impact of changes in foreign currency exchange
rates related to transactions resulted in an increase in net
foreign exchange losses recorded in SG&A of approximately
$6.5 million and $4.6 million for the third quarter
and first nine months of 2011, respectively, as compared to the
same periods of 2010, a decrease in foreign exchange losses
recorded in SG&A of approximately $3.9 million for
2010 as compared to 2009, and an increase in foreign exchange
losses recorded in SG&A of approximately $5.4 million
for 2009 as compared to 2008.
We manage our exposure to foreign currency exchange risk
principally by trying to minimize our net investment in foreign
assets, including, the use of strategic short and long-term
borrowings at the foreign subsidiary level. Consistent with this
strategy, notes payable and other short-term obligations at
October 1, 2011 and December 31, 2010 consist
primarily of short-term borrowings by certain of our foreign
subsidiaries. At December 31, 2010 and 2009, our net
investment in foreign assets was approximately
$147.9 million and $133.5 million, respectively. An
overall unfavorable change in foreign exchange rates in effect
at December 31, 2010 of 10% would result in an approximate
$13.4 million reduction in equity as a result of the impact
on the cumulative translation adjustment. We generally do not
enter into derivative financial instruments to manage foreign
currency exposure.
|
|
C.
|
Commodity
Pricing Risk
|
We are subject to significant market risk with respect to the
pricing of our principal raw materials, which include, among
others, steel, copper, aluminum, plate mirror glass, various
chemicals, paints, plastics, motors and compressors. If prices
of these raw materials were to increase dramatically, we may not
be able to pass such increases on to customers and, as a result,
gross margins could decline significantly. We manage our
exposure to commodity pricing risk by continuing to diversify
our product mix, strategic buying programs and vendor partnering.
We generally do not enter into derivative financial instruments
to manage commodity-pricing exposure. At October 1, 2011,
December 31, 2010, and December 31, 2009, we did not
have any material outstanding commodity forward contracts.
The table that follows sets forth our long-term debt obligations
(excluding approximately $17.5 million of debt discount),
principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market values as of
December 31, 2010 and has been updated from the amounts
presented in our
Form 10-K
for the year ended December 31, 2010 to reflect the
following:
|
|
|
|
|
All payments related to the 11% Notes have been excluded to
reflect the impact of the repurchase and redemption discussed
above.
|
106
|
|
|
|
|
The estimated impact of the 8.5% Notes due 2021 with a
first interest payment of October 15, 2011 has been added.
|
|
|
|
The estimated impact of the Term Loan Facility has been added
and includes the quarterly principal payments of $875,000
through maturity on April 26, 2017 at the initial interest
rate of 5.25%.
|
|
|
|
The impact of the net decrease in amounts borrowed under the ABL
Facility of approximately $8.0 million in the first nine
months of 2011 and the change in the maturity of the ABL
Facility from 2013 to 2015.
|
Less than 1% of our total long-term indebtedness is denominated
in foreign currencies. The weighted average interest rates for
variable rate debt are based on December 31, 2010 interest
rates or in the case of our 8.5% Notes and Term Loan Facility,
based upon the initial interest rates in effect on
April 26, 2011.
Long-term
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Scheduled Maturity
|
|
|
Interest Rate
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
Year-Ending
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
$
|
5.5
|
|
|
$
|
7.0
|
|
|
$
|
12.5
|
|
|
|
6.4
|
%
|
|
|
3.3
|
%
|
|
|
4.7
|
%
|
2012
|
|
|
3.4
|
|
|
|
3.9
|
|
|
|
7.3
|
|
|
|
6.1
|
|
|
|
5.1
|
|
|
|
5.6
|
|
2013
|
|
|
4.7
|
|
|
|
3.8
|
|
|
|
8.5
|
|
|
|
6.4
|
|
|
|
5.1
|
|
|
|
5.8
|
|
2014
|
|
|
2.1
|
|
|
|
3.8
|
|
|
|
5.9
|
|
|
|
7.4
|
|
|
|
5.1
|
|
|
|
5.9
|
|
2015
|
|
|
1.8
|
|
|
|
80.8
|
|
|
|
82.6
|
|
|
|
7.5
|
|
|
|
5.5
|
|
|
|
5.5
|
|
Thereafter
|
|
|
750.3
|
|
|
|
334.5
|
|
|
|
1,084.8
|
|
|
|
9.0
|
|
|
|
5.2
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-term Debt at December 31, 2010(1)
|
|
$
|
767.8
|
|
|
$
|
433.8
|
|
|
$
|
1,201.6
|
|
|
|
8.9
|
%
|
|
|
5.3
|
%
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Market Value of Long-term Debt at October 1, 2011(2)
|
|
$
|
659.0
|
|
|
$
|
433.8
|
|
|
$
|
1,092.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes our 8.5% Notes with a total principal amount of
approximately $500.0 million, our 10% Notes with a
total principal amount of approximately $250.0 million,
outstanding borrowings under our ABL Facility of approximately
$77.0 million, and initial borrowings under our Term Loan
Facility of approximately $350.0 million. |
|
(2) |
|
We determined the fair market value of our 10% Notes and
8.5% Notes using available market quotes at October 1,
2011. For our remaining outstanding indebtedness (including
outstanding borrowings under the ABL Facility and Term Loan
Facility), we assumed that the carrying value of such
indebtedness approximated the fair value based upon the variable
interest rates associated with certain of these debt obligations
and our estimated credit risk. |
See Liquidity and Capital Resources and Note 8,
Notes, Mortgage Notes and Obligations
Payable, to the consolidated financial statements and
Note G, Notes, Mortgage Notes and Obligations
Payable, to the unaudited condensed consolidated
financial statements included elsewhere herein for further
information surrounding our outstanding debt obligations.
107
BUSINESS
General
Nortek was founded in 1967 and is headquartered in Providence,
Rhode Island. The Company is incorporated in the State of
Delaware.
We are a diversified manufacturer of innovative, branded
residential and commercial building products, operating within
four reporting segments:
|
|
|
|
|
the Residential Ventilation Products (RVP) segment,
|
|
|
|
the Technology Products (TECH) segment,
|
|
|
|
the Residential Air Conditioning and Heating Products
(R-HVAC) segment, and
|
|
|
|
the Commercial Air Conditioning and Heating Products
(C-HVAC) segment.
|
Through these segments, we manufacture and sell, primarily in
the United States, Canada and Europe, a wide variety of products
for the remodeling and replacement markets, the residential and
commercial new construction markets, the manufactured housing
market and the personal and enterprise computer markets.
Our performance is significantly impacted by the levels of
residential replacement and remodeling activity, as well as the
levels of residential and non-residential new construction. New
residential and non-residential construction activity and, to a
lesser extent, residential remodeling and replacement activity
are affected by seasonality and cyclical factors such as
interest rates, credit availability, inflation, consumer
spending, employment levels and other macroeconomic factors,
over which we have no control.
Additional information concerning our business is set forth in
Managements Discussion and Analysis of Financial
Condition and Results of Operations, included elsewhere
herein. Additional financial information on our reporting
segments, as well as, foreign and domestic operations is set
forth in Note 12, Segment Information and
Concentration of Credit Risk, to the consolidated
financial statements, and Note E, Segment
Information, to the unaudited condensed consolidated
financial statements, each included elsewhere herein.
Current
Capital Structure
Our capital structure currently consists of the following:
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ABL Facility. On December 17, 2010, we
executed a $300.0 million amended and restated asset-based
revolving credit facility, which terminates in 2015, with a
group of lenders (the ABL Facility). We had
approximately $52.0 million in outstanding borrowings and
$14.7 million in outstanding letters of credit under the
ABL Facility at December 16, 2011.
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Term Loan Facility. In April 2011, we entered
into a new senior secured term loan with certain lenders, UBS
AG, Stamford Branch, as administrative agent and collateral
agent, and the other agents party thereto (the Term Loan
Facility), that provides senior secured financing of
$350.0 million (which may be increased by up to
$200.0 million in certain circumstances). We had
approximately $348.3 million of outstanding borrowings
under the Term Loan Facility at December 16, 2011.
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10% Senior Notes due 2018. In November
2010, we issued a total principal amount of $250.0 million
in 10% Senior Notes due 2018 (the
10% Notes) to initial purchasers who then
resold the 10% Notes to certain institutional investors.
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8.5% Senior Notes due 2021. In April
2011, we issued a total principal amount of $500.0 million
in 8.5% Senior Notes due 2021 (the
8.5% Notes) to an initial purchaser who then
resold the 8.5% notes to certain institutional investors.
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Common Stock and Warrants. On
December 17, 2009, we issued 15,000,000 shares of
common stock, par value $0.01 per share and issued warrants that
may be exercised for a period of five years to purchase
789,474 shares of common stock at an exercise price of
$52.80 per share to certain of our
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pre-Reorganization creditors, including certain of our directors
and executive officers. During the first nine months of 2011,
175,261 shares of restricted common stock vested and
28,178 shares of common stock were issued upon the exercise
of stock options.
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Restricted Stock. On December 17, 2009,
we granted 710,731 shares of restricted common stock. In
addition, during the first nine months of 2011 and the full year
of 2010, we issued 55,616 shares and 2,000 shares,
respectively, of restricted stock and 264,484 shares and
11,750 shares, respectively, of restricted stock were
forfeited. The outstanding shares of restricted common stock
were issued to certain of our executive officers and are
eligible to vest in annual installments based upon the
achievement of specified levels of adjusted earnings before
interest, taxes, depreciation and amortization
(EBITDA), as defined in the applicable award
agreement, for each of the Companys 2010, 2011, 2012 and
2013 fiscal years.
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Options to Purchase Common Stock. On
December 17, 2009, we granted options to purchase
710,731 shares of common stock each at an exercise price of
$17.50 per share. In addition, during 2010 we granted options to
purchase 92,000 shares of common stock at exercise prices
ranging from $17.50 to $41.00 and options to purchase
21,750 shares of common stock were forfeited. In addition
during the first nine months of 2011, we granted options to
purchase 10,000 shares of common stock each at an exercise
price of $39.95 per share and options to purchase
247,187 shares of common stock were forfeited. These stock
options were issued to certain of our executive officers and
directors and vest at the rate of 20% on each anniversary of the
grant date, beginning with the first anniversary of the grant
date, with 100% vesting upon the fifth anniversary of the grant
date, and, unless terminated earlier, expire on the tenth
anniversary of the grant date.
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For further information regarding our ABL Facility, our Term
Loan Facility, our 10% Notes and our 8.5% Notes, see
Note 8, Notes, Mortgage Notes and Obligations
Payable, to the consolidated financial statements and
Note G, Notes, Mortgages Notes and Obligations
Payable, to the unaudited condensed consolidated
financial statements, each included elsewhere herein. For
further information regarding our common stock and warrants, see
Note 2, Reorganization Under Chapter 11 and
Current Capital Structure, and Note 3,
Fresh-Start Accounting (Restated), to the
consolidated financial statements, each included elsewhere
herein. For further information regarding our restricted stock
and options to purchase common stock, see Note 9,
Share-Based Compensation, to the consolidated
financial statements, included elsewhere herein.
2009
Bankruptcy and Reorganization
On December 17, 2009, we successfully emerged from
bankruptcy as a reorganized company after voluntarily filing for
bankruptcy on October 21, 2009 with the United States
Bankruptcy Court for the District of Delaware (the
Bankruptcy Court), pursuant to prepackaged plans of
reorganization (the Reorganization). The purpose of
the Reorganization was to reorganize our capital structure while
allowing us to continue to operate our business. The
Reorganization was necessary because it was determined that we
would be unable to operate our business and meet our debt
obligations under our pre-Reorganization capital structure.
As a result of the Reorganization, approximately
$1.3 billion of debt was eliminated. On December 29,
2009, the Bankruptcy Court closed the bankruptcy cases for
Norteks subsidiaries and on March 31, 2010 closed the
bankruptcy case for Nortek. On December 17, 2009 (the
Effective Date), we emerged from bankruptcy as a
reorganized company with a new capital structure as described
above.
The
Companys Business Segments
Residential
Ventilation Products Segment
Our RVP segment primarily manufactures and distributes room and
whole house ventilation and other products primarily for the
professional remodeling and replacement markets, residential new
construction market and do-it-yourself (DIY) market.
The principal products of the segment, which are sold under the
Broan®,
NuTone®,
Venmar®,
Best®
and
Zephyr®
brand names, among others, are:
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exhaust fans (such as bath fans and fan, heater and light
combination units), and
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indoor air quality products.
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Based on internal research and industry knowledge, we believe
that we are one of the worlds largest suppliers of
residential range hoods and exhaust fans and are the largest
supplier of these products in North America, in each case, based
on revenues. We also believe, based on internal research and
industry knowledge, that we are one of the leading suppliers in
Europe of luxury Eurostyle range hoods, based on
revenues. Our kitchen range hoods expel grease, smoke, moisture
and odors from the cooking area and are offered under an array
of price points and styles from economy to upscale models. The
exhaust fans we offer are primarily used in bathrooms to remove
humidity and odors and include combination units, which may have
lights, heaters or both. Our range hood and exhaust fan products
are differentiated on the basis of air movement as measured in
cubic feet per minute and sound output as measured in sones. The
Home Ventilating Institute in the United States certifies our
range hood and exhaust fan products, as well as our indoor air
quality products.
Our sales of kitchen range hoods and exhaust fans accounted for
approximately 14.1% and 10.3%, respectively, of consolidated net
sales in 2010, 14.2% and 10.3%, respectively, of consolidated
net sales in 2009 and approximately 15.0% and 10.2%,
respectively, of consolidated net sales in 2008.
We believe we are one of the largest suppliers in North America
of indoor air quality products, which include air exchangers, as
well as heat or energy recovery ventilators (HRVs or ERVs,
respectively) that provide whole house ventilation, based on
revenues. These systems bring in fresh air from the outdoors
while exhausting stale air from the home. Both HRVs and ERVs
moderate the temperature of the fresh air by transferring heat
from one air stream to the other. In addition, ERVs also modify
the humidity content of the fresh air. We also sell powered
attic ventilators, which alleviate heat built up in attic areas
and reduce deterioration of roof structures.
Since the late 1970s, homes have been built more airtight and
insulated in order to increase energy efficiency. According to
published studies, this trend correlates with an increased
incidence of respiratory problems such as asthma and allergies
in individuals. In addition, excess moisture, which may be
trapped in a home, has the potential to cause significant
deterioration to the structure and interiors of the home. Proper
intermittent ventilation in high concentration areas, such as
kitchens and baths, as well as whole house ventilation help to
mitigate these problems.
We sell other products in this segment, including, among others,
door chimes, medicine cabinets, trash compactors, ceiling fans
and central vacuum systems, by leveraging our strong brand names
and distribution network.
We sell the products in our RVP segment to distributors and
dealers of electrical and lighting products, kitchen and bath
dealers, retail home centers and private label customers under
the
Broan®,
NuTone®,
Venmar®,
Best®
and
Zephyr®
brand names, among others. Private label customers accounted for
approximately 17.4% of the net sales of this segment in 2010.
A key component of our operating strategy for this segment is
the introduction of new products and innovations, which
capitalize on the strong brand names and the extensive
distribution system of the segments businesses. New
product development efforts are focused on improving the style,
performance, cost, and energy efficiency of the products. In
this segment, we have recently introduced a line of upscale
range hoods encompassing the latest in style and functionality.
Also offered in this segment is a full line of
EnergyStar®
compliant ventilation fans including heavy-duty models ideal for
light commercial installations and offices, recessed fan/lights,
as well as 35 different models in the Ultra
Silenttm
Series. We believe that the variety of product offerings and new
product introductions help us to maintain and improve our market
position for our principal products. At the same time, we
believe that our status as a low-cost producer provides the
segment with a competitive advantage.
Our primary residential ventilation products compete with many
products supplied by domestic and international companies in
various markets. We compete with suppliers of competitive
products primarily on the basis of quality, distribution,
delivery and price. Although we believe we compete favorably
with other suppliers of residential ventilation products, some
of our competitors have greater financial and marketing
resources than this segment of our business.
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Product manufacturing in the RVP segment generally consists of
fabrication from coil and sheet steel and formed metal utilizing
stamping, pressing and welding methods, assembly with components
and subassemblies purchased from outside sources (principally
motors, fan blades, heating elements, wiring harnesses,
controlling devices, glass, mirrors, lighting fixtures,
polyethylene components and electronic components) and painting,
finishing and packaging.
Over the past several years, we have moved the production of
certain of our product lines from facilities in the U.S., Canada
and Italy to regions with lower labor costs, such as China,
Poland and Mexico. In addition to these moves, in 2008, we
consolidated the production of medicine cabinets from our
facilities in Los Angeles, California and Union, Illinois
to our facility in Cleburne, Texas, which was previously used to
manufacture range hoods.
This segments primary products compete globally with
products supplied by many domestic and international suppliers
in various markets. In the range hood market, this
segments primary global competitors are Elica Group, Faber
S.p.A. and Cata Electrodomesticas S.L.
Our RVP segment had 12 manufacturing plants and employed
approximately 2,600 full-time people as of October 1,
2011, of which approximately 200 are covered by collective
bargaining agreements which expire in 2011 and approximately 100
are covered by collective bargaining agreements which expire in
2013. We believe that our relationships with the employees in
this segment are satisfactory.
Technology
Products Segment
Our TECH segment, formerly known as the Home Technology Products
(HTP) segment, manufactures and distributes a broad
array of products designed to provide convenience and security
for residential and certain commercial applications. The
principal product categories sold in this segment are:
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audio/video distribution and control equipment,
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security and access control products, and
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digital display mounting and mobility products.
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The segments audio/video distribution and control
equipment products include whole-house audio/video systems,
video signal transmission and conversion devices, home
integration systems as well as certain accessories often used
with these systems such as structured wiring, power conditioners
and surge protectors. Whole-house audio/video systems include
multi-room/multi-source controllers and amplifiers, home theater
receivers, intercom systems, speakers, and control devices such
as keypads, remote controls and volume controls. The
segments speakers are primarily built-in (in-wall or
in-ceiling) and are primarily used in multi-room or home theater
applications. These products are sold under the
Niles®,
Elan®,
ATONtm,
SpeakerCraft®,
Proficient Audio
Systems®,
Sunfire®,
and
Xantech®
brand names, among others. The segments video signal
transmission and conversion devices allow conversion of video
signals into various formats as well as the transmission of
video signals to multiple display screens. In addition to
residential home theater applications, these products are often
used in non-residential applications such as retail outlets,
airports and casinos and are sold under the
Magentatm
and
Gefen®
brand names. The segments home integration systems include
software and hardware that facilitate the control of third-party
residential subsystems such as home theater, whole-house audio,
climate control, lighting, security and irrigation. These
products are sold under the Home
Logic®
and Elan
g!®
brand names. A specific application for lighting control is sold
by the segment under the
LiteTouch®
brand name. Other products in this category include power
conditioners and surge protectors sold under the
Panamax®
and
Furman®
brand names and structured wiring products sold under the
OpenHouse®
and Channel
Plus®
brand names.
The segments security and access control products include
residential and certain commercial intrusion protection systems,
components for closed circuit television systems (camera
housings), garage and gate operators and devices to gain entry
to buildings and gated properties, such as radio transmitters,
wireless window and door contacts, control panels, keypads and
telephone entry systems. These products are sold under the
Linear®,
SecureWireless,
GTO/PRO®,
Mighty
Mule®,
OSCO®,
Aigis®,
AllStar®,
IEI®,
Luxor and certain private label brand names, as well as
Westinghouse®,
which is licensed.
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The segments digital display mounting and mobility
products primarily are designed with ergonomic features and
include wall mounts, desk mounts, arms, carts, workstations and
stands that attach to a variety of display devices such as
computer monitors, notebook computers and flat panel displays.
These products are sold under the
Ergotron®
and
OmniMount®
brand names as well as certain original equipment manufacturer
brand names in the personal computer industry.
We sell the products in our TECH segment to distributors,
professional installers, electronics retailers and original
equipment manufacturers. Sales in this segment are primarily
driven by replacement applications, new installations in
existing properties and purchases of high-priced audio/video
equipment such as flat panel televisions and displays and to a
lesser extent new construction activity. Sales of digital
display mounting and mobility products are primarily driven by
personal computer and I.T. spending, as well as from the sale of
other products for which a mounting solution is needed. In
addition, a portion of the sales in this segment is driven by
sales to customers in the non-residential market.
The segment offers a broad array of products under
widely-recognized brand names with various features and price
points, which we believe allows it to expand its distribution in
the professional installation and retail markets. Another key
component of our operating strategy is the introduction of new
products and innovations, which capitalize on our well-known
brand names and strong customer relationships.
The segments primary products compete with products
supplied by many domestic and international suppliers in various
markets. The segment competes with several portfolio companies
of Duchossois Industries, Inc., including Chamberlain
Corporation, Milestone AV Technologies and AMX LLC. The segment
also competes with Crestron Electronics, Inc., among others. The
segment competes with suppliers of competitive products
primarily on the basis of quality, distribution, delivery and
price. Although we believe we compete favorably with other
suppliers of home technology products, some of our competitors
have greater financial and marketing resources than this segment
of our business. In addition, certain products are sourced from
low cost Asian suppliers based on our specifications. We believe
that our Asian sourcing provides us with a competitive cost
advantage.
In this segment, we have several administrative and distribution
facilities in the United States and a significant amount of our
products are manufactured at our facilities located in China.
Our TECH segment had 11 manufacturing plants and employed
approximately 3,600 full-time people as of October 1,
2011. We believe that our relationships with the employees in
this segment are satisfactory.
Residential
Air Conditioning and Heating Products Segment
Our R-HVAC segment principally manufactures and sells
split-system and packaged air conditioners and heat pumps, air
handlers, furnaces and related equipment, accessories and parts
for the residential and certain commercial markets. For
site-built homes and certain commercial structures, the segment
markets its products under the licensed brand names
Frigidaire®,
Tappan®,
Philco®,
Kelvinator®,
Gibson®,
Westinghouse®
and
Maytag®.
The segment also supplies products to certain of its customers
under the
Broan®,
NuTone®,
Mammoth®
and several private label brand names. Within the residential
market, we are one of the largest suppliers of HVAC products for
manufactured homes in the United States and Canada. In the
manufactured housing market, the segment markets its products
under the
Intertherm®
and
Miller®
brand names.
Demand for replacing and modernizing existing equipment, the
level of housing starts and manufactured housing shipments are
the principal factors that affect the market for the
segments residential HVAC products. We anticipate that the
demand by the replacement market will continue to exceed the
demand for products by the new installation market as a large
number of previously installed heating and cooling products
become outdated or reach the end of their useful lives. The
demand for residential cooling products is also affected by
spring and summer temperatures, although the seasonal effects
are less dramatic than those experienced in the window air
conditioning market which we do not sell into. We believe that
our ability to offer both heating and cooling products helps
offset the effects of seasonality on this segments sales.
The segment sells its manufactured housing products to builders
of manufactured housing and, through distributors, to
manufactured housing retailers and owners. The majority of sales
to builders of manufactured
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housing consist of furnaces designed and engineered to meet or
exceed certain standards mandated by the U.S. Department of
Housing and Urban Development, or HUD, and other 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
and replacement furnaces. We believe that we have one major
competitor in the manufactured housing furnace market, York by
Johnson Controls, which markets its products primarily under the
Coleman name. The segment competes with most major
industry manufacturers in the manufactured housing air
conditioning market.
The segment sells residential HVAC products for use in
site-built homes through independently owned distributors who
sell to HVAC contractors. The site-built residential HVAC market
is very competitive. In this market, the segment competes with,
among others, Carrier Corporation (a subsidiary of United
Technologies Corporation), Rheem Manufacturing Company, Lennox
Industries, Inc., Trane, Inc. (a subsidiary of Ingersoll-Rand
Company), York by Johnson Controls and Goodman Global, Inc.
During 2010, we estimate that approximately 54% of this
segments sales of residential HVAC products were
attributable to the replacement market, which tends to be less
cyclical than the new construction market.
In addition, the segment sells residential HVAC products outside
of North America, with sales concentrated primarily in Latin
America and the Middle East. International sales consist of not
only the segments manufactured products, but also products
manufactured to specification by outside sources. The products
are sold under the
Westinghouse®
licensed brand name, the segments own
Miller®
brand name, as well as other private label brand names.
The segment competes in both the site-built and manufactured
housing markets on the basis of breadth and quality of its
product line, distribution, product availability and price.
Although we believe that we compete favorably with respect to
certain of these factors, most of the segments competitors
have greater financial and marketing resources and the products
of certain competitors may enjoy greater brand awareness than
our residential HVAC products.
Our R-HVAC segment had 4 manufacturing plants and employed
approximately 1,200 full-time people as of October 1,
2011. We believe that our relationships with our employees in
this segment are satisfactory.
Commercial
Air Conditioning and Heating Products Segment
Our C-HVAC segment manufactures and sells HVAC systems that are
custom-designed to meet customer specifications primarily for
hospitals, educational facilities, as well as commercial
offices, manufacturing facilities, retail stores, clean rooms
and governmental buildings. These systems are designed primarily
to operate on building rooftops (including large self-contained
walk-in units), or on individual floors within a building, and
to have cooling capacities ranging from 40 tons to 600 tons. The
segment markets its commercial HVAC products under the
Governair®,
Mammoth®,
Temtrol®,
Venmar
CEStm,
Ventrol®,
Webcotm,
Huntair®,
Cleanpaktm
and
Fanwall®
brand names. Based on replacing large fans in air handlers with
a modular array of smaller fans,
Fanwall®
technology allows for major improvements in reliability, energy
efficiency, sound attenuation, footprint, and operating costs,
and also is ideal for retrofit applications.
Our subsidiary, Eaton-Williams Group Limited, manufactures and
markets custom and standard air conditioning and humidification
equipment throughout Western Europe under the
Vapac®,
Cubit®,
Qualitair®,
Edenaire®,
Colmantm
and
Moduceltm
brand names.
The market for commercial HVAC equipment is divided into
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, standard equipment suppliers generally
have a larger share of the overall commercial HVAC market than
custom-designed equipment suppliers, such as us. However,
because of certain building designs, shapes or other
characteristics, we believe there are many applications for
which custom-designed equipment is required or is more cost
effective over the life of the building. Unlike standard
equipment, the segments commercial HVAC equipment can be
designed to match a customers exact space, capacity and
performance requirements. The segments packaged rooftop
and self-
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contained walk-in equipment rooms maximize a buildings
rentable floor space because this equipment is located outside
the building. In addition, the manner of construction and timing
of installation of commercial HVAC equipment can often favor
custom-designed over standard systems. As compared with
site-built and factory built HVAC systems, the segments
systems are factory assembled according to customer
specifications and then installed by the customer or third
parties, rather than assembled on site, permitting extensive
testing prior to shipment. As a result, the segments
commercial systems can be installed later in the construction
process than site-built systems, thereby saving the owner or
developer construction and labor costs. The segment sells its
commercial HVAC products primarily to contractors, owners and
developers of commercial office buildings, manufacturing and
educational facilities, hospitals, retail stores, clean rooms
and governmental buildings. The segment seeks to maintain, as
well as establish and develop, strong relationships nationwide
with design engineers, owners and developers, and the persons
who are most likely to value the benefits and long-term cost
efficiencies of its custom-designed equipment.
During 2010, we estimate that approximately 38% of our air
conditioning and heating product commercial sales came from
replacement and retrofit activity, which typically is less
cyclical than new construction activity and generally commands
higher margins. The segment continues to develop products and
marketing programs to increase penetration in the growing
replacement and retrofit market.
The segments commercial HVAC products are marketed through
independent manufacturers representatives, as well as
other sales, marketing and engineering professionals. The
independent representatives are typically HVAC engineers, a
factor which is significant in marketing the segments
commercial products because of the design-intensive nature of
the market segment in which we compete.
We believe that we are among the largest suppliers of
custom-designed commercial HVAC products in the United States.
The segments four largest competitors in the commercial
HVAC market are Carrier Corporation, York by Johnson Controls,
McQuay International (a subsidiary of OYL Corporation) and
Trane, Inc. (a subsidiary of Ingersoll-Rand Company). The
segment competes primarily on the basis of engineering support,
quality, design and construction flexibility and total installed
system cost. Although we believe that we compete favorably with
respect to some of these factors, most of our competitors have
greater financial and marketing resources than this segment of
our business and enjoy greater brand awareness. However, we
believe that our ability to produce equipment that meets the
performance characteristics required by the particular product
application provides us with an advantage that some of our
competitors do not enjoy.
Our C-HVAC segment had 9 manufacturing plants and employed
approximately 2,200 full-time people at October 1,
2011, of which approximately 200 were covered by a collective
bargaining agreement which expires in 2012. We believe that our
relationships with our employees in this segment are
satisfactory.
Backlog
Backlog expected to be filled within the next twelve months was
approximately $313.3 million, $272.4 million and
$213.3 million as of October 1, 2011,
December 31, 2010 and December 31, 2009, respectively.
The increase in backlog at October 1, 2011 as compared to
December 31, 2010 primarily reflects an increase in the
C-HVAC segment primarily related to an increase in orders and
improved pricing during the first nine months of 2011
principally for jobs expected to be delivered during the
remainder of 2011 and the first half of 2012. The increase in
backlog at December 31, 2010 as compared to
December 31, 2009 reflects an increase in backlog for
residential ventilation, technology and commercial HVAC products
of approximately $69.6 million, partially offset by a
reduction in backlog serving residential HVAC customers of
approximately $10.5 million.
Backlog is not regarded as a significant factor for operations
where orders are generally for prompt delivery. While backlog
stated for all periods is believed to be firm, as all orders are
supported by either a purchase order or a letter of intent, the
possibility of cancellations makes it difficult to assess the
firmness of backlog with certainty, and therefore there can be
no assurance that our backlog will result in actual revenues.
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Raw
Materials
We purchase raw materials and most components used in our
various manufacturing processes. The principal raw materials we
purchase are rolled sheet steel, formed and galvanized steel,
copper, aluminum, plate mirror glass, various chemicals, paints,
plastics, motors and compressors.
The materials, molds and dies, subassemblies and components
purchased from other manufacturers, and other materials and
supplies used in our manufacturing processes have generally been
available from a variety of sources. From time to time the cost
and availability of raw materials is affected by the raw
material demands of other industries, among other factors.
Whenever practical, we establish multiple sources for the
purchase of raw materials and components to achieve competitive
pricing, ensure flexibility, and protect against supply
disruption. We employ a company-wide procurement strategy
designed to reduce the purchase price of raw materials and
purchased components. We believe that the use of these strategic
sourcing procurement practices will continue to enhance our
competitive position by reducing costs from vendors and limiting
cost increases for goods and services in sectors experiencing
rising prices.
We are subject to significant market risk with respect to the
pricing of the principal raw materials used to manufacture our
products. If prices of these raw materials were to increase
dramatically, we may not be able to pass such increases on to
our customers and, as a result, gross margins could decline
significantly.
Research
and Development
Our research and development activities are principally for new
product development and represented approximately 2.7%, 2.9%,
2.9%, 2.9% and 2.5% of consolidated net sales for the first nine
months ended October 1, 2011 and October 2, 2010 and
the years ended 2010, 2009 and 2008, respectively.
Trademarks
and Patents
We own or license numerous trademarks that we use in the
marketing of our products. Certain of the trademarks we own,
including
Broan®
and
NuTone®,
are particularly important in the marketing of our products. We
also hold numerous design and process patents, but no single
patent is material to the overall conduct of our business. It is
our policy to obtain and protect patents whenever such action
would be beneficial to us.
Environmental
and Regulatory Matters
We are subject to numerous federal, state, local and foreign
laws and regulations relating to protection of the environment,
including those that impose limitations on the discharge of
pollutants into the environment (land, air and water), establish
standards for the use, treatment, storage and disposal of solid
and hazardous materials and wastes and govern the cleanup of
contaminated sites. We believe that we are in substantial
compliance with the material laws and regulations applicable to
us. We 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
currently or formerly owned or operated by such companies or
sites at which their hazardous wastes or materials were disposed
of or released. Such claims may relate to properties or business
lines acquired by us after a release has occurred. In other
instances, we may be partially liable under law or contract to
other parties that have acquired businesses or assets from us
for past practices relating to hazardous materials or wastes.
Expenditures for the first nine months ended October 1,
2011 and October 2, 2010 and the years ended 2010, 2009 and
2008 to evaluate and remediate such sites were not material to
our business, either individually or collectively. While we are
able to reasonably estimate certain of our contingent losses, we
are unable to estimate with certainty our 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
current or future environmental regulations, (ii) our lack
of information about additional sites where we may be identified
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 may be joint
and several, each PRP is
115
potentially wholly liable for other PRPs that become insolvent
or bankrupt. Thus, the solvency of other PRPs could directly
affect our ultimate aggregate
clean-up
costs. In certain circumstances, our liability for
clean-up
costs may be covered in whole or in part by insurance or
indemnification obligations of third parties.
Our HVAC products must be designed and manufactured to meet
various regulatory standards, including standards addressing
energy efficiency and the use of refrigerants. The United States
and other countries have implemented a protocol on
ozone-depleting substances that restricts or prohibits the use
of hydrochlorofluorocarbons (HCFCs), a refrigerant
used in air conditioning and heat pump products. In particular,
regulations effective January 1, 2010 in the United States
prohibit the use of refrigerant HCFC-22 in HVAC products
manufactured on or after January 1, 2010. Our HVAC products
manufactured after January 1, 2010 for sale or distribution
in the United States are designed for use with acceptable
substitute refrigerants. Our residential HVAC products for
manufactured housing include furnaces which must be designed and
engineered to meet certain standards required by HUD and other
federal agencies, including the U.S. Department of Energy,
which, in 2007, issued revised national energy conservation
standards for residential furnaces scheduled to take effect on
products manufactured on or after November 19, 2015. We
must continue to modify our products to meet these and other
applicable standards as they develop and become more stringent
over time.
Employees
We employed approximately 9,600 full-time people as of
October 1, 2011.
A work stoppage at one of our facilities could cause us to lose
sales and incur increased costs and could adversely affect our
ability to meet customers needs. A plant shutdown or a
substantial modification to a collective bargaining agreement
could result in material gains or losses or the recognition of
an asset impairment. As agreements expire and until negotiations
are completed, we do not know whether we will be able to
negotiate collective bargaining agreements on the same or more
favorable terms as the current agreements, or at all, and
without production interruptions, including labor stoppages.
Working
Capital
The carrying of inventories to support customers and to permit
prompt delivery of finished goods requires substantial working
capital. Substantial working capital is also required to carry
receivables. The demand for our products is seasonal,
particularly in the Northeast and Midwest regions of the United
States and in Canada where inclement weather during the winter
months usually reduces the level of building and remodeling
activity in both the home improvement and new construction
markets. Certain of the residential product businesses in the
R-HVAC segment have in the past been more seasonal in nature
than our other businesses product categories. As a result,
the demand for working capital of our subsidiaries is greater
from late in the first quarter until early in the fourth
quarter. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources, included elsewhere herein.
116
Properties
Set forth below is a brief description of the location and
general character of the principal administrative and
manufacturing facilities and other material real properties of
our continuing operations, all of which we consider to be in
satisfactory repair as of November 15, 2011. All properties
are owned, except for those indicated by an asterisk (*), which
are leased under operating leases, and those with a double
asterisk (**), which are leased under capital leases.
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
Location
|
|
Description
|
|
Square Feet
|
|
|
Residential Ventilation Products Segment:
|
|
|
|
|
|
|
Hartford, Wisconsin
|
|
Manufacturing/Warehouse/Administrative
|
|
|
538,000
|
(2)
|
Hartford, Wisconsin
|
|
Warehouse
|
|
|
130,000
|
*
|
Mississauga, ONT, Canada
|
|
Manufacturing/Warehouse/Administrative
|
|
|
110,000
|
|
Fabriano, Italy
|
|
Manufacturing/Warehouse/Administrative
|
|
|
12,000
|
|
Cerreto DEsi, Italy
|
|
Manufacturing/Warehouse/Administrative
|
|
|
174,000
|
|
Cleburne, Texas
|
|
Manufacturing/Warehouse/Administrative
|
|
|
215,000
|
(2)
|
Drummondville, QUE, Canada
|
|
Manufacturing/Warehouse/Administrative
|
|
|
126,000
|
|
Drummondville, QUE, Canada
|
|
Manufacturing/Warehouse/Administrative
|
|
|
41,000
|
*
|
Chenjian, Huizhou, PRC
|
|
Manufacturing/Warehouse/Administrative/Other
|
|
|
198,000
|
|
San Francisco, California
|
|
Warehouse/Administrative
|
|
|
35,000
|
*
|
Gliwice, Poland
|
|
Manufacturing/Warehouse/Administrative
|
|
|
162,000
|
(1)
|
Tecate, Mexico
|
|
Manufacturing/Warehouse/Administrative
|
|
|
204,000
|
*
|
Alameda, California
|
|
Warehouse/Administrative
|
|
|
38,000
|
*
|
|
|
|
|
|
|
|
Technology Products Segment:
|
|
|
|
|
|
|
Xiang, Bao An County, Shenzhen, PRC
|
|
Manufacturing/Warehouse/Administrative/Other
|
|
|
410,000
|
*
|
Chaiwan, Hong Kong
|
|
Administrative
|
|
|
13,000
|
*
|
Lexington, Kentucky
|
|
Warehouse/Administrative
|
|
|
36,000
|
*
|
Carlsbad, California
|
|
Warehouse/Administrative
|
|
|
97,000
|
*
|
Vista, California
|
|
Warehouse
|
|
|
69,000
|
*
|
Riverside, California
|
|
Administrative
|
|
|
82,000
|
*
|
Grand Rapids, Michigan
|
|
Manufacturing/Warehouse/Administrative
|
|
|
89,000
|
*
|
Phoenix, Arizona
|
|
Manufacturing/Warehouse/Administrative
|
|
|
51,000
|
*
|
Petaluma, California
|
|
Warehouse/Administrative
|
|
|
26,000
|
*
|
Tallahassee, Florida
|
|
Manufacturing/Warehouse/Administrative
|
|
|
71,000
|
(2)
|
Summerville, South Carolina
|
|
Warehouse/Administrative
|
|
|
162,000
|
*
|
New Milford, Connecticut
|
|
Manufacturing/Warehouse/Administrative
|
|
|
17,000
|
**
|
Los Angeles, California
|
|
Warehouse/Administrative
|
|
|
28,000
|
*
|
Salt Lake City, Utah
|
|
Manufacturing/Warehouse/Administrative
|
|
|
25,000
|
*
|
St. Paul, Minnesota
|
|
Manufacturing/Warehouse/Administrative
|
|
|
102,000
|
(2)
|
Dongguan City, Guangdong, PRC
|
|
Manufacturing/Warehouse/Administrative
|
|
|
159,000
|
*
|
Erlanger, Kentucky
|
|
Warehouse/Administrative
|
|
|
18,000
|
*
|
Margate, Kent, United Kingdom
|
|
Manufacturing/Warehouse/Administrative
|
|
|
10,000
|
|
Amersfoort, The Netherlands
|
|
Manufacturing/Warehouse/Administrative
|
|
|
20,000
|
*
|
|
|
|
|
|
|
|
Residential HVAC Products Segment:
|
|
|
|
|
|
|
OFallon, Missouri
|
|
Warehouse/Administrative
|
|
|
70,000
|
*
|
St. Louis, Missouri
|
|
Warehouse
|
|
|
103,000
|
*
|
Boonville, Missouri
|
|
Manufacturing
|
|
|
250,000
|
(2)
|
117
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
Location
|
|
Description
|
|
Square Feet
|
|
|
Boonville, Missouri
|
|
Warehouse/Administrative
|
|
|
150,000
|
(1)
|
Tipton, Missouri
|
|
Manufacturing
|
|
|
50,000
|
(2)
|
Poplar Bluff, Missouri
|
|
Manufacturing/Warehouse
|
|
|
725,000
|
**
|
Dyersburg, Tennessee
|
|
Manufacturing/Warehouse
|
|
|
368,000
|
**
|
Miami, Florida
|
|
Manufacturing/Warehouse/Administrative
|
|
|
111,000
|
*
|
Catano, Puerto Rico
|
|
Warehouse
|
|
|
17,000
|
*
|
|
|
|
|
|
|
|
Commercial HVAC Products Segment:
|
|
|
|
|
|
|
St. Leonard dAston, QUE, Canada
|
|
Manufacturing/Administrative
|
|
|
95,000
|
*
|
Saskatoon, Saskatchewan, Canada
|
|
Manufacturing/Administrative
|
|
|
59,000
|
*
|
Holland, Michigan
|
|
Manufacturing/Administrative
|
|
|
45,000
|
*
|
Oklahoma City, Oklahoma
|
|
Manufacturing/Administrative
|
|
|
127,000
|
(2)
|
Okarche, Oklahoma
|
|
Manufacturing/Warehouse/Administrative
|
|
|
228,000
|
(2)
|
Springfield, Missouri
|
|
Manufacturing/Warehouse/Administrative
|
|
|
113,000
|
*
|
Anjou, QUE, Canada
|
|
Manufacturing/Administrative
|
|
|
127,000
|
*
|
Edenbridge, Kent, United Kingdom
|
|
Manufacturing/Administrative
|
|
|
41,000
|
*
|
Fenton,
Stoke-on-Trent,
United Kingdom
|
|
Manufacturing/Administrative
|
|
|
104,000
|
*
|
Tualatin, Oregon
|
|
Manufacturing/Warehouse/Administrative
|
|
|
200,000
|
*
|
Eden Prairie, Minnesota
|
|
Administrative
|
|
|
30,000
|
*
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
Providence, RI
|
|
Administrative
|
|
|
23,000
|
*
|
|
|
|
(1) |
|
These facilities are pledged as security under various
subsidiary debt agreements. |
|
(2) |
|
These facilities are pledged as first priority security under
our Term Loan Facility and as second priority under the ABL
Facility. |
118
DIRECTORS
AND EXECUTIVE OFFICERS
Directors
of Nortek
The following table sets forth the names of Norteks
directors, their positions, ages as of November 15, 2011
and the year each of them became a director of Nortek:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nortek
|
|
|
|
|
|
|
Director
|
Name
|
|
Principal Occupation
|
|
Age
|
|
Since
|
|
Class I
|
|
|
|
|
|
|
|
|
|
|
John T. Coleman
|
|
Director
|
|
|
64
|
|
|
|
2010
|
|
Thomas A. Keenan
|
|
Director
|
|
|
46
|
|
|
|
2009
|
|
J. David Smith
|
|
Director and Interim Chief
Executive Officer of Nortek
|
|
|
62
|
|
|
|
2010
|
|
Class II
|
|
|
|
|
|
|
|
|
|
|
Jeffrey C. Bloomberg
|
|
Director
|
|
|
64
|
|
|
|
2005
|
|
Joseph M. Cianciolo
|
|
Director
|
|
|
72
|
|
|
|
2003
|
|
James B. Hirshorn
|
|
Director
|
|
|
45
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Class III
|
|
|
|
|
|
|
|
|
|
|
Daniel C. Lukas
|
|
Director
|
|
|
40
|
|
|
|
2010
|
|
Bennett Rosenthal
|
|
Director
|
|
|
48
|
|
|
|
2009
|
|
Jeffrey C. Bloomberg has been a member of the Board of
Directors of Nortek since April 19, 2005 and in 2010 was
appointed to the position of Lead Director. Mr. Bloomberg
was previously a member of Norteks Board of Directors from
January 9, 2003 to August 27, 2004. Mr. Bloomberg
has served since 2001 in the Office of the Chairman of Gordon
Brothers Group LLC, a company which assists retail, consumer
goods and industrial companies in asset redeployment and
provides capital solutions to middle market companies. From 1994
to 2001, Mr. Bloomberg served as the President of Bloomberg
Associates, an investment banking company. Mr. Bloomberg
served as a director of RHI Entertainment, Inc. from
2009-2011
and served as a director of Tweeter Home Entertainment Group
from
1986-2007.
Mr.Bloombergs extensive experience with retailers and
consumer goods and his experience in dealing with issues facing
the Company make him well positioned for his role as a director.
Joseph M. Cianciolo has been a member of the Board of
Directors of Nortek since 2003. Mr. Cianciolo retired in
June 1999 as the managing partner of the Providence, Rhode
Island office of KPMG LLP. At the time of his retirement,
Mr. Cianciolo had been a partner of KPMG LLP since 1970.
Mr. Cianciolo currently serves as a director of United
Natural Foods, Inc. and Eagle Bulk Shipping, Inc.
Mr. Cianciolos extensive knowledge and experience
with accounting matters allows him to provide valuable insight
to the Board of Directors.
John T. Coleman has been a member of the Board of
Directors of Nortek since July 1, 2010. Mr. Coleman
served as President, Chief Operating Officer and a Director of
Bose Corp., a manufacturer of high end audio products, from July
2001 to July 2005. Prior to that, he was Executive Vice
President and Vice President of Human Resources at Bose, and
before that, he was General Manager of Boses European
manufacturing operations. Prior to joining Bose,
Mr. Coleman was Director of Human Resources for General
Electric in Ireland. Mr. Coleman was Head of the College of
Business and Law at University College Cork in Ireland from May
2006 until June 2007. He is a member of the Board of Advisors of
the School of Economics at University College Cork.
Mr. Coleman holds diplomas in Personnel Management and in
Training and Development from the Irish Management Institute. He
also holds a diploma in Management Studies and an M.B.A. from
the University of Ulster, Northern Ireland. Mr. Coleman is
currently serving as a director of Rosetta Stone Inc.
Mr. Coleman has a background in the retail industry
building an international brand. He brings experience in
management, operations, technology, human resources and
education to our Board of Directors.
119
James B. Hirshorn has been a member of the Board of
Directors of Nortek since December 17, 2009.
Mr. Hirshorn is an Operating Advisor to Ares Management
LLC, a global alternative asset management firm
(Ares), where he focuses his time on portfolio
investments across the Ares platform. Mr. Hirshorn has been
engaged by the Company to provide operational advice and
guidance on a consulting basis effective as of July 14,
2011. Mr. Hirshorn has over 18 years of leadership
experience in the manufacturing, retail, private equity and
consulting businesses. From
2007-2008,
Mr. Hirshorn was the President of Potbelly Sandwich Works
and prior to that he served as the Senior Executive VP of
Finance, Operations and R&D for Sealy Mattress Corporation
from
2002-2006.
Prior to joining Sealy, Mr. Hirshorn was a Vice President
at Bain Capital from
1999-2002 in
their portfolio group, providing operating leadership to a
number of Bain Capitals retail and consumer products
businesses. Prior to joining Bain Capital, Mr. Hirshorn was
a manager at Bain & Company from
1993-1998.
Mr. Hirshorn also spent three years with
Procter & Gamble in their product development
organization from
1988-1991.
Mr. Hirshorn served as a director of Sealy Corporation from
2004 to 2006. Mr. Hirshorns experience in operations
at numerous portfolio companies provides him with valuable
expertise to assist the Company.
Thomas A. Keenan has been a member of the Board of
Directors of Nortek since December 17, 2009.
Mr. Keenan is the owner and founder of Keenan LLC, a real
estate investment and development company focused on high end
custom homes and the acquisition of
multi-unit
apartment buildings and commercial complexes. Prior to founding
Keenan LLC, Mr. Keenan served as an investment principal
for First Media LLC, the private investment arm of the Richard
Marriott family, from
1997-2006,
formulating investment strategies for private and public equity
investments and prior to that, he was a consultant at
McKinsey & Company from 1995 to 1997, focused on media
and software clients. Mr. Keenan is currently serving as a
director of Stanley Martin Companies. Mr. Keenans
experience with real estate and the development industry equip
him with valuable insight about the markets for the
Companys products.
Daniel C. Lukas has been a member of the Board of
Directors of Nortek since July 1, 2010. Mr. Lukas is a
Partner in the Private Equity Group of Ares. Prior to joining
Ares in 2008, Mr. Lukas served as a Managing Director of
GSC Group from 2006 through 2008, and Vice President of GSC
Group from 2003 through 2005. Prior to that, he served as Vice
President in the private equity and distressed debt funds at
Thomas Weisel Capital Partners from 2000 to 2002, and before
that, he was with Consolidated Press Holdings Limited, the
private investment vehicle of Kerry Packer in Sydney, Australia.
Earlier, Mr. Lukas was at Hellman & Friedman
after beginning his career at Goldman, Sachs & Co.
Mr. Lukas served as a director of RAM Holdings Ltd. from
2004 until his resignation in 2007, and as a director of
Cherokee International Corporation from 2006 until his
resignation in 2008. Mr. Lukas serves on the board of
directors of City Ventures, LLC, Jacuzzi Brands Corporation and
Sotera Defense Solutions, Inc. Mr. Lukass experience
with acquisitions and debt and equity investments, as well as
his experience serving on other boards of public companies,
allows him to bring valuable insight to the Board of Directors.
Bennett Rosenthal has been a member of the Board of
Directors of Nortek since December 17, 2009.
Mr. Rosenthal is a founding member and Senior Partner of
Ares Management where he serves on the Executive Committee and
co-heads the Ares Private Equity Group. Mr. Rosenthal is
also Chairman of the Board of Directors of Ares Capital
Corporation, a specialty finance company that provides
integrated debt and equity financing solutions to
U.S. middle market companies. Prior to joining Ares in
1998, Mr. Rosenthal was a Managing Director in the Global
Leveraged Finance Group of Merrill Lynch where he was a senior
member of Merrill Lynchs Leveraged Transaction Commitment
Committee. Mr. Rosenthal also serves on the board of
directors of several other companies, including AmeriQual Group,
LLC, Aspen Dental Management, Inc., City Ventures, LLC, Hanger
Orthopedic Group, Inc., Jacuzzi Brands Corporation, Serta Inc.
and Simmons Bedding Company. Mr. Rosenthal previously
served on the board of directors of Maidenform Brands, Inc.
Mr. Rosenthal graduated summa cum laude with a Bachelor of
Science degree in economics from the University of
Pennsylvanias Wharton School of Business where he also
received his M.B.A. with distinction. Mr. Rosenthals
experience with leverage finance and high yield offerings and
serving on other boards of directors makes him well-positioned
to serve as a director for the Company.
J. David Smith has been a member of the Board of
Directors of Nortek since February 18, 2010 and was
appointed as Interim Chief Executive Officer of Nortek as of
July 1, 2011. Mr. Smith served as President of
120
Alumax Fabricated Products, Inc. and as an officer of Alumax,
Inc. from
1989-1996.
Mr. Smith held the positions of Chief Executive Officer and
President of Euramax International, Inc. from 1996 and also
served as its Chairman from 2002 until his retirement in 2008.
Mr. Smith also serves as a director of Commercial Metals
Company. Mr. Smith has extensive operating and management
experience in private and public international metals and
building products companies.
Composition
of the Board of Directors
Our business and affairs are managed under the direction of our
Board of Directors, which consists of nine directors but there
is currently one vacancy. We have determined that six of the
current eight of our directors are independent directors under
currently applicable listing standards of NASDAQ. The only
directors who are not independent are Messrs. Smith and Hirshorn.
Pursuant to our certificate of incorporation, our Board of
Directors is divided into three classes of directors who serve
in staggered three-year terms, as follows:
|
|
|
|
|
Class I directors are Messrs. Coleman, Keenan and
Smith, and their terms will expire at the annual meeting of
stockholders to be held in 2013;
|
|
|
|
Class II directors are Messrs. Bloomberg, Cianciolo
and Hirshorn, and their terms will expire at the annual meeting
of stockholders to be held in 2014;
|
|
|
|
Class III directors are Messrs. Lukas and Rosenthal,
and their terms will expire at the annual meeting of
stockholders to be held in 2012.
|
At each annual meeting of our stockholders, the successors to
the directors whose terms expire at each such meeting will be
elected to serve until the third annual meeting after their
election or until their successor has been elected. As a result,
only one class of directors will be elected at each annual
meeting of our stockholders, with the other classes serving for
the remainder of their respective three-year terms.
Board
Committees
The Board of Directors has a complex set of duties and
responsibilities, both practically and as provided under
Delaware law, the Companys Amended and Restated
Certificate of Incorporation and the Companys Amended and
Restated By-Laws. However, to govern the modern corporation,
there are a myriad of activities that must be performed and that
are more effectively and efficiently performed by smaller groups
of people. To do this, Delaware law gives the Board the
authority to establish committees of the Board to
take on directed duties. Moreover, various regulatory bodies
with jurisdiction over the Company mandate certain committees,
and other various applicable laws give the Board the latitude to
satisfy some of its duties and responsibilities through these
committees.
To this end, the Company has established three committees: an
Audit Committee; a Compensation Committee; and a Nominating and
Corporate Governance Committee. Each committee operates under a
charter approved by our Board of Directors. Copies of each
committees charter are posted on the Corporate Governance
section of the Investors section of our website,
www.nortek-inc.com. The membership, principal duties, and
responsibilities of each committee are set forth below. Under
applicable rules and regulations, and as determined by the
Board, all of the committee members are independent
directors as independence is defined by the NASDAQ
Rules.
121
The membership of the Committees is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominating and
|
|
|
|
|
|
|
Corporate
|
|
|
Audit
|
|
Compensation
|
|
Governance
|
Name
|
|
Committee
|
|
Committee
|
|
Committee
|
|
Jeffrey C. Bloomberg
|
|
|
|
|
|
|
Joseph M. Cianciolo
|
|
Chair(1)
|
|
|
|
|
John T. Coleman
|
|
|
|
|
|
Chair
|
James B. Hirshorn
|
|
|
|
|
|
|
Thomas A. Keenan
|
|
|
|
|
|
|
Daniel C. Lukas
|
|
|
|
Chair
|
|
|
Bennett Rosenthal
|
|
|
|
|
|
|
J. David Smith
|
|
|
|
(2)
|
|
|
|
|
|
(1) |
|
Our Board of Directors has determined that Mr. Cianciolo is
an audit committee financial expert as defined in
applicable SEC rules. |
|
(2) |
|
Prior to July 1, 2011, Mr. Smith served as chairman of
the Compensation Committee. We anticipate that he will return to
that position upon the end of his service as Interim Chief
Executive Officer of the Company. |
Audit
Committee
The committees charter provides that the principal duties
and responsibilities of the Audit Committee include:
|
|
|
|
|
appointing, evaluating, overseeing and replacing, if necessary,
our independent registered public accounting firm;
|
|
|
|
reviewing the design, implementation, adequacy and effectiveness
of our internal controls and our critical accounting policies;
|
|
|
|
reviewing certain regulatory filings with management and our
independent registered public accounting firm; and
|
|
|
|
reviewing earnings press releases and earnings guidance provided
to analysts.
|
All audit and non-audit services, other than de minimus
non-audit services, provided to us by our independent
registered public accounting firm must be approved in advance by
our audit committee.
Compensation
Committee
The committees charter provides that the principal duties
and responsibilities of the Compensation Committee include:
|
|
|
|
|
reviewing and approving annual goals and objectives of our CEO,
evaluating the performance of our CEO in light of those goals
and objectives, determining or assisting to determine our
CEOs compensation level and making all other
determinations with respect to the compensation of our CEO;
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recommending to our Board of Directors the compensation of our
executive officers other than our CEO and, to the extent such
authority is delegated to it by our Board of Directors,
approving the compensation payable to these executive officers,
other than the base salaries of Messrs. Donnelly and Hall,
which are set by the Chief Executive Officer;
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reviewing and approving the compensation of the CEO of each of
the Companys business segments and such other subsidiary
officers as the Committee may from time to time designate
(collectively, the Subsidiary designated officers);
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considering with respect to the compensation of the
Companys executive officers and Subsidiary designated
officers: (a) annual base salary; (b) any bonus or
other short-term incentive program; (c) any long-term
incentive compensation (including cash-based and equity-based
awards); (d) any employment agreements, severance
arrangements,
change-in-control
arrangements and similar agreements or arrangements; and
(e) any perquisites and other special or supplemental
benefits;
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reviewing and approving (and in the case of any Company
executive officer other than the CEO, recommending to the Board)
any termination or other severance pay at the time of the
termination of any Company executive officer or Subsidiary
designated officer which was not previously approved by the
Committee or the Board or otherwise provided by contract;
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reviewing and making recommendations to our Board of Directors
regarding compensation, if any, of the Board of Directors and
its committees; and
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reviewing and making recommendations to our Board of Directors
regarding incentive compensation and equity-based plans that are
subject to approval by our Board of Directors.
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Nominating
and Corporate Governance Committee
The committees charter provides that the principal duties
and responsibilities of the Nominating and Corporate Governance
Committee include:
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evaluating and selecting or recommending for selection
candidates for election to our Board of Directors;
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developing and recommending to our Board of Directors a set of
corporate governance principles and code of ethics;
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evaluating the functions, duties and composition of committees
of our Board of Directors and making recommendations to our
Board of Directors with respect thereto;
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recommending to our Board of Directors or to the appropriate
committee processes for annual evaluations of the performance of
our Board of Directors, our Chairman and our CEO; and
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considering and reporting to our Board of Directors any
questions of possible conflicts of interests of members of our
Board of Directors.
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The Nominating and Corporate Governance Committee of the Board
of Directors is responsible for reviewing with the entire Board
from time to time the appropriate skills and characteristics
required of Board members in the context of the current
make-up of
the Board of directors. The Board of Directors believes that
directors should bring to the Company a variety of perspectives
and skills that are derived from high quality business and
professional experience and that are aligned with the
Companys strategic objectives. The composition of the
Board of Directors should at all times adhere to the standards
of independence promulgated by applicable NASDAQ and SEC rules.
We also require that our directors be able to attend all board
and applicable committee meetings. In this respect, directors
are expected to advise the Chairman of the Board of Directors
and the Chairman of the Nominating and Corporate Governance
Committee in advance of accepting any other public company
directorship or assignment to the audit committee of the board
of any other public company. Additionally, no member of the
Audit Committee of the Board of Directors may sit on more than
four separate audit committees of public companies.
The Nominating and Corporate Governance Committee identifies
nominees by first evaluating the current members of the Board of
Directors willing to continue in service. Current members of the
Board with skills and experience that are relevant to the
Companys business and who are willing to continue in
service are considered for re-nomination, balancing the value of
continuity of service by existing members of the Board with that
of obtaining a new perspective. If any member of the Board does
not wish to continue in service or if the Nominating and
Corporate Governance Committee or the Board decides not to
re-nominate a member for re-election, the Committee will
identify the desired skills and experience of a new nominee in
light of the
123
criteria above. Current members of the Committee and Board may
be consulted for suggestions as to individuals meeting the
criteria above. Research may also be performed to identify
qualified individuals.
Code of
Conduct
The Company has adopted a written code of business conduct and
ethics that applies to our directors, officers, employees and
certain other persons, including our principal executive
officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions.
The current version of the code is posted on the Corporate
Governance section of the Investors section of our website,
www.nortek-inc.com. The Companys website is included
herein as a textual reference only and the information in the
website is not incorporated herein by reference.
Executive
Officers of Nortek
The following table sets forth the names of the executive
officers of Nortek, their positions, and ages as of
November 15, 2011:
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Name
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Age
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Position
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J. David Smith
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62
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Director and Interim Chief Executive Officer
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Almon C. Hall
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65
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Senior Vice President and Chief Financial Officer
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Kevin W. Donnelly
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57
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Senior Vice President, General Counsel and Secretary
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Edward J. Cooney
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64
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Senior Vice President and Treasurer
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The board of directors appointed Mr. Smith, who has been a
director of the Company since February 2010, as Interim Chief
Executive Officer of the Company as of July 1, 2011. For
further information, see Executive
Compensation Compensation Discussion and
Analysis Executive Summary Retirement of
Richard L. Bready and Appointment of J. David Smith as
Interim Chief Executive Officer included elsewhere herein.
Messrs. Hall, Cooney and Donnelly have served in the same
or substantially similar executive positions with Nortek for at
least the past five years.
Our executive officers are elected annually by Norteks
Board of Directors and serve until their successors are chosen
and qualified. Norteks executive officers include only
those officers of Nortek who perform policy-making functions and
have managerial responsibility for major aspects of
Norteks overall operations. A number of other individuals
who serve as officers of Norteks subsidiaries perform
policy-making functions and have managerial responsibilities for
the subsidiary or division by which they are employed and a
number of other individuals who serve as officers of Nortek have
discrete areas of responsibility within Nortek. However, none of
these individuals perform policy-making functions or have
managerial responsibility for major aspects on Norteks
overall operations. Certain of these individuals could,
depending on the earnings of their subsidiary or division, be
more highly compensated than some executive officers of Nortek.
There are no family relationships between any director,
executive officer or other significant employee of the Company
and any other director, executive officer or other significant
employee.
Messrs. Hall, Cooney and Donnelly were executive officers
of the Company when it filed voluntary petitions in the
Bankruptcy Court seeking relief under the provisions of
chapter 11 of the Bankruptcy Code on October 21, 2009.
See Business 2009 Bankruptcy and
Reorganization, included elsewhere herein.
124
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Messrs. Hall, Cooney and Donnelly, together with
Richard L. Bready, who retired from his positions as
Chairman of the Board of Directors, President and Chief
Executive Officer of the Company effective as of July 1,
2011, and Bruce E. Fleming, who retired from his position
as Vice President Corporate Development of the
Company effective as of September 1, 2011, are referred to
in this section as the Companys named executive
officers. For additional information, see
Executive Summary Retirement of
Richard L. Bready and Appointment of J. David Smith as
Interim Chief Executive Officer and
Executive Summary Retirement of
Bruce E. Fleming below. The Board of Directors has
appointed Michael J. Clarke as the Companys President and
Chief Executive Officer, effective December 30, 2011. For
additional information, see Summary Recent
Developments included elsewhere herein for information
about Mr. Clarke, including recent employment experience as
well as a description of his terms of employment with us. Mr.
Clarke is not one of the named executive officers referred to in
this section. This section discusses the principles underlying
our policies and decisions with respect to the compensation of
Norteks named executive officers and the most important
factors relevant to an analysis of these policies and decisions.
Executive
Summary
Company
Performance in 2010
Key highlights of the Companys 2010 performance included
the following:
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The Companys financial performance improved compared to
2009 despite challenging economic conditions that continued to
impact the majority of the markets in which the Company
operates. Net sales for 2010 increased 5% to
$1,899.3 million compared to $1,807.9 million in 2009.
Operating earnings for 2010 improved from a $204.6 million
loss to $70.6 million in income.
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The Company continued to improve its financial position after
emerging from the Reorganization in December 2009. We ended the
year with a cash balance of $58 million and availability
under our asset-based revolving credit facility of approximately
$149 million on December 31, 2010.
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In December 2010, the Company completed its $299 million
acquisition of Ergotron, a leader in the design, manufacture and
marketing of innovative, ergonomic mounting and mobility
products for computer monitors, notebooks and flat panel
displays. The Company believes that Ergotron will be
complementary to the Companys existing Technology Products
segment and provide the Company with an additional platform for
growth and profitability, while diversifying its exposure to the
commercial, healthcare and education markets.
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The Company capitalized on opportunistic fundraising and
refinancing transactions, including closing a private placement
of $250 million aggregate principal amount of
10% Senior Notes due 2018 in November 2010 and amending our
$300 million revolving asset-backed credit agreement in
December 2010, to, among other things, lower the interest rates
payable by the Company and amend certain provisions to provide
Nortek with more flexibility.
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The Company filed a Form 10 registration statement to
register its common stock with the SEC. Such registration
statement was declared effective on November 14, 2011, and
the Companys common stock is currently publicly traded on
the NASDAQ Global Market.
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Executive
Compensation in 2010
After the Reorganization, the Companys executive
management team, led by Mr. Bready, focused on maintaining
Norteks strong presence in the various markets in which it
operates, steadily rebuilding the Company and taking advantage
of opportunistic acquisitions. The Companys named
executive officers were compensated for both Company and
individual performance during 2010. The compensation received by
our named executive officers for 2010 is summarized below.
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Base salary. Messrs. Bready, Hall and
Donnelly each had employment agreements that required Nortek to
pay them a minimum base salary of $3,500,000, $500,000 and
$375,000, respectively. Messrs. Cooney and Fleming did not
have employment agreements. The base salaries for our named
executive officers remained the same for 2010 compared to 2009
levels. The 2010 base salaries were not increased from their
2009 levels as a result of efforts to control costs while the
Company weathered the downturn in the economy.
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Discretionary cash bonuses. Each of the named
executive officers other than Mr. Bready received a
discretionary cash bonus for 2010. Messrs. Hall, Donnelly,
Cooney and Fleming received cash bonuses of $350,000, $350,000,
$260,000 and $100,000, respectively. The recommendations as to
the payment of bonuses and the amounts of such bonuses were
based on the Companys operating performance in 2010
compared to its 2010 operating plan, among other factors.
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Equity-based awards. None of the named
executive officers received equity-based awards in 2010. In
2009, each of the named executive officers received equity-based
awards consisting of both restricted stock awards that vest 25%
annually over four years based on the achievement of adjusted
EBITDA targets and stock options that vest 20% annually over
five years based on continued service to the Company. Because
the Company achieved 111.7% of the pre-established EBITDA target
of $151.72 million for 2010, 25% of each restricted stock
award (the maximum which could vest in 2010) vested on
March 30, 2011, the date the Companys audited
financial statements were certified. 20% of each stock option
also vested based on continued service to the Company on
December 17, 2010.
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Retirement-related and other benefits. The
retirement and other benefits provided to the named executive
officers in 2010 remain unchanged from those provided in 2009.
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Executive
Compensation in 2011
The Compensation Committee is conducting a review of the
Companys executive compensation program and intends to
refine the Companys executive compensation program in
2011. The Compensation Committee has engaged Hay Group, a
compensation consultant, to assist with this review.
In 2011, the base salary of Messrs. Hall, Donnelly, Cooney and
Fleming were increased as follows: Mr. Hall, from $500,000
to $520,000; Mr. Donnelly, from $375,000 to $450,000; Mr.
Cooney, from $300,000 to $375,000; and Mr. Fleming, from
$300,000 to $312,000 prior to his retirement effective September
1, 2011. Mr. Bready received no increase in 2011 prior to his
retirement effective July 1, 2011. These base salary increases
were granted in light of the Companys operating
performance in 2010 compared to its 2010 operating plan, among
other factors including input from Hay Group.
Effective July 1, 2011, the Board of Directors, based on the
recommendation of the Compensation Committee, granted 10,000
shares of restricted stock to each of Messrs. Hall, Cooney and
Donnelly and 5,000 shares of restricted stock to Mr.
Fleming under our 2009 Omnibus Incentive Plan. In each case,
one-third of the shares granted vests on each July 1 of 2012,
2013 and 2014, and the shares are automatically forfeited upon
termination of the respective named executive officers
employment. All of the shares of restricted stock granted to
Mr. Fleming on July 1, 2011 were forfeited upon his
retirement effective September 1, 2011.
On October 21, 2011, the Board of Directors, based upon the
recommendation of the Compensation Committee, approved the
Companys 2011 Short-Term Cash Incentive Plan for Nortek
Executives (the 2011 Plan). The Board of Directors
has selected Messrs. Hall, Cooney and Donnelly as
participants in the 2011 plan. The target bonus amount under the
2011 Plan for each of Messrs. Hall, Cooney and Donnelly is
75% of his respective base salary. The actual amount of an
executives bonus will be determined based on the
achievement of Company and individual performance goals. 70% of
the bonus will be based on the Companys achievement of the
Adjusted EBITDA targets established by the Board. The
Compensation Committee will establish individual performance
goals for each Plan participant, and 30% of the bonus will be
based on the executives achievement of his personal goals.
No bonus will be paid under the 2011 Plan if Adjusted
126
EBITDA for fiscal 2011 is below a certain minimum amount
established by the Board. For additional information, see
Incentive Plans 2011 Short-Term
Cash Incentive Plan below.
Retirement
of Richard L. Bready and Appointment of J. David Smith as
Interim Chief Executive Officer
On June 30, 2011, the Company announced that Richard L.
Bready planned to retire from the positions of Chairman of the
Board of Directors, President and Chief Executive Officer of the
Company, effective as of July 1, 2011 (the Retirement
Date). Mr. Bready remained as an employee of the
Company through the close of business on July 1, 2011, at
which time his resignation from all positions with the Company
became effective.
Under the terms of his then existing employment agreement and by
agreement dated June 30, 2011 (the Separation
Agreement), and in consideration of the observation by
Mr. Bready of certain restrictive covenants for a period of
12 months after the Retirement Date, a release of claims
against the Company, a non-disparagement covenant, and his
agreement to provide certain consulting and transition services
to the Company in connection with his retirement from the
Company, Mr. Bready will receive: (i) a severance
payment of $5,250,000, payable over 18 months in equal
installments; (ii) a lump sum payment of $1,000,000 in lieu
of the lifetime health and medical coverage which would have
been due under Mr. Breadys existing employment
agreement, with a tax
gross-up;
(iii) approximately $750,000, payable over 18 months
in equal installments in respect of certain perquisites set
forth in Mr. Breadys employment agreement. Due to the
requirements of Section 409A of the Internal Revenue Code
of 1986, and pursuant to Company policy, the cash payments noted
above that are due to Mr. Bready in connection with his
separation from service will be delayed for a period of six
months. All unvested equity awards held by Mr. Bready as of
the Retirement Date were forfeited, except that half of his
stock options that would have vested later in 2011 were deemed
vested. Mr. Breadys vested stock options will remain
exercisable until the earlier of (i) five years from the
Retirement Date or (ii) the expiration date of the stock
option.
As of July 1, 2011 (the Start Date), the Board
of Directors appointed J. David Smith, who has been a director
of the Company since February 2010, as Interim Chief Executive
Officer of the Company.
In connection with Mr. Smiths appointment as Interim
Chief Executive Officer of the Company, the Company has entered
into an Interim Chief Executive Officer Agreement (the
Interim CEO Agreement) with Mr. Smith, dated as
of June 30, 2011. Mr. Smith is employed pursuant to
the terms of the Interim CEO Agreement from July 1, 2011
until the earliest to occur of: (i) the date on which a
permanent Chief Executive Officer commences employment with the
Company; (ii) the date that is six months from the Start
Date; or (iii) resignation from the position of Interim
Chief Executive Officer Agreement or termination by the Company.
For his services, Mr. Smith is paid a monthly rate of
$105,000 and is eligible to earn an annual incentive bonus for
2011, based upon achievement of performance metrics and
pro-rated to reflect Mr. Smiths period of employment
with the Company in 2011. Mr. Smith is not entitled to
receive fees for attending Board and committee meetings while
serving as the Interim Chief Executive Officer and his Board
retainers will be appropriately pro-rated for 2011 such that he
will only be paid such retainers for the portion of 2011 in
which he is not serving as Interim Chief Executive Officer.
Effective as of the Start Date, Mr. Smith resigned from
serving as a member of the Compensation Committee of the Board.
Pursuant to the Interim CEO Agreement, Mr. Smith is subject
to restrictions on competition and solicitation during his
employment with the Company and for a period of six months
thereafter with respect to the solicitation restrictions. The
Interim CEO Agreement also contains standard confidentiality and
invention assignment covenants.
Retirement
of Bruce E. Fleming
On August 17, 2011, the Company announced that Bruce E. Fleming
planned to retire from his position as Vice
President Corporate Development of the Company
effective as of September 1, 2011. Mr. Fleming
remained as an employee of the Company through the close of
business on September 1, 2011, at which time his
resignation from all positions with the Company became effective.
127
Under the terms the Separation Agreement dated August 23, 2011,
between the Company and Mr. Fleming and in consideration
for the observation by Mr. Fleming of certain restrictive
covenants for a period of 12 months after the Retirement
Date, a release of claims against the Company, and a
non-disparagement covenant, Mr. Fleming: (i) received
a severance payment of $500,000 on September 1, 2011 and
(ii) will receive continuing coverage under the
Companys health insurance benefits for a period of
12 months after September 1, 2011.
Compensation
Philosophy and Objectives
The Compensation Committee believes that Norteks
compensation program is designed to attract, motivate, reward
and retain high caliber executives to assist Nortek in achieving
its strategic and operating objectives, and to compensate them
at a level that is commensurate with both corporate and
individual performance achievement, with the ultimate goal of
increasing the value of our stockholders investment.
Nortek has historically used a mix of short-term compensation,
consisting of base salaries and cash bonuses, and long-term
compensation, consisting of equity incentive compensation. The
Compensation Committee is conducting a review of the
Companys executive compensation program, including its
philosophy and objectives.
Background
on Executive Compensation Structure and Process for
2010
Prior to 2011, the salary and bonus structure for our named
executive officers was established before the Reorganization and
was approved by our former bondholders and the bankruptcy court
in connection with the Reorganization. The equity awards issued
to our named executive officers, which were also approved in
connection with the Reorganization, were issued in December 2009
with four or five year vesting that is contingent upon
successful completion of multi-year performance
and/or
service periods.
Following the Reorganization, the Board of Directors developed a
new corporate governance structure for the Company that was
approved on April 8, 2010. Under the Companys
corporate governance structure and committee charters, the
independent directors are responsible for determining the
compensation of our Chief Executive Officer, and the full Board
of Directors is responsible for the determining the compensation
of our named executive officers other than our Chief Executive
Officer. In both situations, the directors take into account the
recommendations of the Compensation Committee. Messrs. Hall
and Donnelly also have, and Mr. Bready had, employment
agreements which govern certain elements of their compensation.
In addition, Messrs. Bready and Fleming have separation
agreements which govern certain elements of their compensation.
To the extent required by applicable tax or securities laws, or
to the extent that authority is delegated to it by the Board of
Directors, the Compensation Committee may also approve the
specific elements of compensation for executive officers in
addition to the Chief Executive Officer. No such authority was
delegated by the Board of Directors to the Compensation
Committee in 2010.
Under the Companys new corporate governance structure, the
Compensation Committee and the Board of Directors has
occasionally sought input from the Chief Executive Officer
regarding the compensation of the named executive officers. With
respect to salary and bonus decisions, in January 2011
Mr. Bready provided the Compensation Committee with his
assessment of each executive officers performance, other
than his own, addressing such factors as the officers
achievement of individual goals, leadership accomplishments, and
contributions to Norteks performance. Mr. Bready
provided his recommendations on salary increases and bonuses for
the named executive officers. The Compensation Committee also
asked management to provide a list of companies that are similar
to Nortek in one or more characteristics, including industry
group, product markets, business model, size, complexity,
world-wide market and geography. The Compensation Committee
reviewed the comparison data provided by management, among other
factors, in determining its executive compensation
recommendations for 2010.
Use of
Compensation Consultants and Benchmarking Data
Prior to 2011, the Compensation Committee and Nortek management,
would on occasion, consult compensation consultants and
competitive benchmark data when establishing or reviewing base
salaries and compensation packages. Nortek management engaged
Effective Pay Practices (EPP), a compensation
128
consultant, to review salary and cash bonus compensation for the
named executive officers. The consultant reviewed the cash
compensation packages for our named executive officers,
including their base salary and bonus. The consultants
report was provided to the Compensation Committee to help guide
the Compensation Committees compensation decisions for
2011 base salaries and bonuses for fiscal year 2010 performance.
The Compensation Committee did not use a compensation consultant
or benchmarking data in determining bonuses for 2010. Rather, it
made its determination based on its collective knowledge and
experience in compensation matters.
For 2011, as noted above, the Compensation Committee has engaged
Hay Group to conduct a comprehensive review of our executive
compensation program and advise the Compensation Committee on
all compensation matters related to Norteks executives.
The compensation consultant will assist the Compensation
Committee with, among other things, (i) performing a review
of the Companys executive compensation program,
(ii) determining the appropriate allocation among
short-term and long-term compensation, cash and non-cash
compensation, and the different forms of non-cash compensation
and (iii) identifying an appropriate peer group for
purposes of benchmarking the Companys executive
compensation. The Compensation Committee used data provided by
Hay Group, among other factors, in determining the base salaries
for 2011. The Chief Executive Officer may also provide input to
the Compensation Committee on the performance and compensation
levels of the executives other than himself, but he does not
serve on the Compensation Committee.
Elements
of Compensation
There are five primary components of the compensation package
that we provide to each of our named executive officers. Those
components are:
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base salary;
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discretionary cash bonuses;
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plan-based cash awards;
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equity based awards; and
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retirement-related and other benefits.
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Base
Salary
Nortek provides its named executive officers, like its other
employees, with a base salary in order to compensate them for
the services which they provide to Nortek over the course of the
year. Salaries are typically evaluated annually and adjusted
from their base level from year to year based upon the
executives performance and level of responsibilities. In
certain instances, such as in 2009 and 2010, there have been no
adjustments to salaries due to factors such as the downturn in
the industry and market conditions.
In 2010, Messrs. Bready, Hall and Donnelly each had
employment agreements that required Nortek to pay them a minimum
base salary of $3,500,000, $500,000 and $375,000, respectively.
The employment agreements provided that upward adjustments to
the base salary of Mr. Bready are determined by the Board
of Directors and upward adjustments to the base salaries of
Messrs. Donnelly and Hall are determined by the Chief
Executive Officer. The Chief Executive Officer has historically
sought the approval of the Compensation Committee for salary
increases for Messrs. Donnelly and Hall, and
Mr. Bready continued this practice in 2011. Adjustments to
the base salaries of Messrs. Cooney and Fleming were
determined by the Board of Directors based on the
recommendations of the Compensation Committee.
In 2011, the base salary of Messrs. Hall, Donnelly, Cooney and
Fleming were increased as follows: Mr. Hall, from $500,000
to $520,000; Mr. Donnelly, from $375,000 to $450,000; Mr.
Cooney, from $300,000 to $375,000; and Mr. Fleming, from
$300,000 to $312,000 prior to his retirement effective September
1, 2011. Mr. Bready received no increase in 2011 prior to his
retirement effective July 1, 2011.
129
Discretionary
Cash Bonuses
Awards of discretionary cash bonuses are designed to reward
corporate success and individual achievement with the emphasis
on overall Company performance. In 2010, the Chief Executive
Officer assessed the individual performance of each named
executive officer, other than himself, with Norteks
operating and financial performance achievements as compared to
an established financial plan for Nortek. If the Chief Executive
Officer so determined, he made a recommendation to the
Compensation Committee for a discretionary cash bonus award for
each named executive officer other than himself. The
Compensation Committee considered and, if it deemed appropriate,
recommended the approval or adjustment of such discretionary
cash bonus awards for our named executive officers (other the
our Chief Executive Officer) to the full Board of Directors.
Mr. Breadys employment agreement provided that he was
not specifically entitled to incentive or bonus compensation;
however, it did provide that the Board of Directors could, in
its discretion, award incentive compensation to Mr. Bready,
from time to time. Mr. Bready did not receive a cash bonus
for 2010. In 2010, Messrs. Hall, Donnelly, Cooney and
Fleming received cash bonuses of $350,000, $350,000, $260,000
and $100,000, respectively. The Compensation Committee
recommended to the Board of Directors that the Company pay these
bonuses based on the Companys operating performance in
2010 compared to its 2010 operating plan, among other factors.
Plan-based
Cash Awards
Plan-based cash awards comprise a significant portion of the
cash compensation of and are designed to reward our executives
for their contributions to meeting and exceeding the
Companys overall and individualized performance goals.
Plan-based cash awards are designed as a targeted percentage of
base salary and are awarded based on individual achievement of
goals established by the Compensation Committee for each
participant and our achievement of the annual quantitative
financial goals set by the Board of Directors. By directly tying
executives cash compensation to the achievement of the
Companys yearly financial targets and individual
accomplishment of key objectives measured over the current year,
these plan-based awards are designed to align executives
interests with the intermediate-range goals of the
Companys strategy.
For 2011, the Board of Directors, based upon the recommendation
of the Compensation Committee, approved the Companys 2011
Short-Term Cash Incentive Plan for Nortek Executives. Under the
plan, the target cash bonus amount for each of
Messrs. Hall, Cooney and Donnelly is 75% of his respective
base salary. 70% of the bonus will be based on the
Companys achievement of the Adjusted EBITDA target
established by the Board. The Compensation Committee will
establish individual performance goals for each Plan
participant, and 30% of the bonus will be based on the
executives achievement of his personal goals. No bonus
will be paid under the plan if Adjusted EBITDA for fiscal 2011
is below a certain minimum amount established by the Board.
Equity-Based
Awards
On the Effective Date of the Reorganization, Nortek granted
certain equity awards to the named executive officers and other
employees of Nortek and its subsidiaries. These equity awards
were proposed by the
then-in-office
Chief Executive Officer, approved by our former bondholders and
the bankruptcy court in connection with the Reorganization, and
approved by the then-current Board of Directors. The restricted
stock awards and stock option awards granted in 2009 were
granted to the named executive officers to reward and motivate
their performance, which the Board of Directors believes will
have a long-term impact on increasing stockholder value. The
Board of Directors believes that it is important to ensure that
the named executive officers interests are appropriately
aligned with those of the shareholders of the Company.
Fifty percent of the awards granted to the named executive
officers in 2009 were in the form of performance-based
restricted stock awards and the other fifty percent were in the
form of stock options. 25% percent of the restricted stock
awards will vest each year following the end of each of the
Companys 2010, 2011, 2012 and 2013 fiscal years if 95% of
the Companys adjusted EBITDA target is met for the
applicable year, with 16.67% of the awards granted vesting in a
particular year if 90% of the Companys adjusted
130
EBITDA target is met for that year and 8.33% of the awards
granted vesting if 85% of the Companys adjusted EBITDA
target is met for that year. In addition, if all of the
restricted stock that could vest in that year does not vest, an
additional portion of that restricted stock may vest if the
Companys adjusted EBITDA target for the following year
exceeds 90% of the Companys adjusted EBITDA target for
that following year. Stock options granted vest in equal
installments on each of the first five anniversaries of their
grant date. Restricted stock awards reward performance and align
the executives compensation with the performance of the
Company by tying the number of shares that actually vest to the
Companys performance and stock options stock awards,
through their multi-year vesting, reinforce our goal to retain
top talent.
In 2010, the Company achieved 111.7% of the adjusted EBITDA
target of $151.72 million for 2010, which resulted in the
vesting of 25% of the restricted stock award. For purposes of
the restricted stock awards, adjusted EBITDA is defined as the
Companys Consolidated Cash Flow. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources for a description of how Consolidated
Cash Flow is calculated.
In 2010 there were no grants of equity-based awards to the named
executive officers.
Effective July 1, 2011, the Board of Directors, based on
the recommendation of the Compensation Committee, granted awards
of restricted stock to each of Messrs. Hall, Cooney,
Donnelly and Fleming. In each case, one-third of the shares
granted vests on each July 1 of 2012, 2013 and 2014, and the
shares are automatically forfeited upon termination of the
respective named executive officers employment.
Retirement-Related
Benefits
401(k)
Plan
Each of our named executive officers is eligible to participate
in Norteks 401(k) Savings Plan. The 401(k) plan is a
tax-qualified retirement savings plan pursuant to which all of
Norteks employees, including the named executive officers,
are able to contribute the lesser of 18% of their annual salary
or the limit prescribed by the Internal Revenue Service to the
plan on a before-tax basis. Historically, participants in the
401(k) plan were eligible for a discretionary matching
contribution and a discretionary profit sharing employer
contribution. Prior to 2009, Nortek matched 50% of the
participants contributions up to 6% of compensation (for a
maximum possible match of 3%). For all of 2009 and from
January 1, 2010 to June 30, 2010, Nortek suspended the
discretionary match as a result of efforts to control costs
while the Company weathered the downturn in the economy.
Effective July 1, 2010, Nortek reinstated a discretionary
match of 25% of the participants contributions up to 6% of
compensation (for a maximum possible match of 1.5%). For 2010
under our 401(k) plan, Mr. Hall received $3,918,
Mr. Donnelly received $2,688, Mr. Cooney received
$2,214 and Mr. Fleming received $1,960 of employer match
contributions, and each of our named executive officers received
$6,125 of Company-paid profit sharing contributions.
Pension
Plan
Messrs. Bready, Hall and Donnelly are eligible to receive
benefits under Norteks qualified pension plan as a result
of their respective tenures with the Company. Norteks
qualified pension plan was frozen as of December 31, 1995,
and no further increases in benefits may occur as a result of
additional service or increases in compensation. The benefit
payable to a participant at normal retirement equals the accrued
benefit as of December 31, 1995 and will be payable as a
joint and 50% survivor annuity in the case of a married employee
and as a single-line annuity in the case of an unmarried
employee. The annual pension benefits entitled to be paid to the
named executive officers beginning at age 65 under this
pension plan, as a 50% joint and survivor annuity, are as
follows: Mr. Hall $52,163, and Mr. Donnelly $15,574.
Messrs. Cooney and Fleming are not eligible to receive
benefits under the qualified pension plan. Mr. Bready commenced
his annual benefit effective July 1, 2011 in the amount of
$182,141.28 payable for his lifetime only.
Supplemental
Executive Retirement Plan
We maintain the Nortek, Inc. Supplemental Executive Retirement
Plan B (the SERP) in which Mr. Fleming is the
sole participant. The SERP provides plan participants with a
benefit equal to the value of an annuity with monthly payments
for 180 months. The SERP benefit, before offset, is equal
to 1.667% of a
131
participants Average Compensation for each year of service
not in excess of 30. Average Compensation is the
average of the participants base salary and half of the
participants bonus during the three consecutive calendar
years in which such participants earnings were greatest. A
participants benefit under the SERP is reduced by benefits
under the pension plan and social security benefits, as
applicable. The SERP benefit is payable in installments
beginning with Mr. Flemings termination of employment and
according to plan provisions, his benefit is not subject to
early retirement reduction factors.
Other
Benefits
We also provide each of our named executive officers with health
and life insurance benefits as well as certain other benefits
that are required by the terms of the existing employment
agreements with the named executive officers. In the case of
Mr. Bready, his employment agreement provided that if his
employment were terminated for any reason, the Company is
obligated to provide lifetime medical coverage to
Mr. Bready, his spouse and his dependents in an amount up
to $1,000,000. Alternatively, Mr. Bready could choose to
receive a lump-sum payment in lieu of this coverage. Upon his
retirement effective July 1, 2011, Mr. Bready elected
to receive a lump sum payment of $1,000,000, payment of which is
delayed for six months due to the requirements of
Section 409 A of the Internal Revenue code of 1986 and
pursuant to Company policy. The Company is required to
gross-up
the amount Mr. Bready receives for all applicable taxes. In
the case of Messrs. Hall and Donnelly, in the event the
named executive officers employment is terminated for any
reason, if there is a
change-in-control
or upon the third anniversary of the Reorganization, the Company
is required to make a lump-sum payment of up to $1,000,000 in
lieu of any lifetime medical coverage which would have been due
under the respective employment agreement, with a
gross-up
for all applicable taxes. The payment, prior to the tax
gross-up,
will be at least $838,707 in the case of Mr. Hall and at
least $863,432 in the case of Mr. Donnelly. We are also
required, by the terms of the existing employment agreements
with Messrs. Hall and Donnelly, to provide them with an excise
tax gross-up
in connection with so-called golden parachute payments.
Nortek also provides perquisites, some of which are
discretionary while others are provided pursuant to the terms of
the employment agreements between Nortek and Messrs. Hall and
Donnelly and were provided pursuant to Mr. Breadys
employment agreement prior to his retirement effective as of
July 1, 2011. Under the terms of his Separation Agreement,
Mr. Bready will receive approximately $750,000, payable
over 18 months in equal installments in lieu of perquisites
which would have been due under his employment agreement. The
purpose of these perquisites is to motivate employees, create
goodwill, and reward employees for achievements that may not be
measurable in financial metrics. These perquisites are reflected
in the All Other Compensation column in the Summary
Compensation Table below and the related footnotes.
Termination
Compensation
In order to attract and retain executives, Nortek believes that
certain severance arrangements for its named executive officers
are appropriate and necessary. For Messrs. Hall and Donnelly,
their termination compensation is determined pursuant to the
terms and conditions of their employment agreements.
Messrs. Breadys and Flemings termination
compensation is governed by the respective Separation Agreement,
see Employment Agreements Separation
Agreement of Richard L. Bready and Employment
Agreements Separation Agreement of Bruce E.
Fleming below. Mr. Cooneys termination
compensation is determined pursuant to the terms and conditions
of the Companys Second Amended and Restated Change in
Control Severance Benefit Plan. Nortek believes that termination
benefits and
change-of-control
payments are helpful to provide certainty to the named executive
officers with respect to their positions with Nortek and to
ensure that the named executive officers consider corporate
transactions which are in the best interest of the stockholders
of Nortek without concern over whether the transactions may
jeopardize the executives employment. Also, these benefits
help to ensure that Nortek will have the continued dedication
and full attention of key employees.
For more information on termination compensation payments for
the named executive officers, see the disclosure under
Employment Agreements Potential
Payments upon Termination of Employment or
Change-in-Control
below, Employment Agreements
Separation Agreement of Richard L. Bready below and
Employment Agreements Separation
Agreement of Bruce E. Fleming below.
132
Tax
and Accounting Implications
Section 162(m) of the Internal Revenue Code generally
disallows a tax deduction to public companies for taxable
compensation over $1 million paid to certain executives.
Performance-based compensation is not subject to the deduction
limit if certain requirements are met. The Company takes
Section 162(m) of the Internal Revenue Code into account in
making its executive compensation decisions, but reserves the
right to pay amounts that are not deductible.
We account for equity compensation paid to our employees in
accordance with ASC 718, Compensation
Stock Compensation, (ASC 718),
which requires us to measure and recognize compensation expense
in our financial statements for all share-based payments based
upon an estimate of their grant date fair value over the service
period of the award. We record cash compensation as an expense
at the time the obligation is accrued.
Summary
Compensation Table
The following table sets forth information regarding
compensation awarded to, earned by or paid to our Chief
Executive Officer, our Chief Financial Officer, and our three
other most highly compensated executive officers during fiscal
years 2010, 2009 and 2008.
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Change
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in Pension
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Value and
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Non-
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Non-Equity
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qualified
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Incentive
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Deferred
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Discretionary
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Plan
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Stock
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Option
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Compensation
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All Other
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Total
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Name and Principal Position
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Year
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Salary
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Bonus
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Compensation(1)
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Awards(2)
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Awards(3)
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Earnings(4)
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Compensation(5)(6)
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Compensation
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Richard L. Bready
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2010
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$
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3,500,000
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$
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$
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33,000
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$
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315,611
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$
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3,848,611
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Chairman, President and
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2009
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3,500,000
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$
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500,000
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$
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3,595,650
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$
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1,484,122
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343,000
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300,988
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9,723,760
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Chief Executive Officer
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2008
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3,500,000
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163,000
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376,336
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4,039,336
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Almon C. Hall
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2010
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$
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500,000
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$
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350,000
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$
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72,000
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$
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65,709
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$
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987,709
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Senior Vice President and
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2009
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500,000
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$
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300,000
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$
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479,825
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$
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198,050
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120,000
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46,747
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1,644,622
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Chief Financial Officer
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2008
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500,000
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150,000
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22,000
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58,677
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730,677
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Kevin W. Donnelly
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2010
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$
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375,000
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$
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350,000
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$
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18,000
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$
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52,171
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$
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795,171
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Senior Vice President, General
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2009
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375,000
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$
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300,000
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$
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479,825
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$
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198,050
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26,000
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40,404
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1,419,279
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Counsel and Secretary
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2008
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375,000
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150,000
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3,000
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43,419
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571,419
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Edward J. Cooney
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2010
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$
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300,000
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$
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260,000
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$
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32,077
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$
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592,077
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Senior Vice President and
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2009
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300,000
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$
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300,000
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$
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479,825
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$
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198,050
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23,830
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1,301,705
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Treasurer
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2008
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300,000
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150,000
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32,052
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482,052
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Bruce E. Fleming
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2010
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$
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300,000
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$
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100,000
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$
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147,000
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$
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25,909
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$
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572,909
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Vice President
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2009
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300,000
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15,000
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$
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84,675
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$
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34,950
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$
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124,000
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19,022
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577,647
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Corporate Development
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2008
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300,000
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50,000
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76,000
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35,358
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461,358
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(1) |
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Pursuant to the Emergence Bonus Plan, which was court-approved
as part of the Reorganization, on the date Nortek emerged from
bankruptcy, cash bonuses were awarded to executive officers and
certain key employees of Nortek for their efforts in completing
the Reorganization. All such cash bonuses were paid during
fiscal year 2009. |
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(2) |
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This amount represents the dollar amount of the aggregate grant
date fair value of the restricted stock awards granted during
fiscal year 2009 determined in accordance with ASC 718 and
based on a grant date fair value of a share of common stock
equal to $11.29. The value reported in the table represents the
value of restricted stock awards assuming satisfaction of the
target level of performance. There were no restricted stock
grants made in fiscal year 2010 or 2008. For additional
information, including information regarding the assumptions
used for these calculations, see Note 2,
Reorganization Under Chapter 11, and
Note 9, Share-Based Compensation, to the
consolidated financial statements, included elsewhere herein. |
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(3) |
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This amount represents the dollar amount of the aggregate grant
date fair value of the stock options granted during fiscal year
2009 determined in accordance with ASC 718 and based on a
grant date fair value of a stock option equal to $4.66. There
were no stock option grants made in fiscal year 2010 or 2008.
For additional information, including information regarding the
assumptions used for these |
133
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calculations, see Note 2, Reorganization Under
Chapter 11, and Note 9, Share-Based
Compensation, to the consolidated financial
statements, included elsewhere herein. |
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(4) |
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For 2010, the gross change in the estimated lump sum value of
Mr. Breadys benefit of $33,000 is the net result of a
decrease of $54,000 due to passage of time and an increase of
$87,000 due to a change in assumptions (mortality and discount
rate). The gross change in the estimated lump sum value of
Mr. Halls benefit of $72,000 is the net result of an
increase of $39,000 due to the passage of time and an increase
of $33,000 due to a change in assumptions (mortality and
discount rate). The gross change in the estimated lump sum value
of Mr. Donnellys benefit of $18,000 is the net result
of an increase of $7,000 due to the passage of time and an
increase of $11,000 due to a change in assumptions (mortality
and discount rate). The gross change in the estimated present
value of Mr. Flemings benefit of $147,000 is the net
result of $110,000 due to the passage of time (including $69,000
in benefits earned) and an increase of $37,000 due to a change
in assumptions (mortality and discount rate). |
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For 2009, the gross change in the estimated lump sum value of
Mr. Breadys benefit of $343,000 is the net result of
an increase of $54,000 due to passage of time and an increase of
$289,000 due to a change in assumptions (mortality and discount
rate). The gross change in the estimated lump sum value of
Mr. Halls benefit of $120,000 is the net result of an
increase of $24,000 due to the passage of time and an increase
of $96,000 due to a change in assumptions (mortality and
discount rate). The gross change in the estimated lump sum value
of Mr. Donnellys benefit of $26,000 is the net result
of an increase of $3,000 due to the passage of time and an
increase of $23,000 due to a change in assumptions (mortality
and discount rate). The gross change in the estimated present
value of Mr. Flemings benefit of $124,000 is the net
result of $88,000 due to the passage of time (including $52,000
in benefits earned) and an increase of $36,000 due to a change
in assumptions (mortality and discount rate). |
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For 2008, the gross change in the estimated lump sum value of
Mr. Breadys benefit of $163,000 is the net result of
an increase of $142,000 due to the passage of time and an
increase of $21,000 due to an increase in the IRS qualified plan
benefit limit. The gross change in the estimated lump sum value
of Mr. Halls benefit of $22,000 is due to the passage
of time. The gross change in the estimated lump sum value of
Mr. Donnellys benefit of $3,000 is due to the passage
of time. The gross change in the estimated present value of
Mr. Flemings benefit of $76,000 is due to the passage
of time (including $44,000 in benefits earned). |
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(5) |
|
For Mr. Bready, includes: $231,447 for 2010, $217,954 for
2009 and $303,383 for 2008 related to personal use of
Norteks fractional ownership of aircrafts; $8,382 for 2010
and $4,356 for each of 2009 and 2008 related to excess group
term life insurance; $4,600 for 2010, $0 for 2009 and $16,427
for 2008 for personal use of automobiles provided by Nortek;
$33,500 in 2010, $0 in 2009 and $13,000 in 2008 for tax
preparation services; $21,495 in 2010, $68,868 in 2009 and
$22,354 in 2008 for reimbursement by Nortek for health related
costs paid by the executive; and $10,062 in 2010, $9,811 in 2009
and $9,916 in 2008 for country club dues and assessments for
personal use. To determine the aggregate incremental cost of
Mr. Breadys personal use of Norteks fractional
ownership of aircrafts, Mr. Bready classifies all flights
as either personal or business use, and Nortek aggregates the
itemized costs billed to the Company for each flight
Mr. Bready has identified as personal. The aggregate
incremental cost of tax preparation services is the amount
billed to the Company by an outside tax consultant for
Mr. Breadys personal tax services. |
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|
|
For Mr. Hall, includes: $4,356 for each of 2010, 2009 and
2008 related to Company-paid premiums for excess group term life
insurance; $23,080 for 2010, $23,228 for 2009 and $23,331 for
2008 for personal use of an automobile provided by Nortek;
$2,500 for each of 2010 and 2009 and $4,000 for 2008 for tax
preparation services; $15,889 for 2010, $6,821 for 2009 and
$10,472 for 2008 for reimbursement by Nortek for health-related
costs paid by the executive; and $9,842 for each of 2010 and
2009 and $9,618 for 2008 for country club dues and assessments
for personal use. |
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|
|
For Mr. Donnelly, includes: $2,838 for 2010 and $1,518 for
each of 2009 and 2008 related to Company-paid premiums for
excess group term life insurance; $18,389 for 2010, $18,739 for
2009 and $18,540 for 2008 for personal use of an automobile
provided by Nortek; $15,451 for 2010, $13,746 for 2009 and
$10,551 for 2008 for reimbursement by Nortek for health-related
costs paid by the executive; and $6,680 for 2010, $6,400 for
2009 and $5,910 for 2008 for country club dues and assessments
for personal use. |
134
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|
For Mr. Cooney, includes: $4,356 for each of 2010 and 2009
and $4,312 for 2008 related to Company-paid premiums for excess
group term life insurance; $16,882 for 2010, $16,974 for 2009
and $18,340 for 2008 for personal use of an automobile provided
by Nortek; and $2,500 for each of 2010, 2009 and 2008 for tax
preparation services. |
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|
|
For Mr. Fleming, includes: $4,356 for 2010, $2,838 for 2009
and $2,819 for 2008 related to Company-paid premiums for excess
group term life insurance; and $13,468 for 2010, $16,184 for
2009 and $14,389 for 2008 for personal use of an automobile
provided by Nortek. |
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(6) |
|
For 2010, includes Company-paid matching contributions of $3,918
for Mr. Hall, $2,688 for Mr. Donnelly, $2,214 for
Mr. Cooney and $1,960 for Mr. Fleming and Company-paid
profit sharing contributions of $6,125 each for
Messrs. Bready, Hall, Donnelly, Cooney and Fleming under
Norteks 401(k) Savings Plan, which is a defined
contribution retirement plan. |
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|
|
For 2009, there were no matching contributions or profit sharing
contributions by Nortek for Messrs. Bready, Hall, Donnelly,
Cooney or Fleming under Norteks 401(k) Savings Plan. |
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|
|
For 2008, includes $6,900 in matching contributions by Nortek
for Messrs. Bready, Hall, Donnelly, Cooney and Fleming
under Norteks 401(k) Savings Plan. There was no profit
sharing contribution by Nortek for 2008. |
Grants
of Plan-Based Awards Table
There were no grants of plan-based awards to any of the named
executive officers in 2010.
Outstanding
Equity Awards at December 31, 2010 Table
|
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Option Awards
|
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Stock Awards
|
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Equity
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Incentive
|
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Equity
|
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Plan
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Market
|
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Incentive
|
|
Awards:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
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Value
|
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Plan
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Market or
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|
|
|
|
|
|
|
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|
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of
|
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of
|
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Awards:
|
|
Payout
|
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|
|
|
|
|
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|
|
|
|
|
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Shares
|
|
Shares
|
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Number of
|
|
Value of
|
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|
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|
|
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|
|
|
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or
|
|
or
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Unearned
|
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Unearned
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
Units
|
|
Units
|
|
Shares,
|
|
Shares,
|
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|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
of
|
|
of
|
|
Units or
|
|
Units or
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|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Stock
|
|
Stock
|
|
Other
|
|
Other
|
|
|
Type
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
|
|
that
|
|
that
|
|
Rights
|
|
Rights
|
|
|
of
|
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Option
|
|
have
|
|
have
|
|
that have
|
|
that have
|
|
|
Award
|
|
Grant
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Expiration
|
|
Not
|
|
Not
|
|
Not Vested
|
|
Not Vested
|
Name
|
|
(1)
|
|
Date
|
|
(#)(2)
|
|
(#)(2)
|
|
($)
|
|
Date
|
|
Vested
|
|
Vested
|
|
(#)(3)
|
|
($)(4)
|
|
Richard L. Bready
|
|
ISO
|
|
|
12/17/09
|
|
|
|
5,714
|
|
|
|
22,857
|
|
|
$
|
17.50
|
|
|
|
12/17/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSO
|
|
|
12/17/09
|
|
|
|
57,982
|
|
|
|
231,928
|
|
|
$
|
17.50
|
|
|
|
12/17/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRSA
|
|
|
12/17/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
238,860
|
|
|
$
|
8,598,960
|
|
Almon C. Hall
|
|
ISO
|
|
|
12/17/09
|
|
|
|
5,714
|
|
|
|
22,857
|
|
|
$
|
17.50
|
|
|
|
12/17/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSO
|
|
|
12/17/09
|
|
|
|
2,786
|
|
|
|
11,143
|
|
|
$
|
17.50
|
|
|
|
12/17/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRSA
|
|
|
12/17/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
31,875
|
|
|
$
|
1,147,500
|
|
Kevin W. Donnelly
|
|
ISO
|
|
|
12/17/09
|
|
|
|
5,714
|
|
|
|
22,857
|
|
|
$
|
17.50
|
|
|
|
12/17/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSO
|
|
|
12/17/09
|
|
|
|
2,786
|
|
|
|
11,143
|
|
|
$
|
17.50
|
|
|
|
12/17/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRSA
|
|
|
12/17/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
31,875
|
|
|
$
|
1,147,500
|
|
Edward J. Cooney
|
|
ISO
|
|
|
12/17/09
|
|
|
|
5,714
|
|
|
|
22,857
|
|
|
$
|
17.50
|
|
|
|
12/17/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSO
|
|
|
12/17/09
|
|
|
|
2,786
|
|
|
|
11,143
|
|
|
$
|
17.50
|
|
|
|
12/17/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRSA
|
|
|
12/17/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
31,875
|
|
|
$
|
1,147,500
|
|
Bruce E. Fleming
|
|
ISO
|
|
|
12/17/09
|
|
|
|
1,500
|
|
|
|
6,000
|
|
|
$
|
17.50
|
|
|
|
12/17/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRSA
|
|
|
12/17/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
5,625
|
|
|
$
|
202,500
|
|
|
|
|
(1) |
|
Type of Award: |
|
|
|
ISO = Incentive Stock Option |
|
|
|
NSO = Nonqualified Stock Option |
|
|
|
PRSA = Performance Restricted Stock Award |
135
|
|
|
(2) |
|
Stock options vest at the rate of 20% on each anniversary of the
grant date, beginning with the first anniversary of the grant
date, with 100% vesting upon the fifth anniversary of the grant
date. The $17.50 exercise price was agreed to by the Chief
Executive Officer of Nortek and the Ad Hoc Committee and
approved by the Board of Directors and exceeded the fair market
value of a share of common stock on the date of grant. All stock
options vest in full upon a Change of Control (as defined in the
Incentive Stock Option Agreement or Nonqualified Stock Option
Agreement). Upon a termination of the named executive
officers employment, non-vested stock options are
forfeited, while vested options remain exercisable until the
earlier of (i) three months from the executive
officers termination date or (ii) the expiration date
of the options. Under the terms of his Separation Agreement,
one-half of stock options held by Mr. Bready that would
have vested on the 2011 anniversary of the grant date were
deemed vested, and all of Mr. Breadys vested stock
options will remain exercisable until the earlier of
(i) five years from July 1, 2011 or (ii) the
original expiration date of the stock options. All other
unvested equity awards were forfeited upon the termination of
his employment. For additional information, see
Employment Agreements Separation
Agreement of Richard L. Bready below. Upon his retirement
effective September 1, 2011, Mr. Fleming forfeited all
his non-vested stock options. All Mr. Flemings vested
stock options shall remain exercisable until November 29,
2011, after which date such options shall be forfeited. |
|
(3) |
|
Shares of restricted stock vest at the rate of 25% per year,
subject to satisfaction of 95% of Adjusted EBITDA performance
criteria for fiscal years 2010, 2011, 2012 and 2013, with
vesting dates as of the Measurement Date (defined in the
Restricted Stock Agreement as the date that the Company
determines whether the performance target has been satisfied).
The computation of Adjusted EBITDA is to be performed by
reference to the Companys Adjusted Consolidated Cash Flow
as defined in the Companys indenture governing its
11% Senior Secured Notes due 2013. If the target Adjusted
EBITDA is not achieved, 1/3 of the restricted stock that could
vest with respect to a particular year vests if 85% of Adjusted
EBITDA is achieved and 2/3 vests if 90% of Adjusted EBITDA is
achieved. The numbers in the table represent the number of
shares that would vest if 95% of Adjusted EBITDA were achieved
during each of the 2011, 2012 and 2013 fiscal years. In
addition, if Adjusted EBITDA in any particular year is lower
than the performance target for that year, as set forth in the
Restricted Stock Agreement, the awards which would have vested
in that year may vest in part or in whole in the following year
if certain Adjusted EBITDA performance criteria are exceeded in
the following year. In that case, restricted stock awards would
vest with respect to both the current year and the preceding
year, depending upon the extent to which performance criteria
for the current year were exceeded. All shares of restricted
stock vest in full upon a Change of Control (as defined in the
Restricted Stock Agreement), and are forfeited upon a
termination of the named executive officers employment.
Upon their retirements effective July 1, 2011 and
September 1, 2011, respectively, all unvested shares of
restricted stock held by Mr. Bready and Mr. Fleming as
of July 1, 2011 and September 1, 2011, respectively,
were forfeited. |
|
(4) |
|
Amounts have been determined by multiplying the maximum number
of shares underlying the restricted stock award by $36, which
was the fair market value of a share of Nortek common stock on
December 31, 2010 as traded on the OTC:QB. |
All outstanding equity awards were granted under the Nortek,
Inc. 2009 Omnibus Incentive Plan, which is described in more
detail in the Incentive Plans section below.
Option
Exercises and Stock Vesting During the Year Ended
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Stock Awards(1)
|
|
|
Number of Shares
|
|
Value Realized on
|
|
|
Acquired on Vesting
|
|
Vesting
|
Name
|
|
(#)
|
|
($)(2)
|
|
Richard L. Bready
|
|
|
79,620
|
|
|
$
|
2,866,329
|
|
Almon C. Hall
|
|
|
10,625
|
|
|
$
|
382,500
|
|
Kevin W. Donnelly
|
|
|
10,625
|
|
|
$
|
382,500
|
|
Edward J. Cooney
|
|
|
10,625
|
|
|
$
|
382,500
|
|
Bruce E. Fleming
|
|
|
1,875
|
|
|
$
|
67,500
|
|
136
|
|
|
(1) |
|
Represents the removal of the restriction on 25% of each Named
Executive Officers restricted stock award. Because the
Company achieved 111.7% of the pre-established EBITDA target of
$151.72 million for 2010, 25% of each restricted stock
award (the maximum which could vest in 2010) vested on
March 30, 2011, the date the Companys audited
financial statements were certified. |
|
(2) |
|
Amounts have been determined by multiplying the maximum number
of shares underlying the PRSA by $36, which was the fair market
value of a share of Nortek common stock on December 31,
2010 as traded on the OTC:QB. |
Pension
Benefits for the Year Ended December 31, 2010
Nortek,
Inc. Retirement Plan
Messrs. Bready, Hall and Donnelly participate in the
Nortek, Inc. Retirement Plan (the Nortek Retirement
Plan). Messrs. Cooney and Fleming do not participate
in the Nortek Retirement Plan. The following table provides the
required benefit information for Messrs. Bready, Hall and
Donnelly under the Nortek Retirement Plan for the year ended
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years of
|
|
Estimated
|
|
Payments
|
|
|
Credited
|
|
Present Value of
|
|
During Last
|
Name
|
|
Service(1)
|
|
Accrued Benefit
|
|
Fiscal Year
|
|
Richard L. Bready(2)
|
|
|
21
|
|
|
$
|
2,146,000
|
|
|
$
|
0
|
|
Almon C. Hall
|
|
|
19
|
|
|
|
701,000
|
|
|
|
0
|
|
Kevin W. Donnelly
|
|
|
8
|
|
|
|
132,000
|
|
|
|
0
|
|
|
|
|
(1) |
|
Messrs. Hall and Donnelly have been employed by Nortek for
34 and 24 years, respectively, and Mr. Bready was
employed by Nortek for 36 years prior to his retirement
effective July 1, 2011. As described in greater detail
below, the difference between their years of credited service
under the Nortek Retirement Plan and their actual years of
service with Nortek is a result of the freezing of the Nortek
Retirement Plan. This difference does not result in any
augmentation of benefits. |
|
(2) |
|
Mr. Breadys benefit reflects a payment date of
January 1, 2011 (age 66 and 5 months). |
Annual benefit accruals under the Nortek Retirement Plan ceased
effective December 31, 1995. All plan participants,
including those identified above, became 100% vested on that
date. Retirement benefits were calculated using final average
earnings and credited service according to the plans
benefit formula as of the benefit freeze date.
The estimated present value of each participants accrued
benefit was determined as of December 31, 2010 based on a
discount rate of 5.25% and mortality according to the IRS 2010
Non-Annuitant Mortality Table (sex distinct). These assumptions
are the same as those used for fiscal 2010 financial statement
reporting purposes and represent a change from the prior year.
The Nortek Retirement Plan does not offer a lump sum payment
option for any of the participants identified above.
Reduced early retirement benefits are available to plan
participants who have attained age 55 with at least five
(5) years of vesting service. Accrued benefits are reduced
by 1/180th for each of the first sixty (60) months a
participants early retirement age precedes age 65 and
by 1/360th for each additional month in excess of sixty
(60) months. Each of Messrs. Bready, Hall and Donnelly
is currently eligible for early retirement under the Nortek
Retirement Plan.
The normal form of payment for single participants is a life
annuity. The normal form of payment for married payments is an
actuarially reduced 50% joint & survivor annuity.
Optional forms of payment include actuarially adjusted
joint & survivor benefits (50%,
662/3%,
75%, and 100%) and a ten-year certain and continuous annuity.
137
The estimated annual 50% joint & survivor annuity
payable to each participant identified above at age 65 is
detailed below (estimates are based on actual spouse dates of
birth):
|
|
|
|
|
|
|
Annual Accrued Benefit
|
|
|
Payable at Age 65
|
Name
|
|
50% Joint & Survivor
|
|
Richard L. Bready(1)
|
|
$
|
161,067
|
|
Almon C. Hall
|
|
|
52,163
|
|
Kevin W. Donnelly
|
|
|
15,574
|
|
|
|
|
(1) |
|
Mr. Breadys benefit reflects a payment date of
January 1, 2011 (age 66 and 5 months). |
The gross change in the present value of each participants
estimated benefit is attributable to the passage of time as well
as changes to both the discount rate and mortality assumption.
The impact of each change is summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change Due to
|
|
Change Due to
|
|
Change Due to
|
Name
|
|
Passage of Time
|
|
Discount Rate
|
|
Mortality Table
|
|
Richard L. Bready
|
|
$
|
(54,000
|
)
|
|
$
|
83,000
|
|
|
$
|
4,000
|
|
Almon C. Hall
|
|
|
39,000
|
|
|
|
32,000
|
|
|
|
1,000
|
|
Kevin W. Donnelly
|
|
|
7,000
|
|
|
|
10,500
|
|
|
|
500
|
|
Nortek,
Inc. Supplemental Executive Retirement Plan
We also maintain the Nortek, Inc. Supplemental Executive
Retirement Plan B (the SERP) in which
Mr. Fleming is the sole participant. Mr. Fleming is
completely vested in his SERP benefit. The following table
illustrates the required benefit information for
Mr. Fleming under the SERP for the year ended
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years of
|
|
Estimated
|
|
Payments
|
|
|
Credited
|
|
Present Value of
|
|
During Last
|
Name
|
|
Service
|
|
Accrued Benefit
|
|
Fiscal Year
|
|
Bruce E. Fleming
|
|
|
19.30
|
|
|
$
|
858,000
|
|
|
$
|
0
|
|
The SERP provides plan participants with a benefit equal to the
value of an annuity with monthly payments for 180 months.
The SERP benefit, before the offset described below, is equal to
1.667% of a participants Average Compensation for each
year of service not in excess of 30. Average
Compensation is the average of the participants base
salary and half of the participants bonus during the three
consecutive calendar years in which such participants
earnings were greatest. A participants benefit under the
plan is reduced by other employer-provided retirement benefits
and social security benefits.
In general, SERP benefits are payable in a series of
180 monthly installments beginning on the later of
(a) the date on which the participant attains normal
retirement age under the SERP (age 65) and
(b) the date on which the participant actually retires. If
a participant retires before age 65, accrued benefits are
reduced in accordance with the factors outlined in the plan
document. Specifically, benefits are reduced by 1/180 for each
of the first 60 months the benefit commencement date
precedes the normal retirement date and by 1/360 for each of the
next 60 months the benefit commencement date precedes the
normal retirement date.
A participant who retires prior to attaining age 65 may
elect to have those SERP benefits earned and vested prior to
January 1, 2005 commence any time on or after age 55
(but not after his or her normal retirement date). Benefits that
are earned or vested on or after January 1, 2005 must
commence within 90 days of a participants termination
of employment (in the case of a participant who is eligible for
early retirement).
Since Mr. Fleming has attained age 55 he is eligible
for annual early retirement benefits in the annual amount of
$78,430 based on a benefit commencement date of January 1,
2011. Following his retirement effective September 1, 2011
and pursuant to the terms of his Separation Agreement,
Mr. Fleming will receive SERP benefits commencing on
March 2, 2012 in the annual amount of $109,439. A pension
benefit reduced for disability benefits is also payable under
certain circumstances. Upon a Change of Control (as defined in
the SERP), a participant will become fully vested in his or her
SERP benefit. In the event of a termination of
138
employment by the Company or by a participant for certain listed
reasons within the twenty-four month period following a Change
of Control, a participants benefits will commence upon
termination and will not be subject to the early commencement
reductions specified in the plan.
In the event of the participants death prior to the full
payment of the SERP benefits, the participants spouse will
receive a monthly benefit generally equal to 50% of the amount
then-payable to the participant for the balance of 180 total
payments.
Non-qualified
Deferred Compensation Plans
None of the named executive officers participated in a
non-qualified deferred compensation plan during the 2010 fiscal
year and Nortek did not maintain any non-qualified deferred
compensation plans during the 2010 fiscal year.
Employment
Agreements
Messrs. Hall and Donnelly and J. David Smith and James B.
Hirshorn each have, and Messrs. Bready and Fleming had,
employment, consulting and/or separation agreements with Nortek.
The material terms of these agreements are described below.
Amended
Employment Agreement of Richard L. Bready
Mr. Breadys employment agreement, which was effective
August 27, 2004, was amended effective December 17,
2009. Mr. Breadys agreement, which had an initial
term commencing on August 27, 2004 and concluding on
December 31, 2009, was renewable for successive one-year
terms unless the Company provided Mr. Bready with written
notice of its intent not to renew the agreement at least
90 days prior to the end of the initial term or any
successive term. The amended employment agreement provided that
during the employment term Mr. Bready served as Chairman,
President and Chief Executive Officer of the Company.
The amended employment agreement provided that the base annual
salary for Mr. Bready during the employment term would be
not less than $3,500,000, subject to increase at the Board of
Directors discretion. Mr. Bready was not entitled to
any cash performance bonus awards, unless the Board of Directors
in its sole discretion determined otherwise. In addition,
Mr. Bready was entitled to receive those benefits and
participate in any employee benefit plans generally available to
executive personnel. Mr. Bready also was entitled to
reimbursement of certain club and association dues, two
automobiles and reimbursement of associated costs and the use,
or reimbursement of the cost, of private aircraft transportation
for business travel and up to 50 hours per year of personal
travel.
Under the amended employment agreement, if the employment of
Mr. Bready was terminated for any reason other than for
cause (as defined below) or if his term of employment was not
renewed, the Company was obligated to provide Mr. Bready,
or in the event of his death, his designated beneficiary or
estate, 18 months salary, payable monthly. In the
event his employment was terminated for any reason other than
for cause or by reason of his death, for the
18-month
period following his employment termination, he would have been
entitled to receive continued coverage, at the Companys
expense, under the same or equivalent disability, accident and
life insurance policies as those under which he was covered
immediately prior to his employment termination, an executive
office and accompanying secretarial services in Providence,
Rhode Island and continuation of certain perquisites, including
the club and association dues, car allowance payments and use of
private aircraft.
Under the amended employment agreement for Mr. Bready,
cause generally meant either (i) the willful
and continued failure of Mr. Bready to perform
substantially his material duties to the Company (except a
failure resulting from, or contributed by, incapacity due to
physical or mental illness), after a written demand for
substantial performance specifically identifying the manner in
which he had not so performed his duties that had been adopted
by the Board of Directors at a special meeting had been
delivered to Mr. Bready (with Mr. Bready having the
opportunity to be heard by the Board) or (ii) the
conviction of Mr. Bready of a crime involving theft,
139
embezzlement or fraud against the Company or a civil judgment in
which the Company had been awarded damages from Mr. Bready
in respect of a claim of loss of funds through fraud or
misappropriation by Mr. Bready.
Under the amended employment agreement, upon his termination of
employment, Mr. Bready would have been prohibited from
competing with the Company for one year following termination.
Under the amended employment agreement, following the
termination of employment of Mr. Bready for any reason, the
Company was required to provide, at no additional cost to
Mr. Bready, up to $1,000,000 (not including any additional
tax gross-up
payment as described below) in lifetime medical coverage to
Mr. Bready, his spouse and dependents. In lieu of lifetime
medical coverage, Mr. Bready or his spouse could request a
lump-sum payment in an amount to be established by the Board of
Directors as reasonably sufficient to provide such coverage (but
not in excess of $1,000,000). The Company was also required to
make a
gross-up
payment to Mr. Bready to cover any and all state and
federal income taxes that may have been due as a result of the
provision of such lifetime medical coverage or lump-sum payment.
If it were determined that any payment or benefit provided by
the Company to Mr. Bready under his amended employment
agreement or any other agreement or plan is subject to the 20%
excise tax imposed by Section 4999 of the Internal Revenue
Code, the Company was required to make an additional lump-sum
gross-up
payment to Mr. Bready sufficient, after giving effect to
all federal, state and other taxes and charges with respect to
that payment, to restore him to the same after-tax position that
he would have been in if the excise tax had not been imposed.
Separation
Agreement of Richard L. Bready
Under Mr. Breadys Separation Agreement, dated
June 30, 2011, Mr. Bready agreed to abstain from
competing with the Company for one year following his
retirement, release all claims against the Company, abstain from
defaming or disparaging the Company, and provide certain
consulting and transition services to the Company.
Mr. Bready will receive: (i) a severance payment of
$5,250,000, payable over 18 months in equal installments;
(ii) a lump sum payment of $1,000,000 in lieu of the
lifetime health and medical coverage which would have been due
under Mr. Breadys existing employment agreement, with
a tax
gross-up;
and (iii) approximately $750,000, payable over
18 months in equal installments in lieu of certain
perquisites set forth in Mr. Breadys employment
agreement. Due to the requirements of Section 409A of the
Internal Revenue Code of 1986, and pursuant to Company policy,
the cash payments noted above that are due to Mr. Bready in
connection with his separation from service will be delayed for
a period of six months. All unvested equity awards held by
Mr. Bready as of July 1, 2011 were forfeited, except
that half of his stock options that would have vested later this
year will be deemed vested. Mr. Breadys vested stock
options will remain exercisable until the earlier of
(i) five years from the Retirement Date or (ii) the
expiration date of the stock option.
Interim
Chief Executive Officer Agreement of J. David
Smith
The terms of Mr. Smiths employment agreement,
effective July 1, 2011, provide that Mr. Smith will
serve as Interim Chief Executive Officer until the earliest to
occur of: (i) the date on which a permanent Chief Executive
Officer commences employment with the Company; (ii) the
date that is six months from the Start Date as defined therein;
or (iii) resignation from the position of Interim Chief
Executive Officer Agreement or termination by the Company. For
his services, Mr. Smith will be paid a monthly rate of
$105,000 and will be eligible to earn an annual incentive bonus
for 2011, based upon achievement of performance metrics and
pro-rated to
reflect Mr. Smiths period of employment with the
Company in 2011.
Mr. Smith will not be entitled to receive fees for
attending Board and committee meetings while serving as the
Interim Chief Executive Officer and his Board retainers will be
appropriately pro-rated for 2011 such that he will only be paid
such retainers for the portion of 2011 in which he is not
serving as Interim Chief Executive Officer. Effective as of the
Start Date, Mr. Smith resigned from serving as a member of
the Compensation Committee of the Board.
140
Pursuant to the Interim CEO Agreement, Mr. Smith will be
subject to restrictions on competition and solicitation during
his employment with the Company and for a period of six months
thereafter with respect to the solicitation restrictions. The
Interim CEO Agreement also contains standard confidentiality and
invention assignment covenants.
Consulting
Agreement of James B. Hirshorn
The terms of Mr. Hirshorns Consulting Agreement,
effective July 1, 2011, provide that Mr. Hirshorn will
provide consulting services to the Interim Chief Executive
Officer of the Company for an initial term of one year, which is
terminable upon fifteen days prior notice by either the Company
or Mr. Hirshorn. For his services, Mr. Hirshorn will
be paid a fee of $35,000 per month, and the Company will
reimburse his reasonable and necessary business expenses
incurred in the course of providing the services. The Consulting
Agreement contains standard confidentiality covenants.
Mr. Hirshorn will remain entitled to receive fees for
attending Board and committee meetings during the term of the
Consulting Agreement.
Amended
Employment Agreements of Almon C. Hall and Kevin W.
Donnelly
The employment agreements of Messrs. Hall and Donnelly,
which were effective August 27, 2004, were amended
effective December 17, 2009. Each such amended employment
agreement is on terms substantially similar to each other,
except as otherwise noted below. Each such amended employment
agreement remains effective until the termination of the
executives employment. The amended employment agreements
provide that Mr. Hall will serve as Senior Vice President
and Chief Financial Officer of the Company and that
Mr. Donnelly will serve as Senior Vice President, General
Counsel and Secretary of the Company.
The amended employment agreement for Mr. Hall provides that
his basic annual salary will be not less than $500,000. The
amended employment agreement for Mr. Donnelly provides that
his basic annual salary will be not less than $375,000. The
amended employment agreements provide that upward adjustments to
the base salaries of Messrs. Hall and Donnelly shall be
approved by the Chief Executive Officer. Messrs. Hall and
Donnelly are also eligible for incentive compensation in each
year of the employment period as recommended by the Chief
Executive Officer of the Company and approved by the
compensation committee or the full Board of Directors of the
Company. In addition, Messrs. Hall and Donnelly are
entitled to receive those benefits, and participate in any
employee benefit plans generally available to executive
personnel of the Company. Messrs. Hall and Donnelly are
also entitled to reimbursement of the costs associated with one
country club and one automobile for personal and business use.
In the event Messrs. Halls or Donnellys
employment is terminated for any reason, there is a Change in
Control (as defined below) or upon the third anniversary of the
Reorganization (whichever is first to occur), the Company is
required to make a lump-sum payment of up to $1,000,000, each,
in lieu of any lifetime medical coverage which would have been
due under the respective employment agreement, with a
gross-up
for all applicable taxes. The payment prior to any tax
gross-up
will be at least $838,707 in the case of Mr. Hall and at
least $863,432 in the case of Mr. Donnelly.
Under each amended employment agreement, if employment is
terminated:
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by the Company without cause, as defined below,
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by the executive for good reason, as defined
below, or
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|
as a result of the executives death or disability (as
defined in the amended employment agreement),
|
then the Company is obligated to provide the executive or, in
the event of death, his designated beneficiary or estate,
severance pay and other specified benefits and perquisites,
including long-term disability insurance, for a period of two
years from the date of termination.
Under each amended employment agreement, severance pay for the
executive is equal to his annual salary as of the date of
termination plus the highest amount of bonus, or incentive
compensation, exclusive of the Nortek 1999 equity performance
plan, paid or payable in cash to the executive in any one of the
three calendar years immediately prior to the completion of the
2004 transaction involving Thomas H. Lee Partners, L.P. (the
THL Transaction) or, if higher, the three calendar
years immediately prior to such termination.
141
Under each amended employment agreement, if (i) the
employment of the executive is terminated by the Company without
cause, by the executive for good reason or as a result of
disability, the executive will be prohibited from competing with
the Company for two years from the date of termination and
(ii) the employment of the executive is terminated by the
Company with cause or by the executive as a result of
resignation without good reason, the executive will be
prohibited from competing with the Company for one year.
Under each amended employment agreement for Messrs. Hall
and Donnelly, cause generally means a good faith
determination by the Chief Executive Officer that either of the
following has occurred: (i) the willful and continued
failure of the relevant executive to perform (other than as a
result of disability) his material duties to the Company after
notice and an opportunity to cure has been provided, or
(ii) the conviction of the officer of a crime involving
theft, embezzlement or fraud against the Company or a civil
judgment in which the Company is awarded damages from the
officer in respect of a claim of loss of funds through fraud or
misappropriation by the officer.
Under each amended employment agreement for Messrs. Hall
and Donnelly, Change in Control means a change
in ownership, a change in the effective
control or a change in the ownership of a
substantial portion of the Companys assets, each as
defined in regulations promulgated by the U.S. Department
of the Treasury under Internal Revenue Code Section 409A.
Under each amended employment agreement for Messrs. Hall
and Donnelly, good reason generally means a material
adverse change in the executives terms of employment,
including (i) the Companys reduction of, or failure
to pay, any base salary or incentive compensation, (ii) the
Companys failure to provide certain specified benefits
under the agreement, (iii) the Companys assignment to
the executive of any duties materially inconsistent with his
position, authority, duties or responsibilities, or any other
action which results in a material diminution of such position,
authority, duties or responsibilities, (iv) a relocation to
a location outside Providence, Rhode Island, (v) a
requirement to travel significantly more than the executive had
previously been required or (vi) any other material breach
of the employment agreement. In order to terminate employment
for good reason, the executive must provide the
Company with notice identifying the nature of the good
reason pursuant to which he seeks to terminate employment
and give the Company a reasonable opportunity to cure it (and
the Company must not do so).
If it is determined that any payment or benefit provided by the
Company to Mr. Hall or Donnelly under his amended
employment agreement or any other agreement or plan is subject
to the 20% excise tax imposed by Section 4999 of the
Internal Revenue Code, the Company is required to make an
additional lump-sum
gross-up
payment to Mr. Hall or Donnelly (as applicable) sufficient,
after giving effect to all federal, state and other taxes and
charges with respect to that payment, to restore him to the same
after-tax position that he would have been in if the excise tax
had not been imposed.
Separation
Agreement of Bruce E. Fleming
Under the terms the Separation Agreement dated August 23, 2011,
between the Company and Mr. Fleming and in consideration
for the observation by Mr. Fleming of certain restrictive
covenants for a period of 12 months after the Retirement
Date, a release of claims against the Company, and a
non-disparagement covenant, Mr. Fleming: (i) received
a severance payment of $500,000 on the Retirement Date and
(ii) will receive continuance of coverage under the
Companys health insurance benefits for a period of
12 months after the Retirement Date.
Second
Amended and Restated Change in Control Severance Benefit
Plan
Nortek has a retention plan for certain of its key employees
that provides that, in consideration of each covered individual
agreeing not to voluntarily terminate his employment, if there
is an attempted change of control of the Company, as that term
is defined in the plan, and, if, within the 24 month period
following the change of control, the employment of the
individual is terminated by Nortek for any reason or by the
individual by reason of a material adverse change in the terms
of employment as provided in the plan, the individual will be
entitled at the time of termination to severance pay for a
period of 24 months following termination at an annual rate
equal to the individuals base annual salary at the time of
termination plus the
142
highest amount of bonus or incentive compensation paid or
payable to the individual for any one of the three calendar
years preceding the change of control, and to continued medical,
life insurance and other benefits for the 24 month period.
If payments under the plan are subject to the excise tax under
Sections 4999 and 280G of the Internal Revenue Code,
payments will be reduced so that no amounts are subject to
excise tax. The plan is a double trigger plan
because both (i) a change of control and (ii) an
employment termination within 24 months of the change of
control are required in order to receive severance under the
plan. The Reorganization constituted a change of control under
the plan. Thus, until December 17, 2011, the first trigger
has been met. Mr. Cooney is the only named executive
officer among the participants under the plan. Mr. Fleming
was also a participant under the plan prior to his retirement
effective September 1, 2011. Under the terms of his
Separation Agreement, Mr. Fleming released the Company from
all claims arising under this plan.
Potential
Payments upon Termination of Employment or Change in
Control
Our named executive officers are entitled to certain benefits in
the event their employment is terminated with or without cause,
for good reason or due to disability or death, or upon a change
of control of the Company. The following table assumes that a
change in control and a termination of the named executive
officers employment occurred on December 31, 2010.
The following table describes the potential payments and
benefits to each of our named executive officers following a
termination of employment for cause or a termination without
cause, for good reason or due to disability or death, as well as
upon a change of control, occurring hypothetically in each case
on December 31, 2010. The fair market value of a share of
our common stock on December 31, 2010 was $36 as quoted on
the OTC:QB as the closing price at the end of trading. Actual
amounts payable to each executive listed below upon termination
of employment can only be determined definitively at the time of
each executives actual departure and actual amounts that
are payable upon a change in control can only be definitively
determined at the time of such transaction (if one were to
occur). In addition to the amounts shown in the table below,
each executive would receive payments for amounts of base salary
and vacation time accrued through the date of termination and
payment for any reimbursable business expenses incurred. For
information relating to compensation earned by each of our named
executive officers, see the Summary Compensation
Table above. The named executive officers other than
Mr. Cooney would also be entitled to benefits under our
pension plan or SERP, as applicable, pursuant to
143
the terms of these plans. See the section Pension Benefits
for the Year Ended December 31, 2010 above and see
footnote 14 to the table below.
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Termination
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Without
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|
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Cause,
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|
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for Good
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|
|
|
|
|
|
|
|
|
|
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Reason or
|
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|
|
|
|
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|
|
|
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Due to
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Termination
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Disability or
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Change of
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Name
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Benefits
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for Cause
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Death
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|
Control
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Richard L. Bready
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Base Salary
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$
|
5,250,000
|
(1)
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Bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
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Healthcare benefits
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$
|
1,737,619
|
(2)
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|
|
1,737,619
|
(2)
|
|
|
|
|
|
|
Insurance Benefits and Other Perquisites
|
|
|
|
|
|
|
618,261
|
(3)
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|
|
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|
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Market Value of Awards Vesting
|
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|
|
|
|
|
|
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|
$
|
13,312,479
|
(4)
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|
|
Gross-Up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Total
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$
|
1,737,619
|
|
|
$
|
7,605,880
|
(5)
|
|
$
|
13,312,479
|
(6)
|
Almon C. Hall
|
|
Base Salary
|
|
|
|
|
|
$
|
1,000,000
|
(1)
|
|
|
|
|
|
|
Bonus
|
|
|
|
|
|
|
1,450,000
|
(7)
|
|
|
|
|
|
|
Healthcare benefits
|
|
$
|
1,457,354
|
(8)
|
|
|
1,457,354
|
(8)
|
|
$
|
1,457,354
|
(8)
|
|
|
Insurance Benefits and Other Perquisites
|
|
|
|
|
|
|
5,376
|
(9)
|
|
|
|
|
|
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Market Value of Awards Vesting
|
|
|
|
|
|
|
|
|
|
$
|
1,776,500
|
(4)
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|
|
Gross-Up
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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Total
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$
|
1,457,354
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|
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$
|
3,912,730
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|
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$
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3,233,854
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(6)
|
Kevin W. Donnelly
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Base Salary
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|
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|
$
|
750,000
|
(1)
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|
|
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Bonus
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900,000
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(7)
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|
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Healthcare benefits
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$
|
1,500,316
|
(8)
|
|
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1,500,316
|
(8)
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|
$
|
1,500,316
|
(8)
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|
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Insurance Benefits and Other Perquisites
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|
|
|
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5,376
|
(9)
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Market Value of Awards Vesting
|
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|
|
|
|
|
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$
|
1,776,500
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(4)
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Gross-Up
|
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|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
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Total
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$
|
1,500,316
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|
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$
|
3,155,692
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|
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$
|
3,276,816
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(6)
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Edward J. Cooney
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Base Salary
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$
|
600,000
|
(10)
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$
|
600,000
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(10)
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Bonus
|
|
|
600,000
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(11)
|
|
|
600,000
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(11)
|
|
|
|
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|
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Healthcare benefits
|
|
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23,588
|
(12)
|
|
|
23,588
|
(12)
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|
|
|
|
|
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Insurance Benefits and Other Perquisites
|
|
|
4,868
|
(13)
|
|
|
4,868
|
(13)
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|
|
|
|
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Market Value of Awards Vesting
|
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|
|
|
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|
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$
|
1,776,500
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
|
1,228,456
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$
|
1,228,456
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|
|
$
|
1,776,500
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Bruce E. Fleming
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Base Salary
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$
|
600,000
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(10)
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$
|
600,000
|
(10)
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|
|
|
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Bonus
|
|
|
550,000
|
(11)
|
|
|
550,000
|
(11)
|
|
|
|
|
|
|
Healthcare benefits
|
|
|
23,588
|
(12)
|
|
|
23,588
|
(12)
|
|
|
|
|
|
|
Insurance Benefits and Other Perquisites
|
|
|
4,868
|
(13)
|
|
|
4,868
|
(13)
|
|
|
|
|
|
|
Market Value of Awards Vesting
|
|
|
|
|
|
|
|
|
|
$
|
313,500
|
(4)
|
|
|
SERP Benefit
|
|
|
|
|
|
|
201,000
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,178,456
|
|
|
$
|
1,379,456
|
|
|
$
|
313,500
|
|
|
|
|
(1) |
|
Represents the executive officers base salary payable over
24 months, or in the case of Mr. Bready,
18 months. Under the terms of Mr. Breadys Separation
Agreement, this amount will be paid. |
|
(2) |
|
Represents the annual cost of Mr. Breadys continued
medical coverage or, at Mr. Breadys option, a lump
sum cash payment of up to $1,000,000, in lieu of lifetime
medical and dental coverage, along with a tax
gross-up on
such amount. The above amount reflects the estimated cost to the
Company of a $1,000,000 payment and the tax
gross-up on
that payment. The actual amount payable to Mr. Bready will
be the present value of the Companys remaining obligation
to provide for lifetime continued medical |
144
|
|
|
|
|
and dental benefits, up to $1,000,000 or the cost of such
coverage up to $1,000,000. Upon his retirement effective
July 1, 2011, Mr. Bready elected to receive a lump-sum
payment of $1,000,000. |
|
(3) |
|
Represents costs of continued coverage under disability,
accident and life insurance plans; cost of office space and
administrative support similar to what is currently provided by
the Company; personal use of an aircraft and automobiles and
other specified benefits and perquisites, in each case for
18 months following termination. Mr. Breadys
estate will not be entitled to such benefits in the event of
termination due to death. Under the terms of
Mr. Breadys Separation Agreement this amount was
increased to $750,000. |
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(4) |
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Represents the fair market value of stock options and
performance-based restricted shares that vest on a change in
control, determined using a per-share price of $36, the fair
market value of a share of our common stock on December 31,
2010. Upon his retirement effective July 1, 2011,
Mr. Bready forfeited 222,937 unvested stock options and
238,860 unvested shares of restricted stock. Upon his retirement
effective September 1, 2011, Mr. Fleming forfeited
6,000 unvested stock options and 10,625 unvested shares of
restricted stock. |
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(5) |
|
Because Mr. Breadys estate is not entitled to receive
certain benefits and perquisites in the event of termination due
to death, the total amount of payments and benefits due to
Mr. Breadys estate in the event of termination due to
death, assuming such termination occurred on December 31,
2010, is $7,022,735. |
|
(6) |
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Based on the following assumptions, the payments and benefits
payable to the named executive officers upon a termination of
employment in connection with a change in control would not be
subject to the excise tax under Sections 280G and 4999 of
the Internal Revenue Code: (i) base amount calculations
were based on each named executive officers average
W-2
compensation for the period from
2005-2009,
(ii) a statutory federal income tax rate of 35%, a Rhode
Island income tax rate of 9.9%, and a Medicare tax rate of
1.45%, and (iii) the full value of performance-based
restricted stock awards (rather than simply the value of their
acceleration on a change in control) was assumed. |
|
(7) |
|
Represents two annual payments equal to the highest amount of
bonus or incentive compensation paid to the executive officer
with respect to any of the three (3) calendar years prior
to the date of termination or, if higher, the three
(3) calendar years prior to the THL Transaction. |
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(8) |
|
Represents the greater of (a) $838,707, in the case of
Mr. Hall, or $863,432, in the case of Mr. Donnelly,
and (b) the present value of the Companys remaining
obligation to provide for lifetime continued medical and dental
benefits up to $1,000,000, in either case along with a tax
gross-up on
such amount. Such amount is payable to Mr. Hall and
Mr. Donnelly upon any termination of employment, however
caused, or upon a change of control of the Company, whether or
not the officer is terminated following such change of control.
The above amount reflects the estimated cost to the Company of a
$838,707 payment to Mr. Hall, a $863,432 payment to
Mr. Donnelly and the tax
gross-up on
those payments. |
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(9) |
|
Represents costs of continued coverage under disability,
accident and life insurance plans, in each case for two years
following termination. |
|
(10) |
|
Represents the executive officers base salary payable over
24 months under the Second Amended and Restated Change in
Control Severance Benefit Plan (the Change in Control
Plan). As noted above under Second Amended and
Restated Change in Control Severance Plan, the Change of
Control Plan is a double trigger plan because both
(i) a change of control and (ii) an employment
termination within 24 months of the change of control are
required in order to receive severance under the Change of
Control Plan. The Reorganization constituted a change of control
under the Change of Control Plan. Thus, until December 17,
2011, the first trigger has been met. Under the terms of his
Separation Agreement, Mr. Fleming released the Company from
all claims arising under the Change in Control Plan. |
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(11) |
|
Represents two annual incentive bonuses of $300,000 each (in the
case of Mr. Cooney) or $275,000 each (in the case of
Mr. Fleming) under the Change in Control Plan. Under the
terms of his Separation Agreement, Mr. Fleming released the
Company from all claims arising under the Change in Control Plan. |
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(12) |
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Represents payment of continued health coverage for
24 months under the Change in Control Plan. Under the terms
of his Separation Agreement, Mr. Fleming released the
Company from all claims arising under the Change in Control Plan. |
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(13) |
|
Represents costs of continued coverage under the same
disability, accident and life insurance plans for 24 months
under the Change in Control Plan. Under the terms of his
Separation Agreement, Mr. Fleming released the Company from
all claims arising under the Change in Control Plan. |
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(14) |
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Represents the difference between the amounts payable to
Mr. Fleming upon a Qualifying Termination (as
such term is defined in the Nortek, Inc. Supplemental Executive
Retirement Plan B (the SERP) during the twenty-four
month period following a Change of Control (as defined in the
SERP) as compared to the amount payable upon an early
retirement, which is the amount Mr. Fleming would receive
pursuant to the SERP if his employment terminated under
circumstances other than a Qualifying Termination following a
Change of Control. Mr. Fleming is the sole participant in
the SERP. Following his retirement effective September 1,
2011 and pursuant to the terms of his Separation Agreement,
Mr. Fleming will receive SERP benefits commencing on
March 2, 2012 in the annual amount of $109,439.76. See
Retirement Related Benefits
Supplemental Executive Retirement Plan above for
additional information regarding the SERP and
Mr. Flemings benefits under this plan. |
Incentive
Plans
Nortek,
Inc. 2009 Omnibus Incentive Plan
In connection with our emergence from bankruptcy, on
December 17, 2009 the Board of Directors adopted the
Nortek, Inc. 2009 Omnibus Incentive Plan (the 2009
Plan). The following is a summary of the material terms of
the 2009 Plan.
Eligibility. Employees, directors and other
individuals providing services to the Company (and its
subsidiaries and affiliates) are eligible to receive awards
under the 2009 Plan. The Compensation Committee of the Board of
Directors (the Committee) selects from among the
eligible individuals those employees, directors and service
providers who will receive awards under the 2009 Plan.
Shares Available for Issuance under the
Plan. Subject to the adjustment provisions
contained in the 2009 Plan, the maximum number of shares of
common stock that are available for issuance under the 2009 Plan
is 2,153,110 shares. The maximum number of shares under the
2009 Plan available for incentive stock option grants is
1,076,555. Subject to the adjustment provisions contained in the
2009 Plan, the maximum number of shares for which incentive
stock options, non-qualified stock options and stock
appreciation rights may be granted to any individual in any
calendar year is 627,990 shares, the maximum number of
shares with respect to any other stock-based awards that may be
granted to any individual in any calendar year is 627,990 and
the maximum value of cash payable with respect to awards
denominated in cash or property that may be granted to any
individual in a calendar year is $5,000,000. In the event that
any award expires, is forfeited or otherwise terminated without
the issuance of shares of common stock, the shares subject to
the award (to the extent of such cancellation or forfeiture)
will again be available for awards under the 2009 Plan. Awards
assumed in connection with mergers and other corporate events
will not count against the number of shares available for grant
under the 2009 Plan.
In connection with our emergence from bankruptcy, restricted
stock and stock option awards with respect to up to
1,435,407 shares could have been granted to eligible
individuals (with no more than 50% of the available shares to be
granted pursuant to restricted stock awards). Of the
1,435,407 shares eligible for grant on the Effective Date
of the Reorganization, 1,421,462 shares of restricted stock
and options were granted on the Effective Date. Since the
Effective Date through November 15, 2011, an additional
57,616 shares of restricted stock and options relating to
102,000 shares have been granted under the 2009 Plan, and
276,234 shares of restricted stock and options relating to
268,937 shares of common stock have been forfeited,
following which 1,117,203 shares are still available for
grant.
Administration. The Committee (or the Board of
Directors or any other committee designated by the Board of
Directors) administers the 2009 Plan. The Committee has the
authority to determine the individuals to whom awards will be
granted under the 2009 Plan, the terms and conditions of awards
and award agreements evidencing awards, and the types of awards
to be granted.
146
Types of Awards. Incentive stock options,
nonstatutory stock options, stock appreciation rights,
restricted stock awards, other stock-based awards and
performance-based compensation awards may be granted under the
2009 Plan.
Stock Options. Both incentive stock options
and non-qualified stock options may be granted under the 2009
Plan. The exercise price of a stock option granted under the
2009 Plan will not be less than 100% of the fair market value of
the common stock at the time of grant, as determined by the
Committee. In no event will the term of an option be greater
than ten years.
Stock Appreciation Rights. A stock
appreciation right entitles the holder upon exercise to receive
common stock equal in value to the excess of the fair market
value of the shares of stock subject to the right over the fair
market value of such shares on the date of grant.
Restricted Stock, Stock Units and Other Stock-Based
Awards. The 2009 Plan provides for awards of
shares of restricted common stock, restricted stock units and
other stock-based awards, including dividend equivalents and
awards that are valued by reference to the fair market value of
shares of Company common stock. The Committee may condition the
grant of awards upon a participants achievement of one or
more performance goals. Generally, awards of restricted stock
are subject to the requirement that the shares be forfeited to
the Company unless specified conditions are met. Generally,
awards of stock units are promises to deliver shares of stock in
the future, subject to any conditions specified in the 2009 Plan
and the award.
Adjustment. In the event of any corporate
event or transaction involving the Company or one of our
affiliates, including a merger, consolidation, reorganization,
recapitalization, stock split or other similar corporate event
or transaction, the Committee is authorized to make equitable
adjustments, including, without limitation, adjustments to the
number and kind of shares of stock or other property that may be
issued under the 2009 Plan or under awards granted under the
2009 Plan, the number and kind of shares or other property
subject to outstanding awards, the exercise price of options and
the purchase price of other awards and the annual award limits.
In the event of a change of control (as defined in the 2009
Plan), the Committee may make adjustments to the terms and
conditions of outstanding awards, including any of the
following, either alone or in combination:
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the continuation or assumption of outstanding awards under the
2009 Plan by the Company (if it is the surviving company) or by
the surviving company or its parent;
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the substitution by the surviving company or its parent of
awards with equivalent value to the outstanding awards;
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the accelerated exercisability, vesting
and/or lapse
of restrictions under outstanding awards immediately prior to
the occurrence of such event;
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upon written notice, that any outstanding awards must be
exercised, to the extent then exercisable, during a reasonable
period of time immediately prior to the scheduled consummation
of the event, or such other period as determined by the Company,
and at the end of such period, that such awards shall terminate
to the extent not exercised; and
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the cancellation of all or any portion of the outstanding awards
for fair market value (as determined in the Companys
discretion).
|
Termination of Service. The Committee will
determine the effect of a termination of employment or service
on awards granted under the 2009 Plan. Unless otherwise
determined by the Committee, if a 2009 Plan participants
service terminates prior to the end of the performance or
vesting period applicable to the award or any relevant
performance goals are not achieved, then the portion of the
award that is not vested or earned will be forfeited.
Amendment/Termination. Unless earlier
terminated, the 2009 Plan will terminate on December 17,
2019. The Committee may amend or terminate the 2009 Plan,
provided that no such action may adversely affect a
147
participants right under an award without his or her
consent. Amendments to the 2009 Plan will be conditioned on
stockholder approval, to the extent such approval is required by
law.
Federal Tax Effects. The following discussion
summarizes certain material federal income tax consequences
associated with the grant and exercise of stock options under
the 2009 Plan. The summary does not purport to cover federal
employment tax or other federal tax consequences that may be
associated with the 2009 Plan, nor does it cover state, local or
non-U.S. taxes.
Incentive Stock Options (ISO). In general, an
optionee realizes no taxable income upon the grant or exercise
of an ISO. However, the exercise of an ISO may result in an
alternative minimum tax liability to the optionee. With certain
exceptions, a disposition of shares purchased under an ISO
within two years from the date of grant or within one year after
exercise produces ordinary income to the optionee (and a
deduction to the Company) equal to the value of the shares at
the time of exercise less the exercise price. Any additional
gain recognized in the disposition is treated as a capital gain
for which the Company is not entitled to a deduction. If the
optionee does not dispose of the shares until after the
expiration of these one- and two-year holding periods, any gain
or loss recognized upon a subsequent sale is treated as a
long-term capital gain or loss for which the Company is not
entitled to a deduction.
Non-qualified (Non-ISO) Options. In general,
in the case of a non-qualified option, the optionee has no
taxable income at the time of grant but realizes income in
connection with the exercise of the option in an amount equal to
the excess (at the time of exercise) of the fair market value of
the shares acquired upon exercise over the exercise price. The
Company is entitled to a corresponding deduction. Upon a
subsequent sale or exchange of the shares, any gain or loss
recognized in the sale or exchange is treated as a capital gain
or loss (long-term or short-term depending on the applicable
holding period) for which the Company is not entitled to a
deduction.
In general, an ISO that is exercised more than three months
after termination of employment (other than termination by
reason of death) is treated as a non-qualified option. ISOs are
also treated as non-qualified stock options to the extent they
first become exercisable by an individual in any calendar year
for shares having a fair market value (determined as of the date
of grant) in excess of $100,000.
Under the so-called golden parachute provisions of
the Code, the vesting or accelerated exercisability of awards in
connection with a change in control of the Company may be
required to be valued and taken into account in determining
whether participants have received compensatory payments,
contingent on the change in control, in excess of certain
limits. If these limits are exceeded, certain amounts payable to
the participant, including income recognized by reason of the
grant, vesting or exercise of awards under the Amended Plan, may
be subject to an additional 20% federal tax and may not be
deductible to the Company.
Awards Granted under the Plan following the
Reorganization. On December 17, 2009, in
connection with its emergence from bankruptcy, the Company
granted awards relating to 1,421,462 shares of common stock
to certain of its key employees, of which 710,731 were in the
form of restricted stock awards, 374,034 were in the form of
incentive stock options and 336,697 were in the form of
non-qualified stock options. 25% of the restricted stock
awards granted on that date (the Emergence Restricted
Stock Awards) vest per year following the end of each of
the Companys 2010, 2011, 2012 and 2013 fiscal years if 95%
of the Companys Adjusted EBITDA Target is met for the year
in question, with 16.67% of the total Emergence Restricted Stock
Awards granted vesting in a particular year if 90% of the
Companys Adjusted EBITDA Target is met for that year and
8.33% of the total Emergence Restricted Stock Awards granted
vesting if 85% of the Companys Adjusted EBITDA Target is
met for that year. In addition, if all of the restricted stock
that could vest in that year does not vest, an additional
portion of that restricted stock may vest if the Companys
Adjusted EBITDA Target for the following year exceeds 90% of the
Companys Adjusted EBITDA Target for that following year.
Emergence Restricted Stock Awards that do not vest in a given
fiscal year (or the following year, if applicable) are
forfeited. If the grantee terminates his or her employment prior
to the vesting of shares of restricted stock, those shares are
forfeited. In the event of a Change of Control (as defined in
the 2009 Plan), Emergence Restricted Stock Awards that have not
previously been forfeited will vest immediately.
148
Incentive stock options and non-qualified stock options granted
on December 17, 2009 (Emergence Options) vest
in equal installments on each of the first five anniversaries of
their grant date. Unvested Emergence Options are forfeited upon
the termination of the grantees employment with the
Company and its affiliates, and Emergence Options that have not
vested prior to a Change of Control fully vest upon a Change of
Control.
On July 1, 2011, the Board of Directors, based on the
recommendation of the Compensation Committee, granted awards
aggregating 35,000 shares of restricted stock under the
2009 Plan to certain of its key employees. One-third of the
shares granted vests on each July 1 of 2012, 2013 and 2014.
Unvested shares of restricted stock are automatically forfeited
upon termination of the respective employees employment.
These shares of restricted stock do not cumulate dividends or
have voting rights until vested.
On August 8, 2011, the Board of Directors, based on the
recommendation of the Compensation Committee, granted awards
aggregating 15,616 shares of restricted stock under the
2009 Plan to the Companys directors. One-third of the
shares granted vests on each August 8 of 2012, 2013 and 2014.
Unvested shares of restricted stock are forfeited upon the
termination of the grantees directorship with the Company
and its affiliates. These shares of restricted stock do not
cumulate dividends or have voting rights until vested.
Since the Effective Date through November 15, 2011, an
additional 57,616 shares of restricted stock and options
relating to 102,000 shares have been granted under the 2009
Plan, and 276,234 shares of restricted stock and options
relating to 268,937 shares of common stock have been forfeited.
2011
Short-Term Cash Incentive Plan
On October 21, 2011, the Board of Directors, based upon the
recommendation of the Compensation Committee, approved the
Companys 2011 Short-Term Cash Incentive Plan for Nortek
Executives (the 2011 Plan). The Board of Directors
has selected Messrs. Hall, Cooney, and Donnelly as
participants in the 2011 plan. The target bonus amount under the
2011 Plan for each of Messrs. Hall, Cooney and Donnelly is
75% of his respective base salary. The actual amount of an
executives bonus will be determined based on the
achievement of Company and individual performance goals. 70% of
the bonus will be based on the Companys achievement of the
Adjusted EBITDA targets established by the Board of Directors.
The Compensation Committee has established individual
performance goals for each Plan participant, and 30% of the
bonus will be based on the executives achievement of his
personal goals. No bonus will be paid under the 2011 Plan if
Adjusted EBITDA for fiscal 2011 is below a certain minimum
amount established by the Board of Directors.
Director
Compensation
For their services as directors during 2010, Norteks
directors who were not officers, employees or consultants of
Nortek or its subsidiaries received directors fees from
Nortek.
Under our prior director compensation policy, which became
effective in April 2010, our non-employee directors are
compensated as follows:
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annual retainer fee of $50,000, payable quarterly in advance;
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additional annual retainer fee of $10,000 for the chair of the
Audit Committee and an annual retainer fee of $5,000 for the
other members of the Audit Committee;
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fee for board meetings of $1,500 per meeting; and
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fee for committee meetings of $1,500 per meeting, if they are
held on a day when there is not a board meeting.
|
Under our current director compensation policy, which became
effective in August 2011, our non-employee directors are
compensated as follows:
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annual retainer fee of $50,000, payable quarterly in advance;
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149
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additional annual retainer fee of $15,000 for the chair of the
Audit Committee and an additional annual retainer fee of $2,500
for the other members of the Audit Committee;
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additional annual retainer fee of $12,500 for the chair of the
Compensation Committee and an additional annual retainer fee of
$2,500 for the other members of the Compensation Committee;
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additional annual retainer fee of $7,500 for the chair of the
Nominating and Corporate Governance Committee;
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fee for board meetings of $1,500 per meeting;
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fee for committee meetings of $1,500 per meeting, if they are
held on a day when there is not a board meeting; and
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additional annual retainer fee of $20,000 for the Lead Director,
which is retroactive to October 18, 2010.
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Each annual retainer fee is payable in advance in four equal
quarterly installments on the first day of each quarter,
provided that the amount of such payment will be prorated for
any portion of the quarter that the director was not serving on
our board. Each non-employee director is also reimbursed for
reasonable travel and other expenses incurred in connection with
attending meetings of the Board of Directors and any committee
on which he or she serves.
The following table provides a summary of compensation paid for
the year ended December 31, 2010 to Norteks Board of
Directors. The table shows amounts earned by such persons for
services rendered to Nortek in all capacities in which they
served:
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Change in
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Pension
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Non-
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Value and
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Equity
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Nonqualified
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Fees Earned
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Incentive
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Deferred
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or Paid in
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Stock
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Option
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Plan
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Compensation
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All Other
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Cash
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Awards
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Awards
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Compensation
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Earnings
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Compensation
|
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Name
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($)
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($)
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($)(4)(5)
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($)
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($)
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($)(6)
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Total ($)
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Jeffrey C. Bloomberg
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$
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83,500
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$
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44,400
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$
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318
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$
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128,218
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Joseph M. Cianciolo
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88,500
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44,400
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588
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133,488
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John T. Coleman(1)
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44,000
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210,400
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203
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254,603
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James B. Hirshorn
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76,500
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44,400
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120,900
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Thomas A. Keenan
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83,500
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44,400
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528
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128,428
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Daniel C. Lukas(1)
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41,500
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210,400
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251,900
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Bennett Rosenthal
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72,000
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44,400
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116,400
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Jeffrey B. Schwartz(2)
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30,500
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30,500
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J. David Smith(1)(3)
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70,500
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44,400
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4,360
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119,260
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(1) |
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Mr. Smith became a director on February 18, 2010.
Messrs. Coleman and Lukas became directors on July 1,
2010. |
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(2) |
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Mr. Schwartz was a director until June 30, 2010. |
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(3) |
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Pursuant to the Interim Chief Executive Officer Agreement
effective July 1, 2011, Mr. Smith will remain a
director of the Company, but during the period he is employed by
the Company as Interim Chief Executive Officer, he (i) will
not receive the prorated amount of the Companys annual
directors retainer which accrues and (ii) will not
receive any fees for attending any Board of Directors meetings. |
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(4) |
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For 2010, this amount represents the dollar amount of the
aggregate grant date fair value of the stock options granted
during fiscal year 2010 determined in accordance with
ASC 718 and based on a grant date fair value of a stock
option equal to $4.44 for the options granted on April 8,
2010, and $21.04 for the options granted on August 12,
2010. For additional information, including information
regarding the |
150
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assumptions used for these calculations, see Note 2,
Reorganization Under Chapter 11, and
Note 9, Share-Based Compensation, to the
consolidated financial statements, included elsewhere herein. |
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(5) |
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Messrs. Bloomberg, Cianciolo, Coleman, Hirshorn, Keenan,
Lukas, Rosenthal and Smith each had 10,000 option awards
outstanding at the end of fiscal year 2010. |
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(6) |
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Represents the reimbursement for reasonable travel and other
expenses incurred in connection with attending meetings of the
Board of Directors and any committee on which he or she serves. |
On April 8, 2010, pursuant to the 2009 Plan, our Board of
Directors issued options to purchase 10,000 shares of
common stock to each of Messrs. Bloomberg, Cianciolo,
Hirshorn, Keenan, Rosenthal, Schwartz and Smith at an exercise
price of $17.50 per share, which was the exercise price agreed
upon by the Chief Executive Officer of the Company and the ad
hoc committee in connection with the Reorganization. Such
exercise price was approved by the Board of Directors and
exceeded the fair market value of a share of common stock on the
date of grant, calculated pursuant to ASC 718. On
August 12, 2010, pursuant to the 2009 Plan, our Board of
Directors issued options to purchase 10,000 shares of
common stock to each of Messrs. Coleman and Lukas at an
exercise price of $41.00 per share, which was determined to be
the fair market value of our common stock on that date based on
the closing price on that date on the OTC:QB. These stock
options vest at the rate of 20% on each anniversary of the grant
date, beginning with the first anniversary of the grant date,
with 100% vesting upon the fifth anniversary of the grant date,
and, unless terminated earlier, expire on the tenth anniversary
of the grant date. Unvested stock options are forfeited upon the
termination of the grantees directorship with the Company
and its affiliates, and stock options that have not vested prior
to a Change of Control (as defined in the 2009 Plan) fully vest
upon a Change of Control. Each of the options to purchase
10,000 shares of common stock granted to Mr. Schwartz
were forfeited upon his resignation as a director of the Company
on June 30, 2010.
On August 8, 2011, the Board of Directors granted awards of
1,952 shares of restricted stock to each director under the
2009 Plan. One-third of each directors award vests on each
August 8 of 2012, 2013 and 2014. Unvested shares of restricted
stock are forfeited upon the termination of the grantees
directorship with the Company and its affiliates, and shares of
restricted stock that have not vested prior to a Change of
Control (as defined in the 2009 Plan) fully vest upon a Change
of Control. These shares of restricted stock have voting rights;
any dividends are paid upon vesting.
The stock options and restricted shares granted to each of
Messrs. Rosenthal and Lukas are held for the benefit of
Ares Management LLC and certain funds managed by or affiliated
with Ares Management LLC (collectively, the Ares
Entities). Pursuant to policies of the Ares Entities, each
of Messrs. Rosenthal and Lukas holds and held,
respectively, such stock options and restricted shares as
nominee for the sole benefit of the Ares Entities and has
assigned all economic, pecuniary and voting rights in respect of
such stock options and restricted shares to the Ares Entities.
Each of Messrs. Rosenthal and Lukas expressly disclaims
beneficial ownership of such stock options and restricted shares.
Compensation
Committee Interlocks and Insider Participation
During the 2010 fiscal year, there were no compensation
committee interlocks between the Company and any other entity
involving the Companys or such entitys executive
officers or board members.
Risk
Assessment of Compensation Policies and Practices
In March 2011, the Board of Directors, with direction from the
Companys outside legal counsel, reviewed the
Companys compensation policies and practices for all
employees, including executive officers, and determined that the
Companys compensation policies and practices do not create
or encourage the taking of risks that are reasonably likely to
have a material adverse effect on the Company.
151
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table includes information, as of
November 15, 2011, about the beneficial ownership of
Norteks common stock for:
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each stockholder known by us to own beneficially 5% or more of
our common stock;
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each of our directors;
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each of the officers included in our Summary Compensation
Table; and
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all directors and executive officers as a group.
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Beneficial ownership is determined in accordance with the rules
of the SEC. Except as otherwise indicated by footnote, the
number of shares and percentage ownership indicated in the
following table is based on 15,077,873 outstanding shares of
Nortek common stock, which includes all shares of unrestricted
common stock, and shares of restricted common stock awarded
under Norteks 2009 Omnibus Incentive Plan as to which the
grantee has voting but not dispositive power. Shares of Nortek
common stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of
November 15, 2011 are deemed to be outstanding and to be
beneficially owned by the entity or person holding such options
or warrants for the purpose of computing the percentage
ownership of such entity or person but are not treated as
outstanding for the purpose of computing the number of shares
owned and percentage ownership of any other entity or person.
Except as indicated by footnote and subject to community
property laws where applicable, to our knowledge, the persons
named in the table below will have sole voting and investment
power with respect to all shares of common stock shown as
beneficially owned by them.
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Amount and Nature of
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Percentage
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Name and Address of Beneficial Owner
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Beneficial Ownership
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of Class
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Holders of more than 5% of our voting securities:
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Funds affiliated with Ares Management LLC(1)
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5,291,257
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35.09
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%
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Funds managed by subsidiaries of FMR LLC(2)
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2,402,660
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15.88
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Funds affiliated with Gates Capital Management, Inc.(3)
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1,830,704
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12.06
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Capital Research and Management Company(4)
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832,632
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5.52
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Directors and Named Executive Officers:
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Richard L. Bready(5)
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197,772
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1.30
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Jeffrey C. Bloomberg(6)
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2,500
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*
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Joseph M. Cianciolo(7)
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2,028
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*
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John T. Coleman(8)
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2,000
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*
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James B. Hirshorn(8)
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2,000
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*
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Thomas A. Keenan(8)
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2,000
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*
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Daniel C. Lukas(8)(9)
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2,000
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*
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Bennett Rosenthal(8)(9)
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2,000
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*
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J. David Smith(10)
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4,000
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*
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Almon C. Hall(11)
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49,404
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*
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Kevin W. Donnelly(12)
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52,561
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*
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Edward J. Cooney(13)
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51,811
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*
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Bruce E. Fleming(14)
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1,500
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*
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All Directors and Named Executive Officers(15) (13 persons)
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371,576
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2.44
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%
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* |
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Less than one percent |
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(1) |
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Consists of (a) 2,492,305 shares of common stock held
by Ares Corporate Opportunities Fund II, L.P. (ACOF
II) and (b) 2,798,952 shares of common stock
held by Ares Corporate Opportunities Fund III, |
152
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L.P. (ACOF III). Does not include the shares
identified in footnote (10) to this table held by
Messrs. Lukas and Rosenthal as nominees for the benefit of
the Ares Entities (as defined below). The general partner of
ACOF II is ACOF Management II, L.P. (ACOF
Management II) and the general partner of ACOF
Management II is ACOF Operating Manager II, L.P.
(ACOF Operating Manager II). The manager of
ACOF II is ACOF Operating Manager II. The general
partner ACOF III is ACOF Management III, L.P.
(ACOF Management III) and the general partner
of ACOF Management III is ACOF Operating Manager III,
LLC. (ACOF Operating Manager III). The manager
of ACOF III is ACOF Operating Manager III. ACOF
Operating Manager II and ACOF Operating Manager III
are each indirectly controlled by Ares Management LLC (AM
LLC), which, in turn, is indirectly controlled by Ares
Partners Management Company LLC (APMC and, together
with ACOF II, ACOF III, ACOF Management II, ACOF
Management III, ACOF Operating Manager II, ACOF
Operating Manager III and AM LLC, the Ares
Entities). APMC is managed by an executive committee
comprised of Michael Arougheti, David Kaplan, Gregory Margolies,
Antony Ressler and Bennett Rosenthal. Each of the members of the
executive committee, the Ares Entities (other than ACOF II
and ACOF III with respect to the securities held directly
by such fund) and the officers, partners, members and managers
of the Ares Entities expressly disclaims beneficial ownership of
these securities, except to the extent of any pecuniary interest
therein. The address of each Ares Entity is 2000 Avenue of the
Stars, 12th Floor, Los Angeles, CA 90067. |
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(2) |
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Fidelity Management & Research Company
(Fidelity), 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR LLC and an
investment adviser registered under Section 203 of the
Investment Advisers Act of 1940 may be deemed to be the
beneficial owner of 2,284,188 shares of the Common Stock of
Nortek, Inc. (the Company) and 51,225 shares of
Common Stock issuable upon the exercise of warrants, as a result
of acting as investment adviser to various investment companies
registered under Section 8 of the Investment Company Act of
1940 (each, the Fund). Edward C. Johnson 3d and FMR
LLC, through their control of Fidelity, and the Fund each has
sole power to dispose of the securities owned by the Fund. |
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Members of the family of Edward C. Johnson 3d, Chairman of FMR
LLC, are the predominant owners, directly or through trusts, of
Series B voting common shares of FMR LLC, representing 49%
of the voting power of FMR LLC. The Johnson family group and all
other Series B shareholders have entered into a
shareholders voting agreement under which all
Series B voting common shares will be voted in accordance
with the majority vote of Series B voting common shares.
Accordingly, through their ownership of voting common shares and
the execution of the shareholders voting agreement,
members of the Johnson family may be deemed, under the
Investment Company Act of 1940, to form a controlling group with
respect to FMR LLC. |
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Neither FMR LLC nor Edward C. Johnson 3d, Chairman of FMR LLC,
has the sole power to vote or direct the voting of the shares
owned directly by the Fund, which power resides with the
Funds Boards of Trustees. Fidelity carries out the voting
of the shares under written guidelines established by the
Funds Boards of Trustees. |
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Pyramis Global Advisors, LLC, 900 Salem Street, Smithfield,
Rhode Island, 02917, an indirect wholly-owned subsidiary of FMR
LLC and an investment adviser registered under Section 203
of the Investment Advisers Act of 1940, is the beneficial owner
of 3,491 shares of the outstanding Common Stock of the
Company and 138 shares of Common Stock issuable upon the
exercise of warrants, as a result of its serving as investment
adviser to institutional accounts,
non-U.S.
mutual funds, or investment companies registered under
Section 8 of the Investment Company Act of 1940 owning such
shares. |
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Pyramis Global Advisors Trust Company, 900 Salem Street,
Smithfield, Rhode Island, 02917, an indirect wholly-owned
subsidiary of FMR LLC and a bank as defined in
Section 3(a)(6) of the Securities Exchange Act of 1934, is
the beneficial owner of 62,081 shares of the outstanding
Common Stock of the Company and 1,537 shares of Common
Stock issuable upon the exercise of warrants, as a result of its
serving as investment manager of institutional accounts owning
such shares. |
153
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(3) |
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Consists of 1,734,564 shares of common stock and
96,140 shares of common stock issuable upon the exercise of
warrants, in each case held by funds and persons affiliated with
Gates Capital Management, Inc (Gates Capital). The
address of Gates Capital is 1177 Avenue of the Americas,
32nd Floor, New York, NY 10036. |
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(4) |
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Consists of 793,646, 18,686, 16,450 and 3,850 shares of
common stock beneficially held by American High-Income Trust;
The Income Fund of America; American Funds Insurance Series,
Asset Allocation Fund; and American Funds Insurance Series,
High-Income Bond Fund, respectively. For purposes of the
reporting requirements of the Securities Exchange Act of 1934,
Capital Research and Management Company, which serves as the
investment advisor for each such fund, may be deemed to be the
beneficial owner of all of the shares held by the funds. Capital
Research and Management Company, however, expressly disclaims
that it is, in fact, the beneficial owner of such securities.
Capital Research and Management Company is an investment adviser
registered under the Investment Advisers Act of 1940. The
address of Capital Research and Management Company is
333 South Hope Street, 55th Floor, Los Angeles,
CA 90071. |
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(5) |
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Consists of (a) 85,846 shares of common stock,
(b) 16,382 shares of common stock issuable upon
exercise of warrants and (c) 95,544 shares of common stock
issuable upon exercise of stock options. |
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(6) |
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Consists of (a) 500 shares of common stock and
(b) 2,000 shares of common stock issuable upon the
exercise of stock options. |
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(7) |
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Consists of (a) 28 shares of common stock and
(b) 2,000 shares of common stock issuable upon the
exercise of stock options. |
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(8) |
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Consists of 2,000 shares of common stock issuable upon the
exercise of stock options. |
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(9) |
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Does not include the securities held by ACOF II and ACOF III. As
disclosed in footnote (1) above, Messrs. Lukas and
Rosenthal are associated with Ares. Messrs. Lukas and
Rosenthal each expressly disclaims beneficial ownership of the
securities held by ACOF II and ACOF III. |
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(10) |
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Consists of (a) 2,000 shares of common stock and
(b) 2,000 shares of common stock issuable upon the
exercise of stock options. |
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(11) |
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Consists of (a) 8,695 shares of common stock,
(b) 334 shares of common stock issuable upon exercise
of warrants (c) 8,500 shares of common stock issuable
upon exercise of stock options and (d) 31,875 shares
of unvested restricted common stock awarded under our 2009
Omnibus Incentive Plan, as to which unvested restricted common
stock Mr. Hall has voting but not dispositive power. |
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(12) |
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Consists of (a) 9,066 shares of common stock,
(b) 334 shares of common stock issuable upon exercise
of warrants, (c) 11,286 shares of common stock
issuable upon exercise of stock options and
(d) 31,875 shares of unvested restricted common stock
awarded under our 2009 Omnibus Incentive Plan, as to which
unvested restricted common stock Mr. Donnelly has voting
but not dispositive power. |
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(13) |
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Consists of (a) 8,316 shares of common stock,
(b) 334 shares of common stock issuable upon exercise
of warrants, (c) 11,286 shares of common stock
issuable upon exercise of stock options and
(d) 31,875 shares of unvested restricted common stock
awarded under our 2009 Omnibus Incentive Plan, as to which
unvested restricted common stock Mr. Cooney has voting but
not dispositive power. |
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(14) |
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Consists of 1,500 shares of common stock. |
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(15) |
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Consists of an aggregate of (a) 115,951 shares of
common stock, (b) 17,384 shares of common stock
issuable upon exercise of warrants, (c) 142,616 shares of
common stock issuable upon the exercise of stock options and (d)
95,625 shares of unvested restricted common stock awarded
under our 2009 Omnibus Incentive Plan held by executive
officers, as to which each executive officer has voting but not
dispositive power. |
154
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Transactions
with Related Parties
Except with respect to those agreements described in
Executive Compensation Employment
Agreements, included elsewhere herein, there were no
Related Person Transactions during fiscal year 2010, and there
have been no Related Person Transactions to date in fiscal year
2011.
Policies
and Procedures for Review of Related-Person
Transactions
Our Board of Directors has adopted written policies and
procedures for the review, approval or ratification of any
transaction, arrangement or relationship in which we are a
participant, the amount involved exceeds $120,000 and one of our
executive officers, directors, director nominees, 5%
stockholders (or their immediate family or household members) or
any firm, corporation or other entity in which any of the
foregoing persons has a position or relationship (or, together
with his or her immediate family members, a 10% or greater
beneficial ownership interest) (each, a Related
Person) has a direct or indirect material interest.
If a Related Person proposes to enter into such a transaction,
arrangement or relationship (a Related Person
Transaction), the Related Person must report the proposed
transaction to our General Counsel. If the General Counsel
determines that the proposed transaction is a Related Person
Transaction, it shall be submitted to our Audit Committee for
consideration. No member of the Audit Committee may participate
in any review of any Related Person Transaction with respect to
which such member or any of his or her immediate family members
is the Related Person. The policy also permits the chair of the
Audit Committee to review and, if deemed appropriate, approve
proposed Related Person Transactions that arise between Audit
Committee meetings.
In the event we become aware of a Related Person Transaction
that has not been previously approved or previously ratified
under this policy, such ongoing or pending transactions will be
submitted to the Audit Committee or the chair of the Audit
Committee promptly. Based on the conclusions reached, the Audit
Committee or the chair will evaluate all options, including
ratification, amendment or termination. If the transaction is
completed, the Audit Committee or the chair will determine if
rescission of the transaction
and/or any
disciplinary action is appropriate, and will ask the General
Counsel to evaluate our controls and procedures to determine the
reason the transaction was not submitted for prior approval.
A Related Person Transaction reviewed under the policy will be
considered approved or ratified if it is authorized by the Audit
Committee after full disclosure of the Related Persons
interest in the transaction. As appropriate for the
circumstances, the Audit Committee will review and consider:
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the benefits to the Company;
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the impact on a directors independence in the event the
Related Person is a director, an immediate family
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member of a director or an entity in which a director has a
position or relationship;
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the availability of other sources for comparable products or
services;
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the terms of the transaction; and
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the terms available to unrelated third parties or to employees
generally.
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The Audit Committee may approve or ratify a Related Person
Transaction only if the Audit Committee determines that, under
all of the circumstances, the transaction is in or is not
inconsistent with our best interests. The Audit Committee may
impose any conditions on the Related Person Transaction that it
deems appropriate.
155
Director
Independence
Norteks board of directors has determined that all but
Messrs. Hirshorn and Smith are considered
independent directors within the meaning of the
rules of the NASDAQ for listed companies. With regard to the
audit committee, the board of directors has determined that the
four members of the audit committee of the Company are
independent within the meaning of
Rule 10A-3
of the Exchange Act.
156
DESCRIPTION
OF OTHER INDEBTEDNESS
Senior
Secured Asset-Based Revolving Credit Facility
We summarize below the principal terms of the agreements that
govern our senior secured asset-based revolving credit facility.
This summary is not a complete description of all the terms of
such agreements.
General
On December 17, 2010, the Company entered into an amended
and restated $300.0 million senior secured asset-based
revolving credit facility (the ABL Facility). The
ABL Facility consists of a $280.0 million
U.S. facility and a $20.0 million Canadian facility.
As of December 16, 2011, we had approximately
$52.0 million in outstanding borrowings and approximately
$14.7 million in outstanding letters of credit under our
ABL Facility. Based on the borrowing base calculations as of
December 9, 2011, at December 16, 2011 the Company had
excess availability of approximately $189.0 million under
the ABL Facility and approximately $150.6 million of excess
availability before triggering the cash deposit requirements as
discussed further below, see Mandatory
Repayments.
Availability under the ABL Facility is limited to the lesser of
$300.0 million and a borrowing base equal to the sum
(subject to certain reserves and other adjustments) of:
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85% of the net amount of eligible accounts receivable;
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85% of the net orderly liquidation value of eligible
inventory; and
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up to $25.0 million of available cash subject to certain
limitations as specified in the ABL Facility.
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The borrowing base is calculated separately for the
U.S. and Canadian subfacilities, so each of the
U.S. and Canadian subfacilities must be supported by
borrowing base assets of its respective borrowers and subsidiary
guarantors. The ABL Facility provides the lenders considerable
discretion to impose reserves or availability blocks, which
could materially impair the amount of borrowings that would
otherwise be available to the Company and its subsidiaries and
may require the Company to repay certain amounts outstanding
under the ABL Facility.
Our ABL Facility includes borrowing capacity available for
letters of credit, with a $60.0 million sublimit for
U.S. standby letters of credit and a $5.0 million
sublimit for Canadian standby letters of credit. There is also a
sublimit for borrowings on
same-day
notice, referred to as swingline loans, with a
$20.0 million sublimit for U.S. swingline loans and a
$3.0 million sublimit to Canadian swingline loans.
The ABL Facility provides us with the right at any time to
request up to $100.0 million of additional commitments
under this facility. The existing lenders under the ABL Facility
will not be under any obligation to provide such additional
commitments, and any increase in commitments is subject to
customary conditions precedent. If we were to request any such
additional commitments, the facility size could increase to up
to $400.0 million (but additional commitments under the
Canadian subfacility could never exceed $20.0 million), but
our ability to borrow under the ABL Facility would still be
limited by the amount of the borrowing base.
Additional borrowings under the ABL Facility are subject to the
satisfaction of customary conditions, including absence of a
default and accuracy of representations and warranties.
Interest
rate and fees
The interest rates applicable to loans under the ABL Facility
are, at the Companys option, equal to either (1) the
LIBOR rate for a 30, 60, 90 or 180 day interest period (or
any other period that is 365 days or less, if available),
plus an applicable margin percentage ranging from 2.25% per
annum to 2.75% per annum, depending on the Companys
Average Excess Availability (as defined in the ABL Facility),
(2) for Canadian borrowings, the annual average rate
identified on the CDOR Page plus 0.05%, plus an applicable
margin ranging from 2.25% per annum to 2.75% per annum, or
(3) an alternate base rate equal to, for Canadian
Borrowings, the Canadian Base Rate or the Canadian Prime Rate,
and for U.S. Borrowings the greater of
157
(i) the prime rate, (ii) the Federal Funds rate plus
0.50% or, (iii) 1.00% plus the LIBOR rate for a 30 day
interest period as determined on such day, plus an applicable
margin percentage ranging from 1.25% to 1.75%, which is
determined based upon the average excess borrowing availability
for the previous fiscal quarter. Interest shall be payable at
the end of the selected interest period, but no less frequently
than quarterly for base rate loans and no less than monthly for
LIBOR loans in excess of 90 days. At December 16,
2011, the weighted average interest rate on the ABL Facility was
approximately 2.8%.
Mandatory
repayments
If at any time the aggregate amount of outstanding loans,
unreimbursed letter of credit drawings and undrawn letters of
credit under our ABL Facility (or under either the U.S. or
Canadian facility) exceeds the lesser of (i) the commitment
amount of such facility and (ii) the borrowing base of such
facility, we will be required to repay outstanding loans and
cash collateralize letters of credit in an aggregate amount
equal to such excess, with no reduction of the commitment amount
of such facility. In addition, the Company will be required to
deposit cash from its material deposit accounts (including all
concentration accounts) daily in collection accounts maintained
with the administrative agent under the ABL Facility, which will
be used to repay outstanding loans and cash collateralized
letters of credit, if (i) excess availability (as defined
in the ABL Facility) falls below the greater of
$35.0 million and 15% of the borrowing base or (ii) an
event of default has occurred and is continuing. A breach of
this covenant could result in a default under the ABL Facility.
Based on the borrowing base calculations as of December 9,
2011, at December 16, 2011 the Company had approximately
$150.6 million of excess availability before triggering the
cash deposit requirements as discussed above. Additionally, the
credit agreement governing our ABL Facility requires us to
prepay outstanding loans with 100% of the net cash proceeds of
certain asset sales and casualty and condemnation events,
subject to reinvestment rights and certain other exceptions.
Voluntary
repayment
We may voluntarily reduce the unutilized portion of the
commitment amount and repay outstanding loans at any time
without premium or penalty other than customary
breakage costs with respect to LIBOR loans.
Amortization
and final maturity
There is no scheduled amortization under our ABL Facility. All
outstanding loans under the facility are due and payable in full
upon termination of the ABL Facility on December 17, 2015.
Guarantees
and security
All obligations under our ABL Facility are unconditionally
guaranteed by substantially all existing and future, direct and
indirect, wholly-owned domestic subsidiaries (and the Canadian
subfacility is guaranteed or borrowed by substantially all our
Canadian wholly-owned subsidiaries) and in any event by all
subsidiaries that guarantee the notes. All obligations under our
ABL Facility, and the guarantees of those obligations, are
secured, subject to certain exceptions, by substantially all of
our assets and the assets of the guarantors, including:
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a first-priority security interest in personal property
consisting of accounts receivable, inventory, cash, deposit
accounts, and certain related assets and proceeds of the
foregoing; and
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a second-priority security interest in, and mortgages on,
substantially all of our material owned real property and
equipment and all assets that will secure the Term Loan Facility
on a first-priority basis.
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The obligations of our Canadian subsidiaries that are borrowers
of the Canadian facility under the ABL Facility are secured by a
first-priority security interest in personal property consisting
of accounts receivable and inventory of certain Canadian
subsidiaries.
158
Restrictive
covenants and other matters
Under the ABL Facility, if (i) excess availability falls
below the greater of $30 million and 12.5% of the borrowing
base or (ii) an event of default has occurred and is
continuing, the Company will be required to satisfy and maintain
a consolidated fixed charge coverage ratio measured on a
trailing four quarter basis of not less than 1.1 to 1.0. In
addition, the credit agreement for the ABL Facility contains
certain negative covenants that will, subject to significant
exceptions, limit our ability and the ability of our
subsidiaries to, among other things:
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incur, assume or permit to exist additional indebtedness or
guarantees;
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incur liens and engage in sale leaseback transactions;
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make investments and loans;
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pay dividends, make payments or redeem or repurchase capital
stock;
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engage in mergers, acquisitions and asset sales;
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prepay, redeem or purchase certain indebtedness including the
notes;
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amend or otherwise alter terms of certain indebtedness,
including the notes, and certain material agreements;
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enter into agreements limiting subsidiary distributions;
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engage in certain transactions with affiliates; and
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alter the business that we conduct.
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Our ABL Facility contains certain customary representations and
warranties, affirmative financial and operating covenants and
events of default, including among other things payment
defaults, breach of representations and warranties, covenant
defaults, cross-defaults to certain indebtedness, certain events
of bankruptcy, certain events under ERISA, material judgments,
actual or asserted failure of any guaranty or security document
supporting our ABL Facility to be in full force and effect, and
change of control. If such an event of default occurs, the
lenders under our ABL Facility would be entitled to take various
actions, including the acceleration of amounts due under our ABL
Facility and all actions permitted to be taken by a secured
creditor.
10% Notes
Due 2018
On November 23, 2010, the Company issued approximately
$250 million in aggregate principal amount of
10% Notes due December 1, 2018. The 10% Notes are
guaranteed on a senior unsecured basis by substantially all of
the Companys domestic subsidiaries.
Interest on the 10% Notes accrues at the rate of 10% per
annum and is payable semi-annually in arrears on June 1 and
December 1, commencing on June 1, 2011, until
maturity. Interest on the 10% Notes accrues from the date
of original issuance or, if interest has already been paid, from
the date it was most recently paid. Interest is computed on the
basis of a
360-day year
comprised of twelve
30-day
months.
The 10% Notes contain an optional redemption provision
whereby, at any time and from time to time prior to
December 1, 2013, the Company may redeem up to 35% of the
aggregate principal amount of the 10% Notes with the net
cash proceeds from certain equity offerings at a redemption
price equal to 110.0% of the aggregate principal amount of the
10% Notes, plus accrued and unpaid interest, provided that
at least 65% of the original aggregate principal amount of the
10% Notes remains outstanding after the redemption. On or
after December 1, 2014 the 10% Notes are redeemable at
the option of the Company, in whole or in part, at any time and
from time to time, on or after December 1, 2014 at 105.0%,
declining to 102.5% on December 1, 2015 and further
declining to 100.0% on December 1, 2016.
In addition, at any time and from time to time prior to
December 1, 2014, the Company may redeem all or any portion
of the 10% Notes outstanding at a redemption price equal to
100% of the aggregate principal
159
amount of the 10% Notes to be redeemed together with
accrued and unpaid interest to such redemption date, plus a
make whole premium.
The indenture governing the 10% Notes contains certain
negative covenants that restrict, among other things, the
payment of cash dividends and prepayments of subordinated debt,
the incurrence of additional indebtedness, the granting of
liens, the making of certain investments, mergers,
consolidations and sales of assets (all as defined in the
indenture, notes and other agreements). The 10% Notes
require us to offer to repurchase such notes at 101% of the
principal amount thereof upon certain change of control events.
On October 21, 2011, the Company notified the Trustee for
the 10% Notes of the existence of a default, as defined in
the related indenture, resulting from the Companys failure
to timely provide a current report on
Form 8-K
including certain financial statements required by
Item 9.01 of
Form 8-K
related to the Companys acquisition of Ergotron. The
Company has subsequently filed an amendment to the
Form 8-K
relating to the Ergotron acquisition, which includes such
financial statements, on November 10, 2011. Accordingly,
there was no Event of Default, as defined in the indenture, and
the Company is in compliance with the terms, covenants and
conditions set forth in the indenture relating to the
10% Notes.
Outstanding
8.5% Senior Notes due 2021
On April 26, 2011, the Company issued approximately
$500 million in aggregate principal amount of
8.5% Senior Notes due 2021. The 8.5% Notes are
unconditionally guaranteed on a senior unsecured basis by
substantially all the Companys domestic subsidiaries.
Interest on the 8.5% Notes accrues at the rate of 8.5% per
annum and is payable semi-annually in arrears on April 15 and
October 15, commencing on October 15, 2011, until
maturity. Interest on the 8.5% Notes accrues from the date
of original issuance or, if interest has already been paid, from
the date it was most recently paid. Interest is computed on the
basis of a
360-day year
comprised of twelve
30-day
months.
At any time prior to April 15, 2014, the Company may redeem
up to 35% of the aggregate principal amount of the
8.5% Notes with the net cash proceeds from certain equity
offerings (as defined) at a redemption price of 108.5% plus
accrued and unpaid interest, provided that at least 65% of the
original aggregate principal amount of the 8.5% Notes
remains outstanding after the redemption and the redemption
occurs within 90 days of the date of the closing of such
equity offerings (as defined). On or after April 15, 2016,
the 8.5% Notes are redeemable at the option of the Company,
in whole or in part, at any time and from time to time, on or
after April 15, 2016 at 104.25%, declining to 102.125% on
April 15, 2017, declining to 101.063% on April 15,
2018 and further declining to 100.0% on April 15, 2019.
In addition, at any time and from time to time prior to
April 15, 2016, the Company may redeem all or any portion
of the 8.5% Notes outstanding at a redemption price equal
to 100% of the aggregate principal amount of the 8.5% Notes
to be redeemed together with accrued and unpaid interest to such
redemption date, plus a Make Whole Amount.
The indenture governing the 8.5% Notes contains certain
restrictive financial and operating covenants including
covenants that restrict, among other things, the payment of cash
dividends, the incurrence of additional indebtedness, the making
of certain investments, mergers, consolidations and the sale of
assets (all as defined in the indenture and other agreements).
The 8.5% Notes require us to offer to repurchase such notes
at 101% of the principal amount thereof upon certain change of
control events.
Senior
Secured Term Loan Credit Facility
Overview
On April 26, 2011, we entered into a credit agreement and
related security and other agreements for a $350.0 million
senior secured term loan facility with certain lenders, UBS AG,
Stamford Branch, as administrative agent and collateral agent,
and the other agents party thereto (the Term Loan
Facility).
The Term Loan Facility provides that, we may request additional
tranches of term loans in an aggregate amount not to exceed
$200.0 million. Availability of such additional tranches of
term loans is subject to the
160
absence of any default, a pro forma secured leverage ratio test,
and among other things, the receipt of commitments by existing
or additional financial institutions.
Interest
rate and fees
The Term Loan Facility bears interest, at the Companys
option, at a rate per annum equal to either (1) base rate
(as defined in our new Term Loan Facility) or (2) LIBOR (as
defined in our new Term Loan Facility), in each case plus an
applicable margin. The initial borrowings under the Term Loan
Facility were at 5.25% and at December 16, 2011, the
weighted average interest rate on the Term Loan Facility
remained at approximately 5.25%.
Mandatory
repayments
The credit agreement governing the Companys Term Loan
Facility requires the Company to prepay outstanding term loans,
subject to certain exceptions, with:
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50% (subject to reduction to 25% and 0% based upon the
Companys secured leverage ratio) of the Companys
annual excess cash flow, commencing with the fiscal year ended
December 31, 2012;
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100% of the net cash proceeds of certain asset sales and
casualty and condemnation events, subject to reinvestment rights
and certain other exceptions; and
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100% of the net cash proceeds of any issuance of debt, other
than debt permitted under the Term Loan Facility.
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Voluntary
repayment
Certain voluntary prepayments on or prior to the first
anniversary of the closing of the Term Loan Facility are subject
to a call premium of 1%. Otherwise, the Company may voluntarily
repay outstanding loans at any time without premium or penalty
other than customary breakage costs with respect to
LIBOR loans.
Amortization
and final maturity
We are required to make scheduled quarterly payments each equal
to 0.25% of the original principal amount of the term loans,
with the balance due on the sixth anniversary of the closing
date.
Guarantees
and security
All obligations under our Term Loan Facility are unconditionally
guaranteed by substantially all existing and future, direct and
indirect, wholly-owned domestic restricted subsidiaries of
Nortek and in any event by all subsidiaries that guarantee the
notes. All obligations under our Term Loan Facility, and the
guarantees of those obligations, are secured, subject to certain
exceptions, by substantially all of our assets and the assets of
the guarantors, including:
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a second-priority security interest in personal property
consisting of accounts receivable, inventory, cash, deposit
accounts, and certain related assets and proceeds of the
foregoing; and
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a first-priority security interest in, and mortgages on,
substantially all of our material owned real property and
equipment.
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Restrictive
covenants and other matters
The credit agreement that governs the Term Loan Facility
contains certain negative covenants that, subject to significant
exceptions, limit our ability and the ability of our
subsidiaries to, among other things:
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incur, assume or permit to exist additional indebtedness or
guarantees;
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incur liens;
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make investments and loans;
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pay dividends, make payments or redeem or repurchase capital
stock;
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engage in mergers, acquisitions and asset sales;
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repay, redeem or purchase certain indebtedness including the
notes;
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amend or otherwise alter terms of certain indebtedness,
including the notes, and certain material agreements;
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enter into agreements limiting subsidiary distributions;
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engage in certain transactions with affiliates; and
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alter the business that we conduct.
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Our Term Loan Facility contains certain customary
representations and warranties, affirmative financial and
operating covenants and events of default, including among other
things payment defaults, breach of representations and
warranties, covenant defaults, cross-defaults to certain
indebtedness, certain events of bankruptcy, certain events under
ERISA, material judgments, actual or asserted failure of any
guaranty or security document supporting our Term Loan Facility
to be in full force and effect, and change of control. If such
an event of default occurs, the lenders under our Term Loan
Facility will be entitled to take various actions, including the
acceleration of amounts due under our Term Loan Facility and all
actions permitted to be taken by a secured creditor.
162
DESCRIPTION
OF EXCHANGE NOTES
The Issuer issued $500 million in aggregate principal
amount of 8.5% Senior Notes Due 2021 (the outstanding
notes) under an Indenture (the Indenture),
dated as of April 26, 2011 among itself, the Guarantors and
U.S. Bank National Association, as trustee (the
Trustee). The outstanding notes were issued in a
private transaction that was not subject to the registration
requirements of the Securities Act. In this section, we refer to
the exchange notes together with the outstanding notes as the
Notes. The terms of the Notes include those stated
in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended
(the Trust Indenture Act).
The following description is a summary of the material
provisions of the Indenture. It does not restate the Indenture
in its entirety. We urge you to read the Indenture because it
and not this description, defines your rights as holders of the
Notes. You may request a copy of the Indenture by following the
procedures outlined under the caption Where You Can Find
More Information.
You can find the definitions of certain terms used in this
description under the subheading Certain
Definitions. Certain terms used in this description but
not defined below under Certain
Definitions have the meanings assigned to them in the
Indenture. In this description, the word issuer
refers only to Nortek, Inc.
Exchange
Notes versus Outstanding Notes
The terms of the exchange notes are substantially identical to
the outstanding notes except that the exchange notes will be
registered under the Securities Act and will be free of any
covenants regarding exchange registration rights.
Brief
Description of the Notes and the Note Guarantees
The Notes:
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are senior unsecured obligations of the issuer;
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are pari passu in right of payment with any existing and future
senior Indebtedness of the issuer;
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are effectively subordinated to any Secured Indebtedness of the
issuer (including Indebtedness under the ABL Facility and the
Term Loan Facility) to the extent of the value of the assets
securing such Indebtedness;
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are structurally subordinated to all liabilities (including
Indebtedness and trade payables) of any non-Guarantor
Subsidiaries; and
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will be guaranteed on a senior unsecured basis by the Guarantors.
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The Note Guarantees:
The Notes will be guaranteed by all of the current and certain
future Domestic Subsidiaries of the issuer, other than a
Receivables Subsidiary or any Immaterial Subsidiary. See
Additional Note Guarantees. None of the
issuers Subsidiaries organized outside of the United
States will guarantee the Notes.
Each Note Guarantee:
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will be a senior unsecured obligation of the Guarantor;
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will be pari passu in right of payment with any existing and
future senior Indebtedness of the Guarantor;
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will be effectively subordinated to all Secured Indebtedness of
such Guarantor to the extent of the value of the assets securing
such Indebtedness, including such Guarantors guarantee of
the ABL Facility and the Term Loan Facility; and
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will be structurally subordinated to any Indebtedness or
Obligations of any of such Guarantors non-Guarantor
Subsidiaries.
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163
As of the date of the Indenture, all of the issuers
subsidiaries will be Restricted Subsidiaries.
However, none of the issuers Foreign Restricted
Subsidiaries will guarantee the Notes. See Risk
Factors Risks Related to Our Indebtedness and
Certain Other Obligations Claims of holders of the
notes will be structurally subordinated to claims of creditors
of certain of our subsidiaries that will not guarantee the
notes. In addition, under the circumstances described
below under the subheading Certain
Covenants Designation of Restricted and Unrestricted
Subsidiaries, the issuer will be permitted to designate
certain of its subsidiaries as Unrestricted
Subsidiaries. The issuers Unrestricted Subsidiaries
will not be subject to many of the restrictive covenants in the
Indenture. The issuers Unrestricted Subsidiaries will not
guarantee the Notes.
Principal,
Maturity and Interest
The Indenture provides for the issuance by the issuer of Notes
initially in an aggregate principal amount of
$500.0 million. The issuer may issue additional notes (the
Additional Notes) from time to time after this
offering. Any offering of Additional Notes is subject to the
covenant described below under the caption
Certain Covenants Incurrence of
Indebtedness and Issuance of Preferred Stock. The Notes
and any Additional Notes subsequently issued under the Indenture
would be treated as a single class for all purposes under the
Indenture, including, without limitation, waivers, amendments,
redemptions and offers to purchase, but the Notes and Additional
Notes may not be treated as fungible for U.S. federal
income tax purposes. The issuer will issue Notes in
denominations of $2,000 and integral multiples of $1,000 in
excess thereof. The Notes will mature on April 15, 2021.
Interest on the Notes will accrue at the rate of 8.50% per annum
and will be payable semi-annually in arrears on April 15 and
October 15, commencing October 15, 2011. The issuer
will make each interest payment to the Holders of record on the
immediately preceding April 1 and October 1.
Interest on the Notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it
was most recently paid. Interest will be computed on the basis
of a 360-day
year comprised of twelve
30-day
months.
Paying
Agent and Registrar for the Notes
The Trustee will initially act as Paying Agent and Registrar.
The issuer may change the Paying Agent or Registrar without
prior notice to the Holders, and the issuer or any of its
Subsidiaries may act as Paying Agent or Registrar.
Transfer
and Exchange
A Holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and
transfer documents and the issuer may require a Holder to pay
any taxes and fees required by law or permitted by the
Indenture. The issuer is not required to transfer or exchange
any Note selected for redemption.
Also, the issuer 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.
Ranking
The Notes will be unsecured senior Indebtedness of the issuer,
will rank equally in right of payment to all existing and future
senior Indebtedness of the issuer (including Indebtedness under
the ABL Facility, the Term Loan Facility and the 2018 Notes) and
will rank senior in right of payment with all existing and
future Subordinated Indebtedness of the issuer. The Notes also
will be effectively subordinated to any Secured Indebtedness
(including Indebtedness under the ABL Facility and the Term Loan
Facility) of the issuer and the Guarantors to the extent of the
value of the assets securing such Indebtedness.
164
The Guarantees will be unsecured senior Indebtedness of the
applicable Guarantor, will rank equally in right of payment to
all existing and future senior Indebtedness of such Guarantor
(including its guarantee of Indebtedness under the ABL Facility
and the Term Loan Facility) and will rank senior in right of
payment with all existing and future Subordinated Indebtedness
of such Guarantor. The Guarantees also will be effectively
subordinated to any Secured Indebtedness of the applicable
Guarantor (including its guarantee of Indebtedness under the ABL
Facility and the Term Loan Facility) to the extent of the value
of the assets securing such Secured Indebtedness.
As of October 1, 2011, the issuer and its Subsidiaries had
$689.9 million aggregate principal amount of senior
Indebtedness (excluding the Notes and the Note Guarantees)
outstanding, net of discounts, (excluding unused commitments).
A significant portion of the operations of the issuer are
conducted through its Subsidiaries. Unless the Subsidiary is a
Guarantor, claims of creditors on such Subsidiaries, including
trade creditors, and claims of preferred stockholders (if any)
of such Subsidiaries generally will have priority with respect
to the assets and earnings of such Subsidiaries over the claims
of creditors of the issuer, including the Holders of the Notes.
The Notes, therefore, will be effectively subordinated to
holders of Indebtedness and other creditors (including trade
creditors) and preferred stockholders (if any) of Subsidiaries
of the issuer that are not Guarantors. Although the Indenture
limits the incurrence of Indebtedness by and the issuance of
Disqualified Stock and preferred stock of certain of the
issuers Subsidiaries, such limitation is subject to a
number of significant qualifications. See
Certain Covenants Incurrence of
Indebtedness and Issuance of Preferred Stock.
Although the Indenture contains limitations on the amount of
additional Indebtedness that the issuer and its Restricted
Subsidiaries may Incur, under certain circumstances the amount
of such Indebtedness could be substantial. See
Certain Covenants Incurrence of
Indebtedness and Issuance of Preferred Stock and
Certain Covenants Liens.
Note
Guarantees
The Guarantors will jointly and severally guarantee on a senior
unsecured basis the issuers obligations under the
Indenture and the Notes. The obligations of each Guarantor under
its Note Guarantee will be limited as necessary to prevent that
Note Guarantee from constituting a fraudulent conveyance under
applicable law. See Risk Factors Risks Related
to Our Indebtedness and Certain Other Obligations
Because each guarantors liability under its guarantees may
be reduced to zero, voided or released under certain
circumstances, you may not receive any payments from some or all
of the guarantors and Risk Factors Risks
Related to Our Indebtedness and Certain Other
Obligations Under certain circumstances a court
could cancel the exchange notes or the related guarantees under
fraudulent conveyance laws.
The Indenture provides that a Guarantor may not sell or
otherwise dispose of all or substantially all of its assets to,
or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than
the issuer or another Guarantor, unless:
(1) immediately after giving effect to that transaction, no
Default or Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or
disposition or the Person formed by or surviving any such
consolidation or merger is a corporation, partnership or limited
liability company, organized or existing under (i) the laws
of the United States, any state thereof or the District of
Columbia or (ii) the laws of the same jurisdiction as that
Guarantor and, in each case, assumes all the obligations of that
Guarantor under the Indenture, its Note Guarantee and the
Registration Rights Agreement pursuant to a supplemental
indenture satisfactory to the Trustee; or
(b) such sale or other disposition complies with the
Asset Sale provisions of the Indenture, including
the application of the Net Proceeds therefrom.
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The Note Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all
or substantially all of the assets of that Guarantor (including
by way of merger or consolidation) to a Person that is not
(either before or after giving effect to such transaction) the
issuer or a Restricted Subsidiary of the issuer, if the sale or
other disposition of all or substantially all of the assets of
that Guarantor complies with the Asset Sale
provisions of the Indenture, including the application of the
Net Proceeds therefrom; provided, however, that such Guarantor
is released from its guarantees, if any, of, and all pledges and
security, if any, granted in connection with, the ABL Facility,
the Term Loan Facility, the 2018 Notes and any other
Indebtedness of the issuer or any Restricted Subsidiary of the
issuer;
(2) in connection with any sale of all of the Capital Stock
of a Guarantor to a Person that is not (either before or after
giving effect to such transaction) the issuer or a Restricted
Subsidiary of the issuer, if the sale of all such Capital Stock
of that Guarantor complies with the Asset Sale
provisions of the Indenture, including the application of the
Net Proceeds therefrom; provided, however, that such Guarantor
is released from its guarantees, if any, of, and all pledges and
security, if any, granted in connection with, the ABL Facility,
the Term Loan Facility, the 2018 Notes and any other
Indebtedness of the issuer or any Restricted Subsidiary of the
issuer;
(3) if the issuer properly designates any Restricted
Subsidiary that is a Guarantor as an Unrestricted Subsidiary;
(4) in connection with any sale of Capital Stock of a
Guarantor to a Person that results in the Guarantor no longer
being a Subsidiary of the issuer, if the sale of such Capital
Stock of that Guarantor complies with the Asset Sale
provisions of the Indenture, including the application of the
Net Proceeds therefrom;
(5) if the issuer exercises its legal defeasance option or
its covenant defeasance option as described under
Legal Defeasance and Covenant Defeasance
or if its obligations under the Indenture are discharged in
accordance with the terms of the Indenture; or
(6) upon the release or discharge of all Guarantees by such
Guarantor which would have required such Guarantor to guarantee
the Notes pursuant to the covenant described under
Certain Covenants Limitation on
Issuance of Guarantees of Indebtedness (including, without
limitation, the ABL Facility, the Term Loan Facility and the
2018 Notes Indenture).
Optional
Redemption
At any time prior to April 15, 2014, the issuer may on any
one or more occasions redeem, upon not less than 30 nor more
than 60 days prior notice mailed by first-class mail
to each Holders registered address, up to 35% of the
aggregate principal amount of Notes issued under the Indenture
(calculated after giving effect to any issuance of Additional
Notes) at a redemption price of 108.500% of the principal amount
thereof, plus accrued and unpaid interest and Additional
Interest, if any, to the redemption date, with the net cash
proceeds of one or more Designated Offerings of the issuer (or
of any Parent to the extent such proceeds are contributed to the
equity capital of the issuer, other than in the form of
Disqualified Stock); provided that:
(1) at least 65% of the aggregate principal amount of Notes
issued under the Indenture (calculated after giving effect to
any issuance of Additional Notes) remains outstanding
immediately after the occurrence of such redemption (excluding
Notes held by the issuer and its Subsidiaries); and
(2) the redemption must occur within 90 days of the
date of the closing of such Designated Offering.
On or after April 15, 2016, the issuer may redeem all or a
part of the Notes, upon not less than 30 nor more than
60 days notice, at the redemption prices (expressed
as percentages of principal amount) set forth
166
below plus accrued and unpaid interest and Additional Interest,
if any, thereon, to the applicable redemption date, if redeemed
during the twelve-month period beginning on April 15 of the
years indicated below:
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Year
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Percentage
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2016
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104.250
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2017
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102.125
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2018
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101.063
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2019 and thereafter
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100.000
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In addition, at any time and from time to time prior to
April 15, 2016, the issuer may redeem all or any portion of
the Notes outstanding at a redemption price equal to
(a) 100% of the aggregate principal amount of the Notes to
be redeemed, together with accrued and unpaid interest to such
redemption date, plus (b) the Make Whole Amount.
The issuer may acquire Notes by means other than a redemption,
whether by tender offer, open market purchases, negotiated
transactions or otherwise, in accordance with applicable
securities laws, so long as such acquisition does not otherwise
violate the terms of the Indenture.
If less than all of the Notes are to be redeemed at any time,
the Trustee will select Notes for redemption as follows:
(1) if the Notes are listed on any national securities
exchange, in compliance with the requirements of the principal
national securities exchange on which the Notes are
listed; or
(2) if the Notes are not so listed on any national
securities exchange, on a pro rata basis, by lot or by such
method as the Trustee shall deem fair and appropriate.
No Notes of $2,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each
Holder of Notes to be redeemed at its registered address, except
that redemption notices may be mailed more than 60 days
prior to a redemption date if the notice is issued in connection
with a defeasance of the Notes or a satisfaction and discharge
of the Indenture. Notices of redemption may not be conditional,
except that optional redemptions pursuant to the first paragraph
after the Optional Redemption heading
above may, at the issuers discretion, be subject to one or
more conditions precedent, including, but not limited to,
completion of a Designated Offering.
If any Note is to be redeemed in part only, the notice of
redemption that relates to that Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion of the original
Note will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption
become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
Repurchase
at the Option of Holders
The issuer is not required to make any mandatory redemption or
sinking fund payments with respect to the Notes. However, under
certain circumstances, the issuer may be required to offer to
purchase Notes as described under the captions
Repurchase at the Option of
Holders Change of Control and
Certain Covenants Asset
Sales.
Change
of Control
If a Change of Control occurs, each Holder of Notes will have
the right to require the issuer to repurchase all or any part
(equal to $2,000 or an integral multiple of $1,000 in excess
thereof) of that Holders Notes pursuant to a Change of
Control Offer on the terms set forth in the Indenture. In the
Change of Control Offer, the issuer will offer a Change of
Control Payment in cash equal to 101% of the aggregate principal
amount of Notes repurchased plus accrued and unpaid interest and
Additional Interest, if any, thereon, to the date of
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purchase. Within 30 days following any Change of Control,
the issuer will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of
Control and offering to repurchase Notes on the Change of
Control Payment Date specified in such notice, which date shall
be no earlier than 30 days and no later than 60 days
from the date such notice is mailed, pursuant to the procedures
required by the Indenture and described in such notice. The
issuer 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 the Notes as
a result of a Change of Control. To the extent that the
provisions of any securities laws or regulations conflict with
the Change of Control provisions of the Indenture, the issuer
will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under
the Change of Control provisions of the Indenture by virtue of
such conflict.
On the Change of Control Payment Date, the issuer will, to the
extent lawful:
(1) accept for payment all Notes or portions thereof
properly tendered pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the
Change of Control Payment in respect of all Notes or portions
thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee the
Notes so accepted together with an Officers Certificate
stating the aggregate principal amount of Notes or portions
thereof being purchased by the issuer.
The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the
Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Note equal in
principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in
a principal amount of $2,000 or an integral multiple of $1,000
in excess thereof. The issuer 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 ABL Credit Agreement, the Term Loan Credit Agreement and the
2018 Notes Indenture each, and other Indebtedness agreements
may, provide that certain change of control events with respect
to the issuer would constitute a default under such agreements.
Such defaults could result in amounts outstanding under the ABL
Facility, the Term Loan Facility, the 2018 Notes and such other
Indebtedness being declared due and payable. The issuers
ability to pay cash to the Holders following the occurrence of a
Change of Control may be limited by its then existing financial
resources. Therefore, sufficient funds may not be available when
necessary to make any required repurchases.
The provisions described above that require the issuer to make a
Change of Control Offer following a Change of Control will be
applicable regardless of whether any other provisions of the
Indenture are applicable. Except as described above with respect
to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that
the issuer repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
The issuer will not be required to make a Change of Control
Offer upon a Change of Control if a third party makes the Change
of Control Offer in the manner, at the times and otherwise in
compliance with the requirements set forth in the Indenture
applicable to a Change of Control Offer made by the issuer and
purchases all Notes validly tendered and not withdrawn under
such Change of Control Offer. A Change of Control Offer may be
made in advance of a Change of Control, conditional upon such
Change of Control, if a definitive agreement is in place for the
Change of Control at the time of making of the Change of Control
Offer. Notes repurchased pursuant to a Change of Control Offer
will be retired and cancelled.
The definition of Change of Control includes a phrase relating
to the direct or indirect sale, lease, transfer, conveyance or
other disposition of all or substantially all of the
properties or assets of the issuer and its Subsidiaries taken as
a whole. Although there is a limited body of case law
interpreting the phrase substantially all, there is
no precise established definition of the phrase under applicable
law. Accordingly,
168
the ability of a Holder of Notes to require the issuer to
repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets
of the issuer and its Subsidiaries taken as a whole to another
Person or group may be uncertain.
The provisions under the Indenture relating to the issuers
obligation to make an offer to repurchase the Notes as a result
of a Change of Control may be waived or modified with the
written consent of the Holders of a majority in principal amount
of the Notes.
Certain
Covenants
The Indenture contains covenants including, among others, the
following:
Asset
Sales
The issuer will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) the issuer (or the Restricted Subsidiary, as the case
may be) receives consideration at the time of such Asset Sale at
least equal to the fair market value of the assets or Equity
Interests issued or sold or otherwise disposed of;
(2) in the case of Asset Sales involving consideration in
excess of $10.0 million, such fair market value is
determined by the issuers Board of Directors and evidenced
by a resolution of the Board of Directors set forth in an
Officers Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by
the issuer or such Restricted Subsidiary is in the form of cash,
Cash Equivalents or Replacement Assets or a combination thereof.
Within 365 days after the issuers or Restricted
Subsidiary of the issuers receipt of the Net Proceeds from
such Asset Sale, the issuer or such Restricted Subsidiary may at
its option do any one or more of the following:
(1) permanently reduce any Indebtedness secured by a
Permitted Lien (including the ABL Facility and the Term Loan
Facility) or any Indebtedness of a Restricted Subsidiary that is
not a Guarantor (and, in the case of revolving obligations, to
correspondingly reduce commitments with respect thereto) or any
Pari Passu Indebtedness, in each case other than Indebtedness
owed to the issuer or an Affiliate of the issuer; provided,
however, that if the issuer or any Guarantor shall so reduce any
Pari Passu Indebtedness, the issuer will equally and ratably
reduce Indebtedness under the Notes through open-market
purchases (to the extent such purchases are at or above 100.0%
of the principal amount thereof) or by making an offer to all
Holders of Notes to purchase at a purchase price equal to 100%
of the principal amount thereof, plus accrued and unpaid
interest and additional interest, if any, the pro rata principal
amount of the Notes, such offer to be conducted in accordance
with the procedures set forth below for an Asset Sale Offer but
without any further limitation in amount; or
(2) acquire assets or make capital expenditures, that, in
either case, are used or useful in a Permitted Business
(provided, however, that if such acquisition is in the form of
the acquisition of Capital Stock of a Person, such acquisition
results in such Person becoming a Restricted Subsidiary of the
issuer or, if such Person is a Restricted Subsidiary of the
issuer (other than a Wholly Owned Subsidiary), in an increase in
the percentage ownership of such Person by the issuer or any
Restricted Subsidiary of the issuer) (an Asset Sale
Investment).
Pending the final application of any such Net Proceeds, the
issuer or such Restricted Subsidiary of the issuer may
temporarily reduce Indebtedness under a revolving credit
facility, if any, or otherwise invest such Net Proceeds in Cash
Equivalents. The Indenture provides that any Net Proceeds from
any Asset Sale that are not applied as provided and within the
365-day time
period set forth in the preceding paragraph will be deemed to
constitute Excess Proceeds. When the aggregate
amount of Excess Proceeds exceeds $20.0 million, the issuer
shall make an offer to all Holders of Notes (and, at the option
of the issuer, to holders of any Pari Passu Indebtedness) (an
Asset Sale Offer) to purchase the maximum principal
amount of Notes (and principal amount
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or accreted value, as applicable, of such Pari Passu
Indebtedness), that is a multiple of $2,000 or an integral
multiple of $1,000 in excess thereof that may be purchased out
of the Excess Proceeds at an offer price in cash in an amount
equal to 100% of the principal amount thereof, plus accrued and
unpaid interest and additional interest, if any (or, in respect
of such Pari Passu Indebtedness, such lesser price, if any, as
may be provided for by the terms of such Pari Passu
Indebtedness), to the date fixed for the closing of such offer,
in accordance with the procedures set forth in the Indenture.
The issuer will commence an Asset Sale Offer with respect to
Excess Proceeds not later than ten business days after the date
that Excess Proceeds exceed $20.0 million by mailing the
notice required pursuant to the terms of the Indenture, with a
copy to the Trustee. To the extent that the aggregate amount of
Notes (and such Pari Passu Indebtedness) tendered pursuant to an
Asset Sale Offer is less than the Excess Proceeds, the issuer
may use any remaining Excess Proceeds for general corporate
purposes. If the aggregate principal amount of Notes (and such
Pari Passu Indebtedness) surrendered by holders thereof exceeds
the amount of Excess Proceeds, the Trustee shall select the
Notes (and such Pari Passu Indebtedness) to be purchased in the
manner described below. Upon completion of any such Asset Sale
Offer, the amount of Excess Proceeds which served as the basis
for such Asset Sale Offer shall be reduced to zero.
The issuer 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 each repurchase of Notes
pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with
the Asset Sales provisions of the Indenture, the issuer will
comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the
Asset Sale provisions of the Indenture by virtue of such
conflict.
If more Notes (and Pari Passu Indebtedness) are tendered
pursuant to an Asset Sale Offer than the issuer is required to
purchase, the principal amount of the Notes (and Pari Passu
Indebtedness) to be purchased will be determined pro rata based
on the principal amounts so tendered and the selection of the
actual Notes for purchase will be made by the Trustee on a pro
rata basis to the extent practicable; provided, however, that no
Notes (or Pari Passu Indebtedness) of $2,000 or less shall be
purchased in part.
Notices of an Asset Sale Offer shall be mailed by first-class
mail, postage prepaid, at least 30 but not more than
60 days before the purchase date to each Holder of Notes at
such holders registered address. If any Note is to be
purchased in part only, any notice of purchase that relates to
such Note shall state the portion of the principal amount
thereof that has been or is to be purchased.
A new Note in principal amount equal to the unpurchased portion
of any Note purchased in part will be issued in the name of the
Holder thereof upon cancellation of the original Note. On and
after the purchase date, unless the issuer defaults in payment
of the purchase price, interest shall cease to accrue on Notes
or portions thereof purchased.
For purposes of this provision, each of the following shall be
deemed to be cash:
(1) any liabilities (as shown on the issuers or such
Restricted Subsidiarys most recent balance sheet) of the
issuer or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated
to the Notes or any Note Guarantee) that are assumed by the
transferee of any such assets and, in the case of liabilities
other than Non-Recourse Debt, where the issuer and all
Restricted Subsidiaries are released from any further liability
in connection therewith;
(2) any securities, notes or other obligations received by
the issuer or any such Restricted Subsidiary from such
transferee that are converted by the issuer or such Restricted
Subsidiary into cash within 180 days thereafter (to the
extent of the cash received in that conversion); and
(3) any Designated Noncash Consideration received by the
issuer or any of its Restricted Subsidiaries in such Asset Sale
having an aggregate fair market value (as determined in good
faith by the Board of Directors of the issuer), taken together
with all other Designated Noncash Consideration received
pursuant to this clause (3) that is at that time
outstanding, not to exceed the greater of
(x) $50.0 million or (y) 5.0% of Consolidated
Tangible Assets at the time of the receipt of such Designated
Noncash Consideration (with the fair market value of each item
of Designated Noncash Consideration being measured at the time
received without giving effect to subsequent changes in value).
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Notwithstanding the preceding, any liabilities of the issuer or
any Restricted Subsidiary that are not assumed by the transferee
of such assets in respect of which the issuer and all Restricted
Subsidiaries are not released from any future liabilities in
connection therewith shall not be considered consideration.
This covenant contains a number of substantial qualifications
and exceptions. See the definition of Asset Sale
under Certain Definitions.
Restricted
Payments
The issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment
or distribution on account of the issuers or any of its
Restricted Subsidiaries Equity Interests (including,
without limitation, any payment in connection with any merger or
consolidation involving the issuer or any of its Restricted
Subsidiaries), other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the issuer
or to the issuer or a Restricted Subsidiary of the issuer;
(2) purchase, redeem or otherwise acquire or retire for
value (including, without limitation, in connection with any
merger or consolidation involving the issuer) any Equity
Interests of the issuer or any Parent;
(3) make any payment of principal or premium on or with
respect to, or purchase, redeem, defease or otherwise acquire or
retire for value, any Indebtedness that is subordinated to the
Notes or the Note Guarantees prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment (other
than (A) from the issuer or a Restricted Subsidiary or
(B) the purchase, repurchase, redemption, defeasance or
other acquisition or retirement of such subordinated
Indebtedness purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in
each case due within one year of the date of such purchase,
repurchase, redemption, defeasance or other acquisition or
retirement); or
(4) make any Restricted Investment (all such payments and
other actions set forth in clauses (1) through
(4) above being collectively referred to as
Restricted Payments),
unless, at the time of and after giving effect to such
Restricted Payment:
(1) no Default or Event of Default shall have occurred and
be continuing or would occur as a consequence thereof;
(2) the issuer would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the
applicable four quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption
Incurrence of Indebtedness and Issuance of
Preferred Stock; and
(3) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments made by the issuer and
its Restricted Subsidiaries after the Issue Date (excluding
Restricted Payments permitted by clauses (2), (3), (4), (5),
(6), (7), (8), (9), (10), (12), (13) and (14) of the
next succeeding paragraph), is less than the sum, without
duplication, of:
(a) 50% of the Consolidated Net Income of the issuer for
the period (taken as one accounting period) beginning on
April 3, 2011 and ending on the date of the issuers
most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit); plus
(b) 100% of the aggregate net proceeds (including the fair
market value of property) received by the issuer subsequent to
the Issue Date as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the issuer (other
than Excluded Contributions or net proceeds from the issue and
sale of Disqualified Stock) or from the issue or sale of
convertible or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of the issuer that
171
have been converted into or exchanged for such Equity Interests
(other than Equity Interests (or Disqualified Stock or debt
securities) sold to a Restricted Subsidiary of the issuer); plus
(c) an amount equal to the net reduction in Restricted
Investments by the issuer and its Restricted Subsidiaries,
subsequent to the Issue Date, resulting from payments of
interest on Indebtedness, dividends, repayments of loans or
advances or other transfers of assets, in each case to the
issuer or any such Restricted Subsidiary from any such
Investment, or from the net cash proceeds from the sale of any
such Investment, or from a redesignation of an Unrestricted
Subsidiary to a Restricted Subsidiary, but only if and to the
extent such amounts are not included in the calculation of
Consolidated Net Income and not to exceed in the case of any
Investment the amount of the Restricted Investment previously
made by the issuer or any Restricted Subsidiary in such Person
or Unrestricted Subsidiary.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after
the date of declaration thereof, if at said date of declaration
such payment would have complied with the provisions of the
Indenture;
(2) the redemption, repurchase, retirement, defeasance or
other acquisition of any subordinated Indebtedness of the issuer
or any Restricted Subsidiary or of any Equity Interests of the
issuer or any Parent in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary of the issuer) of, Equity Interests of the
issuer other than Disqualified Stock (and any distribution, loan
or advance of such net cash proceeds to any Parent for such
purpose) or out of contributions to the equity capital of the
issuer (other than Disqualified Stock); provided that the amount
of any such net proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (3)(b) of the
preceding paragraph;
(3) the repayment, defeasance, redemption, repurchase or
other acquisition of subordinated Indebtedness of the issuer or
any Restricted Subsidiary with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary
of the issuer to the holders of any series or class of its
common Equity Interests on a pro rata basis;
(5) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the issuer and
any distribution, loan or advance to any Parent for the
repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of any Parent, in each case held
by any former or current employees, officers, directors or
consultants of the issuer or any of its Restricted Subsidiaries
or their respective estates, spouses, former spouses or family
members under any management equity plan or stock option or
other management or employee benefit plan upon the death,
disability or termination of employment of such Persons, in an
amount not to exceed $7.5 million (plus the amount of any
withholding or similar taxes payable by any such person in
connection with grants under such plan) in any calendar year;
provided, that such amount in any calendar year may be increased
by an amount not to exceed (i) the net cash proceeds from
the sale of Equity Interests (other than Disqualified Stock) of
the issuer (or any Parent to the extent such net cash proceeds
are contributed to the common equity of the issuer) to
employees, officers, directors or consultants of the issuer and
its Restricted Subsidiaries that occurs after the Issue Date (to
the extent the cash proceeds from the sale of such Equity
Interests have not otherwise been applied to the payment of
Restricted Payments pursuant to clause (2) above or
previously applied to the payment of Restricted Payments
pursuant to this clause (5)) plus (ii) the cash proceeds of
key man life insurance policies received by the issuer and its
Restricted Subsidiaries after the Issue Date less any amounts
previously applied to the payment of Restricted Payments
pursuant to this clause (5); provided further that cancellation
of Indebtedness owing to the issuer from employees, officers,
directors and consultants of the issuer or any of its Restricted
Subsidiaries in connection with a repurchase of Equity Interests
of the issuer from such Persons will not be deemed to constitute
a Restricted Payment for purposes of this covenant or any other
provisions of the Indenture to the extent that the proceeds
received from the sale of such Equity Interests were excluded
from clause 3(b) of the
172
preceding paragraph; provided further that the net cash proceeds
from such sales of Equity Interests described in clause (i)
of this clause (5) shall be excluded from clause 3(b) of
the preceding paragraph to the extent such proceeds have been or
are applied to the payment of Restricted Payments pursuant to
this clause (5);
(6) the payment of dividends or other distributions or the
making of loans or advances to any Parent in amounts required
for any Parent to pay franchise taxes and other fees required to
maintain its existence and provide for all other operating costs
of any Parent to the extent attributable to the ownership or
operation of the issuer and its Restricted Subsidiaries,
including, without limitation, in respect of director fees and
expenses, administrative, legal and accounting services provided
by third parties and other costs and expenses including all
costs and expenses with respect to filings with the SEC plus any
indemnification claims made by directors or officers of any
Parent attributable to the ownership or operation of the issuer
and its Restricted Subsidiaries;
(7) the payment of dividends or other distributions by the
issuer to any Parent in amounts required to pay the tax
obligations of any Parent attributable to the issuer and its
Subsidiaries determined as if the issuer and its Subsidiaries
had filed a separate consolidated, combined or unitary return
for the relevant taxing jurisdiction; provided that any refunds
received by any Parent attributable to the issuer or any of its
Subsidiaries shall promptly be returned by any Parent to the
issuer through a contribution to the common equity of, or the
purchase of common stock (other than Disqualified Stock) of the
issuer from, the issuer; and provided further that the amount of
any such contribution or purchase shall be excluded from clause
(3)(b) of the preceding paragraph; provided further that the
permitted payment pursuant to this clause (7) with respect
to any taxes of any Unrestricted Subsidiary for any taxable
period shall be limited to the amount actually paid with respect
to such period by such Unrestricted Subsidiary to the issuer or
its Restricted Subsidiaries for the purposes of paying such
consolidated, combined or similar taxes;
(8) repurchases of Capital Stock deemed to occur upon the
cashless exercise of stock options and warrants;
(9) other Restricted Payments not otherwise permitted
pursuant to this covenant in an aggregate amount not to exceed
$75.0 million;
(10) the declaration and payment of dividends and
distributions to holders of any class or series of Disqualified
Stock of the issuer or any of its Restricted Subsidiaries issued
or incurred in accordance with the covenant described below
under the caption Incurrence of Indebtedness
and Issuance of Preferred Stock;
(11) following the first Public Equity Offering of the
issuer or any Parent after the date of the Indenture, the
payment of dividends on the issuers common stock (and, in
the case of a Public Equity Offering of any Parent, solely for
the purpose of paying dividends on such Parents common
stock) in an amount not to exceed 6% per annum of the gross
proceeds of such Public Equity Offering received by or
contributed to the common equity capital of, the issuer (other
than any such gross proceeds constituting Excluded
Contributions);
(12) upon the occurrence of a Change of Control or Asset
Sale and within 60 days after completion of the offer to
repurchase Notes pursuant to the covenant described above under
the caption Repurchase at the Option of
Holders Change of Control and
Asset Sales (including the purchase of
all Notes tendered), any purchase or redemption of Indebtedness
of the issuer subordinated to the Notes that is required to be
repurchased or redeemed pursuant to the terms thereof as a
result of such Change of Control or Asset Sale, at a purchase
price not greater than 101% of the outstanding principal amount
thereof (plus accrued and unpaid interest);
(13) the payment of dividends or other distributions by the
issuer to any Parent in amounts required for any Parent to pay
any expenses incurred in connection with unconsummated offerings
of debt securities or Equity Interests of any Parent; and
173
(14) Restricted Payments that are made with Excluded
Contributions;
provided, however, that in the case of clauses (2), (3), (5),
(9), (10), (11), (12) and (13) above, no Default or
Event of Default has occurred and is continuing.
The amount of all Restricted Payments (other than cash) shall be
the fair market value on the date of the Restricted Payment of
the asset(s) or securities proposed to be transferred or issued
to or by the issuer or such Subsidiary, as the case may be,
pursuant to the Restricted Payment. The fair market value of any
assets or securities that are required to be valued by this
covenant shall, if the fair market value thereof exceeds
$10.0 million, be determined by the Board of Directors
whose resolution with respect thereto shall be delivered to the
Trustee. The Board of Directors determination must be
based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if the
fair market value exceeds $25.0 million. If any fairness
opinion or appraisal is required by the Indenture in connection
with any Restricted Payments, the issuer shall deliver to the
Trustee an Officers Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon
which the calculations required by this Restricted
Payments covenant were computed, together with a copy of
such fairness opinion or appraisal.
Notwithstanding the foregoing provisions of this covenant,
neither the issuer nor its Restricted Subsidiaries may make a
Restricted Payment (including the repurchase, redemption or
other acquisition or retirement for value of any Equity
Interests of the issuer or any distribution, loan or advance to
any Parent) for the purposes, directly or indirectly, of funding
the repurchase, redemption or other acquisition or retirement
for value of, or payment of dividends or distribution on, any
Equity Interests of, or making any Investment in the holder of
any Equity Interests in, any Parent, in each case by means of
utilization of the cumulative Restricted Payment credit provided
by the first paragraph of this covenant, or the exceptions
provided by clauses (1) or (9) of the second paragraph
of this covenant.
Incurrence
of Indebtedness and Issuance of Preferred Stock
The issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to
(collectively, incur) any Indebtedness (including
Acquired Debt), and the issuer will not issue any Disqualified
Stock and the issuer will not permit any of its Restricted
Subsidiaries to issue any Disqualified Stock or preferred stock;
provided, however, that the issuer and the Restricted
Subsidiaries may incur Indebtedness (including Acquired Debt) or
issue Disqualified Stock and the Restricted Subsidiaries may
issue preferred stock, if the Fixed Charge Coverage Ratio for
the issuers most recently ended four full fiscal quarters
for which internal financial statements are available
immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock or preferred
stock is issued would have been at least 2.00 to 1, determined
on a pro forma basis (including a pro forma application of the
net proceeds therefrom), as if the additional Indebtedness had
been incurred or Disqualified Stock or preferred stock had been
issued, as the case may be, at the beginning of such
four-quarter period; provided, however, that the aggregate
amount of Indebtedness or Disqualified Stock that may be
incurred and Preferred Stock that may be issued under this
paragraph by Restricted Subsidiaries that are not Guarantors
shall not exceed $50.0 million.
The first paragraph of this covenant will not prohibit the
incurrence of any of the following items of Indebtedness
(collectively, Permitted Debt):
(1) the incurrence by the issuer or any Restricted
Subsidiary of Indebtedness under (a) any ABL Facility in an
aggregate principal amount at any one time outstanding (with
letters of credit being deemed to have a principal amount equal
to the maximum potential liability of the issuer and the
Restricted Subsidiaries thereunder) not to exceed the greater of
(x) $325.0 million and (y) the Borrowing Base, in
each case, less (x) the aggregate amount of all Net
Proceeds of Asset Sales applied by the issuer or any Guarantor
to repay any Indebtedness under any ABL Facility (and to effect
a corresponding commitment reduction thereunder) pursuant to the
covenant described above under the caption
Certain Covenants Asset
Sales and (y) amounts outstanding under any Qualified
Receivables Transactions and (b) any Credit Facility
(including the Term Loan Facility) in an aggregate principal
amount at any one time outstanding not to exceed
$550.0 million, less the aggregate amount of all Net
Proceeds of Asset
174
Sales applied by the issuer or any Guarantor to repay any
Indebtedness under such Credit Facilities pursuant to the
covenant described above under the caption
Certain Covenants Asset
Sales;
(2) the incurrence by the issuer or any Restricted
Subsidiary of the Existing Indebtedness;
(3) the incurrence by the issuer and its Restricted
Subsidiaries of Indebtedness represented by the Notes to be
issued on the date of the Indenture and the related Note
Guarantees, the Exchange Notes and the related Note Guarantees
to be issued pursuant to the Registration Rights Agreement; and
any exchange notes issued by the issuer in exchange for
Additional Notes, if any, issued in compliance with the
Indenture and pursuant to a registered exchange offer and the
related Note Guarantees;
(4) the incurrence by the issuer or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease
Obligations, mortgage financings or purchase money obligations,
in each case, incurred for the purpose of financing all or any
part of the purchase price, or cost of construction or
improvement, of property (real or personal), plant or equipment
used in the business of the issuer or any of its Restricted
Subsidiaries, whether through the direct purchase of assets or
the Capital Stock of any Person owning such assets, in an
aggregate principal amount, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (4), not to
exceed, at any time outstanding, the greater of
(x) $30.0 million or (y) 3.0% of Consolidated
Tangible Assets of the issuer;
(5) the incurrence by the issuer or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange
for, or the net proceeds of which are used to refund, refinance
or replace Indebtedness (other than intercompany Indebtedness)
that is permitted by the Indenture to be incurred under the
first paragraph of this covenant or clauses (2), (3), (4), (5),
(15), or (16) of this paragraph;
(6) the incurrence by the issuer or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the
issuer and any of its Restricted Subsidiaries; provided,
however, that:
(a) if the issuer or any Guarantor is the obligor on such
Indebtedness, and such Indebtedness is owed to a Restricted
Subsidiary that is not a Guarantor, such Indebtedness must be
expressly subordinated to the prior payment in full in cash of
all obligations with respect to the Notes, in the case of the
issuer, or the Note Guarantee, in the case of a
Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a
Person other than the issuer or a Restricted Subsidiary thereof
and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either the issuer or a
Restricted Subsidiary thereof, shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the issuer or
such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (6);
(7) the incurrence by the issuer or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred in the
ordinary course of business for the purpose of fixing, hedging
or swapping interest rate, commodity price or foreign currency
exchange rate risk (or to reverse or amend any such agreements
previously made for such purposes), and not for speculative
purposes, and that do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of
fluctuations in interest rates, commodity prices or foreign
currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(8) the guarantee by the issuer or any Restricted
Subsidiary of Indebtedness of the issuer or a Restricted
Subsidiary of the issuer that was permitted to be incurred by
another provision of this covenant; provided that, in the case
of a guarantee of any Restricted Subsidiary that is not a
Guarantor, such Restricted Subsidiary complies with the covenant
described below under the caption Limitations on Issuances
of Guarantees of Indebtedness;
(9) the accrual of interest, the accretion or amortization
of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the
same terms, and the payment of dividends on Disqualified Stock
or preferred stock in the form of additional shares of the same
class of
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Disqualified Stock or preferred stock will not be deemed to be
an incurrence of Indebtedness or an issuance of Disqualified
Stock or preferred stock for purposes of this covenant;
provided, in each such case, that the amount thereof is included
in Fixed Charges of the issuer as accrued;
(10) the incurrence by the issuer or any Restricted
Subsidiary of obligations in respect of Cash Management Services;
(11) the incurrence by the issuer or any of its Restricted
Subsidiaries of Indebtedness constituting reimbursement
obligations with respect to letters of credit issued in the
ordinary course of business, including, without limitation,
letters of credit in respect of workers compensation
claims or self-insurance, or other Indebtedness with respect to
reimbursement type obligations regarding workers
compensation claims or self-insurance; provided, however, that,
upon the drawing of such letters of credit or the incurrence of
such Indebtedness, such obligations are reimbursed within
30 days following such drawing or incurrence;
(12) the incurrence by the issuer or any of its Restricted
Subsidiaries of Indebtedness arising from agreements of the
issuer or such Restricted Subsidiary providing for
indemnification, adjustment of purchase price or similar
obligations, in each case, incurred or assumed in connection
with the disposition of any business, assets or Capital Stock of
the issuer or a Restricted Subsidiary, other than guarantees of
Indebtedness incurred by any Person acquiring all or any portion
of such business, assets or a Subsidiary for the purpose of
financing such acquisition; provided that:
(a) such Indebtedness is not reflected on the balance sheet
of the issuer or any Restricted Subsidiary (contingent
obligations referred to in a footnote or footnotes to financial
statements and not otherwise reflected on the balance sheet will
not be deemed to be reflected on that balance sheet for purposes
of this clause (a)); and
(b) the maximum assumable liability in respect of that
Indebtedness shall at no time exceed the gross proceeds
including noncash proceeds (the fair market value of those
noncash proceeds being measured at the time received and without
giving effect to any subsequent changes in value) actually
received by the issuer
and/or that
Restricted Subsidiary in connection with that disposition;
(13) the issuance of Disqualified Stock or preferred stock
by any of the issuers Restricted Subsidiaries issued to
the issuer or another Restricted Subsidiary; provided that
(i) any subsequent issuance or transfer of any Equity
Interests that results in such Disqualified Stock or preferred
stock being held by a Person other than the issuer or a
Restricted Subsidiary thereof and (ii) any sale or other
transfer of any such shares of Disqualified Stock or preferred
stock to a Person that is not either the issuer or a Restricted
Subsidiary thereof shall be deemed, in each case, to constitute
an issuance of such shares of Disqualified Stock or preferred
stock that was not permitted by this clause (13);
(14) the incurrence by the issuer or any of its Restricted
Subsidiaries of obligations in respect of performance and surety
bonds and completion guarantees provided by the issuer or such
Restricted Subsidiary in the ordinary course of business;
(15) the incurrence of (a) Indebtedness or
Disqualified Stock of the issuer and Indebtedness, Disqualified
Stock or preferred stock of the issuer or any Restricted
Subsidiary equal to 100.0% of the net cash proceeds received by
the issuer since immediately after the Issue Date from the issue
or sale of Equity Interests of the issuer or cash contributed to
the capital of the issuer (in each case, other than Excluded
Contributions or proceeds of Disqualified Stock or sales of
Equity Interests to the issuer or any of its Subsidiaries or
amounts applied to make a Restricted Payment in accordance with
clause (2) of the second paragraph of the covenant
described under the caption Restricted
Payments) as determined in accordance with clause (3)(b)
of the first paragraph of the covenant described under the
caption Restricted Payments to the
extent such net cash proceeds or cash have not been applied
pursuant to such clauses to make Restricted Payments or to make
other Investments, payments or exchanges pursuant to the second
paragraph of the covenant described under the caption
Restricted Payments or to make Permitted
Investments (other than Permitted Investments specified in
clauses (1), (2) and (3) of the definition thereof)
and (b) Indebtedness or Disqualified Stock of the issuer or
any Restricted Subsidiary in
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an aggregate principal amount (or accreted value, as applicable)
at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (15), not to
exceed $75.0 million;
(16) the incurrence by the Foreign Restricted Subsidiaries
of the issuer of Indebtedness in an aggregate principal amount
at any one time outstanding (with letters of credit being deemed
to have a principal amount equal to the maximum potential
liability of the Restricted Subsidiaries thereunder), including
all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this
clause (16), not to exceed $75.0 million;
(17) the incurrence of any Indebtedness by a Receivables
Subsidiary that is not recourse to the issuer or any other
Restricted Subsidiary of the issuer (other than Standard
Securitization Undertakings) incurred in connection with a
Qualified Receivables Transaction; provided, that, the aggregate
amount of Indebtedness under this clause (17), when aggregated
with all Indebtedness outstanding under clause (1), shall not
exceed the maximum amount permitted under clause (1);
(18) the incurrence of Indebtedness (x) of the issuer
or a Restricted Subsidiary incurred to finance an acquisition or
(y) Persons that are acquired by the issuer or any
Restricted Subsidiary or merged into the issuer or Restricted
Subsidiary in accordance with the terms of this Indenture;
provided, that after giving effect to any such transaction,
including the incurrence
and/or
repayment or retirement of any Indebtedness, the Fixed Charge
Coverage Ratio would be equal to or greater than the Fixed
Charge Coverage Ratio immediately prior to such transaction;
(19) contingent liabilities arising out of endorsements of
checks and other negotiable instruments for deposit or
collection in the ordinary course of business;
(20) the incurrence by the issuer of Indebtedness to effect
the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the issuer or any Parent,
in each case held by any former or current employees, officers,
directors or consultants of the issuer or any of its Restricted
Subsidiaries or their respective estates, spouses, former
spouses or family members under any management equity plan or
stock option or other management or employee benefit
plan-upon
the death, disability or termination of employment of such
Persons, in an aggregate amount at any one time outstanding not
to exceed the maximum amount of such acquisitions pursuant to
clause (5) of the covenant described under the caption
Restricted Payments;
(21) the incurrence of Indebtedness of the issuer or any
Restricted Subsidiary supported by a letter of credit issued
pursuant to an ABL Facility in a principal amount not in excess
of the stated amount of such letter of credit; and
(22) contingent liabilities arising out of endorsements of
checks and other negotiable instruments for deposit or
collection in the ordinary course of business.
For purposes of determining compliance with this
Incurrence of Indebtedness and Issuance of Preferred
Stock covenant, in the event that any proposed
Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1)
through (22) above, or is entitled to be incurred pursuant
to the first paragraph of this covenant, the issuer will be
permitted to classify such item of Indebtedness on the date of
its incurrence, and from time to time may reclassify, in any
manner that complies with this covenant at such time.
Indebtedness under the ABL Facility or the Term Loan Facility on
the date of the Indenture shall be deemed to have been incurred
on such date in reliance on the exception provided by
clause (1) of the definition of Permitted Debt.
Liens
The Indenture provides that the issuer will not, and will not
permit any Restricted Subsidiary to, directly or indirectly,
create, Incur or suffer to exist any Lien (other than Permitted
Liens) on any asset or property of the issuer or such Restricted
Subsidiary, or any income or profits therefrom, or assign or
convey any right to receive income therefrom, that secures any
Obligations of the issuer or such Restricted Subsidiary, unless
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(1) in the case of Liens securing Subordinated
Indebtedness, the notes or any applicable Note Guarantee is
secured by a Lien on such assets of the issuer or such
Restricted Subsidiary and proceeds thereof that is senior in
priority to such Liens; or (2) in all other cases, the
notes or the applicable Note Guarantee is equally and ratably
secured with or prior to such Obligation with a Lien on the same
assets of the issuer or such Restricted Subsidiary, as the case
may be.
The preceding paragraph will not require the issuer or any
Restricted Subsidiary of the issuer to secure the notes if the
relevant Lien consists of a Permitted Lien. Any Lien which is
granted to secure the notes or such Note Guarantee under the
preceding paragraph shall be automatically released and
discharged at the same time as the release of the Lien (other
than a release following enforcement of remedies in respect of
such Lien or the Obligations secured by such Lien) that gave
rise to the obligation to secure the notes or such Note
Guarantee under the preceding paragraph.
Dividend
and Other Payment Restrictions Affecting Restricted
Subsidiaries
The issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to
exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its
Capital Stock to the issuer or any of its Restricted
Subsidiaries or pay any indebtedness owed to the issuer or any
of its Restricted Subsidiaries;
(2) make loans or advances to the issuer or any of its
Restricted Subsidiaries; or
(3) transfer any of its properties or assets to the issuer
or any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to
encumbrances or restrictions existing under or by reason of:
(1) Existing Indebtedness, the ABL Credit Agreement, the
Term Loan Credit Agreement and the 2018 Notes Indenture;
(2) the Indenture, the Notes and the Note Guarantees or by
other Indebtedness of the issuer or of a Guarantor which is pari
passu in right of payment with the Notes or Note Guarantees, as
applicable, incurred under an indenture pursuant to the covenant
described above under the caption Incurrence
of Indebtedness and Issuance of Preferred Stock; provided
that the encumbrances and restrictions are no more restrictive,
taken as a whole, than those contained in the Indenture;
(3) applicable law or regulation;
(4) any agreements or instruments governing Indebtedness or
Capital Stock of a Person acquired by the issuer or any of its
Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness or Capital
Stock was incurred or issued, as the case may be, in connection
with or in contemplation 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, or
the property or assets of the Person, so acquired; provided
that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred;
(5) customary non-assignment provisions in leases, licenses
and other agreements entered into in the ordinary course of
business;
(6) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions on the
property so acquired of the nature described in clause (3)
of the preceding paragraph;
(7) an agreement entered into for the sale or disposition
of Capital Stock or assets of a Restricted Subsidiary or an
agreement entered into for the sale of specified assets or the
granting of an option to purchase specified assets (in either
case, so long as such encumbrance or restriction, by its terms,
terminates on the earlier of the termination of such agreement
or the consummation of such agreement and so long as such
restriction applies only to the Capital Stock or assets to be
sold);
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(8) Permitted Refinancing Indebtedness, provided that the
encumbrances and restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more
restrictive, taken as a whole, than those contained in the
agreements governing the Indebtedness being refinanced;
(9) Permitted Liens securing Indebtedness that limit the
right of the debtor to dispose of the assets subject to such
Lien;
(10) customary limitations on the disposition or
distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course
of business;
(11) any Purchase Money Note, or other Indebtedness or
contractual requirements of a Receivables Subsidiary in
connection with a Qualified Receivables Transaction; provided
that such restrictions only apply to such Receivables Subsidiary;
(12) cash or other deposits or net worth imposed by
customers or agreements entered into in the ordinary course of
business;
(13) customary provisions in joint venture agreements;
(14) Indebtedness of a Foreign Restricted Subsidiary
permitted to be incurred under the Indenture; and
(15) any encumbrances or restrictions imposed by any
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings of the
agreements, contracts, instruments or obligations referred to in
clauses (1) through (14) above; provided that such
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are, in
the good faith judgment of the issuers board of directors,
not materially more restrictive, taken as a whole, with respect
to such dividend and other payment restrictions than the
dividend or other payment restrictions contained in the
contracts, agreements, instruments or obligations referred to in
clauses (1) through (14) above prior to such
amendment, modification, restatement, renewal, increase,
supplement, refunding, replacement or refinancing; provided
further, however, that with respect to contracts, agreements,
instruments or obligations existing on the Issue Date, any such
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings contain,
in the good faith judgment of the issuers board of
directors, dividend and other payment restrictions that are not
materially more restrictive, taken as a whole, than such
restrictions contained in such contracts, instruments or
obligations as in effect on the Issue Date.
Merger,
Consolidation or Sale of Assets
The issuer will not, directly or indirectly, consolidate or
merge with or into another Person (whether or not the issuer is
the surviving corporation), and the issuer will not sell,
assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the issuer and
its Restricted Subsidiaries taken as a whole, in one or more
related transactions, to another Person (including by way of
consolidation or merger), unless:
(1) either: (a) the issuer is the surviving
corporation; or (b) the Person formed by or surviving any
such consolidation or merger (if other than the issuer) or to
which such sale, assignment, transfer, conveyance or other
disposition shall have been made is a corporation, partnership
or limited liability company organized or existing under the
laws of the United States, any state thereof or the District of
Columbia; provided that, in the case such Person is a limited
liability company or a partnership, such Person will form a
Wholly Owned Subsidiary that is a corporation and cause such
Subsidiary to become a co-issuer of the Notes;
(2) the Person formed by or surviving any such
consolidation or merger (if other than the issuer) or the Person
to which such sale, assignment, transfer, conveyance or other
disposition shall have been made assumes all the obligations of
the issuer, as the case may be, under the Notes, the Indenture
and the Registration Rights Agreement pursuant to agreements
reasonably satisfactory to the Trustee;
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(3) immediately after such transaction and any related
financing transactions, no Default or Event of Default
exists; and
(4) the issuer or the Person formed by or surviving any
such consolidation or merger (if other than the issuer), or to
which such sale, assignment, transfer, conveyance or other
disposition shall have been made, will, on the date of such
transaction after giving pro forma effect thereto and any
related financing transactions as if the same had occurred at
the beginning of the applicable four-quarter period be permitted
to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption
Incurrence of Indebtedness and Issuance of
Preferred Stock, or if not, the Fixed Charge Coverage
Ratio on such basis is higher than the Fixed Charge Coverage
Ratio immediately prior to such transactions.
Notwithstanding clauses (3) and (4) of the preceding
paragraph, the issuer may merge or consolidate with a Restricted
Subsidiary incorporated solely for the purposes of organizing
the issuer in another jurisdiction. The Indenture also provides
for similar provisions relating to any consolidation, merger or
sale, assignment, transfer, conveyance or disposal of all or
substantially all of the properties or assets of a Guarantor,
excluding clause (4) above.
In addition, neither the issuer nor any Restricted Subsidiary
may, directly or indirectly, lease all or substantially all of
its properties or assets, in one or more related transactions,
to any other Person. This Merger, Consolidation or Sale of
Assets covenant will not apply to a sale, assignment,
transfer, conveyance or other disposition of assets between or
among the issuer and any of its Restricted Subsidiaries that are
Guarantors.
Transactions
with Affiliates
The issuer will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate
involving aggregate consideration in excess of $5.0 million
on or after the Issue Date (each, an Affiliate
Transaction), unless:
(1) such Affiliate Transaction is on terms that are no less
favorable to the issuer or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable
transaction by the issuer or such Restricted Subsidiary with an
unrelated Person; and
(2) the issuer delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
in excess of $10.0 million, a resolution of the Board of
Directors set forth in an Officers Certificate certifying
that such Affiliate Transaction complies with this covenant and
that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
in excess of $25.0 million, an opinion as to the fairness
to the issuer or such Restricted Subsidiary of such Affiliate
Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national
standing (an Independent Financial Advisor).
The following items shall not be deemed to be Affiliate
Transactions and, therefore, will not be subject to the
provisions of the prior paragraph:
(1) any consulting, severance or employment agreement or
arrangement entered into by the issuer or any of its Restricted
Subsidiaries approved by a majority of the disinterested members
of the Board of Directors of the issuer;
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(2) transactions (i) between or among the issuer
and/or the
Guarantors, (ii) between or among Restricted Subsidiaries
that are not Guarantors; and (iii) between or among the
issuer and the Guarantors, on the one hand, and Restricted
Subsidiaries that are not Guarantors, on the other hand, in the
ordinary course of business;
(3) payment of reasonable directors fees to directors of
the issuer and any Parent and the provision of customary
indemnities to directors, officers employees or consultants of
the issuer, and any Parent or any Restricted Subsidiary;
(4) issuances and sales of Equity Interests (other than
Disqualified Stock) to Affiliates of the issuer;
(5) any tax sharing agreement or arrangement and payments
pursuant thereto among the issuer and its Subsidiaries and any
other Person with which the issuer or its Subsidiaries is
required or permitted to file a consolidated, combined or
unitary tax return or with which the issuer or any of its
Restricted Subsidiaries is or could be part of a consolidated,
combined or unitary group for tax purposes in amounts not
otherwise prohibited by the Indenture;
(6) Restricted Payments that are permitted by the
provisions of the Indenture described above under the caption
Restricted Payments or any Permitted
Investment;
(7) loans to employees that are approved in good faith by a
majority of the Board of Directors of the issuer in an amount
not to exceed $5.0 million outstanding at any time and
advances and expense reimbursements to employees in the ordinary
course of business;
(8) agreements (and payments relating thereto) existing on
the Issue Date and described in this offering memorandum as the
same may be amended, modified or replaced from time to time, so
long as any amendment, modification or replacement is not
materially less favorable to the issuer and its Restricted
Subsidiaries than the agreement in effect on the Issue Date;
(9) transactions with a joint venture engaged in a
Permitted Business; provided that all the outstanding ownership
interests of such joint venture are owned only by the issuer,
its Restricted Subsidiaries and Persons who are not Affiliates
of the issuer;
(10) transactions between a Receivables Subsidiary and any
Person in which the Receivables Subsidiary has an Investment;
(11) transactions with customers, clients, suppliers or
purchasers or sellers of goods, in each case in the ordinary
course of business; and
(12) transactions which have been approved by a majority of
the disinterested members of the Board of Directors and with
respect to which an Independent Financial Advisor has delivered
an opinion as to the fairness to the issuer or such Restricted
Subsidiary of such transaction from a financial point of view.
Additional
Note Guarantees
If on or after the date of the Indenture the issuer or any of
its Restricted Subsidiaries acquires or creates another Domestic
Subsidiary (other than a Receivables Subsidiary, an Immaterial
Subsidiary or a non-Wholly Owned Subsidiary unless such
non-Wholly Owned Subsidiary guarantees any Credit Facilities or
any capital markets debt securities of the Issuer or any
Guarantor) that Guarantees any Indebtedness of the issuer or any
Restricted Subsidiary, then that newly acquired or created
Domestic Subsidiary must become a Guarantor and execute a
supplemental indenture and deliver an Opinion of Counsel to the
Trustee within 20 Business Days of the date on which it was
acquired or created. At the issuers option, the issuer may
cause any Foreign Restricted Subsidiary to Guarantee the Notes.
Each Guarantee by a Restricted Subsidiary may be released as
described under Note Guarantees.
181
Designation
of Restricted and Unrestricted Subsidiaries
The Board of Directors of the issuer may designate any
Restricted Subsidiary to be an Unrestricted Subsidiary if that
designation would not cause a Default; provided that in no event
shall there be any Unrestricted Subsidiaries on or immediately
following the date of the Indenture. If a Restricted Subsidiary
is designated as an Unrestricted Subsidiary, the aggregate fair
market value of all outstanding Investments owned by the issuer
and its Restricted Subsidiaries in the Subsidiary so designated
(after giving effect to any sale of Equity Interests of such
Subsidiary in connection with such designation) will be deemed
to be an Investment made as of the time of such designation and
will either reduce the amount available for Restricted Payments
under the first paragraph of the covenant described above under
the caption Restricted Payments or
reduce the amount available for future Investments under one or
more clauses of the definition of Permitted
Investments. That designation will only be permitted if
such Investment would be permitted at that time and if such
Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. The Board of Directors of the issuer
may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be
deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the issuer of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be
permitted if (1) such Indebtedness is permitted under the
covenant described under the caption
Incurrence of Indebtedness and Issuance of
Preferred Stock calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter
reference period; and (2) no Default or Event of Default
would be in existence following such designation.
Limitations
on Issuances of Guarantees of Indebtedness
The issuer will not permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee any other Indebtedness of
the issuer or any other Restricted Subsidiary (other than a
Guarantee by a Foreign Restricted Subsidiary securing the
payment of Indebtedness of another Foreign Restricted
Subsidiary) unless either (1) such Restricted Subsidiary is
a Guarantor or (2) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture
providing for the Guarantee of the payment of the Notes by such
Restricted Subsidiary, which Guarantee shall be senior to or
pari passu with such Subsidiarys Guarantee of such other
Indebtedness.
Notwithstanding the preceding paragraph, any Note Guarantee will
provide by its terms that it will be automatically and
unconditionally released and discharged under the circumstances
described above under the caption Note
Guarantees. The form of the Note Guarantee will be
attached as an exhibit to the Indenture.
Business
Activities
The issuer will not, and will not permit any Restricted
Subsidiary to, engage in any business other than Permitted
Businesses, except as would not be material to the issuer and
its Restricted Subsidiaries, taken as a whole.
Payments
for Consent
The issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, pay or cause to be paid
any consideration to or for the benefit of any Holder of 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 and is paid to
all Holders of the Notes that consent, waive or agree to amend
in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
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Reports
Whether or not required by the Commission, so long as any Notes
are outstanding the issuer will furnish to the Trustee and
Cede & Co., as the nominee of the DTC, on behalf of
the Holders of Notes, within the time periods specified in the
Commissions rules and regulations for a non-accelerated
filer:
(1) all quarterly and annual financial information that
would be required to be contained in a filing with the
Commission on
Forms 10-Q
and 10-K if
the issuer were required to file such Forms, including a
Managements Discussion and Analysis of Financial
Condition and Results of Operations and, with respect to
the annual information only, a report on the annual financial
statements by the issuers certified independent
accountants; and
(2) all current reports that would be required to be filed
with the Commission on Form
8-K if the
issuer were required to file such reports;
provided, that if the issuer files such reports electronically
with the Commissions Electronic Data Gathering Analysis
and Retrieval System (or any successor system) within such time
periods, the issuer shall not be required under the Indenture to
furnish such reports as specified above.
In addition, following the date by which the issuer is required
to consummate the exchange offer contemplated by the
Registration Rights Agreement, whether or not required by the
Commission, the issuer will file a copy of all of the
information and reports referred to in clauses (1) and
(2) above with the Commission for public availability
within the time periods specified in the Commissions rules
and regulations (unless the Commission will not accept such a
filing) and make such information available to securities
analysts and prospective investors upon request. In addition,
the issuer and the Guarantors have agreed that, for so long as
any Notes (but not the Exchange Notes) remain outstanding, they
will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under
the Securities Act.
In addition, if at any time any Parent becomes a Guarantor
(there being no obligation of any Parent to do so), holds no
material assets other than cash, Cash Equivalents and the
Capital Stock of the issuer or any direct or indirect parent of
the issuer (and performs only the related incidental activities
associated with such ownership) and complies with the
requirements of
Rule 3-10
of
Regulation S-X
promulgated by the Commission (or any successor provision), the
reports, information and other documents required to be filed
and furnished to holders of the Notes pursuant to this covenant
may, at the option of the issuer, be filed by and be those of
such Parent rather than the issuer.
To the extent any such information is not so filed or furnished,
as applicable, within the time periods specified above and such
information is subsequently filed or furnished, as applicable,
the issuer will be deemed to have satisfied its obligations with
respect thereto at such time and any Default with respect
thereto shall be deemed to have been cured; provided that such
cure shall not otherwise affect the rights of the Holders under
Events of Default and Remedies if Holders of at
least 25% in principal amount of the then total outstanding
Notes have declared the principal, premium, if any, interest and
any other monetary obligations on all the then outstanding Notes
to be due and payable immediately and such declaration shall not
have been rescinded or cancelled prior to such cure.
Events of
Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of
interest on, or Additional Interest with respect to, the Notes;
(2) default in payment when due of the principal of, or
premium, if any, on the Notes;
(3) failure by the issuer or any of its Restricted
Subsidiaries to comply with the provisions described under the
captions Repurchase at the Option of
Holders Change of Control,
Certain Covenants Asset
Sales or Certain Covenants
Merger, Consolidation or Sale of Assets;
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(4) failure by the issuer or any of its Restricted
Subsidiaries for 60 days after notice by the Trustee or by
Holders of at least 25% in principal amount of the then
outstanding Notes to comply with any of the other agreements in
the Indenture;
(5) 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 issuer
or any of its Restricted Subsidiaries (or the payment of which
is guaranteed by the issuer or any of its Restricted
Subsidiaries) whether such Indebtedness or guarantee now exists,
or is created after the date of the Indenture, if that default:
(a) is caused by a failure to make any payment when due at
the final maturity (after any applicable grace period) of such
Indebtedness (a Payment Default); or
(b) results in the acceleration of such Indebtedness prior
to its express maturity;
and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default
or the maturity of which has been so accelerated, aggregates
$50.0 million or more;
(6) failure by the issuer or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of
$50.0 million (net of any amount covered by insurance),
which judgments are not paid, discharged or stayed for a period
of 60 days after such judgments have become final and
non-appealable and, in the event such judgment is covered by
insurance, an enforcement proceeding has been commenced by any
creditor upon such judgment or decree that is not promptly
stayed;
(7) except as permitted by the Indenture, any Note
Guarantee of a Guarantor that is a Significant Subsidiary, or
the Note Guarantees of any group of Guarantors that, taken
together, would constitute a Significant Subsidiary, shall be
held in any judicial proceeding to be unenforceable or invalid
or shall cease for any reason to be in full force and effect or
any such Guarantor or group of Guarantors, or any Person acting
on behalf of any such Guarantor or group of Guarantors, shall
deny or disaffirm its obligations under its Note
Guarantee; and
(8) certain events of bankruptcy or insolvency with respect
to the issuer or any of its Significant Subsidiaries or any
group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary.
In the case of an Event of Default arising from certain events
of bankruptcy or insolvency, with respect to the issuer, all
outstanding Notes will become due and payable immediately
without further action or notice. If any other Event of Default
occurs and is continuing, the Trustee or the Holders of at least
25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately by
notice in writing to the issuer specifying the respective Event
of Default.
Holders of the Notes may not enforce the Indenture or the Notes
except as provided in such documents. Subject to certain
limitations, Holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of
principal or interest or Additional Interest) if it determines
that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the
Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Notes waive any existing Default or
Event of Default and its consequences under the Indenture except
a continuing Default or Event of Default in the payment of
interest or Additional Interest on, or the principal of, the
Notes.
The issuer is required to deliver to the Trustee annually a
statement regarding compliance with the Indenture. Upon becoming
aware of any Default or Event of Default, the issuer is required
to deliver to the Trustee a statement specifying such Default or
Event of Default.
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No
Personal Liability of Directors, Officers, Employees and
Stockholders
No director, officer, employee, incorporator, member, partner,
or stockholder of the issuer or any Subsidiary, or any Parent
have any liability for any obligations of the issuer or the
Guarantors under the Notes, the Indenture, the Note Guarantees
or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting
a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes.
The waiver may not be effective to waive liabilities under the
federal securities laws, and it is the view of the Commission
that such waiver is against public policy.
Legal
Defeasance and Covenant Defeasance
The issuer may, at its option and at any time, elect to have all
of its obligations discharged with respect to the outstanding
Notes and all obligations of the Guarantors discharged with
respect to their Note Guarantees (Legal Defeasance)
except for:
(1) the rights of Holders of outstanding Notes to receive
payments in respect of the principal of, or interest or premium
and Additional Interest, if any, on such Notes when such
payments are due from the trust referred to below;
(2) the issuers obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance
of an office or agency for payment and money for security
payments held in trust;
(3) the rights, powers, trusts, duties and immunities of
the Trustee, and the issuers and the Guarantors
obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the issuer may, at its option and at any time,
elect to have the obligations of the issuer and the Guarantors
released with respect to certain covenants that are described in
the Indenture (Covenant Defeasance) and thereafter
any omission to comply with those covenants shall not constitute
a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including
nonpayment, bankruptcy, receivership, rehabilitation and
insolvency events) described under Events of Default
will no longer constitute an Event of Default with respect to
the Notes.
In order to exercise either Legal Defeasance or Covenant
Defeasance:
(1) the issuer must irrevocably deposit with the Trustee,
in trust, for the benefit of the Holders of the Notes, cash in
U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, or interest and
premium and Additional Interest, if any, on the outstanding
Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the issuer must specify whether
the Notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, the issuer shall have
delivered to the Trustee an Opinion of Counsel reasonably
acceptable to the Trustee confirming that (a) the issuer
has received from, or there has been published by, the Internal
Revenue Service a ruling or (b) since the date of the
Indenture, there has been a change in the applicable federal
income tax law, in either case, to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the Holders
of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the issuer shall
have delivered to the Trustee an Opinion of Counsel reasonably
acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant
185
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and
be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be
applied to such deposit and the grant of any Lien securing such
borrowing);
(5) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default
under any material agreement or instrument to which the issuer
or any of its Subsidiaries is a party or by which the issuer or
any of its Subsidiaries is bound;
(6) the issuer must deliver to the Trustee an
Officers Certificate stating that the deposit was not made
by the issuer with the intent of preferring the Holders of Notes
over the other creditors of the issuer with the intent of
defeating, hindering, delaying or defrauding creditors of the
issuer or others; and
(7) the issuer must deliver to the Trustee an
Officers Certificate and an Opinion of Counsel, each
stating that all conditions precedent relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
Amendment,
Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the
Indenture or the Notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal
amount of the Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of,
or tender offer or exchange offer for, Notes), and any existing
default or compliance with any provision of the Indenture or the
Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes
(including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for,
Notes).
Without the consent of each Holder affected, an amendment or
waiver may not (with respect to any Notes held by a
non-consenting Holder):
(1) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the Stated Maturity
of any Note or alter the provisions relating to the redemption
price of any Note at any time;
(3) reduce the rate of or change the time for payment of
interest on any Note;
(4) waive a Default or Event of Default in the payment of
principal of, or interest or premium, or Additional Interest, if
any, on the Notes (except a rescission of acceleration of the
Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment
default that resulted from such acceleration);
(5) make any Note payable in money other than
U.S. dollars;
(6) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of
Notes to receive payments of principal of, or interest or
premium or Additional Interest, if any, on the Notes;
(7) make any change in the preceding amendment and waiver
provisions; or
(8) expressly subordinate such Note or any Note Guarantee
to any other Indebtedness of the issuer or any Guarantor or make
any other change in the ranking or priority of any Note that
would adversely affect the Holders.
Notwithstanding the preceding, without the consent of any Holder
of Notes, the issuer, the Guarantors and the Trustee may amend
or supplement the Indenture or the Notes:
(1) to cure any ambiguity, defect or inconsistency;
186
(2) to provide for uncertificated Notes in addition to or
in place of certificated Notes;
(3) to provide for the assumption of the issuers or
any Guarantors obligations to Holders of Notes in the case
of a merger or consolidation or sale of all or substantially all
of the issuers or such Guarantors assets;
(4) to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not
adversely affect in any material respect the legal rights of any
such Holder;
(5) to comply with requirements of the Commission in order
to effect or maintain the qualification of the Indenture under
the TIA;
(6) to provide for the issuance of Additional Notes in
accordance with the Indenture;
(7) to add Guarantors with respect to the Notes or to
secure the Notes;
(8) to comply with the rules of any applicable securities
depositary;
(9) to provide for a successor trustee in accordance with
the terms of the Indenture or to otherwise comply with any
requirement of the Indenture; or
(10) to conform the text of the Indenture or the Notes to
any provision of this Description of the Notes to the extent
that such provision was intended to be a verbatim recitation of
the text of this Description of the Notes.
The consent of the Holders is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the
proposed amendment.
After an amendment under the Indenture becomes effective, the
issuer is required to mail to the respective Holders a notice
briefly describing such amendment. However, the failure to give
such notice to all Holders entitled to receive such notice, or
any defect therein, will not impair or affect the validity of
the amendment.
Satisfaction
and Discharge
The Indenture will be discharged and will cease to be of further
effect as to all Notes issued thereunder, when the issuer or any
Guarantor has paid or caused to be paid all sums payable by it
under the Indenture and, either:
(1) all Notes that have been authenticated (except lost,
stolen or destroyed Notes that have been replaced or paid and
Notes for whose payment money has theretofore been deposited in
trust and thereafter repaid to the issuer) have been delivered
to the Trustee for cancellation; or
(2) (a) all Notes that have not been delivered to the
Trustee for cancellation have become due and payable by reason
of the making of a notice of redemption or otherwise or will
become due and payable within one year, including as a result of
a redemption notice properly given pursuant to the Indenture,
and the issuer or any Guarantor has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust
solely for the benefit of the Holders, cash in
U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient
without consideration of any reinvestment of interest, to pay
and discharge the entire Indebtedness on the Notes not delivered
to the Trustee for cancellation for principal, premium and
Additional Interest, if any, and accrued interest to the date of
maturity or redemption; (b) no Default or Event of Default
shall have occurred and be continuing on the date of such
deposit or shall occur as a result of such deposit and such
deposit will not result in a breach or violation of, or
constitute a default under, any other instrument to which the
issuer or any Guarantor is a party or by which the issuer or any
Guarantor is bound; and (c) the issuer has delivered
irrevocable instructions to the Trustee under the Indenture to
apply the deposited money toward the payment of the Notes at
maturity or on the redemption date, as the case may be.
In addition, the issuer must deliver an Officers
Certificate and an Opinion of Counsel to the Trustee stating
that all conditions precedent to satisfaction and discharge have
been satisfied.
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Concerning
the Trustee
If the Trustee becomes a creditor of the issuer or any
Guarantor, the Indenture limits its right to obtain payment of
claims in certain cases, or to realize on 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 acquires 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 a majority in principal amount of the 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, the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man 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
Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
Governing
Law
The Indenture and the Notes will be governed by, and construed
in accordance with, the laws of the State of New York.
Certain
Definitions
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all
such terms, as well as any other capitalized terms used herein
for which no definition is provided.
2018 Notes means the issuers
10.0% senior notes due 2018.
2018 Notes Indenture means the indenture
dated as of November 23, 2010 governing the 2018 Notes.
ABL Credit Agreement means the Amended and
Restated Credit Agreement among the issuer, certain Subsidiaries
of the issuer, the financial institutions from time to time
party thereto, Bank of America, N.A., as Administrative Agent
and Bank of America, N.A. and General Electric Capital
Corporation, as Collateral Agents, dated as of December 17,
2010.
ABL Facility means the asset-based revolving
credit facility under the ABL Credit Agreement, including any
related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced, restated,
substituted or refinanced in whole or in part from time to time,
including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the
amount of available borrowings thereunder or adding Subsidiaries
of the issuer as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or
any successor or replacement agreement and whether by the same
or any other agent, lender or group of lenders.
Acquired Debt means, with respect to any
specified Person:
(1) Indebtedness of any other Person existing at the time
such other Person is merged with or into or became a Subsidiary
of such specified Person, whether or not such Indebtedness is
incurred in connection with, or in contemplation of, such other
Person merging with or into, or becoming a Subsidiary of, such
specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
Affiliate of any specified Person means any
other Person directly or indirectly controlling or controlled by
or under direct or indirect common control with such specified
Person. For purposes of this definition, control, as
used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether
through the ownership of
188
voting securities, by agreement or otherwise. For purposes of
this definition, the terms controlling,
controlled by and under common control
with shall have correlative meanings.
Asset Acquisition means (a) an
Investment by the issuer or any of its Restricted Subsidiaries
in any other Person if, as a result of such Investment, such
Person shall become a Restricted Subsidiary of the issuer, or
shall be merged with or into the issuer or any Restricted
Subsidiary of the issuer, or (b) the acquisition by the
issuer or any Restricted Subsidiary of the issuer of all or
substantially all of the assets of any other Person or any
division or line of business of any other Person.
Asset Sale means:
(1) the sale, lease, conveyance or other disposition of any
assets or rights of the issuer or any Restricted Subsidiary;
provided that the sale, conveyance or other disposition of all
or substantially all of the assets of the issuer and its
Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption
Repurchase at the Option of
Holders Change of Control
and/or the
provisions described above under the caption
Certain Covenants Merger,
Consolidation or Sale of Assets and not by the provisions
of the Asset Sale covenant; and
(2) the issuance or sale of Equity Interests in or by any
of the issuers Restricted Subsidiaries (other than
directors qualifying shares or shares required by
applicable law to be held by Persons other than the issuer or a
Restricted Subsidiary).
Notwithstanding the preceding, the following items shall not be
deemed to be Asset Sales:
(1) any single transaction or series of related
transactions that involves assets having a fair market value of
less than $10.0 million;
(2) a transfer of assets (i) between or among the
issuer and Restricted Subsidiaries that are Guarantors or
(ii) between or among Foreign Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Restricted
Subsidiary that is a Guarantor to the issuer or to another
Restricted Subsidiary that is a Guarantor;
(4) the sale, lease, sublease, license, sublicense or
consignment of equipment, inventory or other assets in the
ordinary course of business;
(5) the sale or other disposition of cash or Cash
Equivalents;
(6) a Restricted Payment or Permitted Investment that is
permitted by the covenant described above under the caption
Certain Covenants Restricted
Payments;
(7) the licensing of intellectual property to third Persons
on customary terms as determined by the Board of Directors in
good faith;
(8) any sale of accounts receivable, or participation
therein, in connection with any Qualified Receivables
Transaction;
(9) any sale or disposition of any property or equipment
that has become damaged, worn-out, obsolete, condemned, given
over in lieu of deed or otherwise unsuitable or not required for
the ordinary course of the business of the issuer and its
Restricted Subsidiaries;
(10) any sale of Equity Interests in, or Indebtedness or
other securities of, an Unrestricted Subsidiary;
(11) any foreclosures of assets; and
(12) any disposition of an account receivable in connection
with the collection or compromise thereof.
Attributable Debt in respect of a sale and
leaseback transaction means, at the time of determination, the
present value of the obligation of the lessee for net rental
payments during the remaining term of the lease included in such
sale and leaseback transaction, including any period for which
such lease has been extended
189
or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the
rate of interest implicit in such transaction, determined in
accordance with GAAP.
Beneficial Owner has the meaning assigned to
such term in
Rule 13d-3
and
Rule 13d-5
under the Exchange Act, except that in calculating the
beneficial ownership of any particular person (as
that term is used in Section 13(d)(3) of the Exchange Act),
such person shall be deemed to have beneficial
ownership of all securities that such person has the
right to acquire by conversion or exercise of other securities,
whether such right is currently exercisable or is exercisable
only upon the occurrence of a sub sequent condition. The terms
Beneficially Owns and Beneficially Owned
shall have a corresponding meaning.
Board of Directors means:
(1) with respect to a corporation, the board of directors
of the corporation or a committee thereof authorized to exercise
the power of the board of directors of such corporation;
(2) with respect to a partnership, the Board of Directors
of the general partner of the partnership; and
(3) with respect to any other Person, the board or
committee of such Person serving a similar function.
Borrowing Base means, as of any date, an
amount equal to:
(1) 67% of the amount of all accounts receivable owned by
the issuer and its Restricted Subsidiaries as of the end of the
most recent fiscal quarter preceding such date; plus
(2) 50% of the amount of all inventory owned by the issuer
and its Restricted Subsidiaries as of the end of the most recent
fiscal quarter preceding such date;
all calculated on a consolidated basis and in accordance with
GAAP.
Capital Lease Obligation means, at the time
any determination thereof is to be made, the amount of the
liability in respect of a capital lease that would at that time
be required to be capitalized on a balance sheet in accordance
with GAAP.
Capital Stock means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any
and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock;
(3) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or
limited); and
(4) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses
of, or distributions of assets of, the issuing Person.
Cases means the cases filed by the Debtors in
the United States Bankruptcy Court for the District of Delaware
under chapter 11 of the United States Bankruptcy Code (Case
No. 09-13611).
Cash Equivalents means:
(1) United States dollars or, in the case of any Foreign
Restricted Subsidiary, such local currencies held by it from
time to time in the ordinary course of business;
(2) securities issued or directly and fully guaranteed or
insured by the United States government or any agency or
instrumentality of the United States, Canada or any member
nation of the European Union having maturities of not more than
360 days from the date of acquisition;
(3) certificates of deposit, time deposits and eurodollar
time deposits with maturities of twelve months or less from the
date of acquisition, bankers acceptances with maturities
not exceeding six
190
months and overnight bank deposits, in each case, with any
domestic commercial bank having capital and surplus in excess of
$500.0 million;
(4) repurchase obligations for underlying securities of the
types described in clauses (2) and (3) above entered
into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the rating of
P-1 or
better from Moodys Investors Service, Inc.
(Moodys) or
A-1 or
better from Standard & Poors Rating Services
(S&P) and in each case maturing within twelve
months after the date of acquisition;
(6) readily marketable direct obligations issued by any
state of the United States or any political subdivision thereof
having one of the two highest rating categories from either
Moodys or S&P with maturities of twelve months or
less from the date of acquisition;
(7) instruments equivalent to those referred to in
clauses (1) to (6) above denominated in euro or any
other foreign currency comparable in credit quality and tenor to
those referred to above and customarily used by corporations for
cash management purposes in any jurisdiction outside the United
States to the extent reasonably required in connection with any
business conducted by any Restricted Subsidiary organized in
such jurisdiction; and
(8) investments in funds which invest substantially all of
their assets in Cash Equivalents of the kinds described in
clauses (1) through (7) of this definition.
Cash Management Services means any or the
following to the extent not constituting a line of credit (other
than an overnight overdraft facility that is not in default):
ACH transactions, treasury
and/or cash
management services, including, without limitation, controlled
disbursement services, overdraft facilities, foreign exchange
facilities, deposit and other accounts and merchant services.
Change of Control means the occurrence of any
of the following:
(1) the direct or indirect sale, transfer, conveyance or
other disposition (other than by way of merger or
consolidation), in one or a series of related transactions, of
all or substantially all of the properties or assets of the
issuer and its Restricted Subsidiaries, taken as a whole, to any
person (as that term is used in
Section 13(d)(3) of the Exchange Act) other than any of the
Permitted Holders;
(2) the adoption of a plan relating to the liquidation or
dissolution of the issuer or the direct parent company of the
issuer;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation, but excluding a
transaction referred to in clause (5) of this definition)
the result of which is that any person (other than
any of the Permitted Holders) or persons (other than
any of the Permitted Holders) that are together a
group (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) becomes the Beneficial Owner,
directly or indirectly, of more than 50% of the voting power of
the Voting Stock of the issuer or a Permitted Parent;
(4) the first day on which a majority of the members of the
Board of Directors of the issuer are not Continuing
Directors; or
(5) the issuer consolidates with, or merges with or into,
any Person, or any Person consolidates with, or merges with or
into, the issuer, in any such event pursuant to a transaction in
which any of the outstanding Voting Stock of the issuer or such
other Person is converted into or exchanged for cash, securities
or other property, other than any such transaction where
(A) the Voting Stock of the issuer outstanding immediately
prior to such transaction is converted into or exchanged for
Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person or any direct or indirect parent of such
Person, in each case constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee
Person or such parent, as the case may be (in each case,
immediately after giving effect to such issuance) and
(B) immediately after such transaction, no
person or group (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act), other
than the Permitted Holders,
191
becomes the Beneficial Owner, directly or indirectly, of more
than 50% of the voting power of the Voting Stock of the
surviving or transferee Person or such parent.
Notwithstanding the foregoing, (A) a Person shall not be
deemed to have beneficial ownership of securities subject to a
stock purchase agreement, merger agreement or similar agreement
until the consummation of the transactions contemplated by such
agreement and (B) the term Change of Control
shall not include a merger or consolidation of the issuer with
or the sale, assignment, conveyance, transfer, lease or other
disposition of all or substantially all of the issuers
assets to, (x) an Affiliate incorporated or organized
solely for the purpose of reincorporating or reorganizing the
issuer in another jurisdiction
and/or for
the sole purpose of forming a holding company or (y) a
Guarantor.
Consolidated Cash Flow means, with respect to
any specified Person for any period, the Consolidated Net Income
of such Person for such period and, without duplication, plus:
(1) provision for taxes based on income or profits of such
Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was deducted in computing
such Consolidated Net Income; plus
(2) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether or not paid or
accrued and whether or not capitalized (including, without
limitation, amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers acceptance
financings, and net of the effect of all payments made or
received pursuant to Hedging Obligations), to the extent that
any such expense was deducted in computing such Consolidated Net
Income; plus
(3) depreciation, amortization (including amortization of
the step-up
in inventory valuation arising from purchase accounting and
other intangibles) and other non-cash expenses (excluding any
such noncash expense to the extent that it represents an accrual
of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such
period to the extent that such depreciation, amortization and
other noncash expenses were deducted in computing such
Consolidated Net Income; plus
(4) any reasonable expenses, fees or charges incurred
during such period related to the Transactions or any
acquisition, Investment, Asset Sale, incurrence, repayment or
modification of Indebtedness or issuance of Equity Interests
whether or not successful and including, in each case, any such
transaction consummated prior to the Issue Date and any such
transaction undertaken but not completed, in each case to the
extent that any such expenses, fees or charges were deducted in
computing such Consolidated Net Income; plus
(5) (a) non-recurring cash charges and (b) the
amount of run-rate cost savings and synergies
projected by the issuer in good faith to result from actions
either taken or expected to be taken within 12 months after
the end of such period (which cost savings and synergies shall
be subject only to certification by management of the issuer and
calculated on a pro forma basis as though such cost savings and
synergies had been realized on the first day of such period),
net of the amount of actual benefits realized from such actions
(it is understood and agreed that run-rate means the
full recurring benefit that is associated with any action taken
or expected to be taken within 12 months (which
adjustments, without duplication, may be incremental to Pro
Forma Cost Savings adjustments made pursuant to the definition
of Fixed Charge Coverage Ratio)); provided that the
aggregate amount of addbacks made pursuant to this
clause (5) in any period of four consecutive fiscal
quarters shall not exceed 10% of Consolidated Cash Flow (prior
to giving effect to such addbacks); minus
(6) non-cash items increasing such Consolidated Net Income
for such period, excluding any items which represent the
reversal of any accrual of, or cash reserve for, anticipated
cash charges in any period; provided, that all adjustments made
pursuant to fresh-start accounting made prior to the date that
the Debtors emerge from Chapter 11 bankruptcy proceedings
(the Emergence Date) and any expenses
192
arising after the Emergence Date that are included in cost of
goods sold arising from adjustments to inventory and any
additional depreciation and amortization expenses that are made
in connection with fresh-start accounting shall be excluded from
the calculation of Consolidated Cash Flow but without
duplication to any such exclusion made in the calculation of
Consolidated Net Income.
Notwithstanding the preceding, the provision for taxes based on
the income or profits of, and the depreciation and amortization
and other non-cash expenses of, a Restricted Subsidiary of the
issuer shall be added to Consolidated Net Income to compute
Consolidated Cash Flow of the issuer only to the extent that a
corresponding amount would be permitted at the date of
determination to be dividended to the issuer by such Restricted
Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction
pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted
Subsidiary or its stockholders.
Consolidated Net Income means, with respect
to any specified Person for any period, the aggregate of the Net
Income of such Person and its Subsidiaries for such period, on a
consolidated basis, determined in accordance with GAAP; provided
that:
(1) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting shall be excluded; provided, that, to the extent not
previously included, Consolidated Net Income shall be increased
by the amount of dividends or distributions paid in cash to the
specified Person or a Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary that is not
a Guarantor (and, solely for purposes of the covenant described
under Certain Covenants Restricted
Payments (and not for any other purpose, including the
calculation of Consolidated Cash Flow for purposes of the
covenant described under Certain
Covenants Limitation on Incurrence of Indebtedness
and Issuance of Preferred Stock) any other Restricted
Subsidiaries) shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by
that Restricted Subsidiary of that Net Income is not at the date
of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary
or its stockholders, unless such restriction with respect to the
payment of dividends or similar distributions has been legally
waived; provided that Consolidated Net Income of such Person
shall be increased by the amount of dividends or distributions
or other payments that are actually paid in cash (or to the
extent converted into cash) to such Person or a Restricted
Subsidiary thereof (subject to provisions of this
clause (2) during such period, to the extent not previously
included therein;
(3) the Net Income (or loss) of any Person acquired in a
pooling of interests transaction for any period prior to the
date of such acquisition shall be excluded;
(4) the cumulative effect of a change in accounting
principles shall be excluded;
(5) noncash charges relating to employee benefit or other
management compensation plans of any Parent (to the extent such
noncash charges relate to plans of any Parent for the benefit of
members of the Board of Directors of the issuer (in their
capacity as such) or employees of the issuer and its Restricted
Subsidiaries), the issuer or any of its Restricted Subsidiaries
or any noncash compensation charge arising from any grant of
stock, stock options or other equity-based awards of any Parent
(to the extent such noncash charges relate to plans of any
Parent for the benefit of members of the Board of Directors of
the issuer (in their capacity as such) or employees of the
issuer and its Restricted Subsidiaries), the issuer or any of
its Restricted Subsidiaries (excluding in each case any noncash
charge to the extent that it represents an accrual of or reserve
for cash expenses in any future period or amortization of a
prepaid cash expense incurred in a prior period) in each case,
to the extent that such noncash charges are deducted in
computing such Consolidated Net Income shall be excluded;
(6) any non-cash goodwill, other impairment charges or
noncash charges relating to the amortization of intangibles, in
each case, in accordance with GAAP, shall be excluded;
193
(7) any increase in cost of sales as a result of the
step-up in
inventory valuation arising from applying the purchase method of
accounting in accordance with GAAP in connection with any
acquisition consummated after the date of the Indenture, net of
taxes, shall be excluded;
(8) unrealized gains and losses relating to hedging
transactions and
mark-to-market
of Indebtedness denominated in foreign currencies in accordance
with GAAP shall be excluded;
(9) all adjustments made pursuant to fresh-start accounting
made prior to the Emergence Date and any expenses arising after
the Emergence Date that are included in cost of goods sold
arising from adjustments to inventory and any additional
depreciation and amortization expenses that are made in
connection with fresh-start accounting shall be
excluded; and
(10) all cash and non-cash restructuring charges, including
(i) any fees, expenses or charges related to or arising
from the restructuring of the Debtors in connection with the
Cases, including, without limitation, all fees, expenses or
charges incurred or reimbursed by the Debtors (including those
of the Debtors, the informal committees of holders of the
Debtors public indebtedness, the committee appointed to
represent the interests of equity holders in the Cases, any
witnesses retained by the Debtors in the Cases and the
respective legal and financial advisors of such parties),
whether incurred in connection with the planning, negotiation,
structuring or implementation of the Plan of Reorganization, and
whether incurred prior to the petition date of the Cases, during
the pendency of the Cases or after the effective date of the
Cases, and (ii) any severance, relocation and transition
costs, shall be excluded.
Consolidated Tangible Assets means, with
respect to any Person, the consolidated total assets of such
Person and its Restricted Subsidiaries determined in accordance
with GAAP, less all goodwill, trade names, trademarks, patents
and other similar intangibles properly classified as intangibles
in accordance with GAAP, all as shown on the most recent balance
sheet for such Person.
Continuing Directors means, as of any date of
determination, any member of the Board of Directors of the
issuer or any Parent, as the case may be, who:
(1) was a member of such Board of Directors on the date of
the Indenture;
(2) was nominated for election or elected to such Board of
Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such
nomination or election; or
(3) was designated or appointed by the Principals.
Credit Facilities means one or more debt
facilities (including, without limitation, the ABL Facility and
the Term Loan Facility), commercial paper facilities or
indentures, in each case with banks or other institutional
lenders or a trustee providing for revolving credit loans, term
loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables),
letters of credit or issuances of notes, in each case as
amended, modified, renewed, refunded, replaced, restated,
substituted or refinanced in whole or in part from time to time.
Debtors means the issuer and certain of its
Subsidiaries and affiliates that are debtors under the Cases.
Default means any event that is, or with the
passage of time or the giving of notice or both would be, an
Event of Default.
Designated Noncash Consideration means the
fair market value of noncash consideration received by the
issuer or any of its Restricted Subsidiaries in connection with
an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers Certificate setting
forth the basis of such valuation, less the amount of cash or
Cash Equivalents received in connection with a subsequent sale
of such Designated Noncash Consideration.
Designated Offering means an Equity Offering.
194
Disqualified Stock means any Capital Stock
that, by its terms (or by the terms of any security into which
it is convertible, or for which it is exchangeable, in each case
at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the
option of the holder thereof, in whole or in part, on or prior
to the date that is 91 days after the date on which the
Notes mature; provided that if such Capital Stock is issued to
any employee or to any plan for the benefit of employees of the
issuer or any of its Restricted Subsidiaries or by any such plan
to such employees, such Capital Stock shall not constitute
Disqualified Stock solely because it may be required to be
repurchased by the issuer or such Restricted Subsidiary in order
to satisfy applicable statutory or regulatory obligations; and
provided further that any Capital Stock that would constitute
Disqualified Stock solely because the holders thereof have the
right to require the issuer to repurchase such Capital Stock
upon the occurrence of a change of control or an asset sale
shall not constitute Disqualified Stock if the terms of such
Capital Stock provide that the issuer may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless
such repurchase or redemption complies with the covenant
described above under the caption Certain
Covenants Restricted Payments.
Domestic Subsidiary means any Restricted
Subsidiary that was formed under the laws of the United States
or any state thereof or the District of Columbia.
Equity Interests means Capital Stock and all
warrants, options or other rights to acquire Capital Stock (but
excluding any debt security that is convertible into, or
exchangeable for, Capital Stock).
Equity Offering means an offering (including
in a private placement) of the Equity Interests (other than
Disqualified Stock) of the issuer or any Parent, other than
public offerings with respect to the Equity Interests registered
on
Form S-8.
Excluded Contributions means the net cash
proceeds received by the issuer after the Issue Date from
(a) contributions to its common equity capital and
(b) the sale (other than to a Subsidiary or to any
management equity plan or stock option plan or any other
management or employee benefit plan or agreement of the issuer
or any of its Subsidiaries) of Capital Stock (other than
Disqualified Stock) of the issuer, in each case designated
within 60 days of the receipt of such net cash proceeds as
Excluded Contributions pursuant to an Officers
Certificate, the cash proceeds of which are excluded from the
calculation set forth in the second clause (3) of the first
paragraph of the covenant described above under the heading
Certain Covenants Restricted
Payments.
Existing Indebtedness means Indebtedness
outstanding on the date of the Indenture after giving effect to
the Transactions, other than under the ABL Credit Agreement, the
Term Loan Credit Agreement and the Indenture, but including, for
the avoidance of doubt, the $250,000,000 in aggregate principal
amount of 2018 Notes issued on November 23, 2010.
Fixed Charge Coverage Ratio means with
respect to any specified Person for any period, the ratio of the
Consolidated Cash Flow of such Person for such period to the
Fixed Charges of such Person for such period. In the event that
the specified Person or any of its Restricted Subsidiaries
incurs, assumes, Guarantees, repays, repurchases or redeems any
Indebtedness or issues, repurchases or redeems Disqualified
Stock or preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being
calculated and on or prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made
(the Calculation Date), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, Guarantee, repayment, repurchase or
redemption of Indebtedness, or such issuance, repurchase or
redemption of Disqualified Stock or preferred stock, and the use
of the proceeds therefrom as if the same had occurred at the
beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge
Coverage Ratio:
(1) the Investments, acquisitions, dispositions, mergers,
consolidations and discontinued operations (as determined in
accordance with GAAP) that have been made by the issuer or any
Restricted Subsidiary of the issuer during the four-quarter
reference period or subsequent to such reference period and on
or prior to or simultaneously with the Calculation Date shall be
calculated on a pro forma basis including
195
Pro Forma Cost Savings assuming that the Transactions and all
such Investments, acquisitions, dispositions, mergers,
consolidations and discontinued operations (and the change in
any associated fixed charge obligations and the change in
Consolidated Cash Flow resulting therefrom) had occurred on the
first day of the four-quarter reference period. If since the
beginning of such period any Person (that subsequently became a
Restricted Subsidiary of the issuer or was merged with or into
the issuer or any Restricted Subsidiary of the issuer since the
beginning of such period) shall have made any Investment,
acquisition, disposition, merger, consolidation or discontinued
operation that would have required adjustment pursuant to this
definition, then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect thereto for such period as if
such Investment, acquisition, disposition, merger, consolidation
or discontinued operation had occurred at the beginning of the
applicable four-quarter period; and
(2) in calculating Fixed Charges attributable to interest
on any Indebtedness computed on a pro forma basis,
(a) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Calculation Date and which will
continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Calculation Date;
(b) if interest on any Indebtedness actually incurred on
the Calculation Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Calculation Date will be deemed
to have been in effect during the four-quarter period; and
(c) notwithstanding clause (a) above, interest on
Indebtedness determined on a fluctuating basis, to the extent
such interest is covered by agreements relating to interest rate
swaps, caps or collars, shall be deemed to accrue at the rate
per annum resulting after giving effect to the operation of such
agreement.
Fixed Charges means, with respect to any
specified Person for any period, the sum, without duplication of,
(1) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or
accrued, including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest
payments (other than the amortization of discount or imputed
interest arising as a result of purchase accounting), the
interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers acceptance
financings, and net of the effect of all payments made or
received pursuant to Hedging Obligations; plus
(2) the consolidated interest of such Person and its
Restricted Subsidiaries that was capitalized during such period;
plus
(3) any interest expense on Indebtedness of another Person
that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or
one of its Restricted Subsidiaries, whether or not such
Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends and
distributions, whether paid or accrued and whether or not in
cash, on any series of preferred stock or Disqualified Stock of
such Person or any of its Restricted Subsidiaries, other than
dividends on Equity Interests payable solely in Equity Interests
of the issuer (other than Disqualified Stock) or to the issuer
or a Restricted Subsidiary that is a Guarantor, times (b) a
fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal,
in each case, on a consolidated basis and in accordance with
GAAP; minus
(5) the amortization or expensing of financing fees
incurred by the issuer and its Restricted Subsidiaries in
connection with the Transactions and recognized in the
applicable period; minus
(6) interest income actually received by the issuer or any
Restricted Subsidiary in cash for such period.
196
Foreign Restricted Subsidiary means any
Restricted Subsidiary of the issuer incorporated in any
jurisdiction outside the United States.
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 have been approved by a
significant segment of the accounting profession, which are in
effect on the date of the Indenture.
Guarantee means a guarantee other than by
endorsement of negotiable instruments for collection in the
ordinary course of business, direct or indirect, in any manner
including, without limitation, by way of a pledge of assets or
through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
Guarantors means any Person that incurs a
Guarantee of the Notes; provided, that, upon the release and
discharge of such Person from its Note Guarantee in accordance
with the Indenture, such Person shall cease to be a Guarantor.
Hedging Obligations means, with respect to
any specified Person, the obligations of such Person under:
(1) interest rate swap agreements, interest rate cap
agreements, interest rate collar agreements and other agreements
or arrangements designed for the purpose of fixing, hedging or
swapping interest rate risk;
(2) commodity swap agreements, commodity option agreements,
forward contracts and other agreements or arrangements designed
for the purpose of fixing, hedging or swapping commodity price
risk; and
(3) foreign exchange contracts, currency swap agreements
and other agreements or arrangements designed for the purpose of
fixing, hedging or swapping foreign currency exchange rate risk.
Holder means the Person in whose name a Note
is registered on the Registrars books.
Immaterial Subsidiary means any Subsidiary of
the issuer that has less than $1,000,000 in total assets;
provided that the aggregate total assets for all Immaterial
Subsidiaries shall not at any time exceed $5,000,000.
Indebtedness means, with respect to any
specified Person, any indebtedness of such Person, whether or
not contingent, in respect of:
(1) borrowed money;
(2) obligations evidenced by bonds, notes, debentures or
similar instruments or letters of credit (or reimbursement
agreements in respect thereof);
(3) bankers acceptances;
(4) Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price
of any property, except any such balance that constitutes an
accrued expense or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than
letters of credit and Hedging Obligations) would appear as a
liability upon a balance sheet of the specified Person prepared
in accordance with GAAP. In addition, the term
Indebtedness includes all Indebtedness of others
secured by a Lien on any asset of the specified Person (whether
or not such Indebtedness is assumed by the specified Person), to
the extent not otherwise included, the Guarantee by the
specified Person of any obligations constituting Indebtedness,
and Indebtedness of any partnership in which such Person is a
general partner.
197
The amount of any Indebtedness outstanding as of any date shall
be:
(1) the accreted value thereof, in the case of any
Indebtedness issued with original issue discount;
(2) the principal amount thereof, together with any
interest thereon that is more than 30 days past due, in the
case of any other Indebtedness; and
(3) with respect to Indebtedness of another Person secured
by a Lien on the assets of the issuer or any of its Restricted
Subsidiaries, the lesser of the fair market value of the
property secured or the amount of the secured Indebtedness.
Investments means, with respect to any
Person, all direct or indirect investments by such Person in
other Persons (including Affiliates) in the forms of loans
(including Guarantees or other obligations), advances or capital
contributions (excluding accounts receivable, trade credit,
advances to customers, commission, travel and similar advances
to officers and employees made consistent with past practices),
purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on
a balance sheet prepared in accordance with GAAP. If the issuer
or any Restricted Subsidiary of the issuer sells or otherwise
disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of the issuer such that, after giving
effect to any such sale or disposition, such Person is no longer
a Restricted Subsidiary of the issuer, the issuer shall be
deemed to have made a Restricted Investment on the date of any
such sale or disposition equal to the fair market value of the
Equity Interests of such Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final
paragraph of the covenant described above under the caption
Certain Covenants Restricted
Payments. The acquisition by the issuer or any Restricted
Subsidiary of the issuer of a Person that holds an Investment in
a third Person shall be deemed to be an Investment by the issuer
or such Restricted Subsidiary in such third Person in an amount
equal to the fair market value of the Investment held by the
acquired Person in such third Person in an amount determined as
provided in the final paragraph of the covenant described above
under the caption Certain
Covenants Restricted Payments.
For purposes of the definition of Unrestricted
Subsidiary and the covenant described above under the
caption Certain Covenants
Restricted Payments, (i) Investments shall include
the portion (proportionate to the issuers equity interest
in such Subsidiary) of the fair market value of the net assets
of a Subsidiary of the issuer at the time such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that
upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the issuer shall be deemed to continue to have a
permanent Investment in an Unrestricted Subsidiary
in an amount (if positive) equal to (x) the issuers
Investment in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the
issuers equity interest in such Subsidiary) of the fair
market value of the net assets of such Subsidiary at the time of
such redesignation; and (ii) any property transferred to or
from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as
determined in good faith by the issuer.
Issue Date shall mean April 26, 2011,
the original issue date of the Notes.
Lien means, with respect to any asset, any
mortgage, lien, pledge, charge, security interest or encumbrance
of any kind in respect of such asset, whether or not filed,
recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any
lease (other than an operating lease), any option or other
agreement to sell or give a security interest in and any filing
of or agreement to give any financing statement under the
Uniform Commercial Code (or equivalent statutes of any
jurisdiction).
Make Whole Amount means, with respect to any
Note at any redemption date, the greater of (i) 1.0% of the
principal amount of such Note and (ii) the excess, if any,
of (A) an amount equal to the present value of (1) the
redemption price of such Note at April 15, 2016 plus
(2) the remaining scheduled interest payments on the Notes
to be redeemed (subject to the right of Holders on the relevant
record date to receive interest due on the relevant interest
payment date) to April 15, 2016 (other than interest
accrued but unpaid to the redemption date), computed using a
discount rate equal to the Treasury Rate plus 50 basis
points, over (B) the principal amount of the Notes to be
redeemed.
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Net Income means, with respect to any
specified Person, the net income (loss) of such Person,
determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision
for taxes on such gain (or loss), realized in connection with:
(a) any Asset Sale (without reference to the
$5.0 million limitation); or (b) the disposition of
any other assets by such Person or any of its Restricted
Subsidiaries (other than in the ordinary course of business) or
the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries;
(2) any extraordinary or nonrecurring gains, losses or
charges, together with any related provision for taxes on such
gain, loss or charge; and
(3) any gains, losses, or charges of the issuer and its
Subsidiaries incurred in connection with the Transactions
together with any related provision for taxes on such gain,
loss, or charge.
Net Proceeds means the aggregate cash
proceeds received by the issuer or any of its Restricted
Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition
of any non-cash consideration received in any Asset Sale), net
of the direct costs relating to such Asset Sale or disposition
of such non-cash consideration, including, without limitation,
legal, accounting and investment banking fees, and sales
commissions, and any relocation expenses incurred as a result
thereof, taxes paid or payable as a result thereof or as a
result of any transactions occurring or deemed to occur in
connection with a prepayment hereunder, in each case, after
taking into account any available tax credits or deductions and
any tax sharing arrangements, and amounts required to be applied
to the repayment of Indebtedness (other than revolving credit
Indebtedness, unless there is a required reduction in
commitments) secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any (1) reserve for
adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP and (2) any reserve or
payment with respect to any liabilities associated with such
asset or assets and retained by the issuer after such sale or
other disposition thereof, including, without limitation,
severance costs, pension and other post-employment benefit
liabilities and liabilities related to environmental matters or
against any indemnification obligations associated with such
transaction.
Non-Recourse Debt means Indebtedness:
(1) as to which neither the issuer nor any of its
Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), or (b) is directly or
indirectly liable as a guarantor or otherwise; and
(2) as to which the lenders have been notified in writing
that they will not have any recourse to the stock or assets of
the issuer or any of its Restricted Subsidiaries.
Note Guarantee shall mean the Guarantee of
the Notes by the Guarantors.
Obligations means any principal, interest,
penalties, fees, indemnifications, reimbursements, damages,
costs, expenses and other liabilities payable under the
documentation governing any Indebtedness.
Officers Certificate means, with
respect to any Person, a certificate signed by the Chief
Executive Officer or President and by the Treasurer, Chief
Financial Officer or Chief Accounting Officer of such Person.
Parent means any direct or indirect parent
company of the issuer.
Pari Passu Indebtedness means: (1) with
respect to the issuer, the Notes and any Indebtedness which
ranks pari passu in right of payment to the Notes (including the
2018 Notes); and (2) with respect to any Guarantor, its
Note Guarantee and any Indebtedness which ranks pari passu in
right of payment to such Guarantors Note Guarantee
(including its guarantee of the 2018 Notes).
Permitted Business means any business
conducted or proposed to be conducted (as described in this
offering memorandum) by the issuer and its Restricted
Subsidiaries on the date of the Indenture and other businesses
reasonably related or ancillary thereto.
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Permitted Holders means each of (i) the
Principals and any group (within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange
Act or any successor provision) of which any of the Principals
are members; provided that, in the case of such group and
without giving effect to the existence of such group or any
other group, such Principals, collectively, have beneficial
ownership of more than 50% of the total voting power of the
Voting Stock of the issuer or any other direct or indirect
parent company of the issuer and (ii) any Permitted Parent
that (A) is newly formed at the time of any transaction and
(B) would not, if the Person or Persons forming such
Permitted Parent and owning all of such Permitted Parents
Equity Interests were to engage in such transaction in lieu of
Permitted Parent and if all references to Permitted
Parent in the definition of Change of Control were to be
disregarded, result in a Change of Control. Any Person or group
whose acquisition of beneficial ownership constitutes a Change
of Control in respect of which a Change of Control Offer is made
in accordance with the requirements of the Indenture will
thereafter constitute an additional Permitted Holder.
Permitted Investments means:
(1) any Investment in the issuer or in a Restricted
Subsidiary;
(2) any Investment in Cash Equivalents;
(3) any Investment by the issuer or any Restricted
Subsidiary of the issuer in a Person, if as a result of such
Investment:
(a) such Person becomes a Restricted Subsidiary of the
issuer; or
(b) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets
to, or is liquidated into, the issuer or a Restricted Subsidiary
of the issuer;
(4) any Investment made as a result of the receipt of
non-cash consideration from an Asset Sale or other sale of
assets that was made pursuant to and in compliance with the
covenant described above under the caption
Certain Covenants Asset
Sales;
(5) any Investment the payment for which consists of Equity
Interests (other than Disqualified Stock) of the issuer or any
Parent (which Investment, in the case of any Parent, is
contributed to the common equity capital of the issuer; provided
that any such contribution shall be excluded from
subclause (b) of the second clause (3) of the first
paragraph of the covenant described under the caption
Certain Covenants Restricted
Payments);
(6) Hedging Obligations;
(7) Investments to the extent such Investments, when taken
together with all other Investments made pursuant to this
clause (7) and outstanding on the date of such Investment,
do not exceed the greater of (x) $50.0 million or
(y) 5.0% of Consolidated Tangible Assets of the issuer;
provided that Investments pursuant to this clause (7) shall
not, directly or indirectly, fund the repurchase, redemption or
other acquisition or retirement for value of, or payment of
dividends or distribution on, any Equity Interests of, or making
any Investment in the holder of any Equity Interests in, any
Parent;
(8) any Investment of the issuer or any of its Restricted
Subsidiaries existing on the date of the Indenture; and any
extension, modification or renewal of any such Investment, but
only to the extent not involving additional advances,
contributions or other Investments of cash or other assets or
other increases thereof (other than as a result of the accrual
or accretion of interest or original issue discount or the
issuance of
pay-in-kind
securities, in each case, pursuant to the terms of such
Investment as in effect on the Issue Date);
(9) loans to employees that are approved in good faith by a
majority of the Board of Directors of the issuer in an amount
not to exceed $5.0 million outstanding at any time;
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(10) any Investment acquired by the issuer or any of its
Restricted Subsidiaries:
(a) in exchange for any other Investment or accounts
receivable held by the issuer or any such Restricted Subsidiary
in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of a Person, or
(b) as a result of a foreclosure by the issuer or any of
its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any
secured Investment in default;
(11) Investments consisting of the licensing or
contribution of intellectual property pursuant to joint
marketing arrangements with other Persons;
(12) Investments in joint ventures engaged in a Permitted
Business not in excess of the greater of
(x) $75.0 million or (y) 7.5% of Consolidated
Tangible Assets of the issuer, in the aggregate outstanding at
any one time;
(13) Investments in Unrestricted Subsidiaries not in excess
of the greater of (x) $75.0 million or (y) 7.5%
of Consolidated Tangible Assets of the issuer, in the aggregate
outstanding at any one time;
(14) Investments by the issuer or a Restricted Subsidiary
of the issuer in a Receivables Subsidiary or any Investment by a
Receivables Subsidiary in any other Person, in each case, in
connection with a Qualified Receivables Transaction; and
(15) Investments of a Person or any of its Subsidiaries
existing at the time such Person becomes a Restricted Subsidiary
or at the time such Person merges or consolidates with the
issuer or any Restricted Subsidiary, in either case in
compliance with this Indenture, provided that such Investments
were not made by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a
Restricted Subsidiary or such merger or consolidation.
The amount of Investments outstanding at any time pursuant to
clauses (7), (12) and (13) shall be reduced by an
amount equal to the net reduction in Investments by the issuer
and its Restricted Subsidiaries, subsequent to the date of the
Indenture, resulting from repayments of loans or advances or
other transfers of assets, in each case to the issuer or any
such Restricted Subsidiary from any such Investment, or from the
net cash proceeds from the sale of any such Investment, or from
a redesignation of an Unrestricted Subsidiary to a Restricted
Subsidiary, not to exceed, in the case of any Investment, the
amount of the Investment previously made by the issuer or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
Permitted Liens means:
(1) Liens securing obligations under the Notes;
(2) Liens securing Indebtedness and other obligations of
the issuer and its Restricted Subsidiaries not to exceed the
greater of (i) the aggregate amount of Indebtedness
permitted to be incurred pursuant to clause (1) of the
second paragraph Certain Covenants
Incurrence of Indebtedness and Issuance of Preferred Stock
and (ii) the maximum principal amount of Indebtedness that,
as of the date such Indebtedness was incurred and after giving
effect to the incurrence of such Indebtedness, would not cause
the Secured Leverage Ratio of the issuer to exceed 3.50 to 1.0;
(3) other Liens existing on the Issue Date after giving
effect to the Transactions;
(4) Liens securing Permitted 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 issuer or
any of its Restricted Subsidiaries not securing the Indebtedness
so refinanced;
(5) Liens on property existing at the time of acquisition
thereof by the issuer or any Restricted Subsidiary of the
issuer; provided that such Liens were in existence prior to the
contemplation of such acquisition and do not extend to any
property other than the property so acquired by the issuer or
the Restricted Subsidiary;
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(6) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (4) of the second
paragraph of the covenant entitled Certain
Covenants Incurrence of Indebtedness and Issuance of
Preferred Stock covering only the assets acquired with
such Indebtedness;
(7) Liens incurred in the ordinary course of business of
the issuer or any Restricted Subsidiary of the issuer with
respect to obligations that do not exceed $75.0 million at
any one time outstanding;
(8) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other
similar obligations (exclusive of obligations for the payment of
borrowed money) incurred in the ordinary course of business;
(9) Liens upon specific items of inventory or other goods
and proceeds of any Person securing such Persons
obligations in respect of bankers acceptances issued or
created for the account of such Person to facilitate the
purchase, shipment or storage of such inventory or other goods;
(10) Liens incurred or deposits made in the ordinary course
of business in connection with workers compensation,
unemployment insurance and other types of social security,
including any Lien securing letters of credit issued in the
ordinary course of business consistent with past practice in
connection therewith;
(11) Liens to secure Indebtedness of any Foreign Restricted
Subsidiary permitted by clause (16) of the second paragraph
of the covenant entitled Certain
Covenants Incurrence of Indebtedness and Issuance of
Preferred Stock covering only the assets of such Foreign
Restricted Subsidiary;
(12) Liens on assets of a Receivables Subsidiary arising in
connection with a Qualified Receivables Transaction;
(13) Liens for taxes, assessments, governmental charges or
claims that are not yet due or are being contested in good faith
by appropriate legal proceedings; provided that any reserve or
other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made therefor;
(14) statutory Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business
and with respect to amounts not yet delinquent or being
contested in good faith by appropriate legal proceedings;
provided that any reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have
been made therefor;
(15) easements,
rights-of-way,
municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not
materially interfere with the ordinary course of business of the
issuer or any of its Subsidiaries, taken as a whole;
(16) leases or subleases or licenses granted to others in
the ordinary course of business of the issuer or any of its
Restricted Subsidiaries, taken as a whole;
(17) Liens encumbering property or assets under
construction arising from progress or partial payments by a
customer of the issuer or any of its Restricted Subsidiaries
relating to such property or assets;
(18) any interest or title of a lessor in the property
subject to any Capital Lease Obligation;
(19) Liens arising from filing precautionary Uniform
Commercial Code financing statements regarding leases;
(20) Liens on property of, or on shares of stock or
Indebtedness of, any Person existing at the time (A) such
Person becomes a Restricted Subsidiary of the issuer or
(B) such Person or such property is acquired by the issuer
or any Restricted Subsidiary; provided that such Liens do not
extend to any other assets of the issuer or any Restricted
Subsidiary and such Lien secures only those obligations which it
secures on the date of such acquisition (and extensions,
renewals, refinancings and replacements thereof);
202
(21) Liens arising from the rendering of a final judgment
or order against the issuer or any Restricted Subsidiary that
does not give rise to an Event of Default;
(22) Liens securing reimbursement obligations with respect
to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds
thereof;
(23) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties
in connection with the importation of goods;
(24) Liens encumbering customary initial deposits and
margin deposits, and other Liens that are either within the
general parameters customary in the industry and incurred in the
ordinary course of business or otherwise permitted under the
terms of the Credit Facilities, in each case securing
Indebtedness under Hedging Obligations;
(25) Liens solely on any cash earnest money deposits made
by the issuer or any of its Restricted Subsidiaries in
connection with any letter of intent or purchase agreement
permitted under the Indenture;
(26) Liens (i) of a collection bank arising under
Section 4-208
of the Uniform Commercial Code (or equivalent statutes) on items
in the course of collection and (ii) in favor of a banking
institution arising as a matter of law encumbering deposits
(including the right of set-off) and which are within the
general parameters customary in the banking industry;
(27) Liens encumbering reasonable customary initial
deposits and margin deposits and similar Liens attaching to
brokerage accounts incurred in the ordinary course of business
and not for speculative purposes;
(28) Liens in favor of the issuer or any Guarantor; and
(29) Liens securing Hedging Obligations and Cash Management
Services so long as (a) related Indebtedness is, and is
permitted to be under the Indenture, secured by a Lien on the
same property securing such Hedging Obligations or (b) such
obligations are secured by the property securing any Credit
Facilities so long as such obligations are owed to lenders (or
affiliates thereof) under such Credit Facilities.
For purposes of determining compliance with this Permitted
Liens definition, in the event that any proposed Lien on
any Indebtedness meets the criteria of more than one of the
categories of Permitted Liens described in clauses (1)
through (29) above, the issuer will be permitted to
classify the Lien on the date of its incurrence, and from time
to time may reclassify, in any manner that complies with this
definition at such time.
Permitted Parent means any direct or indirect
parent of the issuer.
Permitted Refinancing Indebtedness means any
Indebtedness of the issuer or any of its Restricted Subsidiaries
issued in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund other
Indebtedness of the issuer or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable)
of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus all accrued interest thereon and the
accounts receivable and other assets that are customarily
transferred, or in respect of which security interests are
customarily granted, in connection with an asset securitization
transaction involving accounts receivable;
(2) such Permitted Refinancing Indebtedness has a final
maturity date equal to or later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater
than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or
refunded;
203
(3) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right
of payment to the Notes, such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms
at least as favorable to the Holders of Notes as those contained
in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the issuer or
by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
Person means any individual, corporation,
partnership, joint venture, association, joint-stock issuer,
trust, unincorporated organization, limited liability issuer or
government or other entity.
Plan of Reorganization means the joint plan
of reorganization of the Debtors, dated as of September 18,
2009, as amended, supplemented or modified from time to time.
Principals means Ares Management LLC and its
Affiliates.
Pro Forma Cost Savings means, with respect to
any period, the reduction in net costs and related adjustments
that (i) were directly attributable to an Asset Acquisition
that occurred during the four-quarter period or after the end of
the four-quarter period and on or prior to the Calculation Date
and calculated on a basis that is consistent with Regulations
S-X under the Securities Act as in effect and applied as of the
date of the Indenture, (ii) were actually implemented by
the business that was the subject of any such Asset Acquisition
within six months after the date of the Asset Acquisition and
prior to the Calculation Date that are supportable and
quantifiable by the underlying accounting records of such
business or (iii) relate to the business that is the
subject of any such Asset Acquisition and that the issuer
reasonably determines are probable based upon specifically
identifiable actions to be taken within six months of the date
of the Asset Acquisition and, in the case of each (i),
(ii) and (iii), are described, as provided below, in an
Officers Certificate, as if all such reductions in costs
had been effected as of the beginning of such period. Pro Forma
Cost Savings described above shall be accompanied by a
certificate delivered to the Trustee from the issuers
Chief Financial Officer that outlines the specific actions taken
or to be taken, the net cost savings achieved or to be achieved
from each such action and that, in the case of clause (iii)
above, such savings have been determined to be probable.
Public Equity Offering means an offer and
sale for cash of common stock (other than Disqualified Stock) of
the issuer or any Parent pursuant to a registration statement
that has been declared effective by the Commission pursuant to
the Securities Act (other than a registration statement on
Form S-8
or otherwise relating to equity securities issuable under any
employee benefit plan of the issuer).
Purchase Money Note means a promissory note
evidencing a line of credit, or evidencing other Indebtedness,
owed to the issuer or any Restricted Subsidiary of the issuer in
connection with a Qualified Receivable Transaction, which note
shall be repaid from cash available to the maker of such note,
other than amounts required to be established as reserves
pursuant to agreement, amounts paid to investors in respect of
interest, principal and other amounts owning to such investors
and amounts paid in connection with the purchase of newly
generated receivables.
Qualified Receivables Transaction means any
transaction or series of transactions that may be entered into
by the issuer or by any Restricted Subsidiary of the issuer
pursuant to which the issuer or any Restricted Subsidiary of the
issuer may sell, convey or otherwise transfer to a Receivables
Subsidiary, any accounts receivable (whether now existing or
arising in the future) of the issuer or any Restricted
Subsidiary of the issuer and any asset related thereto,
including, without limitation, all collateral securing such
accounts receivable, and all Guarantees or other obligations in
respect of such accounts receivable, proceeds of such accounts
receivable and other assets that are customarily transferred, or
in respect of which security interests are customarily granted,
in connection with an asset securitization transaction involving
accounts receivable.
Receivables Subsidiary means a Subsidiary of
the issuer (other than a Guarantor) that engages in no
activities other than in connection with the financing of
accounts receivables and that is designated by the Board of
Directors of the issuer (as provided below) as a Receivables
Subsidiary (a) no portion of the
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Indebtedness or any other Obligations (contingent or otherwise)
of which (i) is Guaranteed by the issuer or any other
Restricted Subsidiary of the issuer (excluding guarantees of
obligations (other than the principal of, and interest on,
Indebtedness) pursuant to Standard Securitization Undertakings),
(ii) is recourse to or obligates the issuer or any other
Restricted Subsidiary of the issuer in any way other than
pursuant to Standard Securitization Undertakings or
(iii) subjects any property or asset of the issuer or any
other Restricted Subsidiary of the issuer, directly or
indirectly, contingently or otherwise to the satisfaction
thereof, other than pursuant to Standard Securitization
Undertakings, (b) with which neither the issuer nor any
other Restricted Subsidiary of the issuer has any material
contract, agreement, arrangement or understanding (except in
connection with a Purchase Money Note or Qualified Receivables
Transaction) other than on terms no less favorable to the issuer
or such other Restricted Subsidiary of the issuer than those
that might be obtained at the time from Persons that are not
Affiliates of the issuer, other than fees payable in the
ordinary course of business in connection with servicing
accounts receivable, and (c) to which neither the issuer
nor any other Restricted Subsidiary of the issuer has any
obligation to maintain or preserve such entitys financial
condition or cause such entity to achieve a certain level of
operating results. Any such designation by the Board of
Directors of the issuer shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the resolution of
the Board of Directors of the issuer giving effect to such
designation and an Officers Certificate certifying, to the
best of such officers knowledge and belief after
consulting with counsel, that such designation complied with the
foregoing conditions.
Registration Rights Agreement means the
Registration Rights Agreement in respect of the Notes, dated as
of the Issue Date, among the initial purchaser, the issuer and
the Guarantors.
Replacement Assets means (1) non-current
tangible assets that will be used or useful in a Permitted
Business or (2) all or substantially all of the assets of a
Permitted Business or a majority of the Voting Stock of any
Person engaged in a Permitted Business that will become on the
date of acquisition thereof a Restricted Subsidiary.
Restricted Investment means an Investment
other than a Permitted Investment.
Restricted Subsidiary of a Person means any
Subsidiary of the referent Person that is not an Unrestricted
Subsidiary. Unless otherwise specified, a Restricted Subsidiary
as used herein refers to a Restricted Subsidiary of the issuer.
Secured Indebtedness means any Indebtedness
secured by a Lien.
Secured Leverage Ratio means with respect to
any specified Person, as of any date of determination, the ratio
of: (1) the outstanding principal amount of Secured
Indebtedness of such Person and its Restricted Subsidiaries as
of such date on a consolidated basis in accordance with GAAP; to
(2) Consolidated Cash Flow of such Person for the period of
the most recent four consecutive fiscal quarters ending prior to
such date for which financial statements prepared on a
consolidated basis in accordance with GAAP are available;
provided, however, that Consolidated Cash Flow shall be
determined for purposes of this definition with such pro forma
adjustment consistent with the definition of Fixed Charge
Coverage Ratio. For purposes of determining the amount of
Indebtedness outstanding under the Secured Leverage Ratio, the
issuer, at its option, may designate all or any portion of the
commitments under any revolving credit facility to be fully
drawn as of the date of such designation; provided that such
commitments so designated shall thereafter be deemed to be
outstanding at all times thereafter in such amount for the
purposes of the Secured Leverage Ratio.
Securities Act means the Securities Act of
1933, as amended, and the rules and regulations of the
Commission promulgated thereunder.
Significant Subsidiary means any Subsidiary
that would be a significant subsidiary as defined in
Article I,
Rule 1-02
of
Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation
is in effect on the date of the Indenture.
Standard Securitization Undertakings means
representations, warranties, covenants and indemnities entered
into by the issuer or any Restricted Subsidiary of the issuer
that are reasonably customary in an accounts receivable
transaction.
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Stated Maturity means, with respect to any
installment of interest or principal on any series of
Indebtedness, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such
interest or principal prior to the date originally scheduled for
the payment thereof.
Subordinated Indebtedness means (a) with
respect to the issuer, any Indebtedness which is by its terms
subordinated in right of payment to the Notes, and (b) with
respect to any Guarantor, any Indebtedness of such Guarantor
which is by its terms subordinated in right of payment to its
Note Guarantee.
Subsidiary means, with respect to any
specified Person:
(1) any corporation, 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, managers or
trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners
of which are such Person or one or more Subsidiaries of such
Person (or any combination thereof).
Term Loan Credit Agreement means the Credit
Agreement, dated as of the Issue Date, among the issuer, certain
Subsidiaries of the issuer, the financial institutions from time
to time party thereto, UBS AG, Stamford Branch, as
administrative agent and collateral agent.
Term Loan Facility means the senior secured
term loan facility under the Term Loan Credit Agreement,
including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and
in each case as amended, modified, renewed, refunded, replaced,
restated, substituted or refinanced in whole or in part from
time to time, including any agreement extending the maturity of,
refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder or
adding Subsidiaries of the issuer as additional borrowers or
guarantors thereunder) all or any portion of the Indebtedness
under such agreement or any successor or replacement agreement
and whether by the same or any other agent, lender or group of
lenders.
TIA means the Trust Indenture Act of
1939 (15 U.S.C.
§§ 77aaa-77bbbb)
as in effect on the date of the Indenture.
Transactions means, collectively,
(a) the execution, delivery and performance by the issuer
and the Guarantors of the Indenture and other related documents
to which they are a party and the issuance of the Notes
thereunder, (b) the execution, delivery and performance by
the issuer and the Guarantors of the Term Loan Credit Agreement
and other related documents to which they are a party and the
incurrence of term loans thereunder on the Issue Date,
(c) the consummation of the issuers offer to purchase
the issuers 11% Senior Secured Notes due 2013 as
described in this Offering Memorandum and the redemption of any
portion of the 11% Senior Secured Notes due 2013 not
purchased pursuant to such offer to purchase and (d) the
payment of related fees and expenses.
Treasury Rate means, at the time of
computation, the yield to maturity of United States Treasury
Securities with a constant maturity (as compiled and published
in the most recent Federal Reserve Statistical Release H.15(519)
which has become publicly available at least two Business Days
prior to the redemption date or, if such Statistical Release is
no longer published, any publicly available source of similar
market data) most nearly equal to the period from the redemption
date to April 15, 2016; provided, however, that if the
period from the redemption date to April 15, 2016 is not
equal to the constant maturity of a United States Treasury
Security for which a weekly average yield is given, the Treasury
Rate shall be obtained by linear interpolation (calculated to
the nearest one-twelfth of a year) from the weekly average
yields of United States Treasury Securities for which such
yields are given, except that if the period from the redemption
date to April 15, 2016 is less than one year, the weekly
average yield on actively traded United States Treasury
Securities adjusted to a constant maturity of one year shall be
used.
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Uniform Commercial Code means the Uniform
Commercial Code as in effect in the relevant jurisdiction from
time to time. Unless otherwise specified, references to the
Uniform Commercial Code herein refer to the New York Uniform
Commercial Code.
Unrestricted Subsidiary means any Subsidiary
of the issuer that is designated by the Board of Directors as an
Unrestricted Subsidiary pursuant to a Board Resolution, but only
to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is a Person with respect to which neither the issuer
nor any of its Restricted Subsidiaries has any direct or
indirect obligation (a) to subscribe for additional Equity
Interests or (b) to maintain or preserve such Persons
financial condition or to cause such Person to achieve any
specified levels of operating results; and
(3) is not a guarantor or does not otherwise directly or
indirectly provide credit support for any Indebtedness of the
issuer or any of its Restricted Subsidiaries at the time of such
designation unless such guarantee or credit support is released
upon such designation.
Any designation of a Restricted Subsidiary of the issuer as an
Unrestricted Subsidiary shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers
Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described
above under the caption Certain
Covenants Restricted Payments. If, at any
time, any Unrestricted Subsidiary would fail to meet the
preceding requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes
of the Indenture and any Indebtedness of such Subsidiary shall
be deemed to be incurred by a Restricted Subsidiary of the
issuer as of such date and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant
described under the caption Certain
Covenants Incurrence of Indebtedness and Issuance of
Preferred Stock, the issuer shall be in default of such
covenant.
Voting Stock of any Person as of any date
means the Capital Stock of such Person that is at the time
entitled to vote in the election of the Board of Directors of
such Person.
Weighted Average Life to Maturity means, when
applied to any Indebtedness at any date, the number of years
obtained by dividing:
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking
fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making
of such payment; by
(2) the then outstanding principal amount of such
Indebtedness.
Wholly Owned Subsidiary of any Person shall
mean a subsidiary of such person of which securities (except for
directors qualifying shares) or other ownership interests
representing 100% of the Capital Stock are, at the time any
determination is being made, owned, controlled or held by such
person or one or more Wholly Owned Subsidiaries of such person
or by such Person and one or more Wholly Owned Subsidiaries of
such person.
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BOOK-ENTRY;
DELIVERY AND FORM
The certificates representing the exchange notes will be issued
in fully registered form without interest coupons (the
global notes). The global notes will be deposited
with the trustee as a custodian for DTC, as depositary, and
registered in the name of a nominee of such depositary.
The
Global Notes
We expect that pursuant to procedures established by DTC
(a) upon the issuance of the global notes, DTC or its
custodian will credit, on its internal system, the principal
amount at maturity of the individual beneficial interests
represented by such global notes to the respective accounts of
persons who have accounts with such depositary and
(b) ownership of beneficial interests in the global notes
will be shown on, and the transfer of such ownership will be
effected only through, records maintained by DTC or its nominee
(with respect to interests of participants) and the records of
participants (with respect to interests of persons other than
participants). Such accounts initially will be designated by or
on behalf of the initial purchasers and ownership of beneficial
interests in the global notes will be limited to persons who
have accounts with DTC (participants) or persons who
hold interests through participants. Holders may hold their
interests in the global notes directly through DTC if they are
participants in such system, or indirectly through organizations
which are participants in such system.
Except as described below, owners of interests in the global
notes will not have notes registered in their names, will not
receive physical delivery of notes in certificated form and will
not be considered the registered owners or holders
thereof under the indenture for any purpose.
So long as DTC, or its nominee, is the registered owner or
holder of the notes, DTC or such nominee, as the case may be,
will be considered the sole owner or holder of the notes
represented by such global notes for all purposes under the
indenture. No beneficial owner of an interest in the global
notes will be able to transfer that interest except in
accordance with DTCs procedures, in addition to those
provided for under the indenture with respect to the global
notes.
Payments of the principal of, premium (if any), interest
(including additional interest) on, the global notes will be
made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of us, the trustee or any paying
agent will have any responsibility or liability for any aspect
of the records relating to or payments made on account of
beneficial ownership interests in the global notes or for
maintaining, supervising or reviewing any records relating to
such beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment
of principal, premium, if any, interest (including additional
interest) on the global notes, will credit participants
accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the
global notes as shown on the records of DTC or its nominee. We
also expect that payments by participants to owners of
beneficial interests in the global notes held through such
participants will be governed by standing instructions and
customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees
for such customers. Such payments will be the responsibility of
such participants.
Transfers between participants in DTC will be effected in the
ordinary way through DTCs
same-day
funds system in accordance with DTC rules and will be settled in
same day funds.
DTC has advised us that it will take any action permitted to be
taken by a holder of notes (including the presentation of
outstanding notes for exchange as described below) only at the
direction of one or more participants to whose account the DTC
interests in the global notes are credited and only in respect
of such portion of the aggregate principal amount of notes as to
which such participant or participants has or have given such
direction. However, if there is an event of default under the
indenture, DTC will exchange the global notes for certificated
securities, which it will distribute to its participants and
which will be legended as set forth under the heading
Notice to Investors in the final offering memoranda
relating to the outstanding notes.
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DTC has advised us as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a
member of the Federal Reserve System, a clearing
corporation within the meaning of the Uniform Commercial
Code and a Clearing Agency registered pursuant to
the provisions of Section 17A of the Exchange Act. DTC was
created to hold securities for its participants and facilitate
the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts
of its participants, thereby eliminating the need for physical
movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing
corporations and certain other organizations. Indirect access to
the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or
indirectly (indirect participants).
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the global notes among
participants of DTC, it is under no obligation to perform such
procedures, and such procedures may be discontinued at any time.
Neither we nor the trustee will have any responsibility for the
performance by DTC or its participants or indirect participants
of their respective obligations under the rules and procedures
governing their operations.
Certificated
Securities
Certificated securities shall only be issued in exchange for
beneficial interests in the global notes (i) after there
has occurred and is continuing an event of default with respect
to the notes or (ii) if DTC is at any time unwilling or
unable to continue as a depositary for the global notes or has
ceased to be a clearing agency registered under the Exchange Act
and a successor depositary is not appointed by us within
120 days.
Secondary
Market Trading, Global Clearance and Settlement under the
Book-Entry System
Any permitted secondary market trading activity in the notes
will be required by DTC to be settled in immediately available
funds. We expect that secondary trading in any certificated
notes will also be settled in immediately available funds.
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CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion is a summary of certain United States
federal income tax considerations relating to the exchange of
outstanding notes for exchange notes pursuant to the exchange
offer and the ownership and disposition of exchange notes
received pursuant to the exchange offer. This summary does not
purport to be a complete analysis of all the potential tax
considerations relevant to the particular circumstances of
holders. This summary is based on the provisions of the Code,
the Treasury regulations promulgated or proposed thereunder,
judicial authority, published administrative positions of the
Internal Revenue Service (the IRS) and other
applicable authorities, all as in effect on the date of this
prospectus, and all of which are subject to change, possibly on
a retroactive basis. We have not sought any ruling from the IRS
with respect to the statements made and the conclusions reached
in this summary, and there can be no assurance that the IRS will
agree with our statements and conclusions. This summary deals
only with outstanding notes and exchange notes held as
capital assets within the meaning of
Section 1221 of the Code (generally, property held for
investment). This summary does not purport to deal with all
aspects of United States federal income taxation that might be
relevant to particular holders in light of their personal
circumstances or status, nor does it address tax considerations
applicable to holders that may be subject to special tax rules,
such as banks and other financial institutions, tax-exempt
organizations, S corporations, partnerships or other
pass-through entities, insurance companies, broker/dealers,
dealers or traders in securities, controlled foreign
corporations, passive foreign investment companies or certain
former citizens or residents of the United States. This summary
also does not discuss outstanding notes or exchange notes held
as part of a hedge, straddle, synthetic security or conversion
transaction, or situations in which the functional
currency of a United States holder (as defined below) is
not the United States dollar. Moreover, the effect of the
alternative minimum tax and any applicable gift, estate, state,
local or
non-United
States tax laws is not discussed.
THE FOLLOWING DISCUSSION IS INTENDED FOR INFORMATIONAL
PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING
AND ADVICE. INVESTORS CONSIDERING THE EXCHANGE OFFER SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION
OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE
UNITED STATES FEDERAL ESTATE TAX LAWS OR THE LAWS OF ANY STATE,
LOCAL OR
NON-UNITED
STATES TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX
TREATY.
The term United States holder means a beneficial
owner of an outstanding note or an exchange note that is, for
United States federal income tax purposes:
1. an individual citizen or resident of the United States;
2. a corporation, or other entity taxable as a corporation
for United States federal income tax purposes, created or
organized under the laws of the United States or any state
thereof or the District of Columbia;
3. an estate, the income of which is subject to United
States federal income taxation regardless of its source; or
4. a trust, if (i) a court within the United States is
able to exercise primary jurisdiction over its administration
and one or more United States persons (within the meaning of the
Code) has the authority to control all of its substantial
decisions, or (ii) the trust has a valid election in effect
under applicable Treasury regulations to be treated as a
domestic trust.
The term
non-United
States holder means a beneficial owner of an outstanding
note or an exchange note that is an individual, a corporation,
an estate, or a trust, and that is not a United States holder.
If an entity or arrangement treated as a partnership for United
States federal income tax purposes holds outstanding notes or
exchange notes, the United States federal income tax treatment
of a partner in the
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partnership generally will depend upon the status of the partner
and the activities of the partnership. A partner of a
partnership participating in the exchange offer should consult
its own tax advisors about the United States federal income
tax consequences of the ownership and disposition of the
exchange notes and the exchange of outstanding notes for
exchange notes.
Treatment
of the Exchange
The exchange of an outstanding note for an exchange note
pursuant to the exchange offer will not constitute a taxable
exchange for U.S. federal income tax purposes, and
accordingly a holder will not recognize any gain or loss upon
the receipt of an exchange note for an outstanding note. A
holders holding period for an exchange note will include
the holding period for the outstanding note exchanged therefor,
and a holders tax basis in the exchange note immediately
after the exchange will be the same as such holders
adjusted tax basis in such outstanding note immediately before
the exchange.
Effect of
Certain Additional Payments
In certain circumstances, we may be obligated to pay amounts in
excess of the stated interest or principal on the exchange notes
(as described under Description of Exchange
Notes Repurchase at the Option of
Holders Change of Control). These potential
payments may implicate the provisions of U.S. Treasury
regulations relating to contingent payment debt
instruments. According to the applicable
U.S. Treasury regulations, certain contingencies will not
cause a debt instrument to be treated as a contingent payment
debt instrument if such contingencies, as of the date of
issuance, are either remote or incidental. We intend to take the
position that the foregoing contingencies are remote
and/or
incidental, and we do not intend to treat the exchange notes as
contingent payment debt instruments. Our position that such
contingencies are remote
and/or
incidental is binding on a holder unless such holder discloses
its contrary position in the manner required by applicable
U.S. Treasury regulations. If any additional amounts are in
fact paid, holders will be required to recognize such amounts as
income at the time such payments are received or accrued, in
accordance with each holders method of accounting for
U.S. federal income tax purposes. In the event the IRS
successfully takes the position that certain of the potential
payments described above are not remote
and/or
incidental, the amount and timing (and possibly the character)
of the income recognized by a holder would be affected.
In addition, if we exercise our option to repurchase the
exchange notes prior to the maturity date (as described under
Description of Exchange Notes Optional
Redemption), the yield on such exchange notes may be
greater than it would otherwise be. Under special rules
governing this type of unconditional option, we will be deemed
not to exercise this option, and the possibility of this
increased yield will not affect the amount and timing of
interest income you recognize in advance of such events.
The remainder of this discussion assumes that our determinations
above are correct. Holders should consult their own tax advisors
regarding the tax considerations relating to the potential
payments and optional redemption rights described above.
United
States Holders
Payment of Interest. In general, stated
interest on an exchange note will be taken into account by a
United States holder as ordinary income at the time such
interest is accrued or received in accordance with the
holders regular method of accounting for United States
federal income tax purposes.
Market Discount. In general, outstanding notes
will have market discount if such notes were
acquired by a holder after their original issuance at a discount
exceeding a statutorily defined de minimis amount to
their stated redemption price at maturity. United States holders
of outstanding notes that have market discount in such notes
will carry over that market discount to the exchange notes
received pursuant to the exchange offer.
Under the market discount rules, a United States holder is
required to treat any principal payment on, or any gain on a
sale, exchange, redemption or other disposition of, an exchange
note as ordinary income to the
211
extent of any accrued market discount that has not previously
been included in income. Accrued market discount will include
any market discount that has accrued on the exchange note and on
the outstanding note for which the exchange note was received.
If a United States holder disposes of an exchange note in an
otherwise nontaxable transaction, other than certain specified
nonrecognition transactions, such holder will be required to
include any accrued market discount as ordinary income as if
such holder had sold the exchange note at its then fair market
value. In addition, the holder may be required to defer, until
the maturity of the exchange note or its earlier disposition in
a taxable transaction, the deduction of a portion of the
interest expense on any indebtedness incurred or continued to
purchase or carry the outstanding note or the exchange note.
Market discount generally accrues ratably on a straight-line
basis from the date on which a United States holder acquired the
outstanding note through the maturity date of the exchange note
for which the outstanding note was exchanged, unless such holder
makes an irrevocable election to accrue market discount under a
constant-yield method. A United States holder may elect to
include market discount in income currently as it accrues, in
which case the rule described above regarding deferral of
interest deductions will not apply. If such a holder elects to
include market discount in income currently, the holders
adjusted basis in an exchange note will be increased by any
market discount included in income. An election to include
market discount in income currently will apply to all market
discount obligations acquired during or after the first taxable
year for which the election is made, and the election may not be
revoked without the consent of the IRS.
Amortizable Bond Premium. A United States
holder who acquired outstanding notes at a premium (i.e.,
for a price in excess of the notes stated redemption price
at maturity) will carry over that premium to the exchange notes
acquired in the exchange. A United States holder generally may
elect to amortize that premium (amortizable bond
premium) from the acquisition date of the outstanding note
to the maturity date under a constant-yield method based on the
notes payment period. Amortizable bond premium will be
treated as an offset to interest income on the exchange notes
and not as a separate deduction. The election to amortize bond
premium, once made, applies to all debt obligations held or
subsequently acquired by the electing United States holder on or
after the first day of the first taxable year to which the
election applies and may not be revoked without the consent of
the IRS. If such an election to amortize bond premium is not
made, a United States holder must include all amounts of taxable
interest in income without reduction for such premium, and may
receive a tax benefit from the premium only in computing such
United States holders gain or loss upon a disposition of
an exchange note.
Sale, Exchange, Retirement, Redemption or Other Taxable
Disposition of the Notes. Upon a sale, exchange,
retirement, redemption or other taxable disposition of a note,
except as discussed above under Market
Discount, a United States holder generally will recognize
capital gain or loss equal to the difference between
(i) the amount realized on the sale, exchange, retirement,
redemption or other taxable disposition (not including the
amount allocable to accrued but unpaid interest, which will be
treated as ordinary interest income to the extent not previously
included in gross income) and (ii) the holders
adjusted tax basis in the note. A United States holders
adjusted tax basis in an exchange note immediately after the
exchange generally will be the same as such holders basis
in the outstanding note exchanged therefor. Such tax basis will
be increased by any amount includible in income as accrued
market discount (if current inclusion is elected, as described
in more detail above), and decreased by the amount of any
premium amortized by the holder and used to offset interest
income, and by payments from us other than qualified stated
interest (if any). The capital gain or loss will be long-term
capital gain or loss if the United States holders holding
period in the note exceeds one year at the time of the
disposition. Certain non-corporate United States holders
(including individuals) may be eligible for preferential rates
of U.S. federal income tax in respect of long-term capital
gains. The deductibility of capital losses is subject to
limitations under the Code.
Medicare Contribution Tax on Unearned
Income. For taxable years beginning after
December 31, 2012, a 3.8% Medicare tax will be imposed on
the lesser of the net investment income or the
amount by which modified adjusted gross income exceeds a
threshold amount, in either case, of United States holders that
are individuals, estates and trusts. Net investment income
includes, among other things, interest income derived other than
from the conduct of a nonpassive trade or business. Payments of
interest on the exchange notes are expected to constitute net
investment income.
212
Information Reporting and Backup Withholding
Tax. Information reporting requirements generally
will apply with respect to payments of principal, payments of
stated interest, and the proceeds of sales or other dispositions
(including a retirement or redemption) of the exchange notes
unless an exemption exists. In addition, backup withholding may
apply to such payments and proceeds if a United States holder
fails to provide its correct taxpayer identification number and
certify that it is exempt from backup withholding. All
individual United States holders are subject to these
requirements. In general, corporations are exempt from these
requirements, provided that their exemptions are properly
established. Under current law, the backup withholding rate is
28% through 2012, and 31% thereafter.
Backup withholding is not an additional tax and any amounts
withheld under the backup withholding rules may be credited
against a United States holders United States federal
income tax liability (or refunded), provided that the required
information is timely provided to the IRS. United States holders
should consult their own tax advisors regarding the application
of backup withholding in their particular situations, the
availability of an exemption from backup withholding and the
procedure for obtaining such an exemption, if available.
Non-United
States Holders
Payment of Interest. Generally, interest
income of a
non-United
States holder with respect to the exchange notes that is not
effectively connected with a United States trade or business
(and, in the case of a
non-United
States holder eligible for the benefits of an applicable income
tax treaty, is not attributable to a permanent establishment in
the United States) of the
non-United
States holder will not be subject to United States federal
income tax or withholding tax, provided that (i) the
non-United
States holder does not actually or constructively own 10% or
more of the combined voting power of all classes of our stock
entitled to vote, (ii) the
non-United
States holder is not a controlled foreign corporation related to
us actually or constructively through stock ownership,
(iii) the
non-United
States holder is not a bank whose receipt of interest on the
exchange notes is on an extension of credit made pursuant to a
loan agreement entered into in the ordinary course of business
and (iv) either (a) the
non-United
States holder provides an IRS
Form W-8BEN
(or other applicable form) signed under penalties of perjury
that includes its name and address and certifies as to its
non-United
States status in compliance with applicable law and regulations,
or (b) the
non-United
States holder holds the exchange notes through an appropriate
intermediary that provides a statement to us or our agent under
penalties of perjury in which it certifies that an IRS
Form W-8BEN
(or a suitable substitute form) has been received by it from the
non-United
States holder or a qualifying intermediary and furnishes a copy
to us or our agent. If these requirements are not satisfied with
respect to a
non-United
States holder, a 30% U.S. federal income withholding tax
will apply to interest paid on the exchange notes to such
non-United
States holder, unless the
non-United
States holder provides (1) a properly executed IRS
Form W-8BEN
(or successor form) signed under penalties of perjury claiming
an exemption from (or a reduction of) withholding under the
benefit of a tax treaty between the United States and the
non-United
States holders country of residence, or (2) a
properly executed IRS
Form W-8
ECI (or successor form) signed under penalties of perjury
claiming that the payments of interest are effectively connected
with such
non-United
States holders conduct of a trade or business in the
United States, as discussed below.
Except to the extent that an applicable treaty otherwise
provides, a
non-United
States holder generally will be taxed in the same manner as a
United States holder with respect to interest that is
effectively connected with a United States trade or business of
the
non-United
States holder. Effectively connected interest received by a
corporate
non-United
States holder may also, in some circumstances, be subject to an
additional branch profits tax at a 30% rate (or, if
applicable, a lower treaty rate). Even though such effectively
connected interest is subject to United States federal income
tax, and may be subject to the branch profits tax, it is not
subject to withholding tax if the
non-United
States holder delivers a properly executed IRS
Form W-8ECI
(or successor form) to the payor.
Sale, Exchange, Redemption or Other Taxable Disposition of
the Notes. A
non-United
States holder of an exchange note generally will not be subject
to United States federal income tax or withholding tax on any
gain realized on a sale, exchange, retirement, redemption or
other taxable disposition of the note (other than any amount
representing accrued but unpaid interest on the note, which is
subject to the rules discussed above under
Non-United
States Holders Payment of Interest) unless
(i) the gain is effectively connected with
213
a United States trade or business of the
non-United
States holder (and, in the case of a
non-United
States holder eligible for the benefits of an applicable income
tax treaty, is attributable to a permanent establishment in the
United States), in which case the
non-United
States holder will be taxed in the same manner discussed above
with respect to effectively connected income (including, in the
case of a
non-United
States holder that is a corporation, potentially being subject
to branch profits tax), or (ii) in the case of a
non-United
States holder who is an individual, such holder is present in
the United States for a period or periods aggregating
183 days or more during the taxable year of the disposition
and certain other requirements are met, in which case the
non-United
States holder will be subject to a 30% U.S. federal income
tax on any gain recognized (except as otherwise provided by an
applicable income tax treaty), which may be offset by certain
U.S. source losses.
Information Reporting and Backup Withholding
Tax. United States backup withholding tax
generally will not apply to payments of interest on an exchange
note to a
non-United
States holder if the
non-United
States holder certifies that such holder is a foreign person as
described in
Non-United
States Holders Payment of Interest, provided
that the payor does not have actual knowledge or reason to know
that the holder is a United States person. Payments of interest
to a
non-United
States holder, and the amount of tax, if any, withheld with
respect to those payments generally must be reported to the IRS.
Under the provisions of an applicable income tax treaty or
agreement, copies of the information returns reporting such
interest payments and any withholding may also be made available
to the tax authorities in the country in which the
non-United
States holder resides.
Backup withholding is not an additional tax, and any amounts
withheld under the backup withholding rules may be credited
against non-United States holders United States federal
income tax liability (or refunded), provided that the required
information is timely provided to the IRS.
Non-United
States holders should consult their tax advisors regarding the
application of information reporting and backup withholding in
their particular situations, the availability of an exemption
from backup withholding and the procedure for obtaining such an
exemption, if available.
Additional
Withholding and Reporting Requirements for the Exchange Notes
Held By or Through Foreign Entities
Legislation enacted in March 2010 (the HIRE Act)
generally will impose a U.S. federal withholding tax of 30%
on payments of interest and the gross proceeds from a sale or
other disposition of exchange notes to a foreign financial
institution (as specially defined under these rules),
including payments made to it as an intermediary, unless such
institution enters into an agreement with the United States
government to withhold on certain payments and to collect and
provide to the U.S. tax authorities substantial information
regarding U.S. account holders of such institution (which
includes certain equity and debt holders of such institution, as
well as certain account holders that are foreign entities with
U.S. owners). The legislation also generally will impose a
U.S. federal withholding tax of 30% on payments of interest
and the gross proceeds from a sale or other disposition of
exchange notes to a non-financial foreign entity, including
payments made to it as an intermediary, unless such entity
provides the withholding agent with a certification that it does
not have any substantial U.S. owners, or a certification
identifying the direct and indirect substantial U.S. owners
of the entity. Pursuant to recent guidance from the IRS, this
30% withholding tax would apply to certain payments, including
interest on the exchange notes paid on or after January 1,
2014, and to payments of gross proceeds from the sale or other
disposition of exchange notes on or after January 1, 2015.
There are currently no rules coordinating the HIRE Act
withholding taxes with other U.S. federal income tax
withholding taxes, including provisions providing for the proper
crediting of amounts deducted and withheld under the HIRE Act
rules against amounts required to be deducted and withheld under
such other withholding provisions. The timing and application of
any future coordination rules is uncertain; it is possible that
coordination rules would not eliminate duplicative withholding.
The IRSs guidance with respect to these rules is only
preliminary, and the scope of these rules remains unclear and
potentially subject to material changes. You should consult your
tax advisor regarding the new requirements and the effect that
such new requirements may have on the exchange notes.
214
CERTAIN
ERISA AND OTHER CONSIDERATIONS
To the extent the notes are purchased and held by an employee
benefit plan subject to Title I of ERISA, or
Section 4975 of the Code, the following considerations are
among those that should be taken into account. The fiduciary of
an ERISA plan, as well as any other prospective investor subject
to Section 4975 of the Code, must determine that its
purchase and holding of notes does not result in or involve a
non-exempt prohibited transaction under Section 406 of
ERISA or Section 4975 of the Code. To address the above
concerns, certain representations and agreements are provided
for in paragraphs 6 and 7 of the Notice to
Investors, which are designed to ensure that the
acquisition of the notes will not constitute or result in a
nonexempt prohibited transaction under ERISA or the Code.
Similar state, local and
non-U.S. laws
may apply to plans that are not subject to Title I of ERISA
or Section 4975 of the Code.
PLAN OF
DISTRIBUTION
Each broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge that it
will deliver a prospectus in connection with any resale of the
exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer
in connection with resales of exchange notes received in
exchange for outstanding notes where the outstanding notes were
acquired as a result of market-making activities or other
trading activities. To the extent any such broker-dealer
participates in the exchange offer, we have agreed that for a
period of up to 180 days, we will use our commercially
reasonable efforts to make this prospectus, as amended or
supplemented, available to such broker-dealer for use in
connection with any such resale, and will promptly provide such
number of copies of this prospectus (as the amended or
supplemented) as such broker-dealer may reasonably request.
We will not receive any proceeds from any sale of exchange notes
by broker-dealers. Exchange notes received by broker-dealers for
their own accounts pursuant to the exchange offer may be sold
from time to time in one or more transactions in the
over-the-counter
market, in negotiated transactions, through the writing of
options on the exchange notes or a combination of these methods
of resale, at market prices prevailing at the time of resale, at
prices related to the prevailing market prices or negotiated
prices. Any resale may be made directly to purchasers or to
through brokers or dealers who may receive compensation in the
form of commissions or concessions from any broker-dealer or the
purchasers of any exchange notes. Any broker-dealer that resells
exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that
participates in a distribution of the exchange notes may be
deemed to be an underwriter within the meaning of
the Securities Act and any profit on any resale of exchange
notes and any commissions or concessions received by these
persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it
is an underwriter within the meaning of the
Securities Act.
We have agreed to pay all expenses incident to the exchange
offer (including the expenses of one counsel for the holders of
the outstanding notes) other than agency fees and commissions
and underwriting discounts and commissions, if any, and transfer
taxes, if any, attributable to the sale of notes, as applicable,
and will indemnify the holders of outstanding notes, including
any broker-dealers, against certain liabilities, including
liabilities under the Securities Act.
LEGAL
MATTERS
The validity and enforceability of the exchange notes and the
related guarantees offered hereby will be passed upon for us by
Ropes & Gray LLP, Boston, Massachusetts; Cohn
Birnbaum & Shea P.C., Hartford, Connecticut;
Faegre & Benson LLP, Minneapolis, Minnesota; Greenberg
Traurig, LLP, Phoenix, Arizona; Greenberg Traurig, P.A., Miami,
Florida; Holland & Hart LLP, Salt Lake City, Utah;
McAfee & Taft A Professional Corporation, Oklahoma
City, Oklahoma; Rhoades McKee PC, Grand Rapids, Michigan; and
Wyatt, Tarrant & Combs, LLP, Louisville, Kentucky.
215
EXPERTS
Ernst &Young LLP, independent registered public accounting
firm, has audited Norteks consolidated financial
statements and schedule at December 31, 2010 and 2009, and for
the year ended December 31, 2010 (Successor), the period
December 20, 2009 to December 31, 2009 (Successor), the period
January 1, 2009 to December 19, 2009 (Predecessor) and the year
ended December 31, 2008 (Predecessor), as set forth in their
reports. Weve included Norteks consolidated
financial statements and schedule in the prospectus and
elsewhere in the registration statement in reliance on Ernst
&Young LLPs reports, given on their authority as
experts in accounting and auditing.
The consolidated balance sheet as of December 31, 2009 and
the consolidated statement of operations, stockholders
equity and cash flows for the year ended December 31, 2009
of Ergotron, included in this prospectus and elsewhere in the
registration statement have been so included in reliance upon
the report of Grant Thornton LLP, independent registered public
accountants, upon the authority of said firm as experts in
giving said reports.
The consolidated balance sheet as of December 31, 2008 and
the consolidated statements of operations, stockholders
equity and cash flows for the years ended December 31, 2008
and 2007 of Ergotron, included in this prospectus and elsewhere
in the registration statement have been so included in reliance
upon the report of Grant Thornton LLP, independent certified
public accountants, upon the authority of said firm as experts
in giving said reports.
216
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Unaudited Condensed Consolidated Financial Statements of
Nortek, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-5
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
Consolidated Financial Statements of Nortek, Inc. and
Subsidiaries
|
|
|
|
|
|
|
|
F-37
|
|
|
|
|
F-38
|
|
|
|
|
F-40
|
|
|
|
|
F-41
|
|
|
|
|
F-45
|
|
|
|
|
F-117
|
|
Unaudited Condensed Consolidated Financial Statements of
Ergotron, Inc. and Subsidiaries (1)
|
|
|
|
|
|
|
|
F-118
|
|
|
|
|
F-120
|
|
|
|
|
F-121
|
|
|
|
|
F-122
|
|
Consolidated Financial Statements of Ergotron, Inc. and
Subsidiaries (1)
|
|
|
|
|
|
|
|
F-128
|
|
|
|
|
F-130
|
|
|
|
|
F-131
|
|
|
|
|
F-132
|
|
|
|
|
F-134
|
|
|
|
|
F-149
|
|
Consolidated Financial Statements of Ergotron, Inc. and
Subsidiaries (2)
|
|
|
|
|
|
|
|
F-150
|
|
|
|
|
F-152
|
|
|
|
|
F-153
|
|
|
|
|
F-154
|
|
|
|
|
F-156
|
|
|
|
|
F-169
|
|
F-1
|
|
|
(1) |
|
On December 17, 2010, Nortek, Inc. (the
Company) acquired all of the outstanding stock of
Ergotron, Inc. (Ergotron). The acquisition of
Ergotron was significant to the Company under
Article 3-05
of
Regulation S-X
of the Securities and Exchange Commissions
(SEC) rules and regulations
(Rule 3-05).
In addition, the U.S. operations of Ergotron guarantee
Norteks 8.5% Senior Notes due 2021, which are being
registered under this registration statement. As such, Ergoton
is considered to be a recently acquired subsidiary guarantor
under
Article 3-10(g)
of
Regulation S-X
of the SECs rules and regulations
(Rule 3-10(g)).
Accordingly, these consolidated financial statements of Ergotron
are included in this registration statement to satisfy the
Companys requirements under
Rule 3-05
and
Rule 3-10(g)
for the nine months ended October 2, 2010 and
October 3, 2009 and the year ended December 31, 2009. |
|
(2) |
|
These consolidated financial statements of Ergotron are included
in this registration statement to satisfy the Companys
requirements under
Rule 3-05
for the years ended December 31, 2008 and 2007. |
F-2
NORTEK,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollar amounts in millions)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
57.2
|
|
|
$
|
57.7
|
|
Restricted cash
|
|
|
0.1
|
|
|
|
0.1
|
|
Accounts receivable, less allowances of $6.2 million and
$4.9 million, respectively
|
|
|
285.1
|
|
|
|
280.8
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
98.5
|
|
|
|
92.9
|
|
Work in process
|
|
|
30.4
|
|
|
|
24.3
|
|
Finished goods
|
|
|
200.1
|
|
|
|
196.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329.0
|
|
|
|
313.5
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
17.9
|
|
|
|
15.9
|
|
Other current assets
|
|
|
30.5
|
|
|
|
13.8
|
|
Tax refunds receivable
|
|
|
10.9
|
|
|
|
18.5
|
|
Prepaid income taxes
|
|
|
18.4
|
|
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
749.1
|
|
|
|
717.2
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, at Cost:
|
|
|
|
|
|
|
|
|
Land
|
|
|
18.2
|
|
|
|
18.2
|
|
Buildings and improvements
|
|
|
77.5
|
|
|
|
76.0
|
|
Machinery and equipment
|
|
|
193.4
|
|
|
|
185.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289.1
|
|
|
|
279.6
|
|
Less accumulated depreciation
|
|
|
71.6
|
|
|
|
44.1
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
217.5
|
|
|
|
235.5
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
304.7
|
|
|
|
292.1
|
|
Intangible assets, less accumulated amortization of
$72.0 million and $38.2 million, respectively
|
|
|
670.4
|
|
|
|
695.0
|
|
Deferred debt expense
|
|
|
20.9
|
|
|
|
12.2
|
|
Restricted investments and marketable securities
|
|
|
2.2
|
|
|
|
2.4
|
|
Other assets
|
|
|
21.2
|
|
|
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,019.4
|
|
|
|
1,018.4
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,986.0
|
|
|
$
|
1,971.1
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-3
NORTEK,
INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEET
(Continued)
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollar amounts in millions, except shares data)
|
|
|
LIABILITIES AND STOCKHOLDERS INVESTMENT
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable and other short-term obligations
|
|
$
|
2.1
|
|
|
$
|
8.6
|
|
Current maturities of long-term debt
|
|
|
33.7
|
|
|
|
7.7
|
|
Long-term debt (Note G)
|
|
|
0.2
|
|
|
|
1.5
|
|
Accounts payable
|
|
|
170.6
|
|
|
|
175.7
|
|
Accrued expenses and taxes, net
|
|
|
230.3
|
|
|
|
193.2
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
436.9
|
|
|
|
386.7
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
125.6
|
|
|
|
152.7
|
|
Other
|
|
|
175.0
|
|
|
|
171.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300.6
|
|
|
|
323.8
|
|
|
|
|
|
|
|
|
|
|
Notes, Mortgage Notes and Obligations Payable, Less Current
Maturities
|
|
|
1,146.9
|
|
|
|
1,101.8
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note H)
|
|
|
|
|
|
|
|
|
Stockholders Investment:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 authorized
shares; none issued and outstanding at October 1, 2011 and
December 31, 2010
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 90,000,000 authorized
shares; 15,203,439 and 15,000,000 shares issued at
October 1, 2011 and December 31, 2010, respectively
|
|
|
0.1
|
|
|
|
0.1
|
|
Additional paid-in capital
|
|
|
176.7
|
|
|
|
174.7
|
|
Accumulated deficit
|
|
|
(71.9
|
)
|
|
|
(16.8
|
)
|
Accumulated other comprehensive income
|
|
|
(0.2
|
)
|
|
|
0.8
|
|
Less: Treasury stock at cost, 74,950 shares at
October 1, 2011
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders investment
|
|
|
101.6
|
|
|
|
158.8
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Investment
|
|
$
|
1,986.0
|
|
|
$
|
1,971.1
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-4
NORTEK,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
For the Third Quarter Ended
|
|
|
|
October 1, 2011
|
|
|
October 2, 2010
|
|
|
|
(Dollar amounts in millions,
|
|
|
|
except shares and per share data)
|
|
|
Net Sales
|
|
$
|
551.8
|
|
|
$
|
496.6
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
409.6
|
|
|
|
361.4
|
|
Selling, general and administrative expense, net
|
|
|
117.1
|
|
|
|
100.1
|
|
Amortization of intangible assets
|
|
|
11.1
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
537.8
|
|
|
|
469.9
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
14.0
|
|
|
|
26.7
|
|
Interest expense
|
|
|
(24.6
|
)
|
|
|
(22.9
|
)
|
Investment income
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before benefit from income taxes
|
|
|
(10.6
|
)
|
|
|
3.9
|
|
Benefit from income taxes
|
|
|
(8.5
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(2.1
|
)
|
|
$
|
9.8
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.14
|
)
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.14
|
)
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,128,246
|
|
|
|
15,000,000
|
|
Diluted
|
|
|
15,128,246
|
|
|
|
15,301,864
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-5
NORTEK,
INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
For the First Nine Months Ended
|
|
|
|
October 1, 2011
|
|
|
October 2, 2010
|
|
|
|
(Dollar amounts in millions,
|
|
|
|
except shares and per share data)
|
|
|
Net Sales
|
|
$
|
1,605.3
|
|
|
$
|
1,436.5
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
1,183.3
|
|
|
|
1,051.5
|
|
Selling, general and administrative expense, net
|
|
|
351.4
|
|
|
|
298.0
|
|
Amortization of intangible assets
|
|
|
33.9
|
|
|
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,568.6
|
|
|
|
1,378.5
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
36.7
|
|
|
|
58.0
|
|
Interest expense
|
|
|
(81.0
|
)
|
|
|
(69.9
|
)
|
Loss from debt retirement
|
|
|
(33.8
|
)
|
|
|
|
|
Investment income
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(78.0
|
)
|
|
|
(11.8
|
)
|
Benefit from income taxes
|
|
|
(22.9
|
)
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(55.1
|
)
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(3.64
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(3.64
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,121,093
|
|
|
|
15,000,000
|
|
Diluted
|
|
|
15,121,093
|
|
|
|
15,000,000
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-6
NORTEK,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
For the First Nine Months Ended
|
|
|
|
October 1, 2011
|
|
|
October 2, 2010
|
|
|
|
(Dollar amounts in millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(55.1
|
)
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
71.8
|
|
|
|
72.7
|
|
Loss from debt retirement
|
|
|
33.8
|
|
|
|
|
|
Non-cash interest expense, net
|
|
|
4.1
|
|
|
|
1.4
|
|
Non-cash share-based compensation expense
|
|
|
0.4
|
|
|
|
1.9
|
|
Gain on sale of property and equipment
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
Deferred federal income tax benefit
|
|
|
(27.2
|
)
|
|
|
(27.3
|
)
|
Changes in certain assets and liabilities, net of effects
from acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(3.6
|
)
|
|
|
(16.8
|
)
|
Inventories
|
|
|
(21.1
|
)
|
|
|
(30.9
|
)
|
Prepaid and other current assets
|
|
|
(20.6
|
)
|
|
|
0.4
|
|
Accounts payable
|
|
|
(6.3
|
)
|
|
|
35.3
|
|
Accrued expenses and taxes
|
|
|
53.1
|
|
|
|
38.3
|
|
Long-term assets, liabilities and other, net
|
|
|
4.6
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to net loss
|
|
|
88.9
|
|
|
|
77.8
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
33.8
|
|
|
|
74.5
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(13.9
|
)
|
|
|
(12.6
|
)
|
Net cash paid for businesses acquired (Note B)
|
|
|
(30.9
|
)
|
|
|
(9.2
|
)
|
Investment in joint venture (Note B)
|
|
|
(5.3
|
)
|
|
|
|
|
Proceeds from the sale of property and equipment
|
|
|
0.6
|
|
|
|
0.5
|
|
Change in restricted cash and marketable securities
|
|
|
0.2
|
|
|
|
1.2
|
|
Other, net
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(49.1
|
)
|
|
|
(20.1
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Increase in borrowings
|
|
|
80.6
|
|
|
|
47.9
|
|
Payment of borrowings
|
|
|
(99.3
|
)
|
|
|
(138.0
|
)
|
Sale of the 8.5% Senior Notes due 2021
|
|
|
500.0
|
|
|
|
|
|
Net proceeds from borrowings under the Term Loan Facility
|
|
|
348.2
|
|
|
|
|
|
Redemption of the 11% Senior Secured Notes due 2013
|
|
|
(753.3
|
)
|
|
|
|
|
Fees paid in connection with new debt facilities
|
|
|
(58.7
|
)
|
|
|
|
|
Payment of minimum withholding taxes in connection with vesting
of restricted stock
|
|
|
(2.7
|
)
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
14.8
|
|
|
|
(90.8
|
)
|
|
|
|
|
|
|
|
|
|
Net change in unrestricted cash and cash equivalents
|
|
|
(0.5
|
)
|
|
|
(36.4
|
)
|
Unrestricted cash and cash equivalents at the beginning of the
period
|
|
|
57.7
|
|
|
|
89.6
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents at the end of the period
|
|
$
|
57.2
|
|
|
$
|
53.2
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
58.2
|
|
|
$
|
44.3
|
|
|
|
|
|
|
|
|
|
|
Income taxes (refunded) paid, net
|
|
$
|
(5.5
|
)
|
|
$
|
11.6
|
|
|
|
|
|
|
|
|
|
|
The impact of changes in foreign currency exchange rates on cash
was not material and has been included in Other, net.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-7
NORTEK,
INC. AND SUBSIDIARIES
OCTOBER
1, 2011 AND OCTOBER 2, 2010
|
|
(A)
|
BASIS OF
PRESENTATION
|
Nortek, Inc. (Nortek) and all of its wholly-owned
subsidiaries, collectively the Company, is a
diversified manufacturer of innovative, branded residential and
commercial building products, operating within four reporting
segments (see Note E, Segment
Information). Through these segments, the Company
manufactures and sells, primarily in the United States, Canada
and Europe, a wide variety of products for the remodeling and
replacement markets, the residential and commercial new
construction markets, the manufactured housing market and the
personal and enterprise computer markets.
The Company operates on a calendar year and for its interim
periods operates on a 4-4-5 fiscal calendar, where each fiscal
quarter is comprised of two 4-week periods and one 5-week
period, with each week ending on a Saturday. The Companys
fiscal year always begins on January 1 and ends on
December 31. As a result, the Companys first and
fourth quarters may have more or less days included than a
traditional 4-4-5 fiscal calendar, which consists of
91 days. The third quarters ended October 1, 2011
(third quarter of 2011) and October 2, 2010
(third quarter of 2010) each include 91 days.
The first nine months ended October 1, 2011 (first
nine months of 2011) and October 2, 2010 (first
nine months of 2010) include 274 days and
275 days, respectively.
The accompanying unaudited condensed consolidated financial
statements reflect the financial position, results of operations
and cash flows of the Company after elimination of intercompany
accounts and transactions, without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of the interim periods presented.
Although certain information and footnote disclosures normally
included in annual financial statements prepared in accordance
with U.S. generally accepted accounting principles
(U.S. GAAP) have been omitted, the Company
believes that the disclosures included are adequate to make the
information presented herein not misleading. Operating results
for the third quarter and first nine months ended
October 1, 2011 are not necessarily indicative of the
results that may be expected for other interim periods or for
the year ending December 31, 2011. Certain amounts in the
prior years unaudited condensed consolidated financial
statements have been reclassified to conform to the current
period presentation, including reclassifications to other
current assets, other assets, accrued expenses and taxes, net
and other liabilities related to expected insurance
reimbursements.
These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated
financial statements and the related notes included in the
Companys latest annual report on
Form 10-K
and its latest Current Reports on
Form 8-K
as filed with the Securities and Exchange Commission
(SEC).
New
Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standard Update
(ASU)
No. 2011-08,
Testing Goodwill for Impairment (ASU
2011-08),
which changes the way a company completes its annual impairment
review process. The provisions of this pronouncement provide an
entity with the option to first assess qualitative factors to
determine whether the existence of events or circumstances leads
to a determination that it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. ASU
2011-08
allows an entity the option to bypass the qualitative-assessment
for any reporting unit in any period and proceed directly to
performing the first step of the two-step goodwill impairment
test. The pronouncement does not change the current guidance for
testing other indefinite-lived intangible assets for impairment.
This standard is effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after
December 15, 2011. Early adoption is permitted. The Company
does not expect the adoption of ASU
2011-08 to
have a material effect on its financial position or results of
operations.
F-8
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2011, the FASB issued ASU
No. 2011-05,
Presentation of Comprehensive Income (ASU
2011-05),
which will require companies to present the components of net
income and other comprehensive income either in a single
continuous statement or in two separate but consecutive
statements. It eliminates the option to present components of
other comprehensive income as part of the statement of changes
in stockholders equity. The pronouncement does not change
the current option for presenting components of other
comprehensive income, gross or net of the effect of income
taxes, provided that such tax effects are presented in the
statement in which other comprehensive income is presented or
disclosed in the notes to the financial statements. The
pronouncement does not affect the calculation or reporting of
earnings per share. The pronouncement also does not change the
items which must be reported in other comprehensive income, how
such items are measured, or when they must be reclassified to
net income. This standard is effective for reporting periods
beginning after December 15, 2011. Early adoption is
permitted. The Company will adopt this pronouncement in the
first quarter of 2012 and it will have no effect on its
financial position or results of operations, but will impact the
way the Company presents comprehensive income.
In May 2011, the FASB issued ASU
No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs
(ASU
2011-04),
which is intended to result in convergence between
U.S. GAAP and International Financial Reporting Standards
requirements for measurement of, and disclosures about, fair
value. ASU
2011-04
clarifies or changes certain fair value measurement principles
and enhances the disclosure requirements particularly for
Level 3 fair value measurements. This pronouncement is
effective for reporting periods beginning after
December 15, 2011, with early adoption prohibited for
public companies. The new guidance will require prospective
application. The Company will adopt this pronouncement in the
first quarter of 2012 and does not expect its adoption to have a
material effect on its financial position or results of
operations.
In December 2010, the FASB issued ASU
No. 2010-29,
Disclosure of Supplementary Pro Forma Information for
Business Combinations (ASU
2010-29),
which amended guidance to clarify the acquisition date that
should be used for reporting pro-forma financial information for
business combinations. If comparative financial statements are
presented, the pro-forma revenue and earnings of the combined
entity for the comparable prior reporting period should be
reported as though the acquisition date for all business
combinations that occurred during the current year had been
completed as of the beginning of the comparable prior annual
reporting period. The amendments in this guidance became
effective prospectively for business combinations for which the
acquisition date is on or after January 1, 2011. There was
no impact on the Companys consolidated financial results
as the amendments relate only to additional disclosures.
In December 2010, the FASB issued ASU
No. 2010-28,
When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts
(ASU
2010-28),
which amended the guidance on goodwill impairment testing. The
amendments modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For
those reporting units, an entity is required to perform Step 2
of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In making that determination,
an entity should consider whether there are any adverse
qualitative factors indicating that impairment may exist. The
amendments were effective January 1, 2011 and did not have
a material impact on the Companys consolidated financial
statements.
In January 2010, the FASB issued ASU
No. 2010-06,
Improving Disclosures about Fair Value Measurements
(ASU
2010-06),
which establishes additional disclosure requirements for fair
value measurements which the Company included in its interim and
annual financial statements in 2010. Certain disclosure
requirements relating to fair value measurements using
significant unobservable inputs (Level 3) were
deferred until January 1, 2011. These new requirements did
not have an impact on the Companys consolidated financial
results or disclosure in the unaudited condensed consolidated
financial statements (see Note I, Fair
Value).
F-9
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In October 2009, the FASB issued ASU
No. 2009-14,
Certain Revenue Arrangements that Include Software Elements
(ASU
2009-14),
which amends the scope of existing software revenue recognition
accounting. Tangible products containing software components and
non-software components that function together to deliver the
products essential functionality would be scoped out of
the accounting guidance on software and accounted for based on
other appropriate revenue recognition guidance. This guidance
must be adopted in the same period that a company adopts ASU
2009-13
described in the following paragraph. Therefore, the Company
adopted this guidance on January 1, 2011. The adoption of
ASU 2009-14
did not have a material impact on the Companys
consolidated financial statements.
In October 2009, the FASB issued ASU
No. 2009-13,
Multiple- Deliverable Revenue Arrangements (ASU
2009-13),
which amends revenue recognition guidance for arrangements with
multiple deliverables. The new guidance eliminates the residual
method of revenue recognition and allows the use of
managements best estimate of selling price for individual
elements of an arrangement when vendor-specific objective
evidence or third-party evidence is unavailable. The Company
adopted this guidance on January 1, 2011. The adoption of
ASU 2009-13
did not have a material impact on the Companys
consolidated financial statements.
|
|
(B)
|
ACQUISITIONS
AND OTHER INVESTMENTS
|
On April 28, 2011, the Company, through wholly-owned
subsidiaries, acquired all of the stock of TV One Broadcast
Sales Corporation, Barcom (UK) Holdings Limited and Barcom Asia
Holdings, LLC (collectively, TV One) for
approximately $26.0 million. In connection with the
acquisition of TV One, in the second quarter of 2011, the
Company also incurred approximately $0.8 million of fees
and expenses, which have been recorded in selling, general and
administrative expense, net in the accompanying unaudited
condensed consolidated statement of operations. TV One sells a
complete range of video signal processing products for the
professional audio/video and broadcast markets. TV One is
included in the Companys Technology Products segment. The
Company has made preliminary estimates of the fair value of
assets and liabilities of TV One, utilizing information
available at the time that the Companys unaudited
condensed consolidated financial statements were prepared and
these estimates are subject to refinement until all pertinent
information has been obtained. The Company is in the process of
finalizing the purchase accounting and final estimates of fair
value of assets and liabilities, which is expected to be
completed during the fourth quarter of 2011. Any changes to the
estimates for these amounts or other final purchase accounting
adjustments will be reflected as an adjustment to goodwill in
the fourth quarter of 2011 when the purchase price calculation
is finalized.
On March 21, 2011, the Company, through its wholly-owned
subsidiary Huntair Middle East Holdings, Inc.
(Huntair), acquired a forty-nine percent minority
interest in Huntair Arabia, for approximately $5.3 million.
Huntair Arabia is an operating joint venture between the Company
and Alessa Advanced Projects Company (Alessa) in
Saudi Arabia that was formed for purposes of trading,
manufacturing, supplying, installing, and servicing commercial
air conditioning and commercial air handling units in Saudi
Arabia and certain other regions. The Company does not have a
controlling financial interest and, therefore, is accounting for
this investment under the equity method of accounting within the
Commercial HVAC segment. In connection with its investment in
Huntair Arabia, Huntair issued a 10 year note to Alessa for
approximately $5.3 million. The note does not bear interest
and as such, the Company has recorded the note, net of discount
of approximately $0.8 million, on its accompanying
unaudited condensed consolidated balance sheet at
October 1, 2011.
On December 17, 2010, the Company acquired all of the
outstanding stock of Ergotron, Inc. (Ergotron).
Ergotron is a designer, manufacturer and marketer of innovative,
ergonomic mounting and mobility products for computer monitors,
notebooks and flat panel displays in the United States and other
parts of the world. The estimated purchase price was
approximately $299.3 million, consisting of cash payments
totaling approximately $295.6 million, of which
approximately $5.8 million was paid in the first nine
months of 2011, and an estimated payable to the sellers of
approximately $3.7 million related to the remaining
estimated reimbursement of federal and state tax refunds due to
Ergotron for the pre-acquisition period in 2010. The
F-10
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
final amounts due for the reimbursement of federal and state tax
refunds will be determined when the final pre-acquisition tax
returns are filed and the refunds are collected, which is
expected to occur in the fourth quarter of 2011. Any changes to
the estimates for these amounts or other final purchase
accounting adjustments will be reflected as an adjustment to
goodwill in the fourth quarter of 2011 when the purchase price
calculation is finalized.
Goodwill associated with the acquisition of Ergotron was
recorded in the Technology Products segment, and the Company
does not believe that any of the goodwill will be deductible for
tax purposes. Due to revisions to the preliminary estimate of
fair value, which primarily related to intangible assets, net of
deferred tax consequences, the preliminary goodwill allocation
related to Ergotron increased by approximately $0.5 million
from $130.0 million as of December 31, 2010 to
approximately $130.5 million as of October 1, 2011.
On July 6, 2010, the Company, through its wholly-owned
subsidiary, Linear LLC acquired all of the issued and
outstanding membership interests of Skycam, LLC
(Luxor) for approximately $9.1 million
(utilizing approximately $7.9 million of cash and issuing
an unsecured 4% subordinated note in the amount of
$1.2 million due January 2012). Luxor is an online retailer
and distributor of security cameras and digital video recorders
and is included in the Technology Products segment.
The acquisitions of TV One, Ergotron and Luxor contributed
approximately $58.8 million to net sales and approximately
$7.4 million (which includes depreciation and amortization
of approximately $4.3 million) to operating earnings for
the third quarter of 2011 and contributed approximately
$169.3 million to net sales and approximately
$12.1 million (which includes depreciation and amortization
of approximately $20.8 million, including approximately
$7.5 million relating to the amortization of fair value
allocated to inventory) to operating earnings for the first nine
months of 2011.
Contingent consideration of approximately $1.3 million was
paid in the first quarter of 2010 related to the acquisition of
certain entities. The Company does not anticipate paying any
further contingent consideration for completed acquisitions as
of October 1, 2011.
The following table presents a summary of the activity in
goodwill by reporting segment for the first nine months of 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Purchase
|
|
|
October 1,
|
|
|
|
2010
|
|
|
Accounting(1)
|
|
|
2011
|
|
|
|
(Amounts in millions)
|
|
|
Residential Ventilation Products (RVP):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
$
|
154.8
|
|
|
$
|
|
|
|
$
|
154.8
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net RVP goodwill
|
|
|
154.8
|
|
|
|
|
|
|
|
154.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Products (TECH):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
|
137.3
|
|
|
|
12.6
|
|
|
|
149.9
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net TECH goodwill
|
|
|
137.3
|
|
|
|
12.6
|
|
|
|
149.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated goodwill(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
|
292.1
|
|
|
|
12.6
|
|
|
|
304.7
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidated goodwill
|
|
$
|
292.1
|
|
|
$
|
12.6
|
|
|
$
|
304.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Purchase accounting adjustments for TECH goodwill during the
first nine months of 2011 relate to the acquisitions of Ergotron
and TV One. |
|
(2) |
|
There was no goodwill allocated to the R-HVAC or C-HVAC
reporting segments at either October 1, 2011 or
December 31, 2010. |
|
|
(C)
|
STOCKHOLDERS
INVESTMENT
|
Activity within stockholders investment, including
comprehensive loss, for the third quarter of 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Loss
|
|
|
|
(Amounts in millions)
|
|
|
Balance, July 2, 2011
|
|
$
|
0.1
|
|
|
$
|
176.5
|
|
|
$
|
(69.8
|
)
|
|
$
|
4.0
|
|
|
$
|
(3.1
|
)
|
|
$
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
(3.7
|
)
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 shares of common stock issued upon exercise of stock
options
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,483 shares of treasury stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 1, 2011
|
|
$
|
0.1
|
|
|
$
|
176.7
|
|
|
$
|
(71.9
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity within stockholders investment, including
comprehensive (loss) income, for the third quarter of 2010 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Income (Loss)
|
|
|
|
(Amounts in millions)
|
|
|
Balance, July 3, 2010
|
|
$
|
0.1
|
|
|
$
|
173.1
|
|
|
$
|
(16.5
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
9.8
|
|
|
|
|
|
|
|
9.8
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
3.2
|
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 2, 2010
|
|
$
|
0.1
|
|
|
$
|
173.8
|
|
|
$
|
(6.7
|
)
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activity within stockholders investment, including
comprehensive loss, for the first nine months of 2011 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Loss
|
|
|
|
(Amounts in millions)
|
|
|
Balance, December 31, 2010
|
|
$
|
0.1
|
|
|
$
|
174.7
|
|
|
$
|
(16.8
|
)
|
|
$
|
0.8
|
|
|
$
|
|
|
|
$
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(55.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(55.1
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
(0.9
|
)
|
Pension liability adjustment, net of tax of approximately
$0.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(56.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,261 shares of common stock issued upon vesting of
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,178 shares of common stock issued upon exercise of stock
options
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,950 shares of treasury stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.1
|
)
|
|
|
|
|
Modification to executive stock option arrangements
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 1, 2011
|
|
$
|
0.1
|
|
|
$
|
176.7
|
|
|
$
|
(71.9
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity within stockholders investment, including
comprehensive (loss) income, for the first nine months of 2010
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Comprehensive
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
(Loss)
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Income
|
|
|
|
(Amounts in millions)
|
|
|
Balance, December 31, 2009
|
|
$
|
0.1
|
|
|
$
|
171.9
|
|
|
$
|
(3.4
|
)
|
|
$
|
1.5
|
|
|
$
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
(3.3
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 2, 2010
|
|
$
|
0.1
|
|
|
$
|
173.8
|
|
|
$
|
(6.7
|
)
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(D)
|
(LOSS)
EARNINGS PER SHARE
|
The Company calculates basic and diluted (loss) earnings per
share (EPS) in accordance with ASC 260,
Earnings per Share (ASC 260). Basic
(loss) earnings per share amounts are computed using the
weighted average number of common shares outstanding during the
period. Diluted (loss) earnings per share amounts are computed
using the weighted average number of common shares outstanding
and dilutive potential common shares outstanding during each
period.
The reconciliations between basic and diluted (loss) earnings
per share for the third quarter and first nine months of 2011
and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Third Quarter of
|
|
|
For the First Nine Months of
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollar amounts in millions, except shares and per share
data)
|
|
|
Net (loss) earnings
|
|
$
|
(2.1
|
)
|
|
$
|
9.8
|
|
|
$
|
(55.1
|
)
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
15,128,246
|
|
|
|
15,000,000
|
|
|
|
15,121,093
|
|
|
|
15,000,000
|
|
Dilutive effect of stock options
|
|
|
|
|
|
|
301,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares outstanding
|
|
|
15,128,246
|
|
|
|
15,301,864
|
|
|
|
15,121,093
|
|
|
|
15,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.14
|
)
|
|
$
|
0.65
|
|
|
$
|
(3.64
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.14
|
)
|
|
$
|
0.64
|
|
|
$
|
(3.64
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of certain potential common share equivalents,
including warrants, unvested restricted stock, and stock options
were excluded from the computation of diluted shares outstanding
for the third quarter and first nine months of 2011 and 2010, as
inclusion would have been anti-dilutive. A summary of these
common share equivalents excluded from the third quarter and
first nine months of 2011 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Third Quarter of
|
|
|
For the First Nine Months of
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Warrants
|
|
|
789,474
|
|
|
|
789,474
|
|
|
|
789,474
|
|
|
|
789,474
|
|
Restricted stock
|
|
|
316,852
|
|
|
|
706,481
|
|
|
|
316,852
|
|
|
|
706,481
|
|
Stock options
|
|
|
515,616
|
|
|
|
20,000
|
|
|
|
515,616
|
|
|
|
786,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,621,942
|
|
|
|
1,515,955
|
|
|
|
1,621,942
|
|
|
|
2,282,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is a diversified manufacturer of innovative, branded
residential and commercial building products, operating within
four reporting segments:
|
|
|
|
|
the Residential Ventilation Products (RVP) segment,
|
|
|
|
the Technology Products (TECH) segment,
|
|
|
|
the Residential Air Conditioning and Heating Products
(R-HVAC) segment and
|
|
|
|
the Commercial Air Conditioning and Heating Products
(C-HVAC) segment.
|
Through these segments, the Company manufactures and sells,
primarily in the United States, Canada and Europe, a wide
variety of products for the remodeling and replacement markets,
the residential and commercial new construction markets, the
manufactured housing market and the personal and enterprise
computer markets.
F-14
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys performance is significantly impacted by the
levels of residential replacement and remodeling activity, as
well as the levels of residential and non-residential new
construction. New residential and non-residential construction
activity and, to a lesser extent, residential remodeling and
replacement activity are affected by seasonality and cyclical
factors such as interest rates, credit availability, inflation,
consumer spending, employment levels and other macroeconomic
factors, over which the Company has no control.
The RVP segment primarily manufactures and sells room and whole
house ventilation and other products primarily for the
professional remodeling and replacement markets, the residential
new construction market and the do-it-yourself (DIY)
market. The principal products sold by this segment include
kitchen range hoods, exhaust fans (such as bath fans and fan,
heater and light combination units) and indoor air quality
products.
The TECH segment, formerly known as the Home Technology Products
(HTP) segment, manufactures and distributes a broad
array of products designed to provide convenience and security
for residential and certain commercial applications. The
principal product categories sold in this segment include
audio/video distribution and control equipment, security and
access control products, and digital display mounting and
mobility products.
The R-HVAC segment manufactures and sells heating, ventilating
and air conditioning systems for site-built residential and
manufactured housing structures and certain commercial markets.
The principal products sold by the segment are split-system and
packaged air conditioners and heat pumps, air handlers, furnaces
and related equipment.
The C-HVAC segment manufactures and sells heating, ventilating
and air conditioning systems for custom-designed commercial
applications to meet customer specifications. The principal
products sold by the segment are large custom rooftop cooling
and heating products.
The Company evaluates segment performance based on operating
earnings before allocations of corporate overhead costs.
Intersegment net sales and intersegment eliminations are not
material for any of the periods presented. The financial
statement impact of all purchase accounting adjustments,
including intangible assets amortization and goodwill, are
reflected in the applicable operating segment, which are the
Companys reporting units.
F-15
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unaudited net sales, operating earnings and (loss) earnings
before benefit from income taxes for the Companys
reporting segments for the third quarter of 2011 and 2010 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Third Quarter of
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollar amounts
|
|
|
|
in millions)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
146.5
|
|
|
$
|
146.0
|
|
Technology products
|
|
|
196.1
|
|
|
|
139.7
|
|
Residential HVAC products
|
|
|
98.0
|
|
|
|
119.0
|
|
Commercial HVAC products
|
|
|
111.2
|
|
|
|
91.9
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
551.8
|
|
|
$
|
496.6
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss):
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
4.1
|
|
|
$
|
13.4
|
|
Technology products
|
|
|
13.6
|
|
|
|
13.9
|
|
Residential HVAC products
|
|
|
|
|
|
|
4.4
|
|
Commercial HVAC products
|
|
|
4.9
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
22.6
|
|
|
|
32.4
|
|
Executive retirement (Note L)
|
|
|
(0.2
|
)
|
|
|
|
|
Unallocated, net
|
|
|
(8.4
|
)
|
|
|
(5.7
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated operating earnings
|
|
|
14.0
|
|
|
|
26.7
|
|
Interest expense
|
|
|
(24.6
|
)
|
|
|
(22.9
|
)
|
Investment income
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before benefit from income taxes
|
|
$
|
(10.6
|
)
|
|
$
|
3.9
|
|
|
|
|
|
|
|
|
|
|
F-16
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unaudited net sales, operating earnings and loss before benefit
from income taxes for the Companys reporting segments for
the first nine months of 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the First Nine Months of
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollar amounts
|
|
|
|
in millions)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
447.9
|
|
|
$
|
453.1
|
|
Technology products
|
|
|
534.0
|
|
|
|
349.4
|
|
Residential HVAC products
|
|
|
306.7
|
|
|
|
361.3
|
|
Commercial HVAC products
|
|
|
316.7
|
|
|
|
272.7
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
1,605.3
|
|
|
$
|
1,436.5
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss):
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
22.9
|
|
|
$
|
43.2
|
|
Technology products
|
|
|
34.3
|
|
|
|
10.4
|
|
Residential HVAC products
|
|
|
4.7
|
|
|
|
18.6
|
|
Commercial HVAC products
|
|
|
5.1
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
67.0
|
|
|
|
77.5
|
|
Executive retirement (Note L)
|
|
|
(8.7
|
)
|
|
|
|
|
Unallocated, net
|
|
|
(21.6
|
)
|
|
|
(19.5
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated operating earnings
|
|
|
36.7
|
|
|
|
58.0
|
|
Interest expense
|
|
|
(81.0
|
)
|
|
|
(69.9
|
)
|
Loss from debt retirement
|
|
|
(33.8
|
)
|
|
|
|
|
Investment income
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
$
|
(78.0
|
)
|
|
$
|
(11.8
|
)
|
|
|
|
|
|
|
|
|
|
F-17
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company provided for income taxes on an interim basis based
upon the estimated annual effective tax rate for 2011 and 2010.
The following reconciles the federal statutory income tax rate
to the effective tax rate of approximately 29.4% and 72.0% for
the first nine months of 2011 and 2010, respectively:
|
|
|
|
|
|
|
|
|
|
|
For the First Nine Months of
|
|
|
|
2011
|
|
|
2010
|
|
|
Income tax at the federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Net change from federal statutory rate:
|
|
|
|
|
|
|
|
|
Tax benefit from capitalized research and development costs
|
|
|
|
|
|
|
95.8
|
|
Increase in valuation allowance related to deferred tax assets
|
|
|
(8.6
|
)
|
|
|
(53.3
|
)
|
(Increase) decrease in uncertain tax positions, including
interest
|
|
|
(0.5
|
)
|
|
|
9.9
|
|
State income tax benefit, net of federal income tax effect
|
|
|
4.8
|
|
|
|
(2.2
|
)
|
Tax effect resulting from foreign activities
|
|
|
(0.4
|
)
|
|
|
(10.8
|
)
|
Non-deductible expenses
|
|
|
(0.8
|
)
|
|
|
(1.2
|
)
|
Other, net
|
|
|
(0.1
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
Income tax at effective rate
|
|
|
29.4
|
%
|
|
|
72.0
|
%
|
|
|
|
|
|
|
|
|
|
The increase in valuation allowance relates to losses of certain
foreign subsidiaries and losses in certain domestic
jurisdictions. The Company has determined that based on the
history of losses at these subsidiaries, a valuation allowance
is required for these loss carry-forwards since it is more
likely than not that these loss carry-forwards will not be
realized.
As of January 1, 2011, the Company had a liability of
approximately $21.2 million for unrecognized tax benefits
related to various federal, foreign and state income tax
matters. As a result of additional provisions to the reserve
during the first nine months of 2011, the liability for
uncertain tax positions at October 1, 2011 was
approximately $23.3 million. The liability for uncertain
tax positions is included in other long-term liabilities on the
accompanying unaudited condensed consolidated balance sheet. The
corresponding amount of gross uncertain tax benefits was
approximately $24.3 million and $21.9 million at
October 1, 2011 and December 31, 2010, respectively.
The amount of uncertain tax positions that will impact the
Companys effective tax rate is approximately
$13.0 million. The difference between the total amount of
uncertain tax positions and the amount that will impact the
effective tax rate represents the federal tax effect of state
tax items and items that offset temporary differences.
As of October 1, 2011, the Company had approximately
$1.7 million in unrecognized benefits relating to various
state tax issues, for which the statute of limitations is
expected to expire in the fourth quarter of 2011.
As of December 31, 2010, the Company had accrued
liabilities of approximately $3.0 million for interest
related to uncertain tax positions. As of October 1, 2011,
the total amount of accrued interest related to uncertain tax
positions was approximately $4.0 million. The Company
accounts for interest and penalties related to uncertain tax
positions as part of its provision for federal and state taxes.
|
|
(G)
|
NOTES,
MORTGAGE NOTES AND OBLIGATIONS PAYABLE
|
On April 26, 2011, the Company successfully completed the
private placement of $500.0 million in aggregate principal
amount of 8.5% Senior Notes due 2021 (the
8.5% Notes). The Company also entered into a
new senior secured term loan with a final maturity in 2017 and
optional interest rates at the election of the Company,
including LIBOR, as defined in the agreement, plus 4.0% with a
LIBOR floor of 1.25% (the
F-18
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Term Loan Facility). The Company borrowed
$350.0 million aggregate principal under the Term Loan
Facility at a 5.25% interest rate on April 26, 2011, which
resulted in net proceeds to the Company of approximately
$348.2 million, after deducting an original issue discount
of approximately $1.8 million. The Company received
approximately $827.3 million of net proceeds in connection
with the issuance of the 8.5% Notes and Term Loan Facility,
after deducting approximately $20.9 million of underwriting
commissions and legal, accounting and other expenses incurred.
As discussed further below, the Company used approximately
$825.0 million of these net proceeds to repurchase or
redeem all of the Companys 11% Senior Secured Notes,
which included approximately $753.3 million of aggregate
outstanding principal balance, approximately $37.8 million
of tender and redemption premiums and approximately
$33.9 million of accrued but unpaid interest as of the
redemption dates. Net cash from these debt transactions of
approximately $2.3 million was retained by the Company for
general corporate purposes.
The following is a summary of sources and uses in the second
quarter of 2011 related to these debt transactions:
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Sources:
|
|
|
|
|
Proceeds from issuance of the 8.5% Notes
|
|
$
|
500.0
|
|
Proceeds from Term Loan Facility after deducting original issue
discount of approximately $1.8 million
|
|
|
348.2
|
|
|
|
|
|
|
Total sources
|
|
|
848.2
|
|
|
|
|
|
|
Uses:
|
|
|
|
|
Repurchase or redemption of 11% Notes
|
|
|
(753.3
|
)
|
Tender and redemption premiums for 11% Notes
|
|
|
(37.8
|
)
|
Accrued and unpaid interest through the date of tender or
redemption
|
|
|
(33.9
|
)
|
|
|
|
|
|
Subtotal 11% Notes repurchase or redemption
|
|
|
(825.0
|
)
|
Underwriting commissions and legal, accounting and other expenses
|
|
|
(20.9
|
)
|
|
|
|
|
|
Total uses
|
|
|
(845.9
|
)
|
|
|
|
|
|
Net cash to Nortek
|
|
$
|
2.3
|
|
|
|
|
|
|
During the second quarter of 2011, the Company used
approximately $731.1 million of the net proceeds to
repurchase approximately 88.5% or approximately
$666.6 million aggregate principal amount of the
11% Notes through a tender offer in accordance with the
terms of the Companys purchase and consent solicitation
statement dated April 12, 2011 (the Tender
Offer), which was completed on April 26, 2011. The
Tender Offer entitled the holders of the 11% Notes to
receive $1,052.50 per $1,000 in principal amount, plus accrued
and unpaid interest, and resulted in a supplemental indenture to
the 11% Notes, which substantially eliminated all
affirmative and restrictive covenants and certain events of
default under the indenture and provided for a shorter notice
period in connection with a voluntary redemption. The Company
used approximately $93.9 million to discharge its remaining
obligations under the 11% Note indenture (approximately
$86.7 million aggregated principal amount) through a
deposit in trust funds sufficient to pay and discharge all
remaining indebtedness, including accrued and unpaid interest,
on the 11% Notes in conjunction with the notices of
redemption sent to the remaining holders of the 11% Notes.
Under the terms of the supplemental indenture to the
11% Notes, the Company was permitted to redeem
$75.0 million aggregate principal amount at 103%, plus
accrued and unpaid interest, and the remaining
$11.7 million aggregate principal amount at 105%, plus
accrued and unpaid interest.
As certain holders of the new 8.5% Notes and Term Loan
Facility had previously held the 11% Notes up to the time
of their repurchase or redemption, in accordance with Accounting
Standards Codification
470-50,
F-19
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt Modifications and Extinguishments
(ASC
470-50),
the Company determined that, of the total approximately
$60.5 million of original issue discounts, underwriting
commissions, legal, accounting and other expenses and tender and
redemption premiums, approximately $33.8 million should be
recorded as a loss on debt retirement and that approximately
$11.2 million and $15.5 million should be recorded as
deferred debt expense and debt discount, respectively, and
amortized over the lives of the respective debt instruments. The
approximately $11.2 million of deferred debt expense was
allocated approximately $6.3 million to the 8.5% Notes
and approximately $4.9 million to the Term Loan Facility.
The approximately $15.5 million of debt discount was
allocated approximately $7.2 million to the 8.5% Notes
and approximately $8.3 million to the Term Loan Facility.
8.5% Senior
Notes due 2021
The 8.5% Notes are unconditionally guaranteed on a senior
unsecured basis by each of the Companys current and future
domestic restricted subsidiaries that guarantee any of the
Companys other indebtedness. Interest on the
8.5% Notes accrues at the rate of 8.5% per annum and is
payable semi-annually in arrears on April 15 and
October 15, commencing on October 15, 2011, until
maturity. Interest on the 8.5% Notes accrues from the date
of original issuance or, if interest has already been paid, from
the date it was most recently paid. Interest is computed on the
basis of a
360-day year
comprised of twelve
30-day
months.
At any time prior to April 15, 2014, the Company may redeem
up to 35% of the aggregate principal amount of the
8.5% Notes with the net cash proceeds from certain equity
offerings (as defined) at a redemption price of 108.5% plus
accrued and unpaid interest, provided that at least 65% of the
original aggregate principal amount of the 8.5% Notes
remains outstanding after the redemption and the redemption
occurs within 90 days of the date of the closing of such
equity offerings (as defined). On or after April 15, 2016,
the 8.5% Notes are redeemable at the option of the Company,
in whole or in part, at any time and from time to time, on or
after April 15, 2016 at 104.25%, declining to 102.125% on
April 15, 2017, declining to 101.063% on April 15,
2018 and further declining to 100.0% on April 15, 2019.
In addition, at any time and from time to time prior to
April 15, 2016, the Company may redeem all or any portion
of the 8.5% Notes outstanding at a redemption price equal
to (a) 100% of the aggregate principal amount of the
8.5% Notes to be redeemed together with accrued and unpaid
interest to such redemption date, plus (b) the Make
Whole Amount. The Make Whole Amount means,
with respect to the 8.5% Notes at any redemption date, the
greater of (i) 1.0% of the principal amount of the
8.5% Notes and (ii) the excess, if any, of (a) an
amount equal to the present value of (1) the redemption
price of the 8.5% Notes at April 15, 2016 plus
(2) the remaining scheduled interest payments of the
8.5% Notes to be redeemed to April 15, 2016, computed
using a discount rate equal to the Treasury Rate plus 0.5%, over
(b) the principal amount of the 8.5% Notes to be
redeemed.
Pursuant to the registration rights agreement with the initial
purchasers of the 8.5% Notes, the Company has agreed it
will use reasonable best efforts to file and cause to become
effective a registration statement with respect to an offer to
exchange the 8.5% Notes for a new series of registered
notes with substantially similar terms or file and cause to
become effective a shelf registration statement with respect to
the 8.5% Notes on or before the 390th day after the
issuance date of the 8.5% Notes. If the Company is not in
compliance with this obligation, special interest will accrue at
a rate of 0.25% per annum during the
90-day
period immediately following the occurrence of the registration
default and will increase by 0.25% per annum at the end of each
subsequent
90-day
period, but in no event will the special interest rate exceed
1.00% per annum.
The indenture governing the 8.5% Notes contains certain
restrictive financial and operating covenants including
covenants that restrict, among other things, the payment of cash
dividends, the incurrence of additional indebtedness, the making
of certain investments, mergers, consolidations and the sale of
assets (all as defined in the indenture and other agreements).
F-20
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Term
Loan Facility
The Term Loan Facility is repayable in quarterly installments of
$875,000 with a balloon payment for the remaining balance due on
April 26, 2017.
The Term Loan Facility provides that, after April 26, 2011,
the Company may request additional tranches of term loans in an
aggregate amount not to exceed $200.0 million. Availability
of such additional tranches of term loans will be subject to the
absence of any default, a pro forma secured leverage ratio test
and, among other things, the receipt of commitments by existing
or additional financial institutions.
Loans under the Term Loan Facility bear interest, at the
Companys option, at a rate per annum equal to either
(1) base rate (as defined in the credit agreement governing
the Term Loan Facility) or (2) LIBOR (as defined in the
credit agreement governing the Term Loan Facility), in each case
plus an applicable margin. The weighted average interest rate
under the Term Loan Facility at October 1, 2011 was 5.25%.
The credit agreement governing the Companys Term Loan
Facility requires the Company to prepay outstanding term loans,
subject to certain exceptions, with:
|
|
|
|
|
50% (subject to reduction to 25% and 0% based upon the
Companys secured leverage ratio) of the Companys
annual excess cash flow, commencing with the fiscal year ended
December 31, 2012;
|
|
|
|
100% of the net cash proceeds of certain asset sales and
casualty and condemnation events, subject to reinvestment rights
and certain other exceptions; and
|
|
|
|
100% of the net cash proceeds of any issuance of debt, other
than debt permitted under the Term Loan Facility.
|
Certain voluntary prepayments on or prior to the first
anniversary of the closing of the Term Loan Facility are subject
to a call premium of 1%. Otherwise, the Company may voluntarily
prepay outstanding loans at any time without premium or penalty
other than customary breakage costs with respect to
LIBOR loans.
The Term Loan Facility agreement contains certain restrictive
financial and operating covenants, including covenants that
restrict the Companys ability and the ability of its
subsidiaries to complete acquisitions, pay dividends, incur
indebtedness, make investments, sell assets and take certain
other corporate actions.
Other
Indebtedness
The indenture governing the 10% Senior Notes due 2018 (the
10% Notes) contains certain restrictive
financial and operating covenants including covenants that
restrict, among other things, the payment of cash dividends, the
incurrence of additional indebtedness, the making of certain
investments, mergers, consolidations and the sale of assets (all
as defined in the indenture and other agreements). As of
October 1, 2011, the Company had the capacity to make
certain payments, including dividends, under the 10% Notes
of approximately $25.0 million.
On October 21, 2011, the Company notified the Trustee for
the 10% Notes of the existence of a default, as defined in
the related indenture, resulting from the Companys failure
to timely provide a current report on
Form 8-K
including certain financial statements required by
Item 9.01 of
Form 8-K
related to the Companys acquisition of Ergotron. The
Company has subsequently filed an amendment to the
Form 8-K
relating to the Ergotron acquisition, which includes such
financial statements, on November 10, 2011. Accordingly,
there was no Event of Default, as defined in the indenture, and
the Company is in compliance with the terms, covenants and
conditions set forth in the indenture relating to the
10% Notes.
At October 1, 2011 and December 31, 2010, the
Companys subsidiary, Best, was not in compliance with
certain maintenance covenants with respect to one of its loan
agreements with borrowings outstanding of approximately
$0.8 million and $1.4 million at October 1, 2011
and December 31, 2010, respectively. As a
F-21
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
result, the Company reclassified the long-term portion of
outstanding borrowings under this agreement of approximately
$0.6 million as a current liability on its consolidated
balance sheet at December 31, 2010. The lender has not
taken any action related to the covenant noncompliance at this
time. The next measurement date for the maintenance covenant is
for the year ended December 31, 2011 and the Company
believes it is probable that Best will not be in compliance with
such covenants at such time. No assurances can be given that the
lender will continue to not take any action and accordingly, the
Company could be required to repay this outstanding borrowing if
non-compliance is not cured or waived, as the case may be. In
the event this lender accelerates this loan, additional
indebtedness of Best under a different loan agreement with
borrowings outstanding of approximately $1.1 million and
$1.7 million at October 1, 2011 and December 31,
2010, respectively, could also become immediately due and
payable if such cross-default is not waived. As a result, the
Company has also reclassified the long-term portion of this
additional indebtedness of approximately $0.2 million and
$0.9 million as a current liability on its consolidated
balance sheet at October 1, 2011 and December 31,
2010, respectively.
On October 28, 2011, we voluntarily repaid
$25.0 million of outstanding borrowings under our ABL
Facility and accordingly have classified such amount as current
maturities of long-term debt in the accompanying unaudited
condensed consolidated balance sheet.
|
|
(H)
|
COMMITMENTS
AND CONTINGENCIES
|
The Company provides accruals for all direct costs, including
legal costs, associated with the estimated resolution of
contingencies at the earliest date at which it is deemed
probable that a liability has been incurred and the amount of
such liability can be reasonably estimated. Costs accrued are
estimated based upon an analysis of potential results, assuming
a combination of litigation and settlement strategies and
outcomes. Legal costs for other than probable contingencies are
expensed when services are performed.
The Company has indemnified third parties for certain matters in
a number of transactions involving dispositions of former
subsidiaries. The Company has recorded liabilities in relation
to these indemnifications of approximately $5.5 million at
October 1, 2011, of which approximately $2.3 million
are recorded in accrued expenses and approximately
$3.2 million are recorded in other long-term liabilities in
the accompanying unaudited condensed consolidated balance sheet.
At October 1, 2011, the undiscounted future payments
related to these indemnifications are estimated to be
approximately $6.1 million. At December 31, 2010, the
Company had recorded liabilities in relation to these
indemnifications of approximately $5.7 million, of which
approximately $2.2 million was recorded in accrued expenses
and approximately $3.5 million was recorded in other
long-term liabilities in the accompanying condensed consolidated
balance sheet.
The Company sells a number of products and offers a number of
warranties including, in some instances, extended warranties for
which the Company receives proceeds. The specific terms and
conditions of these warranties vary depending on the product
sold and the country in which the product is sold. The Company
estimates the costs that may be incurred under its warranties,
with the exception of extended warranties, and records a
liability for such costs at the time of sale. Deferred revenue
from extended warranties is recorded at estimated fair value and
is amortized over the life of the warranty and periodically
reviewed to ensure that the amount recorded is equal to or
greater than estimated future costs. Factors that affect the
Companys warranty liability include the number of units
sold, historical and anticipated rates of warranty claims, cost
per claim and new product introduction. The Company periodically
assesses the adequacy of its recorded warranty claims and
adjusts the amounts as necessary. As a result of this
assessment, the Company increased its warranty liability by
approximately $5.3 million in the third quarter of 2011,
reducing net income by approximately $2.8 million, or
approximately $0.18 per share, for the third quarter and first
nine months of 2011.
F-22
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the Companys combined short-term and long-term
warranty liabilities during the third quarter of 2011 and 2010
are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Third Quarter of
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Amounts in millions)
|
|
|
Balance, beginning of period
|
|
$
|
55.5
|
|
|
$
|
57.0
|
|
Warranties provided during period
|
|
|
6.7
|
|
|
|
9.0
|
|
Settlements made during period
|
|
|
(7.4
|
)
|
|
|
(9.7
|
)
|
Changes in liability estimate, including expirations and
acquisitions
|
|
|
4.9
|
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
59.7
|
|
|
$
|
53.2
|
|
|
|
|
|
|
|
|
|
|
Changes in the Companys combined short-term and long-term
warranty liabilities during the first nine months of 2011 and
2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the First Nine Months of
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Amounts in millions)
|
|
|
Balance, beginning of period
|
|
$
|
55.9
|
|
|
$
|
54.3
|
|
Warranties provided during period
|
|
|
20.0
|
|
|
|
21.8
|
|
Settlements made during period
|
|
|
(19.7
|
)
|
|
|
(20.3
|
)
|
Changes in liability estimate, including expirations and
acquisitions
|
|
|
3.5
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
59.7
|
|
|
$
|
53.2
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2009, two of the Companys
subsidiaries in the TECH segment began shipping security
products to a new customer under an agreement to manufacture and
sell these security products. Under this agreement, the Company
recognized net sales of approximately $35.7 million and
$62.5 million during the third quarter and first nine
months of 2011, respectively. The Company recognized net sales
of approximately $34.2 million and $45.8 million
relating to this customer during the third quarter and first
nine months of 2010, respectively. The agreement includes
payment terms which are extended beyond the subsidiaries
normal payment terms. The Company has determined that cash basis
accounting treatment is appropriate for revenue recognition
under this agreement. Accordingly, the Company has deferred
revenue recognition on approximately $36.5 million and
$9.2 million of net sales at October 1, 2011 and
December 31, 2010, respectively, and recorded the cost
basis of related inventory shipped of approximately
$23.0 million and $6.5 million at October 1, 2011
and December 31, 2010, respectively, in other current
assets in the accompanying unaudited condensed consolidated
balance sheet. In addition, included in inventory is
approximately $6.7 million and $6.1 million at
October 1, 2011 and December 31, 2010, respectively,
of inventory related to this customer. As only limited cash
collection history was available in periods prior to
December 31, 2009, the Company recorded loss contingency
reserves of approximately $2.0 million as a reduction to
other current assets during the first nine months of 2010.
The customer has made approximately $27.3 million of
payments through December 5, 2011 in the fourth quarter of
2011, including approximately $13.3 million of delinquent
payments that were scheduled to be received in the third quarter
of 2011. In the fourth quarter, the customer notified the
Company of a product recall issue related to certain products
that the Company provided to the customer who in turn sold such
products to third parties. The Company is in the process of
negotiating a resolution of this and other contractual terms in
the customer agreement. These negotiations have not been
completed and, accordingly, the Company has recorded a warranty
reserve of approximately $6.0 million, representing the
Companys best estimate of the amount that may be
ultimately due for the product recall as of October 1,
2011. The Company made an approximate $2.9 million progress
payment to the customer for the product recall in the fourth
quarter of 2011.
F-23
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Although the customer has continued to make payments, the
customer failed to make scheduled payments totaling
approximately $6.0 million through December 5, 2011,
with an additional $3.1 million of payments scheduled for
the remainder of the fourth quarter 2011. The customer has
indicated that failure to make scheduled payments was due to a
delay in the receipt of payments owed to them from their major
customer. The Companys customer has been formally notified
of the delinquent payments, and it is the Companys belief
that there is no dispute by the customer over the amounts due
based on the Companys correspondence and discussions with
the customer. The customer has since made a payment in the
fourth quarter of 2011 of approximately $7.1 million and
has withheld approximately $1.3 million of payments pending
resolution of amounts owed by the Company for the product recall
issue noted above. The Company has collected all remaining
amounts recorded in the consolidated balance sheet as of
October 1, 2011.
There can be no assurances that the Company will be able to
complete its negotiations with this customer or that the
customer will bring its account current and resume making
payments according to terms if the negotiations are not
completed. As such, it is possible that the Company may be
required to record additional reserves and may have reduced
sales and cost of sales from what would have otherwise been
recorded in the fourth quarter of 2011 related to this customer
relationship. The Company will continue to closely monitor the
situation with this customer.
As the Company records revenue on the cash basis of accounting
for this customer, the failure of the Company to receive
scheduled payments resulted in a corresponding reduction to
revenue and cost of goods sold in the Companys third
quarter 2011 operating results. If the customer brings its
account current and makes all other scheduled payments in the
fourth quarter of 2011, then sales and cost of sales will be
higher than what would otherwise have been recorded in the
fourth quarter of 2011.
The Company is subject to other contingencies, including legal
proceedings and claims, arising out of its businesses that cover
a wide range of matters including, among others, environmental
matters, contract and employment claims, product liability,
warranty and modification and adjustment or replacement of
component parts of units sold, which include product recalls.
Product liability, environmental and other legal proceedings
also include matters with respect to businesses previously
owned. 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
workers 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.
The Company has undertaken several voluntary product recalls and
reworks over the past several years. Additional product recalls
and reworks could result in material costs. Many of the
Companys products, especially certain models of bath fans,
range hoods, and residential furnaces and air conditioners, have
a large installed base, and any recalls and reworks related to
products with a large installed base could be particularly
costly. The costs of product recalls and reworks are not
generally covered by insurance. Any recalls or reworks may
adversely affect the Companys reputation as a manufacturer
of high-quality, safe products and could have a material adverse
effect on its financial condition, results of operations and
cash flows.
While it is impossible to ascertain the ultimate legal and
financial liability with respect to contingent liabilities,
including lawsuits, warranty, product liability, environmental
liabilities and product recalls, the Company believes that the
aggregate amount of such liabilities, if any, in excess of
amounts provided or covered by insurance, will not have a
material adverse effect on the Companys consolidated
financial position, results of operations or liquidity. It is
possible, however, that results of operations for any particular
future period could be materially affected by changes in the
Companys assumptions or strategies related to these
contingencies or changes that are not within the Companys
control.
F-24
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys assets and liabilities recorded at fair value
have been categorized based upon a fair value hierarchy in
accordance with ASC 820, Fair Value Measurements and
Disclosures. The levels of the fair value hierarchy are
described below:
|
|
|
|
|
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets and liabilities that the Company
has the ability to access at the measurement date.
|
|
|
|
Level 2 inputs utilize inputs, other than quoted prices
included in Level 1, that are observable for the asset or
liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar assets and liabilities in
active markets, and inputs other than quoted prices that are
observable for the asset or liability, such as interest rates
and yield curves that are observable at commonly quoted
intervals.
|
|
|
|
Level 3 inputs are unobservable inputs for the asset or
liability, allowing for situations where there is little, if
any, market activity for the asset or liability.
|
Measured
on a Recurring Basis
Restricted Investments and Marketable Securities
(Level 1) The fair value of investments is
based on quoted market prices. The fair value of investments was
not materially different from their cost basis at
October 1, 2011 or December 31, 2010.
Financial
Instruments Not Recorded at Fair Value
The carrying value and fair values of financial instruments not
recorded at fair value in the condensed consolidated balance
sheets as of October 1, 2011 and December 31, 2010
were as follows:
Cash and Trade Receivables Cash and trade
receivables are carried at their cost which approximates fair
value because of their short-term nature.
Long-Term Debt At October 1, 2011, the
fair value of the Companys long-term indebtedness was
approximately $108.8 million lower than the amount on the
Companys accompanying unaudited condensed consolidated
balance sheet, before unamortized discount of approximately
$17.0 million. At December 31, 2010, the fair value of
the Companys long-term indebtedness was approximately
$57.1 million higher than the amount on the Companys
accompanying unaudited condensed consolidated balance sheet,
before unamortized discount of approximately $2.0 million.
The Company determined the fair market value of its
10% Notes and 8.5% Notes using available market
quotes. For the Companys remaining outstanding
indebtedness (including outstanding borrowings under the ABL
Facility and Term Loan Facility), the Company assumed that the
carrying value of such indebtedness approximated the fair value
based upon the variable interest rates associated with certain
of these debt obligations and the Companys estimated
credit risk.
|
|
(J)
|
PENSION,
PROFIT SHARING & OTHER POST-RETIREMENT
BENEFITS
|
The Company and its subsidiaries have various pension plans,
supplemental retirement plans for certain officers, profit
sharing and other post-retirement benefit plans requiring
contributions to qualified trusts and union administered funds.
Pension and profit sharing expense charged to operations
aggregated approximately $1.1 million and $1.3 million
for the third quarter of 2011 and 2010, respectively, and
aggregated approximately $3.8 million and $3.2 million
for the first nine months of 2011 and 2010, respectively.
The Companys policy is to generally fund currently at
least the minimum required annual contribution of its various
qualified defined benefit plans. At October 1, 2011, the
Company estimated that approximately
F-25
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$7.4 million would be contributed to the Companys
defined benefit pension plans in 2011, of which approximately
$5.8 million was contributed through the first nine months
of 2011.
The Companys unaudited net periodic (income) benefit cost
for its defined benefit plans for the third quarter of 2011 and
2010 consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
For the Third Quarter of
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollar amounts in millions)
|
|
|
Service cost
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Interest cost
|
|
|
2.1
|
|
|
|
2.2
|
|
Expected return on plan assets
|
|
|
(2.3
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic (income) benefit cost
|
|
$
|
(0.1
|
)
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
The Companys unaudited net periodic (income) benefit cost
for its defined benefit plans for the first nine months of 2011
and 2010 consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
For the First Nine Months of
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollar amounts in millions)
|
|
|
Service cost
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Interest cost
|
|
|
6.4
|
|
|
|
6.6
|
|
Expected return on plan assets
|
|
|
(7.0
|
)
|
|
|
(6.3
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic (income) benefit cost
|
|
$
|
(0.3
|
)
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
The Companys unaudited net periodic benefit cost,
consisting solely of interest costs, for its post-retirement
health benefit plan for the first nine months of 2010 was
approximately $0.2 million. There were no periodic benefit
costs for the Companys post-retirement health benefit plan
for the third quarter and first nine months of 2011 or the third
quarter of 2010.
|
|
(K)
|
EXIT AND
DISPOSAL ACTIVITIES
|
The Company has initiated various exit and disposal activities
including, but not limited to, the following matters.
During 2010, the Company announced the formation of its new
audio/visual control company within the TECH segment called The
AVC Group, LLC (The AVC Group). Upon the formation
of The AVC Group, the operations of Niles Audio Corporation,
Elan Home Systems, L.L.C. and Xantech LLC were combined to
improve the overall operational efficiencies of these companies.
In conjunction with the formation of The AVC Group, the Company
is in the process of consolidating and shutting down certain of
its facilities and, as a result, recorded net expenses within
selling, general and administrative expense, net
(SG&A) of approximately $0.4 million for
the first nine months of 2011 consisting of severance and other
expenses. During 2010, the Company recorded approximately
$2.8 million (of which approximately $2.6 million was
recorded within SG&A) of severance and other expenses
related to this activity, of which approximately
$0.4 million was recorded in SG&A in the third quarter
of 2010. The Company does not anticipate recording any
additional expenses related to severance or other costs
associated with this activity.
In addition, the Company is in the process of restructuring its
Aigis Mechtronics, Inc. (Aigis) and Lite Touch, Inc.
(Lite Touch) facilities within the TECH segment. As
a result, during the third quarter and first nine months of
2011, the Company recorded expenses of approximately
$0.2 million (of which approximately $0.1 million was
recorded within SG&A) and $0.8 million (of which
approximately $0.6 million was recorded
F-26
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
within SG&A), respectively, related to severance and other
costs. The Company anticipates recording additional expenses
associated with the restructuring of Aigis and Lite Touch of
approximately $0.3 million through the fourth quarter of
2011.
In February 2011, management approved an initial plan to reduce
costs and improve production efficiencies at the Companys
subsidiary, Best, and during the third quarter of 2011, our
Board of Directors approved additional plans that are expected
to further improve the overall operational efficiencies of Best.
During the third quarter and first nine months of 2011, the
Company recorded expenses within SG&A of the RVP segment of
approximately $0.1 million and $0.6 million,
respectively, related to severance and other costs. The Company
also recorded additional severance costs of approximately
$0.4 million and $1.7 million within cost of products
sold (COGS) during the third quarter and first nine
months of 2011, respectively. In the fourth quarter of 2011, the
Company transferred certain operations from Italy to Poland in
accordance with the plan and has reached a tentative agreement
with the union regarding severance benefits, subject to the
approval of 100% of the terminated employees. The Company
anticipates recording additional expenses of between
approximately $10 million and $13 million related to
this restructuring plan consisting of severance and other
expenses in the fourth quarter of 2011 and through 2012.
The following table sets forth exit and disposal activity in
accordance with ASC 420, Exit or Disposal Cost
Obligations (ASC 420) in the accompanying
unaudited condensed consolidated statement of operations for the
first nine months of 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
and Asset
|
|
|
|
|
|
Balance
|
|
|
|
12/31/10
|
|
|
Provision
|
|
|
Write Downs
|
|
|
Other
|
|
|
10/1/11
|
|
|
|
(Amounts in millions)
|
|
|
Employee Separation Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
|
|
$
|
2.0
|
|
|
$
|
1.6
|
|
|
$
|
(3.1
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
0.4
|
|
COGS
|
|
|
0.1
|
|
|
|
2.2
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Employee Separation Expenses
|
|
|
2.1
|
|
|
|
3.8
|
|
|
|
(5.0
|
)
|
|
|
(0.1
|
)
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
|
|
|
0.9
|
|
|
|
0.5
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
0.3
|
|
COGS
|
|
|
|
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Costs and Expenses
|
|
|
0.9
|
|
|
|
0.6
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Restructuring Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
|
|
|
2.9
|
|
|
|
2.1
|
|
|
|
(4.2
|
)
|
|
|
(0.1
|
)
|
|
|
0.7
|
|
COGS
|
|
|
0.1
|
|
|
|
2.3
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.0
|
|
|
$
|
4.4
|
|
|
$
|
(6.2
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation expenses are comprised of severance,
vacation, outplacement and retention bonus payments. Other costs
include expenses associated with asset write-downs, terminating
other contractual arrangements, costs to prepare facilities for
closure, and costs to move equipment and products to other
facilities.
|
|
(L)
|
RETIREMENT
OF RICHARD L. BREADY
|
On June 30, 2011, the Company announced that Richard L.
Bready planned to retire from the positions of Chairman of the
Board of Directors, President and Chief Executive Officer of the
Company, effective as of July 1, 2011 (the Retirement
Date).
F-27
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the terms of his existing employment agreement and by
agreement dated June 30, 2011 (the Separation
Agreement), and in consideration for the observation by
Mr. Bready of certain restrictive covenants for a period of
12 months after the Retirement Date, a release of claims
against the Company, a non-disparagement covenant, and his
agreement to provide certain consulting and transition services
to the Company in connection with his retirement from the
Company, Mr. Bready will receive: (i) a severance
payment of $5,250,000, payable over 18 months in equal
installments; (ii) a lump sum payment of $1,000,000 in lieu
of the lifetime health and medical coverage which would have
been due under Mr. Breadys existing employment
agreement, with a tax
gross-up;
(iii) approximately $750,000, payable over 18 months
in equal installments in respect of certain perquisites set
forth in Mr. Breadys employment agreement. Due to the
requirements of Section 409A of the Internal Revenue Code
of 1986, and pursuant to Company policy, the cash payments noted
above that are due to Mr. Bready in connection with his
separation from service will delayed for a period of six months.
All unvested equity awards held by Mr. Bready as of the
Retirement Date were forfeited, except that half of his stock
options that would have vested later this year were deemed
vested. Mr. Breadys vested stock options will remain
exercisable until the earlier of (i) five years from the
Retirement Date or (ii) the expiration date of the stock
options.
As a result, the Company recorded approximately
$0.2 million and $8.7 million of severance expense
within SG&A during the third quarter and first nine months
of 2011, respectively, related to the Separation Agreement.
|
|
(M)
|
GUARANTOR
FINANCIAL STATEMENTS
|
Norteks 10% Notes and 8.5% Notes are guaranteed by
each of Norteks current and future domestic subsidiaries
that guarantee Norteks obligations under its senior
secured credit facilities (the Guarantors). The
Guarantors are wholly-owned either directly or indirectly by
Nortek and jointly and severally guarantee Norteks
obligations under the 10% Notes and 8.5% Notes. None of
Norteks foreign subsidiaries guarantee the 10% Notes
and 8.5% Notes.
Consolidating balance sheets related to Nortek, the Guarantors
and non-Guarantor subsidiaries as of October 1, 2011 and
December 31, 2010 and the related consolidating statements
of operations and cash flows for the third quarter and first
nine months ended October 1, 2011 and October 2, 2010
are reflected below in order to comply with the reporting
requirements for guarantor subsidiaries.
F-28
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Balance Sheet as of October 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
ASSETS:
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
22.9
|
|
|
$
|
9.4
|
|
|
$
|
24.9
|
|
|
$
|
|
|
|
$
|
57.2
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
Accounts receivable, less allowances
|
|
|
|
|
|
|
203.1
|
|
|
|
82.0
|
|
|
|
|
|
|
|
285.1
|
|
Intercompany receivables (payables)
|
|
|
1.6
|
|
|
|
(20.4
|
)
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
|
|
|
|
|
253.4
|
|
|
|
79.5
|
|
|
|
(3.9
|
)
|
|
|
329.0
|
|
Prepaid expenses
|
|
|
1.1
|
|
|
|
11.4
|
|
|
|
5.4
|
|
|
|
|
|
|
|
17.9
|
|
Other current assets
|
|
|
1.6
|
|
|
|
33.9
|
|
|
|
9.2
|
|
|
|
(3.3
|
)
|
|
|
41.4
|
|
Prepaid income taxes
|
|
|
4.0
|
|
|
|
13.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
31.2
|
|
|
|
504.5
|
|
|
|
220.6
|
|
|
|
(7.2
|
)
|
|
|
749.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, at Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
0.5
|
|
|
|
145.7
|
|
|
|
71.3
|
|
|
|
|
|
|
|
217.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-term Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries and long-term receivable from (to)
subsidiaries
|
|
|
1,236.9
|
|
|
|
96.5
|
|
|
|
(43.8
|
)
|
|
|
(1,289.6
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
289.6
|
|
|
|
15.1
|
|
|
|
|
|
|
|
304.7
|
|
Intangible assets, less accumulated amortization
|
|
|
|
|
|
|
632.4
|
|
|
|
38.0
|
|
|
|
|
|
|
|
670.4
|
|
Other assets
|
|
|
25.0
|
|
|
|
18.8
|
|
|
|
0.5
|
|
|
|
|
|
|
|
44.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other long-term assets
|
|
|
1,261.9
|
|
|
|
1,037.3
|
|
|
|
9.8
|
|
|
|
(1,289.6
|
)
|
|
|
1,019.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,293.6
|
|
|
$
|
1,687.5
|
|
|
$
|
301.7
|
|
|
$
|
(1,296.8
|
)
|
|
$
|
1,986.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS INVESTMENT (DEFICIT):
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other short-term obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.1
|
|
|
$
|
|
|
|
$
|
2.1
|
|
Current maturities of long-term debt
|
|
|
28.5
|
|
|
|
3.3
|
|
|
|
1.9
|
|
|
|
|
|
|
|
33.7
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
Accounts payable
|
|
|
0.9
|
|
|
|
81.6
|
|
|
|
88.1
|
|
|
|
|
|
|
|
170.6
|
|
Accrued expenses and taxes, net
|
|
|
40.0
|
|
|
|
142.3
|
|
|
|
48.0
|
|
|
|
|
|
|
|
230.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
69.4
|
|
|
|
227.2
|
|
|
|
140.3
|
|
|
|
|
|
|
|
436.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(35.6
|
)
|
|
|
154.4
|
|
|
|
9.5
|
|
|
|
(2.7
|
)
|
|
|
125.6
|
|
Other long-term liabilities
|
|
|
43.2
|
|
|
|
115.8
|
|
|
|
16.0
|
|
|
|
|
|
|
|
175.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.6
|
|
|
|
270.2
|
|
|
|
25.5
|
|
|
|
(2.7
|
)
|
|
|
300.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes, Mortgage Notes and Obligations Payable, Less Current
Maturities
|
|
|
1,115.0
|
|
|
|
14.9
|
|
|
|
17.0
|
|
|
|
|
|
|
|
1,146.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders investment (deficit)
|
|
|
101.6
|
|
|
|
1,175.2
|
|
|
|
118.9
|
|
|
|
(1,294.1
|
)
|
|
|
101.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders investment (deficit)
|
|
$
|
1,293.6
|
|
|
$
|
1,687.5
|
|
|
$
|
301.7
|
|
|
$
|
(1,296.8
|
)
|
|
$
|
1,986.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Balance Sheet as of December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
ASSETS:
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
16.0
|
|
|
$
|
21.3
|
|
|
$
|
20.4
|
|
|
$
|
|
|
|
$
|
57.7
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
Accounts receivable, less allowances
|
|
|
|
|
|
|
203.6
|
|
|
|
77.2
|
|
|
|
|
|
|
|
280.8
|
|
Intercompany receivables (payables)
|
|
|
1.4
|
|
|
|
(27.4
|
)
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
|
|
|
|
|
241.1
|
|
|
|
75.9
|
|
|
|
(3.5
|
)
|
|
|
313.5
|
|
Prepaid expenses
|
|
|
2.4
|
|
|
|
9.0
|
|
|
|
4.5
|
|
|
|
|
|
|
|
15.9
|
|
Other current assets
|
|
|
6.3
|
|
|
|
18.7
|
|
|
|
8.2
|
|
|
|
(0.9
|
)
|
|
|
32.3
|
|
Prepaid income taxes
|
|
|
6.1
|
|
|
|
9.1
|
|
|
|
1.7
|
|
|
|
|
|
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
32.2
|
|
|
|
475.4
|
|
|
|
214.0
|
|
|
|
(4.4
|
)
|
|
|
717.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, at Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
0.6
|
|
|
|
157.1
|
|
|
|
77.8
|
|
|
|
|
|
|
|
235.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-term Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries and long-term receivable from (to)
subsidiaries
|
|
|
1,236.6
|
|
|
|
132.9
|
|
|
|
(20.8
|
)
|
|
|
(1,348.7
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
280.1
|
|
|
|
12.0
|
|
|
|
|
|
|
|
292.1
|
|
Intangible assets, less accumulated amortization
|
|
|
|
|
|
|
663.6
|
|
|
|
31.4
|
|
|
|
|
|
|
|
695.0
|
|
Other assets
|
|
|
16.3
|
|
|
|
14.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
31.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other long-term assets
|
|
|
1,252.9
|
|
|
|
1,090.8
|
|
|
|
23.4
|
|
|
|
(1,348.7
|
)
|
|
|
1,018.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,285.7
|
|
|
$
|
1,723.3
|
|
|
$
|
315.2
|
|
|
$
|
(1,353.1
|
)
|
|
$
|
1,971.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS INVESTMENT (DEFICIT):
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other short-term obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8.6
|
|
|
$
|
|
|
|
$
|
8.6
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
5.0
|
|
|
|
2.7
|
|
|
|
|
|
|
|
7.7
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
1.5
|
|
Accounts payable
|
|
|
4.0
|
|
|
|
83.9
|
|
|
|
87.8
|
|
|
|
|
|
|
|
175.7
|
|
Accrued expenses and taxes, net
|
|
|
19.3
|
|
|
|
123.9
|
|
|
|
50.0
|
|
|
|
|
|
|
|
193.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23.3
|
|
|
|
212.8
|
|
|
|
150.6
|
|
|
|
|
|
|
|
386.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(12.8
|
)
|
|
|
153.5
|
|
|
|
13.7
|
|
|
|
(1.7
|
)
|
|
|
152.7
|
|
Other long-term liabilities
|
|
|
38.0
|
|
|
|
116.2
|
|
|
|
16.9
|
|
|
|
|
|
|
|
171.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.2
|
|
|
|
269.7
|
|
|
|
30.6
|
|
|
|
(1.7
|
)
|
|
|
323.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes, Mortgage Notes and Obligations Payable, Less Current
Maturities
|
|
|
1,078.4
|
|
|
|
13.2
|
|
|
|
10.2
|
|
|
|
|
|
|
|
1,101.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders investment (deficit)
|
|
|
158.8
|
|
|
|
1,227.6
|
|
|
|
123.8
|
|
|
|
(1,351.4
|
)
|
|
|
158.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders investment (deficit)
|
|
$
|
1,285.7
|
|
|
$
|
1,723.3
|
|
|
$
|
315.2
|
|
|
$
|
(1,353.1
|
)
|
|
$
|
1,971.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Operations
For the third quarter ended October 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
446.0
|
|
|
$
|
170.3
|
|
|
$
|
(64.5
|
)
|
|
$
|
551.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold
|
|
|
|
|
|
|
330.9
|
|
|
|
145.3
|
|
|
|
(66.6
|
)
|
|
|
409.6
|
|
Selling, general and administrative expenses, net
|
|
|
8.3
|
|
|
|
83.7
|
|
|
|
25.1
|
|
|
|
|
|
|
|
117.1
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
10.2
|
|
|
|
0.9
|
|
|
|
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.3
|
|
|
|
424.8
|
|
|
|
171.3
|
|
|
|
(66.6
|
)
|
|
|
537.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings
|
|
|
(8.3
|
)
|
|
|
21.2
|
|
|
|
(1.0
|
)
|
|
|
2.1
|
|
|
|
14.0
|
|
Interest expense
|
|
|
(23.8
|
)
|
|
|
(0.5
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
(24.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before charges and allocations to subsidiaries and
equity in subsidiaries (loss) earnings before income taxes
|
|
|
(32.1
|
)
|
|
|
20.7
|
|
|
|
(1.3
|
)
|
|
|
2.1
|
|
|
|
(10.6
|
)
|
Charges and allocations to subsidiaries and equity in
subsidiaries (loss) earnings before income taxes
|
|
|
21.5
|
|
|
|
(17.7
|
)
|
|
|
(0.1
|
)
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(10.6
|
)
|
|
|
3.0
|
|
|
|
(1.4
|
)
|
|
|
(1.6
|
)
|
|
|
(10.6
|
)
|
(Benefit) provision for income taxes
|
|
|
(8.5
|
)
|
|
|
37.0
|
|
|
|
(4.3
|
)
|
|
|
(32.7
|
)
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(2.1
|
)
|
|
$
|
(34.0
|
)
|
|
$
|
2.9
|
|
|
$
|
31.1
|
|
|
$
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Operations
For the third quarter ended October 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
411.0
|
|
|
$
|
120.4
|
|
|
$
|
(34.8
|
)
|
|
$
|
496.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold
|
|
|
|
|
|
|
290.8
|
|
|
|
104.1
|
|
|
|
(33.5
|
)
|
|
|
361.4
|
|
Selling, general and administrative expenses, net
|
|
|
6.0
|
|
|
|
77.6
|
|
|
|
16.5
|
|
|
|
|
|
|
|
100.1
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
7.9
|
|
|
|
0.5
|
|
|
|
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
376.3
|
|
|
|
121.1
|
|
|
|
(33.5
|
)
|
|
|
469.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings
|
|
|
(6.0
|
)
|
|
|
34.7
|
|
|
|
(0.7
|
)
|
|
|
(1.3
|
)
|
|
|
26.7
|
|
Interest expense
|
|
|
(22.0
|
)
|
|
|
(0.3
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
(22.9
|
)
|
Investment income
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before charges and allocations to subsidiaries and
equity in subsidiaries earnings (loss) before income taxes
|
|
|
(28.0
|
)
|
|
|
34.5
|
|
|
|
(1.3
|
)
|
|
|
(1.3
|
)
|
|
|
3.9
|
|
Charges and allocations to subsidiaries and equity in
subsidiaries earnings (loss) before income taxes
|
|
|
31.9
|
|
|
|
(17.2
|
)
|
|
|
(0.4
|
)
|
|
|
(14.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before (benefit) provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for income taxes
|
|
|
3.9
|
|
|
|
17.3
|
|
|
|
(1.7
|
)
|
|
|
(15.6
|
)
|
|
|
3.9
|
|
(Benefit) provision for income taxes
|
|
|
(5.9
|
)
|
|
|
0.7
|
|
|
|
2.0
|
|
|
|
(2.7
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
9.8
|
|
|
$
|
16.6
|
|
|
$
|
(3.7
|
)
|
|
$
|
(12.9
|
)
|
|
$
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Operations
For the first nine months ended October 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
1,292.2
|
|
|
$
|
531.8
|
|
|
$
|
(218.7
|
)
|
|
$
|
1,605.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold
|
|
|
|
|
|
|
940.2
|
|
|
|
459.2
|
|
|
|
(216.1
|
)
|
|
|
1,183.3
|
|
Selling, general and administrative expenses, net
|
|
|
30.2
|
|
|
|
252.4
|
|
|
|
68.8
|
|
|
|
|
|
|
|
351.4
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
32.0
|
|
|
|
1.9
|
|
|
|
|
|
|
|
33.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.2
|
|
|
|
1,224.6
|
|
|
|
529.9
|
|
|
|
(216.1
|
)
|
|
|
1,568.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings
|
|
|
(30.2
|
)
|
|
|
67.6
|
|
|
|
1.9
|
|
|
|
(2.6
|
)
|
|
|
36.7
|
|
Interest expense
|
|
|
(78.8
|
)
|
|
|
(1.4
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
(81.0
|
)
|
Loss from debt retirement
|
|
|
(33.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33.8
|
)
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before charges and allocations to subsidiaries and
equity in subsidiaries (loss) earnings before income taxes
|
|
|
(142.8
|
)
|
|
|
66.2
|
|
|
|
1.2
|
|
|
|
(2.6
|
)
|
|
|
(78.0
|
)
|
Charges and allocations to subsidiaries and equity in
subsidiaries (loss) earnings before income taxes
|
|
|
64.8
|
|
|
|
(52.1
|
)
|
|
|
|
|
|
|
(12.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(78.0
|
)
|
|
|
14.1
|
|
|
|
1.2
|
|
|
|
(15.3
|
)
|
|
|
(78.0
|
)
|
(Benefit) provision for income taxes
|
|
|
(22.9
|
)
|
|
|
31.9
|
|
|
|
5.8
|
|
|
|
(37.7
|
)
|
|
|
(22.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(55.1
|
)
|
|
$
|
(17.8
|
)
|
|
$
|
(4.6
|
)
|
|
$
|
22.4
|
|
|
$
|
(55.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Operations
For the first nine months ended October 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
1,183.0
|
|
|
$
|
378.5
|
|
|
$
|
(125.0
|
)
|
|
$
|
1,436.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold
|
|
|
|
|
|
|
854.7
|
|
|
|
318.4
|
|
|
|
(121.6
|
)
|
|
|
1,051.5
|
|
Selling, general and administrative expenses, net
|
|
|
19.5
|
|
|
|
224.0
|
|
|
|
54.5
|
|
|
|
|
|
|
|
298.0
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
26.2
|
|
|
|
2.8
|
|
|
|
|
|
|
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.5
|
|
|
|
1,104.9
|
|
|
|
375.7
|
|
|
|
(121.6
|
)
|
|
|
1,378.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings
|
|
|
(19.5
|
)
|
|
|
78.1
|
|
|
|
2.8
|
|
|
|
(3.4
|
)
|
|
|
58.0
|
|
Interest expense
|
|
|
(67.1
|
)
|
|
|
(1.5
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
(69.9
|
)
|
Investment income
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before charges and allocations to subsidiaries and
equity in subsidiaries (loss) earnings before income taxes
|
|
|
(86.6
|
)
|
|
|
76.7
|
|
|
|
1.5
|
|
|
|
(3.4
|
)
|
|
|
(11.8
|
)
|
Charges and allocations to subsidiaries and equity in
subsidiaries (loss) earnings before income taxes
|
|
|
74.8
|
|
|
|
(47.8
|
)
|
|
|
(0.4
|
)
|
|
|
(26.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(11.8
|
)
|
|
|
28.9
|
|
|
|
1.1
|
|
|
|
(30.0
|
)
|
|
|
(11.8
|
)
|
(Benefit) provision for income taxes
|
|
|
(8.5
|
)
|
|
|
9.0
|
|
|
|
6.6
|
|
|
|
(15.6
|
)
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(3.3
|
)
|
|
$
|
19.9
|
|
|
$
|
(5.5
|
)
|
|
$
|
(14.4
|
)
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Cash Flow Statement
For the first nine months ended October 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(72.9
|
)
|
|
$
|
97.3
|
|
|
$
|
9.4
|
|
|
$
|
33.8
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(0.1
|
)
|
|
|
(10.9
|
)
|
|
|
(2.9
|
)
|
|
|
(13.9
|
)
|
Net cash paid for businesses acquired
|
|
|
(5.8
|
)
|
|
|
(25.1
|
)
|
|
|
|
|
|
|
(30.9
|
)
|
Investment in joint venture
|
|
|
|
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
(5.3
|
)
|
Proceeds from the sale of property and equipment
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
|
|
|
|
0.6
|
|
Change in restricted cash and investments
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
Other, net
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5.8
|
)
|
|
|
(40.4
|
)
|
|
|
(2.9
|
)
|
|
|
(49.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in borrowings
|
|
|
50.0
|
|
|
|
5.3
|
|
|
|
25.3
|
|
|
|
80.6
|
|
Payment of borrowings
|
|
|
(66.8
|
)
|
|
|
(5.2
|
)
|
|
|
(27.3
|
)
|
|
|
(99.3
|
)
|
Sale of the 8.5% Senior Notes due 2021
|
|
|
500.0
|
|
|
|
|
|
|
|
|
|
|
|
500.0
|
|
Net proceeds from borrowings under the Term Loan Facility
|
|
|
348.2
|
|
|
|
|
|
|
|
|
|
|
|
348.2
|
|
Redemption of the 11% Senior Secured Notes due 2013
|
|
|
(753.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(753.3
|
)
|
Long-term intercompany advance
|
|
|
68.9
|
|
|
|
(68.9
|
)
|
|
|
|
|
|
|
|
|
Fees paid in connection with new debt facilities
|
|
|
(58.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(58.7
|
)
|
Payment of minimum withholding taxes in connection with vesting
of restricted stock
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
85.6
|
|
|
|
(68.8
|
)
|
|
|
(2.0
|
)
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrestricted cash and cash equivalents
|
|
|
6.9
|
|
|
|
(11.9
|
)
|
|
|
4.5
|
|
|
|
(0.5
|
)
|
Unrestricted cash and cash equivalents at the beginning of the
period
|
|
|
16.0
|
|
|
|
21.3
|
|
|
|
20.4
|
|
|
|
57.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents at the end of the period
|
|
$
|
22.9
|
|
|
$
|
9.4
|
|
|
$
|
24.9
|
|
|
$
|
57.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Cash Flow Statement
For the first nine months ended October 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(66.2
|
)
|
|
$
|
138.5
|
|
|
$
|
2.2
|
|
|
$
|
74.5
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(0.2
|
)
|
|
|
(9.2
|
)
|
|
|
(3.2
|
)
|
|
|
(12.6
|
)
|
Net cash paid for businesses acquired
|
|
|
|
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
(9.2
|
)
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
0.5
|
|
Change in restricted cash and investments
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
0.4
|
|
|
|
1.2
|
|
Intercompany dividend (received from) paid by subsidiaries
|
|
|
10.8
|
|
|
|
4.2
|
|
|
|
(15.0
|
)
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
10.7
|
|
|
|
(13.5
|
)
|
|
|
(17.3
|
)
|
|
|
(20.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in borrowings
|
|
|
|
|
|
|
|
|
|
|
47.9
|
|
|
|
47.9
|
|
Payment of borrowings
|
|
|
(90.0
|
)
|
|
|
(1.6
|
)
|
|
|
(46.4
|
)
|
|
|
(138.0
|
)
|
Long-term intercompany advance
|
|
|
124.1
|
|
|
|
(124.1
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(0.8
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
33.3
|
|
|
|
(125.6
|
)
|
|
|
1.5
|
|
|
|
(90.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrestricted cash and cash equivalents
|
|
|
(22.2
|
)
|
|
|
(0.6
|
)
|
|
|
(13.6
|
)
|
|
|
(36.4
|
)
|
Unrestricted cash and cash equivalents at the beginning of the
period
|
|
|
43.6
|
|
|
|
11.4
|
|
|
|
34.6
|
|
|
|
89.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents at the end of the period
|
|
$
|
21.4
|
|
|
$
|
10.8
|
|
|
$
|
21.0
|
|
|
$
|
53.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
NORTEK,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
Jan. 1, 2009 -
|
|
|
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Dec. 19, 2009
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
(Restated)
|
|
|
Dec. 31, 2008
|
|
|
|
(Amounts in millions, except shares and per share data)
|
|
Net Sales
|
|
$
|
1,899.3
|
|
|
$
|
44.0
|
|
|
|
$
|
1,763.9
|
|
|
$
|
2,269.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
1,391.8
|
|
|
|
35.2
|
|
|
|
|
1,266.0
|
|
|
|
1,673.5
|
|
Selling, general and administrative expense, net
|
|
|
399.9
|
|
|
|
8.5
|
|
|
|
|
372.6
|
|
|
|
468.0
|
|
Pre-petition reorganization items (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
22.5
|
|
|
|
|
|
Goodwill impairment charge (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
284.0
|
|
|
|
710.0
|
|
Amortization of intangible assets
|
|
|
37.0
|
|
|
|
1.5
|
|
|
|
|
22.2
|
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,828.7
|
|
|
|
45.2
|
|
|
|
|
1,967.3
|
|
|
|
2,879.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
|
|
70.6
|
|
|
|
(1.2
|
)
|
|
|
|
(203.4
|
)
|
|
|
(610.0
|
)
|
Interest expense (contractual interest expense was approximately
$145.9 million for the Predecessor period from
January 1, 2009 to December 19, 2009, see Note 3)
|
|
|
(95.7
|
)
|
|
|
(3.6
|
)
|
|
|
|
(135.6
|
)
|
|
|
(134.7
|
)
|
Loss from debt retirement (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.9
|
)
|
Investment income
|
|
|
0.1
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before gain on reorganization items, net
|
|
|
(25.0
|
)
|
|
|
(4.8
|
)
|
|
|
|
(338.8
|
)
|
|
|
(753.8
|
)
|
Gain on reorganization items, net (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
619.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(25.0
|
)
|
|
|
(4.8
|
)
|
|
|
|
280.3
|
|
|
|
(753.8
|
)
|
(Benefit) provision for income taxes
|
|
|
(11.6
|
)
|
|
|
(1.4
|
)
|
|
|
|
85.0
|
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(13.4
|
)
|
|
$
|
(3.4
|
)
|
|
|
$
|
195.3
|
|
|
$
|
(780.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Loss) Earnings per share
|
|
$
|
(0.89
|
)
|
|
$
|
(0.23
|
)
|
|
|
$
|
65,100.00
|
|
|
$
|
(260,233.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss) Earnings per share
|
|
$
|
(0.89
|
)
|
|
$
|
(0.23
|
)
|
|
|
$
|
65,100.00
|
|
|
$
|
(260,233.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
|
|
3,000
|
|
|
|
3,000
|
|
Diluted
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
|
|
3,000
|
|
|
|
3,000
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-37
NORTEK,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
57.7
|
|
|
$
|
89.6
|
|
Restricted cash
|
|
|
0.1
|
|
|
|
1.3
|
|
Accounts receivable, less allowances of $4.9 million and
$0, respectively
|
|
|
280.8
|
|
|
|
249.1
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
92.9
|
|
|
|
72.9
|
|
Work in process
|
|
|
24.3
|
|
|
|
25.6
|
|
Finished goods
|
|
|
196.3
|
|
|
|
174.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313.5
|
|
|
|
273.2
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
15.9
|
|
|
|
18.0
|
|
Other current assets
|
|
|
13.8
|
|
|
|
7.7
|
|
Tax refunds receivable
|
|
|
18.5
|
|
|
|
5.8
|
|
Prepaid income taxes
|
|
|
16.9
|
|
|
|
25.4
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
717.2
|
|
|
|
670.1
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, at Cost:
|
|
|
|
|
|
|
|
|
Land
|
|
|
18.2
|
|
|
|
18.5
|
|
Buildings and improvements
|
|
|
76.0
|
|
|
|
72.8
|
|
Machinery and equipment
|
|
|
185.4
|
|
|
|
155.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279.6
|
|
|
|
247.1
|
|
Less accumulated depreciation
|
|
|
44.1
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
235.5
|
|
|
|
244.9
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Goodwill (Notes 3 and 4)
|
|
|
292.1
|
|
|
|
154.8
|
|
Intangible assets, less accumulated amortization of
$38.2 million and $1.5 million, respectively
(Notes 3 and 4)
|
|
|
695.0
|
|
|
|
536.6
|
|
Deferred debt expense
|
|
|
12.2
|
|
|
|
4.1
|
|
Restricted investments and marketable securities
|
|
|
2.4
|
|
|
|
2.4
|
|
Other assets
|
|
|
16.7
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,018.4
|
|
|
|
703.9
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,971.1
|
|
|
$
|
1,618.9
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-38
NORTEK,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET (Continued)
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(Dollar amounts in millions, except shares data)
|
|
|
|
LIABILITIES AND STOCKHOLDERS INVESTMENT
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable and other short-term obligations
|
|
$
|
8.6
|
|
|
$
|
13.4
|
|
Current maturities of long-term debt
|
|
|
7.7
|
|
|
|
32.4
|
|
Long-term debt (Note 8)
|
|
|
1.5
|
|
|
|
4.1
|
|
Accounts payable
|
|
|
175.7
|
|
|
|
124.5
|
|
Accrued expenses and taxes, net
|
|
|
193.2
|
|
|
|
174.9
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
386.7
|
|
|
|
349.3
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
152.7
|
|
|
|
112.6
|
|
Other
|
|
|
171.1
|
|
|
|
151.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323.8
|
|
|
|
264.1
|
|
|
|
|
|
|
|
|
|
|
Notes, Mortgage Notes and Obligations Payable, Less Current
Maturities
|
|
|
1,101.8
|
|
|
|
835.4
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders Investment:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 authorized
shares; none issued and outstanding at December 31, 2010
and 2009
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 90,000,000 authorized
shares; 15,000,000 shares issued and outstanding at
December 31, 2010 and 2009
|
|
|
0.1
|
|
|
|
0.1
|
|
Additional paid-in capital
|
|
|
174.7
|
|
|
|
171.9
|
|
Accumulated deficit
|
|
|
(16.8
|
)
|
|
|
(3.4
|
)
|
Accumulated other comprehensive income
|
|
|
0.8
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
Total stockholders investment
|
|
|
158.8
|
|
|
|
170.1
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Investment
|
|
$
|
1,971.1
|
|
|
$
|
1,618.9
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-39
NORTEK,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
Jan. 1, 2009 -
|
|
|
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Dec. 19, 2009
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
(Restated)
|
|
|
Dec. 31, 2008
|
|
|
|
(Amounts in millions)
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(13.4
|
)
|
|
$
|
(3.4
|
)
|
|
|
$
|
195.3
|
|
|
$
|
(780.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
91.7
|
|
|
|
6.2
|
|
|
|
|
57.7
|
|
|
|
68.6
|
|
Non-cash interest expense, net
|
|
|
2.1
|
|
|
|
|
|
|
|
|
45.5
|
|
|
|
8.3
|
|
Gain on settlement of liabilities subject to compromise
|
|
|
|
|
|
|
|
|
|
|
|
(539.9
|
)
|
|
|
|
|
Elimination of Predecessor deferred debt expense and debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
42.6
|
|
|
|
|
|
Non-cash fresh-start accounting adjustments
|
|
|
|
|
|
|
|
|
|
|
|
(131.0
|
)
|
|
|
|
|
Non-cash goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
284.0
|
|
|
|
710.0
|
|
Non-cash write-down of foreign subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
|
|
3.3
|
|
Loss from debt retirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9
|
|
Non-cash share-based compensation expense
|
|
|
2.8
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
(Gain) loss on sale of property and equipment
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
Deferred federal income tax (benefit) provision
|
|
|
(18.8
|
)
|
|
|
(1.3
|
)
|
|
|
|
65.2
|
|
|
|
11.1
|
|
Changes in certain assets and liabilities, net of effects
from acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(9.6
|
)
|
|
|
13.4
|
|
|
|
|
(0.4
|
)
|
|
|
47.4
|
|
Inventories
|
|
|
(23.4
|
)
|
|
|
5.6
|
|
|
|
|
44.9
|
|
|
|
5.6
|
|
Prepaid and other current assets
|
|
|
2.8
|
|
|
|
3.9
|
|
|
|
|
(13.5
|
)
|
|
|
1.1
|
|
Accounts payable
|
|
|
22.5
|
|
|
|
(13.1
|
)
|
|
|
|
(12.5
|
)
|
|
|
(33.7
|
)
|
Accrued expenses and taxes
|
|
|
(4.0
|
)
|
|
|
(3.7
|
)
|
|
|
|
(14.0
|
)
|
|
|
1.6
|
|
Long-term assets, liabilities and other, net
|
|
|
(5.6
|
)
|
|
|
(0.8
|
)
|
|
|
|
(5.4
|
)
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to net (loss) earnings
|
|
|
60.3
|
|
|
|
10.2
|
|
|
|
|
(173.9
|
)
|
|
|
835.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
46.9
|
|
|
$
|
6.8
|
|
|
|
$
|
21.4
|
|
|
$
|
54.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(19.8
|
)
|
|
$
|
(0.5
|
)
|
|
|
$
|
(17.9
|
)
|
|
$
|
(25.4
|
)
|
Net cash paid for businesses acquired
|
|
|
(285.2
|
)
|
|
|
|
|
|
|
|
(14.1
|
)
|
|
|
(32.7
|
)
|
Proceeds from the sale of property and equipment
|
|
|
0.4
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
8.5
|
|
Change in restricted cash and investments
|
|
|
1.2
|
|
|
|
0.6
|
|
|
|
|
(1.2
|
)
|
|
|
0.3
|
|
Other, net
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
(2.9
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(303.4
|
)
|
|
$
|
(0.1
|
)
|
|
|
$
|
(33.9
|
)
|
|
$
|
(51.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in borrowings
|
|
$
|
133.1
|
|
|
$
|
0.3
|
|
|
|
$
|
64.7
|
|
|
$
|
279.4
|
|
Payment of borrowings
|
|
|
(149.1
|
)
|
|
|
(4.1
|
)
|
|
|
|
(143.8
|
)
|
|
|
(111.0
|
)
|
Net proceeds from the sale of the 10% Senior Unsecured
Notes due 2018
|
|
|
250.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from the sale of the 10% Senior Secured Notes
due 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
742.2
|
|
Redemption of the senior secured credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(755.5
|
)
|
Fees paid in connection with debt facilities
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
(4.1
|
)
|
|
|
(33.8
|
)
|
Equity investment by Nortek Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Other, net
|
|
|
0.1
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
224.6
|
|
|
|
(3.8
|
)
|
|
|
|
(83.0
|
)
|
|
|
125.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrestricted cash and cash equivalents
|
|
|
(31.9
|
)
|
|
|
2.9
|
|
|
|
|
(95.5
|
)
|
|
|
128.8
|
|
Unrestricted cash and cash equivalents at the beginning of the
period
|
|
|
89.6
|
|
|
|
86.7
|
|
|
|
|
182.2
|
|
|
|
53.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents at the end of the period
|
|
$
|
57.7
|
|
|
$
|
89.6
|
|
|
|
$
|
86.7
|
|
|
$
|
182.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-40
NORTEK,
INC. AND SUBSIDIARIES
For the Year Ended December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
(Loss) Income
|
|
|
|
(Amounts in millions)
|
|
|
Balance, December 31, 2009
|
|
$
|
0.1
|
|
|
$
|
171.9
|
|
|
$
|
(3.4
|
)
|
|
$
|
1.5
|
|
|
$
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(13.4
|
)
|
|
|
|
|
|
|
(13.4
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.6
|
|
|
|
1.6
|
|
Pension liability adjustment, net of a tax benefit of
$0.9 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
0.1
|
|
|
$
|
174.7
|
|
|
$
|
(16.8
|
)
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-41
NORTEK,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS INVESTMENT
For
the Period from December 20, 2009 to December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Income
|
|
|
(Loss) Income
|
|
|
|
(Amounts in millions)
|
|
|
Balance, December 20, 2009
|
|
$
|
0.1
|
|
|
$
|
171.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
(3.4
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
Pension liability adjustment, net of tax provision of
$0.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
0.1
|
|
|
$
|
171.9
|
|
|
$
|
(3.4
|
)
|
|
$
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-42
NORTEK,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS INVESTMENT (DEFICIT)
For
the Period from January 1, 2009 to December 19,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deficit)
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Income
|
|
|
|
(Amounts in millions)
|
|
|
Balance, December 31, 2008 Predecessor
|
|
$
|
|
|
|
$
|
416.7
|
|
|
$
|
(612.1
|
)
|
|
$
|
(24.4
|
)
|
|
$
|
|
|
Net earnings (Restated) (Note 3)
|
|
|
|
|
|
|
|
|
|
|
195.3
|
|
|
|
|
|
|
|
195.3
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
8.0
|
|
Pension liability adjustment, net of tax provision of
$1.8 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
208.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of historical equity (Restated)
|
|
|
|
|
|
|
(416.8
|
)
|
|
|
416.8
|
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 19, 2009 Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 15,000,000 shares of common stock in connection
with the emergence from Chapter 11
|
|
|
0.1
|
|
|
|
171.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 789,474 warrants in connection with the emergence
from Chapter 11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 20, 2009 Successor
|
|
$
|
0.1
|
|
|
$
|
171.9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-43
NORTEK,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS INVESTMENT (DEFICIT)
For
the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
Loss
|
|
|
|
(Amounts in millions)
|
|
|
Balance, December 31, 2007
|
|
$
|
412.4
|
|
|
$
|
168.6
|
|
|
$
|
37.7
|
|
|
$
|
|
|
Net loss
|
|
|
|
|
|
|
(780.7
|
)
|
|
|
|
|
|
|
(780.7
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(25.7
|
)
|
|
|
(25.7
|
)
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
(36.4
|
)
|
|
|
(36.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(842.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution from parent
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
416.7
|
|
|
$
|
(612.1
|
)
|
|
$
|
(24.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-44
NORTEK,
INC. AND SUBSIDIARIES
December 31,
2010
Nortek, Inc. (Nortek) and all of its wholly-owned
subsidiaries, collectively the Company, is a
diversified manufacturer of innovative, branded residential and
commercial building products, operating within four reporting
segments (see Note 12, Segment Information and
Concentration of Credit Risk). Through these segments,
the Company manufactures and sells, primarily in the United
States, Canada and Europe, a wide variety of products for the
remodeling and replacement markets, the residential and
commercial new construction markets, the manufactured housing
market and the personal and enterprise computer markets.
On December 17, 2009 (the Effective Date), the
Company emerged from bankruptcy proceedings under
Chapter 11 (Chapter 11) of the United
States Bankruptcy Code (the Bankruptcy Code). In
connection with the Companys emergence from bankruptcy, as
discussed further in Note 2, Reorganization under
Chapter 11 and Current Capital Structure, the
Company adopted fresh-start reporting pursuant to the provisions
of Accounting Standards Codification (ASC) 852,
Reorganization (ASC 852). The Company
selected December 19, 2009 as the fresh-start reporting
date since it was the closest fiscal week-end to the Effective
Date of December 17, 2009 and the effect of using
December 19, 2009, instead of December 17, 2009, was
not material to the Companys financial condition or
results of operations for the periods presented. ASC 852
requires the implementation of fresh-start reporting if the
reorganization value of the assets of the entity that emerges
from Chapter 11 is less than the sum of the post-petition
liabilities and allowed claims, and holders of voting shares
immediately before confirmation of the plan of reorganization
receive less than 50 percent of the voting shares of the
emerging entity. Under fresh-start reporting a new reporting
entity is deemed to be created and the assets and liabilities of
the entity are reflected at their fair values.
Accordingly, the consolidated financial statements for the
reporting entity subsequent to emergence from Chapter 11
bankruptcy proceedings are not comparable to the consolidated
financial statements for the reporting entity prior to emergence
from Chapter 11 bankruptcy proceedings. References to the
Successor refer to the Company subsequent to the
fresh-start reporting date and references to the
Predecessor refer to the Company prior to the
fresh-start reporting date.
In addition, ASC 852 requires that financial statements,
for periods including and subsequent to a Chapter 11
bankruptcy filing, distinguish between transactions and events
that are directly associated with the reorganization proceedings
and transactions and events associated with the ongoing
operations of the business, as well as additional disclosures.
Effective October 21, 2009, expenses, gains and losses
directly associated with the reorganization proceedings are
reported as gain on reorganization items, net in the
accompanying consolidated statement of operations for the
Predecessor period from January 1, 2009 to
December 19, 2009. The Company, when used in
reference to the period subsequent to emergence from
Chapter 11 bankruptcy proceedings, refers to the Successor,
and when used in reference to periods prior to emergence from
Chapter 11 bankruptcy proceedings, refers to the
Predecessor. In addition, results for the period from
December 20, 2009 to December 31, 2009 are referred to
as the 2009 Successor Period, and results for the
period from January 1, 2009 to December 19, 2009 are
referred to as the 2009 Predecessor Period. For
further information regarding the Companys filing under
and emergence from Chapter 11 bankruptcy proceedings and
the adoption of fresh-start accounting, see Note 2,
Reorganization Under Chapter 11 and Current
Capital Structure, and Note 3,
Fresh-Start Accounting (Restated).
The accompanying Successor and Predecessor consolidated
financial statements reflect the financial position, results of
operations and cash flows of Nortek and all of its wholly-owned
subsidiaries after elimination of intercompany accounts and
transactions. Certain amounts in the prior years
consolidated financial statements have been reclassified to
conform to the current year presentation. For the year ended
December 31, 2010, this includes reclassifications to other
current assets, other assets, accrued expenses and taxes, net
and other liabilities related to expected insurance
reimbursements. The Company believes that these
F-45
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
reclassifications were not material to the consolidated
financial statements at December 31, 2010 and accordingly,
has not reclassified the balance sheet as of December 31,
2009.
|
|
2.
|
REORGANIZATION
UNDER CHAPTER 11 AND CURRENT CAPITAL STRUCTURE
|
On December 17, 2009, the Company successfully emerged from
bankruptcy as a reorganized company after voluntarily filing for
bankruptcy on October 21, 2009 with the United States
Bankruptcy Court for the District of Delaware (the
Bankruptcy Court), pursuant to prepackaged plans of
reorganization (the Reorganization). The purpose of
the Reorganization was to reorganize the Companys capital
structure while allowing it to continue to operate its business.
The Reorganization was necessary because it was determined that
the Company would be unable to operate its business and meet its
debt obligations under its pre-Reorganization capital structure.
As a result of the Reorganization, approximately
$1.3 billion of debt was eliminated. On December 29,
2009, the Bankruptcy Court closed the bankruptcy cases for
Norteks subsidiaries and on March 31, 2010 closed the
bankruptcy case for Nortek. On December 17, 2009 (the
Effective Date), the Company emerged from bankruptcy
as a reorganized company with a new capital structure.
The Companys capital structure at December 31, 2010
consists of the following:
|
|
|
|
|
ABL Facility. In December 2010, the Company
amended and restated its $300.0 million asset-based
revolving credit facility (the ABL Facility) to,
among other things, lower the interest rates payable by the
Company and amend certain provisions to provide Nortek with more
flexibility.
|
|
|
|
10% Senior Unsecured Notes due 2018. In
November 2010, the Company issued a total principal amount of
$250.0 million in 10% Senior Unsecured Notes due 2018
(the 10% Notes) to initial purchasers who then
resold the 10% Notes to certain institutional investors.
|
|
|
|
11% Senior Secured Notes due 2013. On the
Effective Date, the Company issued a total principal amount of
$753.3 million in 11% Senior Secured Notes due 2013
(the 11% Notes) to certain of its
pre-Reorganization creditors.
|
|
|
|
Common Stock and Warrants. On the Effective
Date, the Company issued 15,000,000 shares of common stock,
par value $0.01 per share and issued warrants that may be
exercised for a period of five years to purchase
789,474 shares of common stock at an exercise price of
$52.80 per share to certain of its pre-Reorganization creditors,
including certain of its directors and executive officers.
|
|
|
|
Restricted Stock. On the Effective Date, the
Company granted 710,731 shares of restricted common stock.
In addition, during 2010 the Company issued 2,000 shares of
restricted stock and 11,750 shares of restricted stock were
forfeited. These shares were issued to certain of the
Companys executive officers and are eligible to vest in
annual installments based upon the achievement of specified
levels of adjusted earnings before interest, taxes, depreciation
and amortization (EBITDA), as defined in the
applicable award agreement, for each of the Companys 2010,
2011, 2012 and 2013 fiscal years.
|
|
|
|
Options to Purchase Common Stock. On the
Effective Date, the Company granted options to purchase
710,731 shares of common stock each at an exercise price of
$17.50 per share. In addition, during 2010 the Company granted
options to purchase 92,000 shares of common stock at
exercise prices ranging from $17.50 to $41.00 and options to
purchase 21,750 shares of common stock were forfeited.
These stock options were issued to certain of the Companys
executive officers and directors and vest at the rate of 20% on
each anniversary of the grant date, beginning with the first
anniversary of the grant date, with 100% vesting upon the fifth
anniversary of the grant date, and, unless terminated earlier,
expire on the tenth anniversary of the grant date.
|
F-46
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
For further information regarding the 11% Notes,
10% Notes and ABL Facility, see Note 8,
Notes, Mortgage Notes and Obligations Payable.
For further information regarding the Companys
restricted stock and options to purchase common stock, see
Note 9, Share-Based Compensation.
Cancellation
of Certain Pre-Petition Obligations
Under the Prepackaged Plans, the Companys pre-petition
equity and certain of its debt and other obligations were
cancelled and extinguished, as follows:
|
|
|
|
|
The Predecessors common stock was extinguished, and no
distributions were made to the Predecessors former
shareholders;
|
|
|
|
The Predecessors 10% Notes,
81/2% Notes
and
97/8% Notes
were cancelled, and the indentures governing such debt
securities were terminated (other than for purposes of allowing
holders of each of the notes to receive distributions under the
Prepackaged Plans and allowing the trustees to exercise certain
rights);
|
|
|
|
The Predecessors pre-petition five-year
$350.0 million senior secured asset-based revolving credit
facility (the Predecessor ABL Facility) was paid in
full and terminated; and
|
|
|
|
The Predecessors net intercompany accounts with its former
parent entities were cancelled.
|
For further information regarding the resolution of the
Companys pre-petition liabilities in accordance with the
Prepackaged Plans, see Note 3, Fresh-Start
Accounting (Restated) Liabilities Subject to
Compromise, and Note 8, Notes, Mortgage
Notes and Obligations Payable.
|
|
3.
|
FRESH-START
ACCOUNTING (RESTATED)
|
The Company has restated its previously issued financial
statements to reflect a change in the presentation of the
cancellation of Predecessor stockholders investment
(deficit) resulting from the Companys emergence from
bankruptcy and the application of fresh-start accounting. The
restatement reduced the gain on reorganization items, net in the
accompanying consolidated statement of operations for the
Predecessor period from January 1, 2009 to
December 19, 2009 by approximately $416.8 million and
reduced net (loss) earnings by the same amount for such period.
The amounts in these consolidated financial statements reflect
this restatement. As all Predecessor stockholders
investment (deficit) was eliminated as a result of applying
fresh-start accounting, neither the closing balance sheet of the
Predecessor nor the opening balance sheet of the Successor were
impacted by the restatement. Further, the restatement did not
impact the Predecessors previously reported net cash
provided by operating activities, or net cash used in investing
or financing activities.
The following table shows the impact of the restatement on the
statement of operations for the Predecessor period from
January 1, 2009 to December 19, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
Reported
|
|
Adjustment
|
|
As Restated
|
|
|
(Amounts in millions)
|
|
Gain on reorganization items, net
|
|
$
|
1,035.9
|
|
|
$
|
(416.8
|
)
|
|
$
|
619.1
|
|
Earnings before provision for income taxes
|
|
|
697.1
|
|
|
|
(416.8
|
)
|
|
|
280.3
|
|
Net earnings
|
|
|
612.1
|
|
|
|
(416.8
|
)
|
|
|
195.3
|
|
The consolidated statement of stockholders investment
(deficit) for the Predecessor period from January 1, 2009
to December 19, 2009 has been revised to reflect the
presentation of the cancellation of Predecessor equity as a
credit to (accumulated deficit) retained earnings, impacting the
amounts reported as net earnings and elimination of Predecessor
stockholders investment (deficit) in this statement.
Additionally,
F-47
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
comprehensive income decreased by approximately
$416.8 million to approximately $208.1 million from
the previously reported amount of approximately
$624.9 million as a result of the reduction in net earnings.
The restatement did not impact the Successors consolidated
financial statements.
Reorganization
Value
The Bankruptcy Court confirmed the Prepackaged Plans that
included a range of enterprise values from $1.0 billion to
$1.3 billion (the Enterprise Value Range) and a
range of reorganized equity values from $172.0 million to
$472.0 million (the Equity Value Range), as set
forth in the disclosure statement relating to the Prepackaged
Plans (the Disclosure Statement). The Enterprise
Value Range was determined using a combination of three
valuation methodologies, which included (i) comparable
public company analysis, (ii) precedent transaction
analysis and (iii) discounted cash flow analysis, to arrive
at the overall Enterprise Value Range included in the Disclosure
Statement. The Equity Value Range was determined by deducting
the projected fair value of the Successors debt as of the
Effective Date from the Enterprise Value Range to arrive at the
overall Equity Value Range included in the Disclosure Statement.
The comparable public company analysis examined the value of
comparable companies as a multiple of their key operating
statistics and then applied a range of multiples to the
projected 2009 and 2010 EBITDA of the Company, which were
determined to be the most relevant operating statistics for
analyzing the comparable companies. The range of multiples
applied to 2009 EBITDA was 7.0x to 9.0x and for 2010 EBITDA was
6.0x to 8.0x. A key factor to the public company analysis was
the selection of companies with relatively similar business and
operational characteristics to the Company. The criteria for
selecting comparable companies included, among other relevant
characteristics, lines of business, key business drivers, growth
prospects, maturity of businesses, market presence and brands,
size and scale of operations.
The precedent transaction analysis estimated enterprise value by
examining public merger and acquisition transactions that
involve companies similar to Nortek. An analysis of the
disclosed purchase price as a multiple of various operating
statistics determined industry acquisition multiples for
companies in similar lines of business to the Company. The
transaction multiples were calculated based on the purchase
price, including any debt assumed, paid to acquire companies
that were comparable to the Company. The precedent transaction
analysis used multiples based on the latest twelve months
(LTM) EBITDA for analyzing the group of precedent
transactions. The derived multiples were then applied to the
Companys LTM EBITDA to perform the precedent transaction
analysis. The transaction multiples used ranged from 6.6x to
8.3x.
The discounted cash flow analysis discounted the expected future
cash flows by a discount rate that was determined by estimating
the average cost of debt and equity for the Company based upon
the analysis of similar publicly traded companies. The discount
rates used ranged from 13.0% to 15.0%. The discounted cash flow
analysis included two components to the valuation. The first
component was the calculation of the present value of the
projected un-levered after-tax free cash flows for the years
ending December 31, 2009 through December 31, 2014 and
the second component was the present value of the terminal value
of the cash flows, which was estimated by (i) assuming a
perpetuity growth rate, which ranged from 2.0% to 4.0%, for the
cash flows beyond the projection period or (ii) applying a
terminal EBITDA multiple, which ranged from 6.0x to 8.0x, to the
final period cash flows.
The Enterprise Value Range and Equity Value Range submitted to
the Bankruptcy Court in the Disclosure Statement on
October 21, 2009 were based on a variety of estimates and
assumptions, including the projections of both EBITDA and free
cash flow for future periods, EBITDA multiples, discount rates
and terminal growth rates, among others. The Company considered
the estimates and assumptions used to be reasonable although
they are inherently subject to uncertainty and a wide variety of
significant business, economic and competitive risks beyond the
Companys control. In addition, had the Company used
different estimates and assumptions,
F-48
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
such different estimates and assumptions may have resulted in a
material change to the Enterprise Value Range and the Equity
Value Range. Accordingly, there can be no assurance that the
estimates, assumptions and financial projections used to
determine the Enterprise Value Range and the Equity Value Range
will be realized and the actual results could be materially
different.
The Company determined the reorganization value in accordance
with fresh-start accounting under ASC 852 as follows:
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Enterprise Value attributed to Nortek
|
|
$
|
1,000.0
|
|
Plus: Estimated excess cash at Effective Date (excluding
approximately $45.0 million used to repay the Predecessor
ABL Facility at emergence)
|
|
|
61.2
|
|
Liabilities (excluding debt)
|
|
|
582.2
|
|
|
|
|
|
|
Reorganization value at Effective Date
|
|
|
1,643.4
|
|
Less: the 11% Notes
|
|
|
(753.3
|
)
|
the ABL Facility
|
|
|
(90.0
|
)
|
Subsidiary debt
|
|
|
(45.9
|
)
|
Liabilities (excluding debt)
|
|
|
(582.2
|
)
|
|
|
|
|
|
Equity Value of the New Common Stock
|
|
$
|
172.0
|
|
|
|
|
|
|
Based on the general economic and market conditions in place as
of the Effective Date and the above analysis, the Company
determined that the low end of the Enterprise Value Range and
Equity Value Range were the appropriate values to use in the
determination of reorganization value. The Company used
$45.0 million of available cash and $90.0 million
borrowed under the ABL Facility to repay the Predecessor ABL
Facility on the Effective Date. The Company estimated that an
additional $61.2 million of excess cash would have been
available for further debt reduction and therefore should be
included in the determination of the reorganization value.
Adoption
of Fresh-Start Accounting
Fresh-start accounting requires adjusting the historical net
book value of assets and liabilities to fair value in accordance
with ASC 805, Business Combinations (ASC
805). The Companys estimates of fair value are
inherently subject to significant uncertainties and
contingencies beyond the Companys reasonable control.
Accordingly, there can be no assurance that the estimates,
assumptions, valuations, appraisals and financial projections
will be realized, and actual results could vary materially. If
additional information becomes available related to the
estimates used in determining the fair values, including those
used in determining the fair values of long-lived assets,
liabilities and income taxes, such information could impact the
allocations of fair value included in the Successors
balance sheet as of December 20, 2009.
The excess of reorganization value over the fair value of
tangible and identifiable intangible assets was recorded as
goodwill. Liabilities existing as of the Effective Date, other
than deferred taxes, were recorded at their estimated fair
value. Deferred taxes were determined in conformity with
applicable income tax accounting standards. Predecessor
accumulated depreciation, accumulated amortization, retained
deficit, common stock and accumulated other comprehensive loss
were eliminated.
F-49
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Adjustments recorded to the Predecessor balance sheet as of
December 19, 2009 resulting from the consummation of the
Prepackaged Plans, and the adoption of fresh-start accounting,
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Reorganization
|
|
|
|
|
Fresh Start
|
|
|
Successor
|
|
|
|
Dec. 19, 2009
|
|
|
Adjustments(a)
|
|
|
|
|
Adjustments(h)
|
|
|
Dec. 20, 2009
|
|
|
|
(Amounts in millions)
|
|
|
ASSETS:
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
137.8
|
|
|
$
|
(51.1
|
)
|
|
(b)
|
|
$
|
|
|
|
$
|
86.7
|
|
|
Restricted cash
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
Accounts receivable, less allowances
|
|
|
262.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262.3
|
|
|
Inventories
|
|
|
251.4
|
|
|
|
|
|
|
|
|
|
30.2
|
|
|
|
281.6
|
|
|
Prepaid expenses
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.6
|
|
|
Other current assets
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.1
|
|
|
Prepaid income taxes
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
15.2
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
698.5
|
|
|
|
(51.1
|
)
|
|
|
|
|
45.4
|
|
|
|
692.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
191.8
|
|
|
|
|
|
|
|
|
|
53.4
|
|
|
|
245.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
528.8
|
|
|
|
|
|
|
|
|
|
(374.0
|
)
|
|
|
154.8
|
(i
|
)
|
Intangible assets, less accumulated amortization
|
|
|
112.7
|
|
|
|
|
|
|
|
|
|
425.3
|
|
|
|
538.0
|
|
|
Deferred debt expense
|
|
|
8.7
|
|
|
|
(4.6
|
)
|
|
(b),(c)
|
|
|
|
|
|
|
4.1
|
|
|
Restricted investments and marketable securities
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
Other assets
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
658.7
|
|
|
|
(4.6
|
)
|
|
|
|
|
51.3
|
|
|
|
705.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,549.0
|
|
|
$
|
(55.7
|
)
|
|
|
|
$
|
150.1
|
|
|
$
|
1,643.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS INVESTMENT (DEFICIT)
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other short-term obligations
|
|
$
|
152.3
|
|
|
$
|
(135.0
|
)
|
|
(b)
|
|
$
|
|
|
|
$
|
17.3
|
|
|
Current maturities of long-term debt
|
|
|
7.4
|
|
|
|
25.0
|
|
|
(b)
|
|
|
|
|
|
|
32.4
|
|
|
Long-term debt
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
|
Accounts payable
|
|
|
137.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137.5
|
|
|
Accrued expenses and taxes, net
|
|
|
180.2
|
|
|
|
(2.0
|
)
|
|
(b)
|
|
|
|
|
|
|
178.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
481.5
|
|
|
|
(112.0
|
)
|
|
|
|
|
|
|
|
|
369.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
27.9
|
|
|
|
|
|
|
|
|
|
86.2
|
|
|
|
114.1
|
|
|
Other long-term liabilities
|
|
|
145.8
|
|
|
|
|
|
|
|
|
|
6.6
|
|
|
|
152.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173.7
|
|
|
|
|
|
|
|
|
|
92.8
|
|
|
|
266.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes, Mortgage Notes and Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable, Less Current Maturities
|
|
|
19.6
|
|
|
|
818.3
|
|
|
(b),(d)
|
|
|
(2.5
|
)
|
|
|
835.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities subject to compromise
|
|
|
1,465.2
|
|
|
|
(1,465.2
|
)
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Investment (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor common stock
|
|
|
|
|
|
|
0.1
|
|
|
(d),(e)
|
|
|
|
|
|
|
0.1
|
|
|
Successor additional paid-in capital
|
|
|
|
|
|
|
171.9
|
|
|
(d),(e)
|
|
|
|
|
|
|
171.9
|
|
|
Predecessor common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor additional paid-in capital
|
|
|
416.8
|
|
|
|
(416.8
|
)
|
|
(f)
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(996.2
|
)
|
|
|
948.0
|
|
|
(g)
|
|
|
48.2
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
(11.6
|
)
|
|
|
|
|
|
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders investment (deficit)
|
|
|
(591.0
|
)
|
|
|
703.2
|
|
|
|
|
|
59.8
|
|
|
|
172.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Investment
(Deficit)
|
|
$
|
1,549.0
|
|
|
$
|
(55.7
|
)
|
|
|
|
$
|
150.1
|
|
|
$
|
1,643.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents amounts recorded as of the Effective Date for the
consummation of the Prepackaged Plans, including the settlement
of liabilities subject to compromise, the satisfaction of the
Predecessor ABL |
F-50
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
|
|
|
|
|
Facility, the incurrence of new indebtedness, the issuance of
the New Common Stock, and the cancellation of the Predecessor
common stock. |
|
(b) |
|
This adjustment reflects the net cash payments recorded as of
the Effective Date as follows: |
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Borrowings under the ABL Facility
|
|
$
|
90.0
|
|
Less: Debt issuance costs
|
|
|
(4.1
|
)
|
|
|
|
|
|
Net proceeds from the ABL Facility
|
|
|
85.9
|
|
Repayment of Predecessor ABL Facility, including principal and
accrued interest
|
|
|
(137.0
|
)
|
|
|
|
|
|
|
|
$
|
(51.1
|
)
|
|
|
|
|
|
Subsequent to December 19, 2009, the Company voluntarily
repaid $25.0 million of outstanding borrowings under the
ABL Facility and accordingly, has classified such amount as
current in the December 19, 2009 Successor balance sheet.
|
|
|
(c) |
|
Adjustments to deferred debt expense consist of the following: |
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Elimination of deferred debt expense related to the Predecessor
ABL Facility
|
|
$
|
(8.7
|
)
|
Deferred debt expense related to the ABL Facility (see
(b) above)
|
|
|
4.1
|
|
|
|
|
|
|
|
|
$
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
(d) |
|
This adjustment reflects the settlement of liabilities subject
to compromise (see Liabilities Subject to Compromise
below). |
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Settlement of liabilities subject to compromise(1)
|
|
$
|
(1,465.2
|
)
|
Issuance of the 11% Notes
|
|
|
753.3
|
|
Issuance of the New Common Stock(2)
|
|
|
172.0
|
|
|
|
|
|
|
Gain on settlement of liabilities subject to compromise
|
|
$
|
(539.9
|
)
|
|
|
|
|
|
|
|
|
1) |
|
See Liabilities Subject to Compromise below
for further details. |
|
2) |
|
See (g) below for a reconciliation of the reorganization
value to the value of the New Common Stock (including additional
paid in capital). |
F-51
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
|
|
|
e) |
|
A reconciliation of the reorganization value to the value of the
New Common Stock (including additional paid in capital) as of
the Effective Date, which is based on the low end of the
Enterprise Value Range and Equity Value Range included in the
Disclosure Statement, is as follows: |
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Enterprise Value attributed to Nortek
|
|
$
|
1,000.0
|
|
Plus: Estimated excess cash at Effective Date (excluding
approximately $45.0 million used to repay the Predecessor
ABL Facility at emergence)
|
|
|
61.2
|
|
Liabilities (excluding debt)
|
|
|
582.2
|
|
|
|
|
|
|
Reorganization value at Effective Date
|
|
|
1,643.4
|
|
Less: the 11% Notes
|
|
|
(753.3
|
)
|
the ABL Facility
|
|
|
(90.0
|
)
|
Subsidiary debt
|
|
|
(45.9
|
)
|
Liabilities (excluding debt)
|
|
|
(582.2
|
)
|
|
|
|
|
|
Equity value of the New Common Stock
|
|
$
|
172.0
|
|
|
|
|
|
|
|
|
|
f) |
|
This adjustment reflects the cancellation of the
Predecessors common stock. |
|
g) |
|
This adjustment reflects the cumulative impact of the
reorganization adjustments discussed above: |
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Gain on settlement of liabilities subject to compromise
|
|
$
|
539.9
|
|
Cancellation of Predecessor common stock (see (f) above)
|
|
|
416.8
|
|
Elimination of unamortized deferred debt expense (see
(c) above)
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
$
|
948.0
|
|
|
|
|
|
|
|
|
|
h) |
|
Represents the adjustment of assets and liabilities to fair
value, or other measurement as specified by ASC 805, in
conjunction with the adoption of fresh-start accounting.
Significant adjustments are summarized below: |
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Elimination of Predecessor goodwill
|
|
$
|
(528.8
|
)
|
Successor goodwill (see (i) below)
|
|
|
154.8
|
|
Elimination of Predecessor intangible assets
|
|
|
(112.7
|
)
|
Successor intangible assets(1)
|
|
|
538.0
|
|
Inventory adjustment(2)
|
|
|
30.2
|
|
Property and equipment, net adjustment(3)
|
|
|
53.4
|
|
Other fair value adjustments, net(4)
|
|
|
0.4
|
|
Elimination of Predecessor accumulated other comprehensive loss
(excluding deferred tax portion)
|
|
|
(4.3
|
)
|
|
|
|
|
|
Pre-tax gain on fresh-start accounting adjustments
|
|
|
131.0
|
|
Tax provision related to fresh-start accounting adjustments(5)
|
|
|
(82.8
|
)
|
|
|
|
|
|
Net gain on fresh-start accounting adjustments
|
|
$
|
48.2
|
|
|
|
|
|
|
|
|
|
1) |
|
Intangible assets This adjustment reflects the fair
value of intangible assets determined as of the Effective Date.
Fair value amounts were estimated based, in part, on third party
valuations. For further information on the valuation of
intangible assets, see Note 4, Summary of
Significant Accounting Policies. |
F-52
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
|
|
|
2) |
|
Inventory This amount adjusts inventory to fair
value as of the Effective Date. Raw materials were valued at
current replacement cost,
work-in-process
was valued at estimated finished goods selling price less
estimated disposal costs, completion costs and a reasonable
profit allowance for completion and selling effort. Finished
goods were valued at estimated selling price less estimated
disposal costs and a reasonable profit allowance for selling
effort. In addition, all LIFO inventory reserves were eliminated. |
|
3) |
|
Property, plant and equipment This amount adjusts
property and equipment, net to fair value as of the Effective
Date, giving consideration to the highest and best use of the
assets. Fair value amounts were estimated based, in part, on
third party valuations. Key assumptions used in the appraisals
were based on a combination of income, market and cost
approaches, as appropriate. |
|
4) |
|
Net adjustment to record operating leases and debt at fair value. |
|
5) |
|
Calculated as follows: |
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Increase in prepaid income taxes
|
|
$
|
(15.2
|
)
|
Increase in deferred income taxes
|
|
|
86.2
|
|
Increase in long-term tax liability
|
|
|
4.5
|
|
Deferred tax portion of accumulated other comprehensive loss
|
|
|
7.3
|
|
|
|
|
|
|
Tax provision related to fresh-start accounting
|
|
$
|
82.8
|
|
|
|
|
|
|
The increases in the prepaid income taxes and deferred income
taxes represent the deferred income tax consequences of the
fresh-start accounting adjustments, including the impact of the
basis difference between tax deductible and book goodwill, and
the elimination of certain deferred tax valuation allowances
that are no longer required due to the overall increase in net
deferred tax liabilities as a result of the fresh-start
adjustments. The increase in the long-term tax liability
reflects the impact of fresh-start accounting on required tax
reserves. The deferred tax portion of the accumulated other
comprehensive loss reflects the elimination of deferred taxes on
pension adjustments included in accumulated other comprehensive
loss in connection with fresh-start accounting.
|
|
|
i) |
|
A reconciliation of the reorganization value of the Successor
assets and goodwill is shown below: |
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Reorganization value
|
|
$
|
1,643.4
|
|
Less: Successor assets (excluding goodwill and after giving
effect to fresh-start accounting adjustments)
|
|
|
(1,488.6
|
)
|
|
|
|
|
|
Reorganization value of Successor assets in excess of fair
value Successor goodwill
|
|
$
|
154.8
|
|
|
|
|
|
|
F-53
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Liabilities
Subject to Compromise
Certain pre-petition liabilities were subject to compromise or
other treatment under the Prepackaged Plans and were reported at
amounts allowed or expected to be allowed by the Bankruptcy
Court. These claims were resolved and satisfied as of the
Effective Date. A summary of liabilities subject to compromise
reflected in the Predecessor consolidated balance sheet as of
December 19, 2009, is shown below:
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Predecessor December 19, 2009
|
|
|
|
|
Debt subject to compromise:
|
|
|
|
|
Predecessor 10% Notes
|
|
$
|
750.0
|
|
81/2% Notes
|
|
|
625.0
|
|
97/8% Notes
|
|
|
10.0
|
|
Accrued interest
|
|
|
37.2
|
|
Intercompany account with affiliates, net
|
|
|
43.0
|
|
|
|
|
|
|
Liabilities subject to compromise
|
|
$
|
1,465.2
|
|
|
|
|
|
|
Gain on
Reorganization Items, net
In conjunction with the Companys emergence from bankruptcy
in 2009, the Company recorded a pre-tax gain on reorganization
items, net of approximately $619.1 million related to its
reorganization proceedings and the impact of adopting
fresh-start accounting. A summary of this net pre-tax gain for
the 2009 Predecessor Period is as follows:
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
Pre-tax reorganization items:
|
|
|
|
|
Gain on settlement of liabilities subject to compromise
|
|
$
|
539.9
|
|
Elimination of Predecessor deferred debt expense and debt
discount
|
|
|
(33.9
|
)
|
Elimination of deferred debt expense related to the Predecessor
ABL Facility
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
497.3
|
|
Post-petition professional fees and other reorganization costs
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
488.1
|
|
Non-cash pre-tax fresh-start accounting adjustments
|
|
|
131.0
|
|
|
|
|
|
|
Pre-tax gain on Reorganization Items, net
|
|
$
|
619.1
|
|
|
|
|
|
|
Contractual
Interest Expense
The Company recorded post-petition interest on pre-petition
obligations only to the extent it believed the interest would be
paid during the bankruptcy proceedings or that it was probable
that the interest would be an allowed claim. Had the Company
recorded interest expense based on all of the pre-petition
contractual obligations, interest expense would have increased
by approximately $10.3 million for the 2009 Predecessor
Period.
F-54
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
|
|
4.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting
Policies and Use of Estimates
The preparation of these consolidated financial statements in
conformity with U.S. generally accepted accounting
principles involves estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the
financial statements and the reported amounts of income and
expense during the reporting periods. Certain of the
Companys accounting policies require the application of
judgment in selecting the appropriate assumptions for
calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty. The
Company periodically evaluates the judgments and estimates used
for its critical accounting policies to ensure that such
judgments and estimates are reasonable for its interim and
year-end reporting requirements. These judgments and estimates
are based on the Companys historical experience, current
trends and information available from other sources, as
appropriate. If different conditions result from those
assumptions used in the Companys judgments, the results
could be materially different from the Companys estimates.
Recognition
of Sales and Related Costs, Incentives and Allowances
The Company recognizes sales upon the shipment of its products,
net of applicable provisions for discounts and allowances.
Allowances for cash discounts, volume rebates and other customer
incentive programs, as well as gross customer returns, among
others, are recorded as a reduction of sales at the time of sale
based upon the estimated future outcome. Cash discounts, volume
rebates, and other customer incentive programs are based upon
certain percentages agreed to with the Companys various
customers, which are typically earned by the customer over an
annual period. The Company records periodic estimates for these
amounts based upon the historical results to date, estimated
future results through the end of the contract period and the
contractual provisions of the customer agreements. For calendar
year customer agreements, the Company is able to adjust its
periodic estimates to actual amounts as of December 31 each year
based upon the contractual provisions of the customer
agreements. For those customers who have agreements that are not
on a calendar year cycle, the Company records estimates at
December 31 consistent with the above described methodology.
Customers are generally not required to provide collateral for
purchases. Customer returns are recorded on an actual basis
throughout the year and also include an estimate at the end of
each reporting period for future customer returns related to
sales recorded prior to the end of the period. The Company
generally estimates customer returns based upon the time lag
that historically occurs between the date of the sale and the
date of the return while also factoring in any new business
conditions that might impact the historical analysis, such as
new product introduction. The Company also provides for its
estimate of warranty, bad debts and shipping costs at the time
of sale. Shipping and warranty costs are included in cost of
products sold. Bad debt provisions are included in selling,
general and administrative expense, net. The amounts recorded
are generally based upon historically derived percentages while
also factoring in any new business conditions that might impact
the historical analysis, such as new product introduction for
warranty and bankruptcies of particular customers for bad debts.
Cash and
Cash Equivalents
Cash equivalents consist of short-term highly liquid investments
with original maturities of three months or less which are
readily convertible into cash.
The Company has classified as restricted in the accompanying
consolidated balance sheet certain cash and cash equivalents
that are not fully available for use in its operations. At
December 31, 2010, the Company had approximately
$2.5 million of cash and cash equivalents (of which
approximately $2.4 million is included in long-term assets)
pledged as collateral or held in pension trusts for certain
debt, insurance, employee benefits and other requirements. At
December 31, 2009, the Company had approximately
$3.7 million of cash
F-55
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
and cash equivalents (of which approximately $2.4 million
is included in long-term assets) pledged as collateral or held
in pension trusts for certain debt, insurance, employee benefits
and other requirements.
Fair
Value
The Companys assets and liabilities recorded at fair value
have been categorized based upon a fair value hierarchy in
accordance with ASC 820, Fair Value Measurements and
Disclosures. The levels of the fair value hierarchy are
described below:
|
|
|
|
|
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets and liabilities that the Company
has the ability to access at the measurement date.
|
|
|
|
Level 2 inputs utilize inputs, other than quoted prices
included in Level 1, that are observable for the asset or
liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar assets and liabilities in
active markets, and inputs other than quoted prices that are
observable for the asset or liability, such as interest rates
and yield curves that are observable at commonly quoted
intervals.
|
|
|
|
Level 3 inputs are unobservable inputs for the asset or
liability, allowing for situations where there is little, if
any, market activity for the asset or liability.
|
Measured
on a Recurring Basis
Restricted Investments and Marketable Securities
(Level 1) The fair value of investments is
based on quoted market prices. The fair value of investments was
not materially different from their cost basis at
December 31, 2010 or 2009.
Measured
on a Non-Recurring Basis
During the 2009 Predecessor Period, the Technology Products
(TECH) reporting unit goodwill was written down to
its implied fair value of approximately $68.9 million. This
resulted in a non-cash goodwill impairment charge of
approximately $284.0 million, which was included in the
consolidated statement of operations for the 2009 Predecessor
Period.
The TECH reporting units assets itemized below were
measured at fair value on a non-recurring basis during the 2009
Predecessor Period using a combination of the DCF Approach and
the EBITDA Multiple Approach:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
Other
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
Observable
|
|
Unobservable
|
|
Total
|
|
|
Fair Value
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
Impaired
|
|
|
Measurement
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Losses
|
|
|
(Amounts in millions)
|
|
Goodwill
|
|
$
|
68.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
68.9
|
|
|
$
|
284.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to goodwill noted above, the Company recorded
certain other assets and liabilities at fair value on a
non-recurring basis due to the effects of fresh-start
accounting. These non-recurring fair value measurements were
primarily determined using unobservable inputs and as such,
these fair value measurements are classified within Level 3
of the fair value hierarchy. For further information on assets
and liabilities measured at fair value on a non-recurring basis,
see Goodwill and Intangible Assets of this note,
along with Note 3, Fresh-Start
Accounting.
F-56
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Financial
Instruments Not Recorded at Fair Value
The carrying value and fair values of financial instruments not
recorded at fair value in the condensed consolidated balance
sheets as of December 31, 2010 and 2009 were as follows:
Cash and Trade Receivables Cash and trade
receivables are carried at their cost which approximates fair
value because of their short-term nature.
Long-Term Debt At December 31, 2010,
the fair value of the Companys long-term indebtedness was
approximately $57.1 million higher than the amount on the
Companys accompanying consolidated balance sheet, before
unamortized discount of approximately $2.0 million. At
December 31, 2009, the fair value of the Companys
long-term indebtedness was approximately equal to the amount on
the accompanying consolidated balance sheet. The fair values of
the Companys long-term obligations are determined using
available market quotes.
Inventories
Inventories in the accompanying December 31, 2010
consolidated balance sheet are valued at the lower of cost or
market, while inventories in the accompanying December 31,
2009 consolidated balance sheet reflect adjustments related to
fresh-start accounting as discussed previously in Note 3,
Fresh-Start Accounting (Restated).
At December 31, 2010, approximately $97.8 million of
the Companys total inventories were valued on the
last-in,
first-out method (LIFO) of accounting. Under the
first-in,
first-out method (FIFO), such inventories would have
been approximately $5.8 million lower at December 31,
2010. At December 31, 2009, approximately
$99.6 million of the Companys total inventories were
valued under LIFO. Under FIFO, such inventories would have been
approximately $1.5 million lower at December 31, 2009.
All other inventories were valued under the FIFO method.
In connection with both LIFO and FIFO inventories, the Company
will record provisions, as appropriate, to write-down obsolete
and excess inventory to estimated net realizable value. The
process for evaluating obsolete and excess inventory often
requires the Company to make subjective judgments and estimates
concerning future sales levels, quantities and prices at which
such inventory will be able to be sold in the normal course of
business. Accelerating the disposal process or incorrect
estimates of future sales potential may cause the actual results
to differ from the estimates at the time such inventory is
disposed or sold.
Purchase price allocated to the fair value of inventory is
amortized over the estimated period in which the inventory will
be sold.
Depreciation
and Amortization
Depreciation and amortization of property and equipment,
including capital leases, is provided on a straight-line basis
over their estimated useful lives, which are generally as
follows:
|
|
|
Buildings and improvements
|
|
3-46 years
|
Machinery and equipment, including leases
|
|
1-17 years
|
Leasehold improvements
|
|
Shorter of the term of lease or the estimated useful life
|
Expenditures for maintenance and repairs are expensed when
incurred. Expenditures for renewals and betterments are
capitalized. When assets are sold, or otherwise disposed, the
cost and related accumulated depreciation are eliminated and the
resulting gain or loss is recognized.
F-57
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Goodwill
and Intangible Assets
The following table presents a summary of the activity in
goodwill by reporting segment for the year ended
December 31, 2010 (2010), the 2009 Successor
Period and the 2009 Predecessor Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
Successor
|
|
|
|
Dec. 31,
|
|
|
Impair
|
|
|
Purchase
|
|
|
Translation
|
|
|
Dec. 19,
|
|
|
Fresh
|
|
|
Dec. 31,
|
|
|
Purchase
|
|
|
Dec. 31,
|
|
|
|
2008
|
|
|
-ments
|
|
|
Accounting(1)
|
|
|
Adjustments
|
|
|
2009
|
|
|
Start(2)
|
|
|
2009
|
|
|
Accounting(1)
|
|
|
2010
|
|
|
|
(Amounts in millions)
|
|
|
Residential Ventilation Products (RVP):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
$
|
785.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.6
|
|
|
$
|
785.6
|
|
|
$
|
(630.8
|
)
|
|
$
|
154.8
|
|
|
$
|
|
|
|
$
|
154.8
|
|
Impairment losses
|
|
|
(444.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(444.0
|
)
|
|
|
444.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net RVP goodwill
|
|
|
341.0
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
341.6
|
|
|
|
(186.8
|
)
|
|
|
154.8
|
|
|
|
|
|
|
|
154.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Products (TECH):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
|
428.4
|
|
|
|
|
|
|
|
1.3
|
|
|
|
0.2
|
|
|
|
429.9
|
|
|
|
(429.9
|
)
|
|
|
|
|
|
|
137.3
|
|
|
|
137.3
|
|
Impairment losses
|
|
|
(77.0
|
)
|
|
|
(284.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(361.0
|
)
|
|
|
361.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net TECH goodwill
|
|
|
351.4
|
|
|
|
(284.0
|
)
|
|
|
1.3
|
|
|
|
0.2
|
|
|
|
68.9
|
|
|
|
(68.9
|
)
|
|
|
|
|
|
|
137.3
|
|
|
|
137.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential HVAC Products (R-HVAC):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
|
232.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232.0
|
|
|
|
(232.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
(189.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189.0
|
)
|
|
|
189.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net R-HVAC goodwill
|
|
|
43.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43.0
|
|
|
|
(43.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial HVAC Products (C-HVAC):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
|
75.4
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
75.3
|
|
|
|
(75.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net C-HVAC goodwill
|
|
|
75.4
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
75.3
|
|
|
|
(75.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
|
1,520.8
|
|
|
|
|
|
|
|
1.3
|
|
|
|
0.7
|
|
|
|
1,522.8
|
|
|
|
(1,368.0
|
)
|
|
|
154.8
|
|
|
|
137.3
|
|
|
|
292.1
|
|
Impairment losses
|
|
|
(710.0
|
)
|
|
|
(284.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(994.0
|
)
|
|
|
994.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidated goodwill
|
|
$
|
810.8
|
|
|
$
|
(284.0
|
)
|
|
$
|
1.3
|
|
|
$
|
0.7
|
|
|
$
|
528.8
|
|
|
$
|
(374.0
|
)
|
|
$
|
154.8
|
|
|
$
|
137.3
|
|
|
$
|
292.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase accounting adjustments for TECH goodwill during 2010
relate to the acquisitions of Ergotron, Inc. and Skycam, LLC.
Purchase accounting adjustments for TECH goodwill during the
2009 Predecessor Period relate to contingent earnouts related to
acquisitions within this segment of approximately
$1.3 million. See Note 5,
Acquisitions. |
|
(2) |
|
Refer to Note 3,Fresh-Start Accounting
(Restated), for further information surrounding
fresh-start accounting adjustments. |
As discussed in Note 3, Fresh-Start Accounting
(Restated), the Company adopted fresh-start accounting
upon emergence from bankruptcy, which resulted in a new
determination of goodwill in accordance with ASC 852. As
indicated in the table above, the new determination of goodwill
under ASC 852 resulted in a reduction to Predecessor
goodwill of approximately $374.0 million, which the Company
allocated to the reporting units based on the estimated fair
value of each of the reporting units and related net assets and
liabilities, including the fair value adjustments under
ASC 852 discussed previously, of each reporting unit as of
the Effective Date. Based on this analysis, the Company
determined that the remaining goodwill as of the Effective Date
of approximately $154.8 million would be allocated to the
RVP segment.
F-58
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Prior to the adoption of fresh-start accounting, the Predecessor
classified as goodwill the cost in excess of fair value of the
net assets (including tax attributes) of companies acquired in
purchase transactions (see Note 5,
Acquisitions), net of any subsequent
impairment losses. Predecessor purchase accounting adjustments
relate principally to contingent earnouts related to
acquisitions that were paid in 2009.
The Company accounts for acquired goodwill and intangible assets
in accordance with ASC 805 and ASC Topic 350,
Goodwill and Other (ASC 350), which
involves judgment with respect to the determination of the
purchase price and the valuation of the acquired assets and
liabilities in order to determine the final amount of goodwill
recorded in a purchase.
Under ASC 350, goodwill and intangible assets determined to
have indefinite useful lives are not amortized. Instead, these
assets are evaluated for impairment on an annual basis, or more
frequently when an event occurs or circumstances change between
annual tests that would more likely than not reduce the fair
value of the reporting unit below its carrying value, including,
among others, a significant adverse change in the business
climate. The Company has set the annual evaluation date as of
the first day of its fiscal fourth quarter. The reporting units
evaluated for goodwill impairment by the Company have been
determined to be the same as the Companys operating
segments in accordance with the criteria in ASC 350 for
determining reporting units and include RVP, TECH, R-HVAC and
C-HVAC.
During the first six months of 2009, the Companys
businesses continued to experience a difficult market
environment due primarily to weak residential new construction,
remodeling and residential air conditioning markets. Based on
these macro-economic assumptions, the Company believed that
EBITDA would continue to decline in 2009 and then begin to
rebound in 2010 with continued growth through 2014. The
Companys prior long-term forecasts had expected the
rebound in EBITDA to begin to occur in the second half of 2009.
As a result, the Company significantly lowered its cash flow
forecasts for 2009 and 2010 for all of the reporting units and
for 2011 through 2014 for the TECH, R-HVAC and C-HVAC reporting
units. As a result, the Company concluded in the second quarter
of 2009 that indicators of potential goodwill impairment were
present and therefore the Company needed to perform an interim
test of goodwill impairment in accordance with ASC 350.
In accordance with ASC 350, the Company prepared an interim
Step 1 Test as of July 4, 2009 and an annual Step 1 Test as
of October 4, 2009 that compared the estimated fair value
of each reporting unit to its carrying value. The Company
utilized a combination of a discounted cash flow
(DCF) approach and an EBITDA multiple approach in
order to value the Companys reporting units required to be
tested for impairment.
The DCF approach required that the Company forecast future cash
flows of the reporting units and discount the cash flow stream
based upon a weighted average cost of capital (WACC)
that was derived, in part, from comparable companies within
similar industries. The DCF calculations also included a
terminal value calculation that was based upon an expected
long-term growth rate for the applicable reporting unit. The
Company believes that its procedures for estimating DCF,
including the terminal valuation, were reasonable and consistent
with market conditions at the time of estimation.
The EBITDA multiple approach required that the Company estimate
certain valuation multiples of EBITDA derived from comparable
companies, and apply those derived EBITDA multiples to the
applicable reporting units estimated EBITDA for selected
EBITDA measurement periods.
The annual Step 1 valuations as of October 4, 2009 were
determined using a weighted average of 50% of the DCF approach
and 50% for the EBITDA multiple approach, which the Company
determined to be the most representative allocation for the
measurement of the long-term fair value of the reporting units.
In 2008, and for the interim Step 1 Test as of July 4,
2009, the Company used a weighted average of 70% of the DCF
approach and 30% of the EBITDA multiple approach. The adjustment
to the allocation percentages used for
F-59
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
the annual impairment test reflects the Companys belief
that there is still significant risk in the overall worldwide
economy that could impact the future projections used in the DCF
approach and therefore increasing the allocation to the EBITDA
multiple approach provides better balance to the shorter-term
valuation conclusions under the EBITDA multiple approach and the
longer-term valuation conclusions under the DCF approach.
The results of the Step 1 Tests performed as of July 4,
2009 indicated that the carrying value of the TECH reporting
unit exceeded the estimated fair value determined by the Company
and, as such, a Step 2 Test was required for this
reporting unit. The estimated fair values of the RVP, R-HVAC and
C-HVAC reporting units exceeded the carrying values so no
further interim impairment analysis was required for these
reporting units as of July 4, 2009. The results of the Step
1 Tests performed as of October 4, 2009 for the
Companys annual impairment test indicated that the
estimated fair values of the reporting units exceeded the
carrying values so no further impairment analysis was required.
The Company believes that its assumptions used to determine the
estimated fair values for its reporting units as of July 4,
2009 and October 4, 2009 were reasonable.
Based on the Companys estimates at October 4, 2009,
the impact of reducing the Companys fair value estimates
for RVP, TECH and R-HVAC by 10% would have no impact on the
Companys goodwill assessment for these reporting units.
For C-HVAC, the impact of reducing the Companys fair value
estimates as of October 4, 2009 by 10% would have reduced
the estimated fair value to an amount below the carrying value
for this reporting unit and therefore would have required the
Company to perform additional impairment analysis for this
reporting unit. As a result of the application of fresh-start
accounting, TECH, R-HVAC and
C-HVAC had
no goodwill as of December 31, 2009.
The preliminary Step 2 Test for the TECH reporting unit for the
second quarter of 2009 required the Company to measure the
potential impairment loss by allocating the estimated fair value
of the reporting unit, as determined in Step 1, to the reporting
units assets and liabilities, with the residual amount
representing the implied fair value of goodwill and, to the
extent the implied fair value of goodwill was less than the
carrying value, an impairment loss was recognized. As such, the
Step 2 Test for the TECH reporting unit under ASC 350
required the Company to perform a theoretical purchase price
allocation for TECH to determine the implied fair value of
goodwill as of the evaluation date. Due to the complexity of the
analysis required to complete the Step 2 Tests, and the timing
of the Companys determination of the goodwill impairment,
the Company had not finalized its Step 2 Tests at the end of the
second and third quarters of 2009. In accordance with the
guidance in ASC 350, the Company completed a preliminary
assessment of the expected impact of the Step 2 Tests using
reasonable estimates for the theoretical purchase price
allocation and recorded a preliminary goodwill impairment charge
in the second quarter of 2009 of approximately
$250.0 million for the TECH reporting unit.
During the fourth quarter of 2009, the Company completed its
Step 2 Testing under ASC 350 for the TECH reporting unit by
performing the following procedures, among others:
|
|
|
|
|
Finalized the detailed appraisals used to determine the
estimated fair value of intangible assets, real estate and
machinery and equipment in accordance with methodologies for
valuing assets under ASC 805.
|
|
|
|
Finalized the analysis to determine the estimated fair value
adjustment required for inventory.
|
|
|
|
Finalized the deferred tax analysis, which included determining
the deferred tax consequences of the theoretical purchase price
adjustments required by the Step 2 Test.
|
The Company believes that the procedures performed and estimates
used in the theoretical purchase price allocation for the TECH
reporting unit required for Step 2 Testing under ASC 350
were reasonable and in
F-60
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
accordance with the guidelines for acquisition accounting
included in ASC 805 to determine the theoretical fair value
of the assets and liabilities of the TECH reporting unit used in
the Step 2 Testing.
As a result of the completion of the Step 2 Testing, the Company
recorded a final goodwill impairment charge for the TECH
reporting unit as of July 4, 2009 of approximately
$284.0 million. This represented an increase in the
goodwill impairment charge of approximately $34.0 million,
which was recorded in the Predecessor period from
October 4, 2009 to December 19, 2009. The primary
reasons for the change from the preliminary goodwill impairment
charge recorded in the second quarter of 2009 were changes in
the theoretical valuation of intangible assets from the initial
estimate used, net of the related deferred tax impact.
The Company performed its annual test of goodwill impairment as
of the first day of the fourth quarter of 2010, or
October 3, 2010, utilizing the same approaches as described
previously for the RVP and TECH reporting units, as these were
the only reporting units with goodwill. The Company believes
that its procedures performed and estimates used to determine
the fair value of the reporting units as of October 3, 2010
were reasonable and consistent with market conditions at the
time of estimation. The results of the Step 1 Tests performed as
of October 3, 2010 indicated that the fair value of the RVP
and TECH reporting units exceeded its carrying value and, as
such, no additional goodwill impairment analysis was required
for the RVP and TECH reporting units.
Although the Company believes that the forecast and valuation
assumptions used are reasonable, the worldwide economic
situation remains highly volatile and if the downturn persists
or the recovery is slower than anticipated, the Company may be
required to take additional goodwill impairment charges in the
future. Accordingly, there can be no assurance that the
Companys future forecasted operating results will be
achieved or that future goodwill impairment charges will not
need to be recorded, even after the significant reduction in
goodwill that resulted from the adoption of fresh-start
accounting subsequent to the Effective Date.
In accordance with ASC Topic 360, Property, Plant and
Equipment (ASC 360), the Company evaluates the
realizability of long-lived assets, which primarily consists of
property and equipment and definite lived intangible assets (the
ASC 360 Long-Lived Assets), when events or business
conditions warrant it as well as whenever an interim goodwill
impairment test is required under ASC 350, based on
expectations of non-discounted future cash flows for each
subsidiary. ASC 350 requires that the ASC 360
impairment test be completed and any ASC 360 impairment be
recorded prior to the goodwill impairment test. As a result of
the Companys conclusion that an interim goodwill
impairment test was required during the second quarter of 2009,
the Company performed an interim test for the impairment of
long-lived assets under ASC 360 in the second quarter of
2009 and determined that there were no impairment indicators
under ASC 360. The Company also completed an ASC 360
evaluation as of December 19, 2009, prior to the
Companys emergence from bankruptcy and the adoption of
fresh-start accounting. As a result, the Company recorded an
approximate $1.2 million intangible asset impairment for a
foreign subsidiary in the TECH segment in selling, general and
administrative expense, net in the accompanying statement of
operations. The Company determined that there were no other
significant impairments under ASC 360.
There were no impairment charges recorded for the year ended
December 31, 2010.
The evaluation of the impairment of long-lived assets, other
than goodwill, was based on expectations of non-discounted
future cash flows compared to the carrying value of the
long-lived asset groups in accordance with ASC 360. If the
sum of the expected non-discounted future cash flows was less
than the carrying amount of the ASC 360 Long-Lived Assets,
the Company would recognize an impairment loss. The
Companys cash flow estimates were based upon historical
cash flows, as well as future projected cash flows received from
subsidiary management in connection with the annual Company-wide
planning process and interim forecasting, and, if appropriate,
included a terminal valuation for the applicable subsidiary
based upon an EBITDA multiple. The Company estimated the EBITDA
multiple by reviewing comparable company information and
F-61
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
other industry data. The Company believes that its procedures
for estimating gross future cash flows, including the terminal
valuation, are reasonable and consistent with current market
conditions for each of the dates when impairment testing was
performed.
In connection with the adoption of fresh-start accounting,
intangible assets were recorded at their estimated fair value,
which was based, in part, on third party valuations, as of
December 19, 2009. Intangible assets consist principally of
trademarks, developed technology (unpatented and patented),
customer relationships, and other (which includes, among others,
non-compete and supplier agreements and backlog). The value
assigned to the Companys trademarks and developed
technology was based on the relief from royalty method using
estimated royalty rates that a willing buyer would pay for the
use of the trademark or identified technology. The fair value
was calculated by discounting future cash flows or royalties at
the required rate of return to present value as of
December 19, 2009. The value assigned to the Companys
customer relationships was based on the multi-period excess
earnings method which estimated the fair value of the asset by
discounting future projected earnings of the asset to present
value as of December 19, 2009. Key assumptions used in
these valuation methods include: managements projections
of revenues, expenses and cash flows for future years; an
estimated weighted average cost of capital, depending on the
reporting unit and nature of the asset, ranging from 12.3% to
17.2%; an internal rate of return, depending on the reporting
unit and nature of the asset, ranging from 12.7% to 16.6%, an
assumed discount rate, depending on the reporting unit and
nature of the asset, ranging from 13.8% to 18.5%, and a tax
rate, depending on the reporting unit, ranging from
approximately 37.0% to 39.0%. Accordingly, the fair values are
based on estimates which are inherently subject to significant
uncertainties and actual results could vary significantly from
these estimates.
The table that follows presents the Companys major
components of intangible assets as of December 31, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Intangible
|
|
|
Remaining
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets
|
|
|
Useful Lives
|
|
|
|
|
|
|
(Amounts in millions except for useful lives)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
158.4
|
|
|
$
|
(7.8
|
)
|
|
$
|
150.6
|
|
|
|
20.3
|
|
Developed Technology
|
|
|
67.9
|
|
|
|
(4.5
|
)
|
|
|
63.4
|
|
|
|
12.3
|
|
Customer relationships
|
|
|
483.9
|
|
|
|
(20.6
|
)
|
|
|
463.3
|
|
|
|
17.4
|
|
Others
|
|
|
23.0
|
|
|
|
(5.3
|
)
|
|
|
17.7
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
733.2
|
|
|
$
|
(38.2
|
)
|
|
$
|
695.0
|
|
|
|
17.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
139.8
|
|
|
$
|
(0.5
|
)
|
|
$
|
139.3
|
|
|
|
21.0
|
|
Developed Technology
|
|
|
49.0
|
|
|
|
(0.2
|
)
|
|
|
48.8
|
|
|
|
13.0
|
|
Customer relationships
|
|
|
339.6
|
|
|
|
(0.8
|
)
|
|
|
338.8
|
|
|
|
18.0
|
|
Others
|
|
|
9.7
|
|
|
|
|
|
|
|
9.7
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
538.1
|
|
|
$
|
(1.5
|
)
|
|
$
|
536.6
|
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology, trademarks and customer relationships are
amortized on a straight-line basis. Amortization of intangible
assets charged to operations amounted to approximately
$37.0 million, $1.5 million, $22.2 million and
$28.2 million for the year ended December 31, 2010,
the 2009 Successor Period, the 2009 Predecessor Period and the
year ended December 31, 2008, respectively. See
Note 5, Acquisitions, for
F-62
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
disclosure of intangible assets acquired in 2010 of
approximately $193.7 million related to the acquisition of
Ergotron, Inc.
As of December 31, 2010, the estimated future intangible
asset amortization expense aggregates approximately
$695.0 million as follows:
|
|
|
|
|
Year Ended
|
|
Annual Amortization
|
December 31,
|
|
Expense
|
|
|
(Amounts in millions)
|
|
|
(Unaudited)
|
|
2011
|
|
$
|
44.5
|
|
2012
|
|
|
44.5
|
|
2013
|
|
|
44.4
|
|
2014
|
|
|
44.1
|
|
2015
|
|
|
43.7
|
|
2016 and thereafter
|
|
|
473.8
|
|
Pensions
and Post Retirement Health Benefits
The Company accounts for pensions and post retirement health
benefits in accordance with ASC Topic 715,
Compensation Retirement Benefits,
(ASC 715). The accounting for pensions requires the
estimation of such items as the long-term average return on plan
assets, the discount rate, the rate of compensation increase and
the assumed medical cost inflation rate. Such estimates require
a significant amount of judgment. See Note 10,
Pension, Profit Sharing and Other Post-Retirement
Benefits, for a discussion of these judgments.
Insurance
Liabilities
The Company records insurance liabilities and related expenses
for health, workers compensation, product and general liability
losses, and other insurance reserves and expenses in accordance
with either the contractual terms of its policies or, if
self-insured, the total liabilities that are estimable and
probable as of the reporting date. Insurance liabilities are
recorded as current liabilities to the extent they are expected
to be paid in the succeeding year with the remaining
requirements classified as long-term liabilities. The accounting
for self-insured plans requires that significant judgments and
estimates be made both with respect to the future liabilities to
be paid for known claims and incurred but not reported claims as
of the reporting date. The Company considers historical trends
when determining the appropriate insurance reserves to record in
the consolidated balance sheet for a substantial portion of its
workers compensation and general and product liability losses.
In certain cases where partial insurance coverage exists, the
Company must estimate the portion of the liability that will be
covered by existing insurance policies to arrive at the net
expected liability to the Company. Receivables for insurance
recoveries for product liability claims are recorded as assets,
on an undiscounted basis, in the accompanying consolidated
balance sheet. These recoveries are estimated based on the
contractual arrangements with vendors and other third parties
and historical trends. Prior to 2010, these amounts, which we
have determined to be immaterial to the accompanying
consolidated balance sheet, were recorded as a reduction of the
estimated liabilities.
Income
Taxes
The Company accounts for income taxes using the liability method
in accordance with ASC 740, Income Taxes
(ASC 740), which requires that the deferred tax
consequences of temporary differences between the amounts
recorded in the Companys consolidated financial statements
and the amounts included in the Companys federal and state
income tax returns be recognized in the balance sheet. As the
Company generally
F-63
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
does not file its income tax returns until well after the
closing process for the December 31 financial statements is
complete, the amounts recorded at December 31 reflect estimates
of what the final amounts will be when the actual income tax
returns are filed for that fiscal year. In addition, estimates
are often required with respect to, among other things, the
appropriate state income tax rates to use in the various states
that Nortek and its subsidiaries are required to file, the
potential utilization of operating and capital loss
carry-forwards and valuation allowances required, if any, for
tax assets that may not be realizable in the future.
ASC 740 requires balance sheet classification of current
and long-term deferred income tax assets and liabilities based
upon the classification of the underlying asset or liability
that gives rise to a temporary difference (see Note 7,
Income Taxes).
Share-Based
Compensation Expense
The Company measures share-based compensation expense at fair
value in accordance with ASC 718,
Compensation Stock Compensation
(ASC 718), and recognizes such expense over the
vesting period of the stock-based employee awards. For the year
ended December 31, 2010, the 2009 Predecessor Period and
the year ended December 31, 2008, the Company recognized
share-based compensation expense of approximately
$2.8 million, $0.1 million and $0.1 million,
respectively. There was a de minimis amount of share-based
employee compensation expense recorded for the 2009 Successor
Period. See Note 9, Share-Based
Compensation, for further information regarding the
Successors and the Predecessors share-based
compensation programs.
Commitments
and Contingencies
The Company provides accruals for all direct costs, including
legal costs, associated with the estimated resolution of
contingencies at the earliest date at which it is deemed
probable that a liability has been incurred and the amount of
such liability can be reasonably estimated. Costs accrued are
estimated based upon an analysis of potential results, assuming
a combination of litigation and settlement strategies and
outcomes. Legal costs for other than probable contingencies are
expensed when services are performed. See Note 11,
Commitments and Contingencies, for further
information regarding the Companys commitments and
contingencies.
Research
and Development
The Companys research and development activities are
principally new product development and represent approximately
2.9%, 3.5%, 2.9% and 2.5% of the Companys consolidated net
sales for the year ended December 31, 2010, the 2009
Successor Period, the 2009 Predecessor Period and the year ended
December 31, 2008, respectively, and are recorded in
selling, general and administrative expense, net.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes net earnings (loss),
unrealized gains and losses from foreign currency translation,
and pension liability adjustments, net of tax attributes. The
components of the Companys comprehensive income (loss) and
the effect on earnings for the periods presented are detailed in
the accompanying consolidated statement of stockholders
investment.
F-64
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The balances of each classification, net of tax attributes,
within accumulated other comprehensive income (loss) as of the
periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Post-Retirement
|
|
|
Other
|
|
|
|
Currency
|
|
|
Liability
|
|
|
Comprehensive
|
|
|
|
Translation
|
|
|
Adjustment, net
|
|
|
Income (Loss)
|
|
|
|
(Amounts in millions)
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
28.3
|
|
|
$
|
9.4
|
|
|
$
|
37.7
|
|
Change during the period
|
|
|
(25.7
|
)
|
|
|
(36.4
|
)
|
|
|
(62.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
2.6
|
|
|
|
(27.0
|
)
|
|
|
(24.4
|
)
|
Change during the period
|
|
|
8.0
|
|
|
|
4.8
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 19, 2009
|
|
|
10.6
|
|
|
|
(22.2
|
)
|
|
|
(11.6
|
)
|
Fresh-start accounting adjustments
|
|
|
(10.6
|
)
|
|
|
22.2
|
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 20, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
Change during the period
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
1.5
|
|
Change during the period
|
|
|
1.6
|
|
|
|
(2.3
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
2.3
|
|
|
$
|
(1.5
|
)
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation
The financial statements of subsidiaries outside the United
States are measured using the foreign subsidiaries local
currency as the functional currency. The Company translates the
assets and liabilities of its foreign subsidiaries at the
exchange rates in effect at year-end. Net sales, costs and
expenses are translated using average exchange rates in effect
during the year. Gains and losses from foreign currency
translation are credited or charged to accumulated other
comprehensive income (loss) included in stockholders
investment in the accompanying consolidated balance sheet.
Transaction gains and losses are recorded in selling, general
and administrative expense, net.
Earnings
Per Share
The Company calculates basic and diluted earnings (loss) per
share (EPS) in accordance with ASC 260,
Earnings Per Share (ASC 260). Basic
earnings (loss) per share amounts are computed using the
weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share amounts are computed
using the weighted average number of common shares outstanding
and dilutive potential common shares outstanding during each
period.
F-65
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The reconciliation between basic and diluted earnings (loss) per
share for the periods presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2009 -
|
|
|
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Dec. 19, 2009
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
(Restated)
|
|
|
Dec. 31, 2008
|
|
|
|
(Dollar amounts in millions, except shares and per share
data)
|
|
Net (loss) earnings
|
|
$
|
(13.4
|
)
|
|
$
|
(3.4
|
)
|
|
|
$
|
195.3
|
|
|
$
|
(780.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
|
|
3,000
|
|
|
|
3,000
|
|
Dilutive effect of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares outstanding
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.89
|
)
|
|
$
|
(0.23
|
)
|
|
|
$
|
65,100.00
|
|
|
$
|
(260,233.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.89
|
)
|
|
$
|
(0.23
|
)
|
|
|
$
|
65,100.00
|
|
|
$
|
(260,233.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of certain potential common share equivalents,
including warrants, unvested restricted stock and stock options
were excluded from the computation of diluted shares outstanding
for the year ended December 31, 2010 and the 2009 Successor
Period, as inclusion would have been anti-dilutive. A summary of
these common share equivalents excluded from the year ended
December 31, 2010 and the 2009 Successor Period is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
Warrants
|
|
|
789,474
|
|
|
|
789,474
|
|
Restricted stock
|
|
|
700,981
|
|
|
|
710,731
|
|
Stock options
|
|
|
780,981
|
|
|
|
710,731
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,271,436
|
|
|
|
2,210,936
|
|
|
|
|
|
|
|
|
|
|
There were no potential common share equivalents outstanding
during the Predecessor periods presented.
Earnings (loss) per share for the year ended December 31,
2010 and the 2009 Successor Period is not comparable to the 2009
Predecessor Period or the year ended December 31, 2008, as
all Predecessor common stock was extinguished as part of the
Companys reorganization. See Note 2,
Reorganization Under Chapter 11 and Current
Capital Structure, and Note 3,
Fresh-Start Accounting (Restated).
Related
Party Transactions
The Predecessor had a management agreement with an affiliate of
Thomas H. Lee Partners, L.P. (THL) providing for
certain financial and strategic advisory and consultancy
services. The Predecessor expensed approximately
$1.0 million and $2.0 million during the 2009
Predecessor Period and the year ended December 31, 2008,
respectively, related to this management agreement. In
connection with the Reorganization, the management agreement was
terminated as of the Effective Date.
During the fourth quarter of 2008, certain executive officers of
the Company invested with THL in the purchase of certain senior
unsecured loans with accreted value of approximately
$83.0 million issued by the Companys former parent,
NTK Holdings, Inc. As a result of the Reorganization, these
executive officers received 6,606 shares of common stock
and warrants exercisable for the purchase of 17,384 shares
of common stock based upon their indirect pro rata ownership of
such senior unsecured loans issued by NTK Holdings, Inc.
F-66
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
New
Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
No. 2010-06
which establishes additional disclosure requirements for fair
value measurements. According to the guidance, the fair value
hierarchy disclosures are to be further disaggregated by class
of assets and liabilities. A class is often a subset of assets
or liabilities within a line item in the statement of financial
position. In addition, significant transfers between
Levels 1 and 2 of the fair value hierarchy will be required
to be disclosed. These additional requirements became effective
January 1, 2010 for quarterly and annual reporting. These
amendments did not have an impact on the Companys results
of operations or financial condition as this guidance relates
only to additional disclosures (see Fair
Value). In addition, the guidance requires more
detailed disclosures of the changes in Level 3 instruments.
These changes will be effective January 1, 2011 and are not
expected to have a material impact on the Companys
consolidated financial statements.
In October 2009, the FASB issued ASU
No. 2009-13
which amends revenue recognition guidance for arrangements with
multiple deliverables. The new guidance eliminates the residual
method of revenue recognition and allows the use of
managements best estimate of selling price for individual
elements of an arrangement when vendor-specific objective
evidence, vendor objective evidence or third-party evidence is
unavailable. This guidance is effective for transactions entered
into after January 1, 2011. The Company will adopt this
guidance on January 1, 2011 and does not expect it to have
a material impact on the Companys consolidated financial
statements.
In October 2009, the FASB issued ASU
No. 2009-14
which amends the scope of existing software revenue recognition
accounting. Tangible products containing software components and
non-software components that function together to deliver the
products essential functionality would be scoped out of
the accounting guidance on software and accounted for based on
other appropriate revenue recognition guidance. This guidance
must be adopted in the same period that a company adopts ASU
No. 2009-13
described in the preceding paragraph. Therefore, the Company
will adopt this guidance on January 1, 2011 and does not
expect it to have a material impact on the Companys
consolidated financial statements.
On December 17, 2010, the Company acquired all of the
outstanding stock of Ergotron, Inc. (Ergotron). Ergotron
is a designer, manufacturer and marketer of innovative,
ergonomic mounting and mobility products for computer monitors,
notebooks and flat panel displays in the United States and other
parts of the world. The estimated purchase price was
approximately $298.0 million, which consisted of a cash
payment at the date of acquisition of approximately
$289.8 million and an estimated payable to the sellers of
approximately $8.2 million related to the final cash and
working capital adjustment of approximately $0.4 million,
as defined, and the estimated reimbursement of approximately
$7.8 million for federal and state tax refunds due to
Ergotron for the pre-acquisition period in 2010. The final cash
and working capital adjustment of approximately
$0.4 million was paid in the first quarter of 2011 and
approximately $5.4 million of the estimated federal and
state tax refunds due Ergotron was paid in the second quarter of
2011. The final amounts due for the reimbursement of federal and
state tax refunds will be determined when the final
pre-acquisition tax returns are filed and the refunds are
collected, which is expected to occur in the third and fourth
quarters of 2011. As discussed further below, any changes to the
estimates for these amounts will be reflected as an adjustment
to goodwill in 2011 when the purchase price calculation is
finalized.
The Company selected December 31, 2010 as the date to
record the acquisition of Ergotron as the effect of using
December 31, 2010, instead of December 17, 2010, was
not material to the Companys financial condition or
results of operations for fiscal 2010. Accordingly, the
accompanying consolidated statement of operations for the year
ended December 31, 2010 does not include any activity
related to Ergotron for the period from December 18, 2010
to December 31, 2010.
F-67
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The following is a summary of the preliminary purchase price
allocation based on estimates of the fair value of assets and
liabilities (amounts in millions):
|
|
|
|
|
Preliminary purchase price allocation:
|
|
|
|
|
Historical net assets of Ergotron(1)
|
|
$
|
40.2
|
|
Increase in intangible assets to fair value
|
|
|
193.3
|
|
Increase in property and equipment to fair value
|
|
|
4.1
|
|
Increase in inventories to fair value
|
|
|
7.0
|
|
Other fair value adjustments, net
|
|
|
1.6
|
|
Prepaid and deferred income taxes, net
|
|
|
(78.2
|
)
|
Goodwill
|
|
|
130.0
|
|
|
|
|
|
|
Estimated purchase price
|
|
$
|
298.0
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes current assets of approximately $67.4 million
(including approximately $13.8 million of cash), property
and equipment of approximately $12.2 million, intangible
assets of approximately $0.4 million, other long-terms
assets of approximately $0.6 million, current liabilities
of approximately $(38.8) million and other long-term
liabilities of approximately $(1.6) million. |
The goodwill was recorded in the TECH reporting unit and the
Company does not believe that any of the goodwill will be
deductible for tax purposes (see Note 4, Summary
of Significant Accounting Policies).
The Company has made preliminary estimates of the purchase price
and the fair value of the assets and liabilities of Ergotron,
including inventory, property and equipment, intangible assets,
prepaid and deferred taxes, long-term tax reserves and related
indemnification assets and contingent liabilities utilizing
information available at the time that the Companys
consolidated financial statements were prepared and these
estimates are subject to refinement until all pertinent
information has been obtained. The Company will complete the
following procedures, among others, prior to the issuance of the
December 31, 2011 consolidated financial statements:
|
|
|
|
|
Make a final determination of the purchase price and the related
payable to seller based on the final reimbursement for federal
and state income tax refunds.
|
|
|
|
Finalize the appraisals of intangible assets and property and
equipment.
|
|
|
|
Finalize the estimated fair value adjustment related to
inventories.
|
|
|
|
Finalize the deferred tax analysis for prepaid and deferred
income taxes, including determining the deferred tax
consequences for any changes in the fair value adjustments
discussed above.
|
The total preliminary fair value of intangible assets was
approximately $193.7 million and the Company has determined
that all of the intangible assets are subject to amortization
and that they will have no residual
F-68
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
value at the end of the amortization periods. The following is a
summary of the estimated fair values and weighted average
amortization period by intangible asset class (amounts in
millions, except for useful lives):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
|
|
Fair Value
|
|
|
Useful Lives
|
|
|
Trademarks
|
|
$
|
17.6
|
|
|
|
20.0
|
|
Developed Technology
|
|
|
18.7
|
|
|
|
13.0
|
|
Customer relationships
|
|
|
142.0
|
|
|
|
19.3
|
|
Others
|
|
|
15.4
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193.7
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
In connection with the acquisition of Ergotron, the Company also
incurred approximately $2.2 million of fees and expenses,
which have been recorded in selling, general and administrative
expense, net in the accompanying consolidated statement of
operations.
The unaudited pro forma net sales, (net loss) and basic and
diluted (loss) per share for the Company as a result of the
acquisition of Ergotron for the year ended December 31,
2010 were approximately $2.1 billion, $(21.4) million,
$(1.43) per share and $(1.43) per share, respectively. These
amounts were determined assuming that the acquisition of
Ergotron had occurred on January 1, 2010 and include the
historical results of Ergotron for the year ended
December 31, 2010 as well as pro forma adjustments to
reflect (i) increased depreciation and amortization expense
of approximately $18.3 million from the acquisition fair
value adjustments, including approximately $7.0 million
related to inventory fair value amortization,
(ii) increased interest expense of approximately
$25.3 million related to the amounts borrowed to fund the
acquisition and (iii) other pro forma adjustments that the
Company considered appropriate related to the acquisition of
Ergotron. The approximately $2.2 million of transaction
costs related to the acquisition of Ergotron for the year ended
December 31, 2010 have been excluded from the unaudited pro
forma net loss and basic and diluted loss per share. These pro
forma amounts are not necessarily indicative of the amounts that
would have been achieved had the acquisition taken place as of
January 1, 2010, nor are they necessarily indicative of the
results for future periods. The Company does not consider pro
forma financial information for 2009 to be meaningful as a
result of the Companys adoption of fresh-start accounting
in 2009.
On July 6, 2010, the Company, through its wholly-owned
subsidiary, Linear LLC acquired all of the issued and
outstanding membership interests of Skycam, LLC
(Luxor) for approximately $9.1 million
(utilizing approximately $7.9 million of cash and issuing
an unsecured 4% subordinated note in the amount of
$1.2 million due January 2012). Luxor is an on-line
retailer and distributor of security cameras and digital video
recorders. The acquisition of Luxor, which is included in the
TECH segment, contributed approximately $4.2 million to net
sales and approximately $0.2 million to operating earnings
for the year ended December 31, 2010.
Pro forma results related to the Luxor acquisition have not been
presented, as the effect is not significant to the
Companys consolidated operating results.
Contingent consideration of approximately $1.3 million was
paid in 2010, $14.1 million was paid in 2009 and
$32.7 million was paid in 2008 related to the acquisition
of certain entities. The Company does not anticipate paying any
further contingent consideration for completed acquisitions as
of December 31, 2010.
F-69
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The impact of changes in foreign currency exchange rates on cash
was not material and has been included in Other, net in the
accompanying consolidated statement of cash flows.
Interest paid was approximately $86.6 million,
$0.1 million, $116.1 million and $118.5 million
for the year ended December 31, 2010, the 2009 Successor
Period, the 2009 Predecessor Period and the year ended
December 31, 2008, respectively.
Net cash paid for acquisitions for the periods presented was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Jan. 1, 2009 -
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
Dec. 31, 2008
|
|
|
|
(Amounts in millions)
|
|
Fair value of assets acquired
|
|
$
|
411.4
|
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities assumed or created
|
|
|
(127.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets of businesses acquired
|
|
|
283.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of contingent consideration(1)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
14.1
|
|
|
|
32.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
285.2
|
|
|
$
|
|
|
|
|
$
|
14.1
|
|
|
$
|
32.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Contingent consideration of approximately $1.3 million was
earned in the 2009 Predecessor Period (see Note 5,
Acquisitions) and was paid in February 2010.
This amount is included in accrued expenses and taxes, net on
the accompanying consolidated balance sheet at December 31,
2009 and has been excluded from the accompanying consolidated
statement of cash flows for the 2009 Predecessor Period. |
Significant non-cash financing activities excluded from the
consolidated statement of cash flows, for the 2009 Predecessor
Period, include the issuance of $753.3 million of the
11% Notes in exchange for the cancellation of
$750.0 million of the 10% Notes plus all accrued
interest expense as of December 17, 2009 of approximately
$3.3 million in connection with the Chapter 11
proceedings (see Note 2, Reorganization Under
Chapter 11 and Current Capital Structure and
Note 8, Notes, Mortgage Notes and Obligations
Payable). There were no significant non-cash investing
activities for the 2009 Predecessor Period and no significant
non-cash financing or investing activities for the year ended
December 31, 2010, the 2009 Successor Period and the year
ended December 31, 2008.
The following is a summary of the components of (loss) earnings
before (benefit) provision for income taxes for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2009 -
|
|
|
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Dec. 19, 2009
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
(Restated)
|
|
|
Dec. 31, 2008
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
|
|
Domestic
|
|
$
|
(28.8
|
)
|
|
$
|
(4.3
|
)
|
|
|
$
|
266.3
|
|
|
$
|
(777.4
|
)
|
Foreign
|
|
|
3.8
|
|
|
|
(0.5
|
)
|
|
|
|
14.0
|
|
|
|
23.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(25.0
|
)
|
|
$
|
(4.8
|
)
|
|
|
$
|
280.3
|
|
|
$
|
(753.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-70
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The following is a summary of the (benefit) provision for income
taxes included in the accompanying consolidated statement of
operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Jan. 1, 2009 -
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
Dec. 31, 2008
|
|
|
|
(Amounts in millions)
|
|
Federal income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
0.3
|
|
|
$
|
|
|
|
|
$
|
0.7
|
|
|
$
|
|
|
Deferred
|
|
|
(18.8
|
)
|
|
|
(1.3
|
)
|
|
|
|
65.2
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18.5
|
)
|
|
|
(1.3
|
)
|
|
|
|
65.9
|
|
|
|
11.1
|
|
Foreign
|
|
|
6.5
|
|
|
|
0.1
|
|
|
|
|
10.4
|
|
|
|
14.0
|
|
State
|
|
|
0.4
|
|
|
|
(0.2
|
)
|
|
|
|
8.7
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11.6
|
)
|
|
$
|
(1.4
|
)
|
|
|
$
|
85.0
|
|
|
$
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments, net of refunds, in the year ended
December 31, 2010, the 2009 Successor Period, the 2009
Predecessor Period and the year ended December 31, 2008
were approximately $18.4 million, $0.2 million,
$12.8 million and $10.7 million, respectively.
The table that follows reconciles the federal statutory income
tax dollar amount to the actual income tax (benefit) provision
for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2009 -
|
|
|
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Dec. 19, 2009
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
(Restated)
|
|
|
Dec. 31, 2008
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
|
|
Income tax at the federal statutory rate
|
|
$
|
(8.8
|
)
|
|
$
|
(1.7
|
)
|
|
|
$
|
98.1
|
|
|
$
|
(263.8
|
)
|
Net change from statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of fresh-start accounting adjustments and debt forgiveness
|
|
|
|
|
|
|
|
|
|
|
|
(97.8
|
)
|
|
|
|
|
State income tax provision, net of federal income tax effect
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
|
|
|
5.7
|
|
|
|
1.8
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
68.8
|
|
|
|
244.4
|
|
Increase in valuation allowance
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
35.4
|
|
Non-deductible expenses, net
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
Tax effect resulting from foreign activities and foreign
dividends
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
|
10.4
|
|
|
|
11.1
|
|
Uncertain tax positions
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(3.3
|
)
|
Tax benefit for capitalized R&D costs
|
|
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11.6
|
)
|
|
$
|
(1.4
|
)
|
|
|
$
|
85.0
|
|
|
$
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The table that follows reconciles the federal statutory income
tax rate to the effective tax rate for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2009 -
|
|
|
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Dec. 19, 2009
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
(Restated)
|
|
|
Dec. 31, 2008
|
|
Effective tax rate%:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax at the federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Net change from statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of fresh-start accounting adjustments and debt forgiveness
|
|
|
|
|
|
|
|
|
|
|
|
(34.9
|
)
|
|
|
|
|
State income tax provision, net of federal income tax effect
|
|
|
(1.0
|
)
|
|
|
2.1
|
|
|
|
|
2.0
|
|
|
|
(0.2
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
24.5
|
|
|
|
(32.4
|
)
|
Increase in valuation allowance
|
|
|
(20.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(4.7
|
)
|
Non-deductible expenses, net
|
|
|
(11.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
Tax effect resulting from foreign activities and foreign
dividends
|
|
|
(0.9
|
)
|
|
|
(8.3
|
)
|
|
|
|
3.7
|
|
|
|
(1.5
|
)
|
Uncertain tax positions
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
Tax benefit for capitalized R&D costs
|
|
|
39.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(2.1
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46.4
|
%
|
|
|
29.2
|
%
|
|
|
|
30.3
|
%
|
|
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-72
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The tax effect of temporary differences which give rise to
significant portions of deferred income tax assets and
liabilities as of December 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
Prepaid Income Tax Assets (classified current)
|
|
|
|
|
|
|
|
|
Arising From:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
4.9
|
|
|
$
|
4.3
|
|
Inventories
|
|
|
(4.8
|
)
|
|
|
(3.7
|
)
|
Insurance reserves
|
|
|
2.9
|
|
|
|
4.9
|
|
Warranty accruals
|
|
|
9.5
|
|
|
|
9.7
|
|
Valuation allowances
|
|
|
(1.0
|
)
|
|
|
|
|
Other reserves and assets, net
|
|
|
5.4
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16.9
|
|
|
$
|
25.4
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Tax Assets (Liabilities)
|
|
|
|
|
|
|
|
|
(classified non-current)
|
|
|
|
|
|
|
|
|
Arising From:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
(25.6
|
)
|
|
$
|
(27.6
|
)
|
Intangible assets, net
|
|
|
(236.8
|
)
|
|
|
(166.0
|
)
|
Pension and other benefit accruals
|
|
|
14.4
|
|
|
|
13.4
|
|
Insurance reserves
|
|
|
20.5
|
|
|
|
9.0
|
|
Warranty accruals
|
|
|
9.7
|
|
|
|
7.7
|
|
Net loss and credit carry forwards
|
|
|
17.1
|
|
|
|
23.8
|
|
Other reserves and assets, net
|
|
|
23.3
|
|
|
|
7.5
|
|
Valuation allowance
|
|
|
(20.4
|
)
|
|
|
(27.4
|
)
|
Tax deductible Goodwill
|
|
|
45.1
|
|
|
|
47.0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(152.7
|
)
|
|
$
|
(112.6
|
)
|
|
|
|
|
|
|
|
|
|
In connection with the filing of the Companys
U.S. federal tax return for the period ended
December 17, 2009 in the third quarter of 2010, the Company
made an election to capitalize for tax purposes research and
development costs. This election resulted in the creation of a
deferred tax asset that will be amortized over a 10 year
period. As a result of this election, the Company recorded a
deferred tax benefit of approximately $10.9 million,
including a state tax benefit of approximately
$1.0 million, in 2010.
As of December 31, 2009, as a result of income and related
deferred tax liabilities recognized through fresh-start
accounting, the Company determined that a valuation allowance
was no longer required for most of its domestic deferred tax
assets. The Company has sufficient reversing deferred tax
liabilities available so that it is more likely than not that
its deferred tax assets will be realized. The Company continues
to maintain a valuation allowance for foreign net operating loss
carryforwards, certain state net operating loss carryforwards
and for certain deferred tax assets that, if recognized, would
result in capital losses. The current year net decrease in the
valuation allowance is primarily related to current year losses
of certain foreign subsidiaries and losses in certain domestic
jurisdictions, offset by a decrease in the valuation allowance
related to a write-off of net operating losses and corresponding
valuation allowance in connection with the shutting down of the
Companys subsidiary, Imerge Limited . The Company has
determined that based on the history of losses at
F-73
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
these subsidiaries, a valuation allowance is required for these
loss carry-forwards since it is more likely than not that these
loss carry-forwards will not be realized.
As of December 17, 2009, all of the Companys federal
net operating losses and federal credit carryforwards had been
reduced to zero by the income from the discharge of indebtedness
that was excluded from federal taxable income.
At December 31, 2010, the Company has not provided United
States income taxes or foreign withholding taxes on unremitted
foreign earnings of approximately $53.5 million as those
amounts are considered indefinitely invested. The Company has
provided U.S. income taxes and foreign withholding taxes on
approximately $8.4 million of unremitted foreign earnings
which are not indefinitely invested.
The Company has approximately $49.1 million of foreign net
operating loss carry-forwards that if utilized would offset
future foreign tax payments. Approximately $22.6 million of
these foreign net operating losses have an indefinite
carry-forward period and the remaining foreign net operating
losses will expire at various times beginning in 2013.
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits for the years ended December 31,
2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
Balance at January 1,
|
|
$
|
22.9
|
|
|
$
|
28.6
|
|
Gross increases related to positions taken in the current year
|
|
|
1.9
|
|
|
|
4.7
|
|
Gross increases related to positions taken in prior periods
|
|
|
|
|
|
|
1.4
|
|
Increases related to acquisitions
|
|
|
3.4
|
|
|
|
|
|
Decreases related to adjustment of prior period items
|
|
|
|
|
|
|
(2.2
|
)
|
Decreases related to settlements with taxing authorities
|
|
|
(2.1
|
)
|
|
|
|
|
Decreases related to fresh-start accounting adjustments
|
|
|
|
|
|
|
(5.6
|
)
|
Decreases due to lapse of statutes of limitation related to
state tax and foreign items
|
|
|
(4.2
|
)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
21.9
|
|
|
$
|
22.9
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2010, the Company had a liability of
approximately $22.0 million for unrecognized tax benefits
related to various federal, foreign and state income tax
matters. As a result of additional provisions to the reserve
during the year ended December 31, 2010 and reversals
discussed below, the liability for uncertain tax positions at
December 31, 2010 was approximately $21.2 million. The
liability for uncertain tax positions is included in other
long-term liabilities on the accompanying consolidated balance
sheet. The corresponding amount of gross uncertain tax benefits
was approximately $21.9 million and $22.9 million at
December 31, 2010 and 2009, respectively.
The amount of uncertain tax positions that will impact the
Companys effective tax rate is approximately
$11.2 million. The difference between the total amount of
uncertain tax positions and the amount that will impact the
effective tax rate represents the federal tax effect of state
tax items and items that offset temporary differences.
As of December 31, 2010, the Company has approximately
$2.4 million in unrecognized benefits relating to various
state tax issues, for which the statute of limitations is
expected to expire in 2011. The current period tax provision
includes a reversal of approximately $4.2 million of state
reserves as a result of the lapsing of the statute of
limitations during the year.
F-74
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
As of December 31, 2009, the Company had accrued
liabilities of approximately $3.8 million for interest
related to uncertain tax positions. As of December 31,
2010, the total amount of accrued interest related to uncertain
tax positions was approximately $3.0 million. The Company
accounts for interest and penalties related to uncertain tax
positions as part of its provision for federal and state taxes.
The Company has included a benefit of approximately
$0.7 million as part of its 2010 tax provision related to a
reduction of interest on uncertain tax positions and also made
interest payments of approximately $0.1 million. Included
in the Companys 2009 and 2008 tax provisions are benefits
of approximately $0.7 million and $1.6 million,
respectively, related to reductions in interest on uncertain tax
positions.
In the third quarter of 2010, the Company reached a settlement
related to an income tax and VAT audit related to one of its
foreign subsidiaries. The total amount that the Company paid in
connection with this settlement was approximately
$1.7 million, of which approximately $0.9 million
related to income taxes and approximately $0.8 million
related to VAT. The approximate $0.8 million related to VAT
was recorded within selling, general and administrative expense,
net in the accompanying 2010 consolidated statement of
operations. The Company had previously established income tax
reserves for these uncertain income tax positions totaling
approximately $2.3 million, including interest. The income
tax provision for the year ended December 31, 2010 includes
a reduction in these reserves of approximately $1.4 million.
The Company and its subsidiaries federal, foreign and state
income tax returns are generally subject to audit for all tax
periods beginning in 2007 through the present year.
|
|
8.
|
NOTES,
MORTGAGE NOTES AND OBLIGATIONS PAYABLE
|
Notes payable and other short-term obligations
Short-term bank obligations at December 31, 2010 and 2009
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
Secured lines of credit and bank advances of the Companys
foreign subsidiaries
|
|
$
|
8.6
|
|
|
$
|
13.4
|
|
|
|
|
|
|
|
|
|
|
Short-term bank obligations of the Companys foreign
subsidiaries are secured by accounts receivable of the
Companys foreign subsidiaries with an aggregate net book
value of approximately $8.6 million and have a weighted
average interest rate of approximately 3.7% at December 31,
2010.
F-75
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Notes, Mortgage Notes and Obligations Payable
Notes, mortgage notes and obligations payable, included in the
accompanying consolidated balance sheet at December 31,
2010 and 2009, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
11% Senior Secured Notes due 2013
|
|
$
|
753.3
|
|
|
$
|
753.3
|
|
10% Senior Unsecured Notes due 2018
|
|
|
250.0
|
|
|
|
|
|
ABL Facility
|
|
|
85.0
|
|
|
|
90.0
|
|
Mortgage notes payable
|
|
|
2.6
|
|
|
|
3.1
|
|
Other
|
|
|
20.1
|
|
|
|
25.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111.0
|
|
|
|
871.9
|
|
Less amounts included in current liabilities
|
|
|
9.2
|
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,101.8
|
|
|
$
|
835.4
|
|
|
|
|
|
|
|
|
|
|
10% Senior Unsecured Notes due 2018
On November 23, 2010, the Company sold $250.0 million
principal amount of 10% Senior Unsecured Notes due
December 1, 2018 (the 10% Notes). The
10% Notes were issued for general corporate purposes,
including the acquisition of Ergotron (Note 5,
Acquisitions) and are unconditionally
guaranteed on a senior unsecured basis by each of the
Companys current and future domestic subsidiaries that
guarantee its obligations under the ABL Facility. Net proceeds
from the sale of the 10% Notes, after deducting
underwriting commissions and expenses, amounted to approximately
$243.2 million.
Interest on the 10% Notes accrues at the rate of 10% per
annum and is payable semi-annually in arrears on June 1 and
December 1, commencing on June 1, 2011, until
maturity. Interest on the 10% Notes accrues from the date
of original issuance or, if interest has already been paid, from
the date it was most recently paid. Interest is computed on the
basis of a
360-day year
comprised of twelve
30-day
months.
At any time prior to December 1, 2013, the Company may
redeem up to 35% of the aggregate principal amount of the
10% Notes with the net cash proceeds from certain equity
offerings (as defined) at a redemption price of 110.0% plus
accrued and unpaid interest, provided that at least 65% of the
original aggregate principal amount of the 10% Notes
remains outstanding after the redemption and the redemption
occurs within 90 days of the date of the closing of such
equity offerings (as defined). On or after December 1, 2014
the 10% Notes are redeemable at the option of the Company,
in whole or in part, at any time and from time to time, on or
after December 1, 2014 at 105.0%, declining to 102.5% on
December 1, 2015 and further declining to 100.0% on
December 1, 2016.
In addition, at any time and from time to time prior to
December 1, 2014, the Company may redeem all or any portion
of the 10% Notes outstanding at a redemption price equal to
(a) 100% of the aggregate principal amount of the
10% Notes to be redeemed together with accrued and unpaid
interest to such redemption date, plus (b) the Make
Whole Amount. The Make Whole Amount means,
with respect to the 10% Notes at any redemption date, the
greater of (i) 1.0% of the principal amount of the
10% Notes and (ii) the excess, if any, of (a) an
amount equal to the present value of (1) the redemption
price of the 10% Notes at December 1, 2014 plus
(2) the remaining scheduled interest payments of the
10% Notes to be redeemed, computed using a discount rate
equal to the Treasury Rate plus 50 basis points, over
(b) the principal amount of the 10% Notes to be
redeemed.
F-76
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Pursuant to the registration rights agreement with the initial
purchasers of the 10% Notes, the Company has agreed it will
use reasonable best efforts to file and cause to become
effective a registration statement with respect to an offer to
exchange the 10% Notes for a new series of registered notes
with substantially similar terms or file and cause to become
effective a shelf registration statement with respect to the
10% Notes on or before the 390th day after the
issuance date of the 10% Notes. If the Company is not in
compliance with this obligation, special interest will accrue at
a rate of 0.25% per annum during the
90-day
period immediately following the occurrence of the registration
default and will increase by 0.25% per annum at the end of each
subsequent
90-day
period, but in no event will the special interest rate exceed
1.00% per annum.
The indenture governing the 10% Notes contains certain
restrictive financial and operating covenants including
covenants that restrict, among other things, the payment of cash
dividends, the incurrence of additional indebtedness, the making
of certain investments, mergers, consolidations and the sale of
assets (all as defined in the indenture and other agreements).
As of December 31, 2010, the Company had the capacity to
make certain payments, including dividends, under the
10% Notes of approximately $25.0 million.
11% Senior
Secured Notes due 2013
In connection with the Prepackaged Plans as approved by the
Bankruptcy Court, on December 17, 2009, the Company issued
11% Senior Secured Notes due December 1, 2013 (the
11% Notes) totaling approximately
$753.3 million. The 11% Notes were issued to replace
the 10% Notes cancelled under the Chapter 11
proceedings and are guaranteed on a senior secured basis by
substantially all of the Companys subsidiaries located in
the United States.
Interest on the 11% Notes accrues at the rate of 11% per
annum and is payable semi-annually in arrears on June 1 and
December 1, commencing on June 1, 2010, until
maturity. Interest on the 11% Notes accrues from the date
of original issuance or, if interest has already been paid, from
the date it was most recently paid. Interest is computed on the
basis of a
360-day year
comprised of twelve
30-day
months.
The 11% Notes contain an optional redemption provision
whereby not more than once during any twelve-month period the
Company may redeem the 11% Notes at a redemption price
equal to 103.0% plus accrued and unpaid interest, provided that
the aggregate amount of these redemptions does not exceed
$75.0 million. At any time prior to June 1, 2011, the
Company may redeem up to 35% of the aggregate principal amount
of the 11% Notes with the net cash proceeds from certain
equity offerings at a redemption price of 110.0% plus accrued
and unpaid interest, provided that at least 65% of the original
aggregate principal amount of the 11% Notes remains
outstanding after the redemption. On or after June 1, 2011
the 11% Notes are redeemable at the option of the Company,
in whole or in part, at any time and from time to time, on or
after June 1, 2011 at 105.0%, declining to 102.5% on
June 1, 2012 and further declining to 100.0% on
June 1, 2013.
In addition, at any time and from time to time prior to
June 1, 2011, the Company may redeem all or any portion of
the 11% Notes outstanding at a redemption price equal to
(a) 100% of the aggregate principal amount of the
11% Notes to be redeemed together with accrued and unpaid
interest to such redemption date, plus (b) the Make
Whole Amount. The Make Whole Amount means,
with respect to the 11% Notes at any redemption date, the
greater of (i) 1.0% of the principal amount of the
11% Notes and (ii) the excess, if any, of (a) an
amount equal to the present value of (1) the redemption
price of the 11% Notes at June 1, 2011 plus
(2) the remaining scheduled interest payments of the
11% Notes to be redeemed, computed using a discount rate
equal to the Treasury Rate plus 50 basis points, over
(b) the principal amount of the 11% Notes to be
redeemed.
The 11% Notes are secured by a first-priority lien on
substantially all of the Companys and its domestic
subsidiaries tangible and intangible assets, except those
assets securing the ABL Facility on a first-priority basis. The
Companys 11% Notes have a second-priority lien on the
ABL Facilitys first-priority collateral and
F-77
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
rank equally with all future senior secured indebtedness of the
Company. If the Company experiences a change in control, each
holder of the notes will have the right to require the Company
to purchase the notes at a price equal to 101% of the principal
amount thereof. In addition, a change of control may constitute
an event of default under the ABL Facility.
The indenture governing the 11% Notes contains certain
restrictive financial and operating covenants including
covenants that restrict, among other things, the payment of cash
dividends, the incurrence of additional indebtedness, the making
of certain investments, mergers, consolidations and the sale of
assets (all as defined in the indenture and other agreements).
Amended &
Restated $300.0 million senior secured asset-based
revolving credit facility
In December 2010, Nortek entered into an amended and restated
$300.0 million ABL Facility, which replaced Norteks
three-year $300.0 million senior secured asset-based
revolving credit facility dated March 2010. In conjunction with
amending the ABL Facility, the Company incurred fees and
expenses of approximately $2.7 million.
The ABL Facility consists of a $280.0 million
U.S. facility (with a $60.0 million sublimit for the
issuance of U.S. standby letters of credit and a
$20.0 million sublimit for U.S. swingline loans) and a
$20.0 million Canadian facility. As of December 31,
2010, the Company had approximately $85.0 million in
outstanding borrowings and approximately $17.5 million in
outstanding letters of credit under the ABL Facility and, based
on the December 31, 2010 borrowing base calculations, the
Company had excess availability of approximately
$149.4 million under the ABL Facility.
There are limitations on the Companys ability to incur the
full $300.0 million of commitments under the ABL Facility.
Availability is limited to the lesser of the borrowing base
under the ABL Facility and $300.0 million. The borrowing
base at any time will equal the sum (subject to certain reserves
and other adjustments) of:
|
|
|
|
|
85% of the net amount of eligible accounts receivable;
|
|
|
85% of the net orderly liquidation value of eligible
inventory; and
|
|
|
available cash subject to certain limitations as specified in
the ABL Facility.
|
The interest rates applicable to loans under the ABL Facility
are, at the Companys option, equal to either an adjusted
LIBOR rate for a one, two, three or six month interest period
(or a nine or twelve month period, if available) or an alternate
base rate chosen by the Company, plus an applicable margin
percentage ranging from 2.25% to 2.75% for U.S. Borrowings,
and 1.25% to 1.75% for Canadian Borrowings, depending on the
Companys Average Excess Availability (as defined in the
ABL Facility). The alternate base rate will be the greater of
(1) the Federal Funds rate plus 0.50%, (2) 1.00% plus
the LIBOR rate for a 30 day interest period as determined
on such day, or (3) the prime rate. Interest shall be
payable at the end of the selected interest period, but no less
frequently than quarterly. At December 31, 2010, the
weighted average interest rate on the ABL Facility was
approximately 5.5%.
The Company will be required to deposit cash from its material
deposit accounts (including all concentration accounts) daily in
collection accounts maintained with the administrative agent
under the ABL Facility, which will be used to repay outstanding
loans and cash collateralized letters of credit, if
(i) excess availability (as defined in the ABL Facility)
falls below the greater of $35.0 million or 15% of the
borrowing base or (ii) an event of default has occurred and
is continuing. In addition, under the ABL Facility, if
(i) excess availability falls below the greater of
$30.0 million or 12.5% of the borrowing base or
(ii) an event of default has occurred and is continuing,
the Company will be required to satisfy and maintain a
consolidated fixed charge coverage ratio measured on a trailing
four quarter basis of not less than 1.1 to 1.0. The
Companys ability to meet the required fixed charge
coverage ratio can be affected by events beyond its control. A
breach
F-78
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
of any of these covenants could result in a default under the
ABL Facility. Based on the December 31, 2010 borrowing base
calculations, at December 31, 2010, the Company had
approximately $111.6 million of excess availability before
triggering the cash deposit requirements as discussed above.
Additional borrowings under the ABL Facility require the Company
and its subsidiaries to make certain customary representations
and warranties as of the date of such additional borrowing. In
the event that the Company and its subsidiaries are unable to
make such representations and warranties on such borrowing date,
then the lenders under the ABL Facility may not honor such
request for additional borrowing. The ABL Facility also provides
the lenders considerable discretion to impose reserves or
availability blocks, which could materially impair the amount of
borrowings that would otherwise be available to the Company and
its subsidiaries and may require the Company to repay certain
amounts outstanding under the ABL Facility. There can be no
assurance that the lenders under the ABL Facility will not
impose such actions during the term of the ABL Facility.
The credit agreement for the ABL Facility contains certain
restrictive financial and operating covenants, including
covenants that restrict the Companys ability and the
ability of its subsidiaries to complete acquisitions, pay
dividends, incur indebtedness, make investments, sell assets and
take certain other corporate actions.
Pre-Petition
Senior Notes and the Predecessor ABL Facility 2008
Transactions
On May 20, 2008, the Predecessor sold $750.0 million
of its 10% Senior Notes due 2013 (the Predecessor
10% Notes) at a discount of approximately
$7.8 million, which was being amortized over the life of
the issue. Net proceeds from the sale of the Predecessor
10% Notes, after deducting underwriting commissions and
expenses, amounted to approximately $721.2 million.
In connection with the offering of the Predecessor
10% Notes, Nortek also entered into the Predecessor ABL
Facility, of which $50.0 million was drawn at closing. The
Predecessor incurred fees and expenses of approximately
$12.8 million, which were capitalized and were being
recognized as non-cash interest expense over the term of the
Predecessor ABL Facility.
The net proceeds from the Predecessor 10% Notes and the
Predecessor ABL Facility were used to repay all of the
outstanding indebtedness on May 20, 2008 under
Norteks then existing senior secured credit facility,
which included approximately $675.5 million outstanding
under Norteks senior secured term loan and approximately
$80.0 million outstanding under the revolving portion of
the Nortek senior secured credit facility plus accrued interest
and related fees and expenses. The redemption of Norteks
senior secured term loan resulted in a pre-tax loss of
approximately $9.9 million in the second quarter of 2008,
primarily as a result of writing off unamortized deferred debt
expense.
Other
Indebtedness
At December 31, 2010, the Companys subsidiary, Best,
was not in compliance with certain maintenance covenants with
respect to one of its loan agreements with borrowings
outstanding of approximately $1.4 million at
December 31, 2010. As a result, the Company reclassified
the long-term portion of outstanding borrowings under this
agreement of approximately $0.6 million as a current
liability on its consolidated balance sheet at December 31,
2010. The lender has not taken any action related to the
covenant noncompliance at this time. The next measurement date
for the maintenance covenant is for the year ended
December 31, 2011 and the Company believes it is probable
that Best will not be in compliance with such covenants at such
time. No assurances can be given that the lender will continue
to not take any action and accordingly, the Company could be
required to repay this outstanding borrowing if non-compliance
is not cured or waived, as the case may be. In the event this
lender accelerates this loan, additional indebtedness of Best
under a different loan
F-79
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
agreement with borrowings outstanding of approximately
$1.7 million at December 31, 2010 could also become
immediately due and payable if such cross-default is not waived.
As a result, the Company has also reclassified the long-term
portion of this additional indebtedness of approximately
$0.9 million as a current liability on its consolidated
balance sheet at December 31, 2010.
At December 31, 2009, the Companys subsidiary, Best,
was not in compliance with certain maintenance covenants with
respect to certain loan agreements and as a result, the Company
reclassified approximately $4.1 million of outstanding
borrowings under such long-term debt agreements as a current
liability on its consolidated balance sheet at December 31,
2009.
Mortgage notes payable of approximately $2.6 million
outstanding at December 31, 2010 includes various mortgage
notes and other related indebtedness payable in installments
through 2019. These notes have a weighted average interest rate
of approximately 3.1% and are collateralized by property and
equipment with an aggregate net book value of approximately
$7.6 million at December 31, 2010.
Other obligations of approximately $20.1 million
outstanding at December 31, 2010 include borrowings
relating to equipment purchases, notes payable issued for
acquisitions and other borrowings bearing interest at rates
ranging from approximately 1.8% to 15.0% and maturing at various
dates through 2018. Approximately $11.8 million of such
indebtedness is collateralized by property and equipment with an
aggregate net book value of approximately $14.7 million at
December 31, 2010.
Scheduled
Maturities
The maturities for the Companys notes, mortgage notes and
obligations payable (excluding approximately $2.0 million
of debt discount) were:
|
|
|
|
|
Year Ended
|
|
Debt Obligation
|
December 31,
|
|
Maturities
|
|
|
(Amounts in millions)
|
|
2011
|
|
$
|
9.9
|
|
2012
|
|
|
3.8
|
|
2013
|
|
|
843.3
|
|
2014
|
|
|
2.4
|
|
2015
|
|
|
2.1
|
|
Thereafter
|
|
|
251.5
|
|
|
|
9.
|
SHARE-BASED
COMPENSATION
|
Incentive
Compensation Plan
On December 17, 2009, the Company established the 2009
Omnibus Incentive Plan (the Incentive Plan) which
allows for grants of options, stock appreciation rights,
restricted stock, other stock-based awards and performance-based
compensation awards. The Incentive Plan is administered by the
Board of Directors, the Compensation Committee of the Board of
Directors, or any other committee designated by the Board of
Directors to administer the Incentive Plan (the
Committee). Participants consist of such employees,
directors and other individuals providing services to the
Company, or any subsidiary or affiliate, as the Committee in its
sole discretion determines and whom the Committee may designate
from time to time to receive awards.
Under the 2009 Plan, 2,153,110 shares were authorized for
grant through December 17, 2019, of which 1,076,555 may be
in the form of incentive stock options. The maximum number of
shares for which options and stock appreciation rights may be
granted to any participant in any calendar year is 627,990, and
the
F-80
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
maximum number of shares with respect to other awards
denominated in shares in any calendar year is 627,990. The
maximum value of cash payable with respect to awards denominated
in cash or property that may be granted to any participant in
any plan year is $5.0 million, subject to certain
adjustments as defined. In the event that any outstanding award
expires, is forfeited, cancelled or otherwise terminated without
the issuance of shares or is otherwise settled for cash, the
shares subject to such award shall again be available for
awards. At December 31, 2010, there are 671,148 remaining
shares available for grant under the Incentive Plan.
Stock
Options
Options granted under the Plan generally vest at the rate of 20%
on each anniversary of the grant date, beginning with the first
anniversary of the grant date, with 100% vesting upon the fifth
anniversary of the grant date, and, unless terminated earlier,
expire on the tenth anniversary of the grant date.
The following table summarizes the Successors common stock
option transactions for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding, Beginning of Year
|
|
|
710,731
|
|
|
$
|
17.50
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
92,000
|
|
|
|
22.61
|
|
|
|
710,731
|
|
|
|
17.50
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(21,750
|
)
|
|
|
17.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, End of Year
|
|
|
780,981
|
|
|
$
|
18.10
|
|
|
|
710,731
|
|
|
$
|
17.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted
was approximately $8.05 and $4.66 during the years ended
December 31, 2010 and 2009, respectively. There were no
options granted during 2008.
The estimated fair value of the options granted was measured on
the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions:
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
Risk-Free Interest Rate
|
|
2.39%
|
|
2.19%
|
Expected Term
|
|
5.78 years
|
|
5.78 years
|
Expected Volatility
|
|
55.0%
|
|
55.0%
|
Expected Dividend Yield
|
|
%
|
|
%
|
The risk-free interest rate for periods within the life of the
option is based upon a blend of U.S. Treasury bond rates
with maturities equal to the expected term of the options. The
expected term assumption was derived using a binomial model
analysis. The expected volatility assumption is based upon the
historical volatility of comparable public companies stock
as well as the implied volatility of outstanding options for the
comparable companies that had such options. The dividend yield
represents the expected dividends on the Companys common
stock for the expected term of the option.
At December 31, 2010, there were 139,796 vested and
exercisable options outstanding with a weighted average exercise
price of $17.50, aggregate intrinsic value of approximately
$2.6 million, and weighted average remaining contractual
term of approximately 8.9 years. The aggregate fair value
of options vesting during the year ended December 31, 2010
was approximately $0.7 million. No options were exercised
during
F-81
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
the three years ended December 31, 2010. Additionally, at
December 31, 2010, 582,662 additional options were expected
to vest with a weighted average exercise price of approximately
$18.23, and a weighted average remaining term of approximately
9.0 years. The aggregate intrinsic value of these options
was approximately $10.4 million. The aggregate intrinsic
value of options represents the total pre-tax intrinsic value
(the difference between the estimated fair value of the
Companys stock on December 31, 2010 and the exercise
price, multiplied by the number of
in-the-money
options) that would have been received by the option holders had
all option holders exercised their options on December 31,
2010. This amount changes based upon the fair market value of
the Successors common stock.
As of December 31, 2010, there was approximately
$3.1 million of unrecognized compensation cost related to
stock options granted under the Incentive Plan. That cost is
expected to be recognized on a straight-line basis over a
weighted average period of approximately 4.0 years. Total
compensation expense related to stock options was approximately
$0.8 million for the year ended December 31, 2010. The
related tax benefit recognized for the year ended
December 31, 2010 totaled approximately $0.3 million.
No compensation cost was recognized during the 2009 Successor
Period for stock options.
Restricted
Stock
The Company has awarded restricted shares of common stock to
certain key employees. These shares are eligible to become
vested in annual installments beginning in 2010 based upon the
achievement of specified levels of Adjusted EBITDA, as defined,
for each of the years ended December 31, 2010, 2011, 2012
and 2013. The shares, if any, are vested as of December 31 of
each year. However, as the number of shares vesting is
contingent upon the Companys financial results, determined
based upon the issuance of audited financial statements, the
actual vesting of shares does not occur until the first quarter
of the following year.
Restricted stock has the same cash dividend and voting rights as
other common stock and, once issued, is considered to be legally
issued and outstanding (even when unvested). Recipients of
restricted stock are entitled to receive dividends when and if
the Successor pays a cash dividend on its common stock. Such
dividends are payable only upon the vesting of the related
restricted shares.
The following table summarizes the Successors restricted
stock activity for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested, Beginning of Year
|
|
|
710,731
|
|
|
$
|
11.29
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
2,000
|
|
|
|
10.85
|
|
|
|
710,731
|
|
|
|
11.29
|
|
Vested
|
|
|
(175,261
|
)
|
|
|
11.29
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11,750
|
)
|
|
|
11.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, End of Year
|
|
|
525,720
|
|
|
$
|
11.29
|
|
|
|
710,731
|
|
|
$
|
11.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost of these restricted stock awards, calculated as the
estimated fair market value of the shares on the date of grant,
net of estimated forfeitures, is being recognized as it becomes
probable that the restricted shares, or any portion thereof,
will vest. The fair value of the 2010 grants is based upon the
closing price of the Companys stock on the date of grant.
The fair value of the 2009 grants was estimated using a
combination of the income and market approaches. Total
compensation expense recognized in 2010 related to restricted
stock was approximately $2.0 million. The related tax
benefit recognized for the year ended December 31, 2010
totaled approximately $0.8 million. No compensation cost
was recognized during the 2009 Successor Period for restricted
stock awards. At December 31, 2010 there was approximately
$5.5 million of unrecognized compensation cost with respect
to restricted stock granted under the Incentive Plan.
F-82
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The targeted Adjusted EBITDA for 2013 has not been established.
Therefore, under
ASC 505-50,
Equity-Based Payments to Non-Employees, a
measurement date has not occurred for accounting purposes with
respect to the shares expected to vest in that year.
Predecessor
Stock-Based Compensation
At December 31, 2008, certain employees and consultants
held approximately 23,269 C-1 units and approximately
40,745 C-2 units, which represented equity interests in
THL-Nortek Investors, LLC (Investors LLC), the
parent of NTK Holdings, that functioned similar to stock awards.
The C-1 units vested pro rata on a quarterly basis over a
three-year period and approximately 23,116 were vested at
December 31, 2008. The total fair value of the
C-1 units was approximately $1.2 million and
approximately $0.1 million remained to be amortized at
December 31, 2008. The C-2 units only vested in the
event that certain performance-based criteria, as defined, were
met. At December 31, 2008, there was approximately
$1.6 million of unamortized stock-based employee
compensation with respect to the C-2 units, which would
have been recognized in the event that it became probable that
the C-2 units or any portion thereof would vest. The C-1
and C-2 units were valued using the Black-Scholes option
pricing model to determine the freely-traded call option value
based upon information from comparable public companies, which
was then adjusted to reflect the discount period, the minority
interest factor and the lack of marketability factor to arrive
at the final valuations.
The Predecessor recorded stock-based compensation charges in
selling, general and administrative expense, net of
approximately $0.1 million for the 2009 Predecessor Period
and $0.1 million for the year ended December 31, 2008.
These units were cancelled in connection with the Reorganization.
|
|
10.
|
PENSION,
PROFIT SHARING AND OTHER POST RETIREMENT BENEFITS
|
Nortek and its subsidiaries have various pension, supplemental
retirement plans for certain officers, profit sharing and other
post retirement benefit plans requiring contributions to
qualified trusts and union administered funds.
Pension, profit sharing and other post retirement health benefit
expense charged to operations aggregated approximately
$3.8 million, $0.2 million, $5.9 million and
$5.4 million for the Successor year ended December 31,
2010, the Successor period from December 20, 2009 to
December 31, 2009, the Predecessor period from
January 1, 2009 to December 19, 2009 and the
Predecessor year ended December 31, 2008, respectively.
The decrease in pension, profit sharing and other post
retirement health benefit expense for the year ended
December 31, 2010 over the 2009 Successor and Predecessor
Periods is primarily attributable to the elimination of the
deferred loss recognition component of pension expense, reduced
service and interest costs and favorable investment return for
the Companys defined benefit plans. All outstanding
amortization items were recognized during fiscal 2009 as part of
fresh-start accounting (Note 3, Fresh-Start
Accounting (Restated)). Also contributing to the
decrease was the suspension of the 401(k) matching contribution
and reductions in profit sharing expense in 2010 in the C-HVAC
segment, offset by an increase in profit sharing expense in the
RVP segment.
The increase in pension, profit sharing and other post
retirement health benefit expense for the 2009 Successor and
Predecessor Periods over the year ended December 31, 2008
is primarily attributable to unfavorable investment performance
of the Companys defined benefit plans during the prior
fiscal year. In addition, the asset loss increased expected
Pension Benefit Guaranty Corporation premiums for 2009 and
forced the Company to recognize a portion of the plans
outstanding cumulative loss as a component of fiscal 2009
pension expense. These increases in expense were partially
offset by lower profit sharing expense and the suspension of
certain company matched contributions to the various 401(k)
plans.
F-83
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The Companys policy is to generally fund currently at
least the minimum required annual contribution of its various
qualified defined benefit plans. In 2011, the Company expects to
contribute approximately $7.5 million (unaudited) to its
defined benefit pension plans.
The table that follows provides a reconciliation of benefit
obligations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
|
(Amounts in millions)
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1, 2010, December 20,
2009 and January 1, 2009, respectively
|
|
$
|
159.5
|
|
|
$
|
159.1
|
|
|
|
$
|
151.3
|
|
Service cost
|
|
|
0.4
|
|
|
|
|
|
|
|
|
0.6
|
|
Interest cost
|
|
|
8.9
|
|
|
|
0.4
|
|
|
|
|
8.9
|
|
(Gain) loss due to foreign exchange
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
2.7
|
|
Actuarial loss (gain) excluding assumption changes
|
|
|
1.2
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
Actuarial loss due to assumption changes
|
|
|
9.3
|
|
|
|
|
|
|
|
|
8.1
|
|
Benefits and expenses paid
|
|
|
(12.2
|
)
|
|
|
|
|
|
|
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31, 2010,
December 31, 2009 and December 19, 2009,
respectively
|
|
$
|
166.1
|
|
|
$
|
159.5
|
|
|
|
$
|
159.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table that follows provides a reconciliation of plan assets
for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
|
(Amounts in millions)
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January, 1, 2010, December 20,
2009 and January 1, 2009, respectively
|
|
$
|
116.6
|
|
|
$
|
115.1
|
|
|
|
$
|
100.3
|
|
Actual gain on plan assets
|
|
|
15.8
|
|
|
|
1.5
|
|
|
|
|
21.2
|
|
(Loss) gain due to foreign exchange
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
2.2
|
|
Employer contribution
|
|
|
4.8
|
|
|
|
|
|
|
|
|
3.5
|
|
Benefits and expenses paid
|
|
|
(12.2
|
)
|
|
|
|
|
|
|
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31, 2010,
December 31, 2009 and December 19, 2009,
respectively
|
|
$
|
124.1
|
|
|
$
|
116.6
|
|
|
|
$
|
115.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-84
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
As of December 31, 2010, December 31, 2009 and
December 19, 2009, all of the Companys plans were
underfunded. The table that follows provides a reconciliation of
the funded status of plans for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
|
(Amounts in millions)
|
|
Funded status and statement of financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31, 2010,
December 31, 2009 and December 19, 2009, respectively
|
|
$
|
124.1
|
|
|
$
|
116.6
|
|
|
|
$
|
115.1
|
|
Benefit obligation at December 31, 2010. December 31,
2009 and December 19, 2009, respectively
|
|
|
166.1
|
|
|
|
159.5
|
|
|
|
|
159.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at December 31, 2010, December 31,
2009 and December 19, 2009, respectively
|
|
$
|
(42.0
|
)
|
|
$
|
(42.9
|
)
|
|
|
$
|
(44.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts were recognized in the accompanying
consolidated balance sheet for the Companys defined
benefit plans at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits at December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
Current liabilities
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
Non-current liabilities
|
|
|
41.4
|
|
|
|
42.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42.0
|
|
|
$
|
42.9
|
|
|
|
|
|
|
|
|
|
|
The following amounts were recognized in accumulated other
comprehensive income (loss) in the accompanying consolidated
balance sheet at the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Dec. 31, 2010
|
|
Dec. 31, 2009
|
|
|
Dec. 19, 2009(1)
|
|
|
(Amounts in millions)
|
Actuarial (loss) gain, net of tax benefit (provision) of
approximately $0.6 million and $(0.3) million at
December 31, 2010 and 2009, respectively
|
|
$
|
(1.5
|
)
|
|
$
|
0.8
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
At December 19, 2009, prior to the fresh-start adjustment
to eliminate accumulated other comprehensive income (loss), a
loss of approximately $22.4 million, including a tax
provision of approximately $7.3 million was recognized in
accumulated other comprehensive income. See Note 3,
Fresh-Start Accounting (Restated). |
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for the Companys pension
plans with accumulated benefit obligations in excess of plan
assets were approximately $166.1 million,
$166.0 million and $124.1 million, respectively, as of
December 31, 2010. The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
the Successor pension plans with accumulated benefit obligations
in excess of plan assets were approximately $159.5 million,
$159.4 million and $116.6 million, respectively, as of
December 31, 2009.
F-85
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
At December 31, 2010, the expected future benefit payments
for the Successors defined benefit plans were as follows:
|
|
|
|
|
Year Ended
|
|
Defined Benefit
|
December 31,
|
|
Plan Payments
|
|
|
(Amounts in millions)
|
|
2011
|
|
$
|
11.3
|
|
2012
|
|
|
11.5
|
|
2013
|
|
|
11.6
|
|
2014
|
|
|
11.8
|
|
2015
|
|
|
11.9
|
|
2016-2020
|
|
|
61.6
|
|
The Companys pension plan assets by asset category and by
investment objective for equity securities, investment funds and
investments in limited partnerships are shown in the tables
below. Pension plan assets for the foreign plan relate to the
Companys pension plan in the United Kingdom.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Investment
|
|
|
% of Total
|
|
|
Investment
|
|
|
% of Total
|
|
|
|
(Dollar amounts in millions)
|
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
$
|
2.3
|
|
|
|
1.9
|
%
|
|
$
|
2.2
|
|
|
|
1.9
|
%
|
Foreign plan
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.3
|
|
Government securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
3.2
|
|
|
|
2.6
|
|
|
|
6.4
|
|
|
|
5.5
|
|
Corporate debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
11.1
|
|
|
|
8.9
|
|
|
|
12.3
|
|
|
|
10.5
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
21.1
|
|
|
|
17.0
|
|
|
|
20.6
|
|
|
|
17.7
|
|
Investment funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
53.5
|
|
|
|
43.1
|
|
|
|
43.8
|
|
|
|
37.6
|
|
Foreign plan
|
|
|
10.4
|
|
|
|
8.4
|
|
|
|
24.2
|
|
|
|
20.8
|
|
Investments in limited partnerships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
5.5
|
|
|
|
4.4
|
|
|
|
5.1
|
|
|
|
4.4
|
|
Investments in pooled pension funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign plan
|
|
|
15.5
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
1.5
|
|
|
|
1.2
|
|
|
|
1.6
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total plan assets
|
|
$
|
124.1
|
|
|
|
100.0
|
%
|
|
$
|
116.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities by Investment Objective:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic large cap value
|
|
$
|
3.9
|
|
|
|
3.1
|
%
|
|
$
|
3.5
|
|
|
|
3.0
|
%
|
Domestic mid cap growth
|
|
|
4.0
|
|
|
|
3.2
|
|
|
|
3.6
|
|
|
|
3.1
|
|
Domestic mid cap value
|
|
|
8.1
|
|
|
|
6.5
|
|
|
|
6.2
|
|
|
|
5.3
|
|
Domestic small cap value
|
|
|
5.1
|
|
|
|
4.2
|
|
|
|
7.3
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21.1
|
|
|
|
17.0
|
%
|
|
$
|
20.6
|
|
|
|
17.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-86
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The investment objective for equity securities represents the
principal criteria by which investment manager performance is
evaluated. Individual investments included within these
groupings may include foreign or other equity investments that
are reflective of the overall investment objective for the
investment manager.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Investment
|
|
|
% of Total
|
|
|
Investment
|
|
|
% of Total
|
|
|
|
(Dollar amounts in millions)
|
|
|
Investment Funds by Investment Objective:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic large cap growth
|
|
$
|
4.2
|
|
|
|
3.4
|
%
|
|
$
|
5.6
|
|
|
|
4.8
|
%
|
International growth
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
|
|
4.1
|
|
International value
|
|
|
3.5
|
|
|
|
2.8
|
|
|
|
11.5
|
|
|
|
9.9
|
|
International core
|
|
|
10.2
|
|
|
|
8.2
|
|
|
|
8.5
|
|
|
|
7.3
|
|
Domestic mid cap value
|
|
|
4.1
|
|
|
|
3.3
|
|
|
|
3.4
|
|
|
|
2.9
|
|
Domestic small cap value
|
|
|
8.7
|
|
|
|
7.0
|
|
|
|
4.4
|
|
|
|
3.8
|
|
International macro hedge
|
|
|
2.5
|
|
|
|
2.0
|
|
|
|
2.3
|
|
|
|
2.0
|
|
Fixed income
|
|
|
30.7
|
|
|
|
24.8
|
|
|
|
27.5
|
|
|
|
23.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63.9
|
|
|
|
51.5
|
%
|
|
$
|
68.0
|
|
|
|
58.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Limited Partnerships by Investment
Objective:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic large cap core
|
|
$
|
2.5
|
|
|
|
2.0
|
%
|
|
$
|
2.4
|
|
|
|
2.1
|
%
|
International core
|
|
|
2.9
|
|
|
|
2.3
|
|
|
|
2.6
|
|
|
|
2.2
|
|
Domestic mid cap value
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.5
|
|
|
|
4.4
|
%
|
|
$
|
5.1
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Pooled Pension Funds by Investment
Objective:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International hedge
|
|
$
|
15.5
|
|
|
|
12.5
|
%
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys overall weighted-average asset allocations
for its domestic and foreign plans at December 31, 2010 and
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Asset Category
|
|
2010
|
|
|
2009
|
|
|
Cash and cash equivalents
|
|
|
1.9
|
%
|
|
|
2.2
|
%
|
Equity based
|
|
|
60.6
|
%
|
|
|
56.8
|
%
|
Fixed income based
|
|
|
37.5
|
%
|
|
|
41.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The Companys domestic qualified defined benefit
plans and foreign pension plans assets are invested
to maximize returns without undue exposure to risk. The domestic
plans investment objectives are to produce a total return
exceeding the median of a universe of portfolios with similar
average asset allocation and investment style objectives, and to
earn a return, net of fees, greater or equal to the long-term
rate of return used by the Company in determining pension
expense. The foreign plan investment objectives for the fixed
income fund are to outperform the composite benchmark by 0.8%
per annum over a rolling three year period. The foreign plan
investment objectives for the pooled pension fund are to provide
positive investment returns in all market conditions over the
medium to long-term and the investment strategies include the
use of
F-87
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
advanced derivative techniques that result in a highly
diversified portfolio. As indicated in the tables above,
investment risk for both the domestic and foreign plans are
controlled by maintaining a portfolio of assets that is
diversified across a variety of asset classes and investment
styles in order to minimize exposure with respect to the size of
individual securities and industry concentration. The domestic
plans use a variety of investment managers who are evaluated on
a quarterly basis while the foreign plan uses two investment
funds to manage its assets. The plans asset allocation
policies are consistent with the established investment
objectives and risk tolerances. The asset allocation policies
are developed by examining the historical relationships of risk
and return among asset classes, and are designed to provide the
highest probability of meeting or exceeding the return
objectives at the lowest possible risk. For 2011, the domestic
plans target allocation is 56.5% for equity based
investments, 42.0% for fixed income based investments and 1.5%
for cash. The foreign plan target allocation for 2011 is to
split the pension assets broadly into 60.0% growth investments
and 40.0% bond investments consistent with the portfolio
benchmark for 2010.
The following tables sets forth by level, within the fair value
hierarchy (see Note 4, Summary of Significant
Accounting Policies), the pension plan assets carried
at fair value as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2010
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Amounts in millions)
|
|
|
Interest-bearing cash
|
|
$
|
2.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.3
|
|
U.S. government securities
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Corporate debt
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
11.1
|
|
Equity securities
|
|
|
21.1
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
Investment funds
|
|
|
63.9
|
|
|
|
|
|
|
|
|
|
|
|
63.9
|
|
Investments in limited partnerships
|
|
|
|
|
|
|
|
|
|
|
5.5
|
|
|
|
5.5
|
|
Investments in pooled pension funds
|
|
|
|
|
|
|
|
|
|
|
15.5
|
|
|
|
15.5
|
|
Other long-term investments
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
103.1
|
|
|
$
|
|
|
|
$
|
21.0
|
|
|
$
|
124.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Amounts in millions)
|
|
|
Interest-bearing cash
|
|
$
|
2.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.6
|
|
U.S. government securities
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
6.4
|
|
Corporate debt
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
12.3
|
|
Equity securities
|
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
20.6
|
|
Investment funds
|
|
|
68.0
|
|
|
|
|
|
|
|
|
|
|
|
68.0
|
|
Investments in limited partnerships
|
|
|
|
|
|
|
|
|
|
|
5.1
|
|
|
|
5.1
|
|
Other long-term investments
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
111.5
|
|
|
$
|
|
|
|
$
|
5.1
|
|
|
$
|
116.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-88
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The table below sets forth a summary of changes in the fair
value of the Plans Level 3 assets for the year ended
December 31, 2010:
|
|
|
|
|
|
|
Investments in Limited
|
|
|
|
Partnerships
|
|
|
|
(Amounts in millions)
|
|
|
Balance, beginning of year
|
|
$
|
5.1
|
|
Net increase in value of investments
|
|
|
0.4
|
|
Purchases, sales, issuances and settlements (net)
|
|
|
15.5
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
21.0
|
|
|
|
|
|
|
The assumptions used in determining pension, supplemental
retirement plans and post retirement costs and the projected
benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
For the Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
2008
|
Discount rate for projected benefit obligation
|
|
|
4.00% - 5.40%
|
|
|
|
4.50% - 6.00%
|
|
|
|
|
4.50% - 6.25%
|
|
Discount rate for pension costs
|
|
|
4.50% - 6.00%
|
|
|
|
4.50% - 6.00%
|
|
|
|
|
4.50% - 6.25%
|
|
Expected long-term average return on plan assets
|
|
|
6.72% - 7.75%
|
|
|
|
6.75% - 7.75%
|
|
|
|
|
7.00% - 7.75%
|
|
Rate of compensation increase
|
|
|
2.00% - 3.00%
|
|
|
|
2.00% - 3.00%
|
|
|
|
|
3.25% - 5.00%
|
|
The Company utilizes long-term investment-grade bond yields as
the basis for selecting a discount rate by which plan
obligations are measured. An analysis of projected cash flows
for each plan is performed in order to determine plan-specific
duration. Discount rates are selected based on high quality
corporate bond yields of similar durations.
The Companys net periodic benefit cost for its defined
benefit plans for the periods presented consist of the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Jan. 1, 2009 -
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
Dec. 31, 2008
|
|
|
|
(Amounts in millions)
|
|
Service cost
|
|
$
|
0.4
|
|
|
$
|
|
|
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
Interest cost
|
|
|
8.9
|
|
|
|
0.4
|
|
|
|
|
8.9
|
|
|
|
9.7
|
|
Expected return on plan assets
|
|
|
(8.5
|
)
|
|
|
(0.4
|
)
|
|
|
|
(7.1
|
)
|
|
|
(10.5
|
)
|
Recognized actuarial loss (gain)
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (income)
|
|
$
|
0.8
|
|
|
$
|
|
|
|
|
$
|
3.0
|
|
|
$
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustment to accumulated other comprehensive income
represents the net unrecognized actuarial gains and losses.
These amounts will be recognized in future periods as components
of net periodic pension cost. The Company does not expect to
recognize any amounts recorded in accumulated other
comprehensive income as components of net periodic benefit cost
in the year ended December 31, 2011.
Other changes in assets and obligations recognized in other
comprehensive income (loss) for the year ended December 31,
2010, the 2009 Successor Period, the 2009 Predecessor Period and
the year ended December 31, 2008 consist of net losses of
approximately $2.3 million (net of tax of approximately
$0.9 million), net gains of approximately $0.8 million
(net of tax of approximately $0.3 million), net gains of
F-89
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
approximately $5.2 million (net of tax of approximately
$1.8 million) and net losses of approximately
$36.6 million, respectively.
The table that follows provides a reconciliation of the benefit
obligations of the Companys post retirement health benefit
plans for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Pension Post
|
|
|
|
Retirement Health Benefits
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
|
(Amounts in millions)
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1, 2010, December 20,
2009 and January 1, 2009, respectively
|
|
$
|
6.7
|
|
|
$
|
6.7
|
|
|
|
$
|
6.4
|
|
Interest cost
|
|
|
0.3
|
|
|
|
|
|
|
|
|
0.3
|
|
Actuarial gain excluding assumption changes
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
(0.2
|
)
|
Actuarial loss due to assumption changes
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss due to plan changes
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Benefits and expenses paid
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31, 2010,
December 31, 2009 and December 19, 2009,
respectively
|
|
$
|
6.9
|
|
|
$
|
6.7
|
|
|
|
$
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table that follows provides a reconciliation of the plan
assets of the Companys post retirement health benefit
plans for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Pension Post
|
|
|
|
Retirement Health Benefits
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
|
(Amounts in millions)
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1, 2010,
December 20, 2009 and January 1, 2009, respectively
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
Employer contribution
|
|
|
0.1
|
|
|
|
|
|
|
|
|
0.1
|
|
Benefits and expenses paid
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31, 2010,
December 31, 2009 and December 19, 2009,
respectively
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-90
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The table that follows provides a reconciliation of the funded
status of the Companys post retirement health benefit
plans for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Pension Post
|
|
|
|
Retirement Health Benefits
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
|
(Amounts in millions)
|
|
Funded status and statement of financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
Benefit obligation
|
|
|
6.9
|
|
|
|
6.7
|
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at December 31, 2010, December 31,
2009 and December 19, 2009, respectively
|
|
$
|
(6.9
|
)
|
|
$
|
(6.7
|
)
|
|
|
$
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts were recognized in the accompanying
consolidated balance sheet for the Companys post
retirement health benefit plans at December 31, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
Non-Pension Post Retirement
|
|
|
|
Health Benefits
|
|
|
|
at December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
Current liabilities
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
Non-current liabilities
|
|
|
6.5
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.9
|
|
|
$
|
6.7
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the expected post retirement health
benefit payments for the Successor were as follows:
|
|
|
|
|
|
|
Post Retirement
|
Year Ended
|
|
Health Benefit
|
December 31,
|
|
Payments
|
|
|
(Amounts in millions)
|
|
2011
|
|
$
|
0.4
|
|
2012
|
|
|
5.0
|
|
2013
|
|
|
0.3
|
|
2014
|
|
|
0.3
|
|
2015
|
|
|
0.3
|
|
2016-2020
|
|
|
1.0
|
|
F-91
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The Companys net periodic benefit cost for its post
retirement health benefit plans for the periods presented
consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Jan. 1, 2009 -
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
Dec. 31, 2008
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
|
|
Interest cost
|
|
$
|
0.3
|
|
|
$
|
|
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic post-retirement health benefit cost
|
|
$
|
0.3
|
|
|
$
|
|
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustment to accumulated other comprehensive income
represents the net unrecognized actuarial gains and losses.
These amounts will be recognized in future periods as components
of net periodic pension cost. The Company does not expect to
recognize any amounts recorded in accumulated other
comprehensive income as components of net periodic benefit cost
in the year ended December 31, 2011.
The amount recognized in other comprehensive income for the 2009
Predecessor Period was a loss of approximately $0.4 million
and for the year ended December 31, 2008 was a gain of
approximately $0.2 million. At December 19, 2009,
prior to the fresh-start adjustment to eliminate accumulated
other comprehensive income, a gain of approximately
$0.2 million was recognized in other comprehensive income.
There were no amounts recognized in accumulated other
comprehensive income for the year ended December 31, 2010
or the 2009 Successor Period.
For purposes of calculating the post retirement health benefit
cost, a medical inflation rate of 8.25% and 9.0% was assumed for
2010 and 2009, respectively. For both 2010 and 2009, the rate
was assumed to decrease gradually to an ultimate rate of 5.0% by
2013. A one percentage point change in assumed health care cost
trends does not have a significant effect on the amount of
liabilities recorded in the Successors consolidated
balance sheet at December 31, 2010.
|
|
11.
|
COMMITMENTS
AND CONTINGENCIES
|
The Company provides accruals for all direct costs, including
legal costs, associated with the estimated resolution of
contingencies at the earliest date at which it is deemed
probable that a liability has been incurred and the amount of
such liability can be reasonably estimated. Costs accrued are
estimated based upon an analysis of potential results, assuming
a combination of litigation and settlement strategies and
outcomes. Legal costs for other than probable contingencies are
expensed when services are performed.
At December 31, 2010, the Company is obligated under
operating lease agreements for the rental of certain real estate
and machinery and equipment used in its operations. At
December 31, 2010, future minimum rental obligations
aggregated approximately $62.7 million and are payable as
follows:
|
|
|
|
|
Year Ended
|
|
Future Minimum
|
December 31,
|
|
Rental Obligations
|
|
|
(Amounts in millions)
|
|
2011
|
|
$
|
19.8
|
|
2012
|
|
|
15.7
|
|
2013
|
|
|
10.8
|
|
2014
|
|
|
8.0
|
|
2015
|
|
|
4.7
|
|
Thereafter
|
|
|
3.7
|
|
F-92
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Certain of these lease agreements provide for increased payments
based on changes in the consumer price index. Under certain of
these lease agreements, the Company or its subsidiaries are also
obligated to pay insurance and taxes.
Rental expense charged to continuing operations in the
accompanying consolidated statement of operations was
approximately $32.2 million, $1.2 million,
$31.5 million and $32.2 million for the year ended
December 31, 2010, the 2009 Successor Period, the 2009
Predecessor Period and the year ended December 31, 2008,
respectively.
The Predecessors former subsidiary, Ply Gem, guaranteed
third party obligations relating to rental payments through
June 30, 2016 for a facility leased by a former subsidiary,
which was sold on September 21, 2001. The Predecessor
indemnified these guarantees in connection with the sale of Ply
Gem on February 12, 2004 and had an estimated liability
related to this indemnified guarantee of approximately
$7.2 million at December 31, 2008. During the 2009
Predecessor Period, the Predecessor paid approximately
$3.3 million in exchange for a release from the
indemnification agreement. This event resulted in a reduction of
approximately $3.9 million to selling, general and
administrative expense, net in the accompanying consolidated
statement of operations for the 2009 Predecessor Period. In
connection with the bankruptcy, the Company recovered
approximately $1.2 million from the settlement and
recognized this amount in Gain on Reorganization Items, net in
the accompanying consolidated statement of operations.
The Company has indemnified third parties for certain matters in
a number of transactions involving dispositions of former
subsidiaries. The Company has recorded liabilities in relation
to these indemnifications of approximately $5.7 million at
December 31, 2010, of which approximately $2.2 million
are recorded in accrued expenses and approximately
$3.5 million are recorded in other long-term liabilities in
the accompanying consolidated balance sheet. At
December 31, 2010, the undiscounted future payments related
to these indemnifications are estimated to be approximately
$6.3 million. At December 31, 2009, the Company had
recorded liabilities in relation to these indemnifications of
approximately $9.2 million, of which approximately
$4.6 million was recorded in accrued expenses and
approximately $4.6 million was recorded in other long-term
liabilities in the accompanying consolidated balance sheet.
The Company sells a number of products and offers a number of
warranties including, in some instances, extended warranties for
which the Company receives proceeds. The specific terms and
conditions of these warranties vary depending on the product
sold and the country in which the product is sold. The Company
estimates the costs that may be incurred under its warranties,
with the exception of extended warranties, and records a
liability for such costs at the time of sale. Deferred revenue
from extended warranties is recorded at estimated fair value and
is amortized over the life of the warranty and periodically
reviewed to ensure that the amount recorded is equal to or
greater than estimated future costs. Factors that affect the
Companys warranty liability include the number of units
sold, historical and anticipated rates of warranty claims, cost
per claim and new product introduction. The Company periodically
assesses the adequacy of its recorded warranty claims and
adjusts the amounts as necessary. As a result of this
assessment, the Company reduced its warranty liability by
approximately $4.8 million for the year ended
December 31, 2010. This reduction increased net income by
approximately $3.0 million, or approximately $0.20 per
share, for the year ended December 31, 2010.
F-93
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Changes in the Companys combined short-term and long-term
warranty liabilities (see Note 14, Accrued Expenses and
Taxes, Net and Other Long-Term Liabilities) during the
periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Jan. 1, 2009 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
|
(Amounts in millions)
|
|
Balance, beginning of period
|
|
$
|
54.3
|
|
|
$
|
53.8
|
|
|
|
$
|
51.5
|
|
Warranties provided during period
|
|
|
29.4
|
|
|
|
1.2
|
|
|
|
|
29.2
|
|
Settlements made during period
|
|
|
(25.2
|
)
|
|
|
(0.9
|
)
|
|
|
|
(27.6
|
)
|
Changes in liability estimate, including expirations and
acquisitions
|
|
|
(2.6
|
)
|
|
|
0.2
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
55.9
|
|
|
$
|
54.3
|
|
|
|
$
|
53.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2009, two of the Companys
subsidiaries in the TECH segment began shipping security
products to a new customer under an agreement to manufacture and
sell these security products. Under this agreement, the Company
recognized net sales of approximately $52.1 million in
2010. The agreement includes payment terms which are extended
beyond the subsidiaries normal payment terms. In addition,
the Company evaluated the credit worthiness of this customer and
concluded that collectability was not reasonably assured.
Accordingly, the Company determined cash basis accounting
treatment is appropriate for revenue recognition. Accordingly,
the Company has deferred revenue recognition on approximately
$9.2 million and $7.2 million of sales at
December 31, 2010 and 2009, respectively, and recorded the
cost basis of related inventory shipped of approximately
$6.5 million and $5.6 million at December 31,
2010 and 2009, respectively, in other current assets in the
accompanying consolidated balance sheet. In addition, at
December 31, 2010, the Company has included in inventory
approximately $6.1 million related to this customer. As
only limited cash collection history was available in periods
prior to December 31, 2009, the Company recorded loss
contingency reserves of approximately $3.0 million as a
reduction to other current assets as of December 31, 2009.
Based on collection experience with this customer throughout
2010 and 2011, the Company believes that it will be able to
recover all revenue on the inventories shipped to this customer.
Based on this, in the third quarter of 2010 the Company reversed
the $3.0 million loss contingency reserve that was
previously provided against cost of products sold in 2009.
On February 4, 2009, the Companys subsidiary,
Nordyne, Inc. (Nordyne), initiated action against
Regal Beloit Corporation (Regal Beloit) in the
U.S. District Court for the Eastern District of Missouri.
In the action, Nordyne is seeking a judgment declaring that
certain of its high efficiency heating and air conditioning
products do not infringe on Regal Beloits electronically
commutated motor (ECM) systems patent
U.S. Patent No. 5,592,058 (the 058
Patent)
and/or that
the 058 Patent is invalid. In July 2009, Regal Beloit
filed a response and counterclaimed, denying that Nordyne is
entitled to relief and seeking a judgment that Nordyne has, in
fact, infringed and continues to infringe upon the 058
Patent by making, using, offering for sale and selling such
products. Regal Beloit has also requested the U.S. District
Court to enjoin Nordyne from further infringement of the
058 Patent and to award Regal Beloit compensatory and
other damages.
On February 2, 2011, the Court issued a claim construction
order in which it held that 40 of the 44 claims in the
058 Patent asserted against Nordyne contain limitations
that are indefinite and thus invalid. The remaining claims of
the 058 Patent remain to be litigated. Due to the inherent
uncertainty related to this suit and the information currently
available, it is not possible for the Company to estimate the
potential loss, if any, regarding this matter. While the Company
will continue to litigate its claims vigorously, it is possible
that its business, financial condition, results of operations or
cash flows could be affected by an adverse outcome of this
matter.
F-94
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The Company is subject to other contingencies, including legal
proceedings and claims, arising out of its businesses that cover
a wide range of matters including, among others, environmental
matters, contract and employment claims, product liability,
warranty and modification and adjustment or replacement of
component parts of units sold, which include product recalls.
Product liability, environmental and other legal proceedings
also include matters with respect to businesses previously
owned. 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
workers 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.
The Company has undertaken several voluntary product recalls and
reworks over the past several years, additional product recalls
and reworks could result in material costs. Many of the
Companys products, especially certain models of bath fans,
range hoods, and residential furnaces and air conditioners, have
a large installed base, and any recalls and reworks related to
products with a large installed base could be particularly
costly. The costs of product recalls and reworks are not
generally covered by insurance. Any recalls or reworks may
adversely affect the Companys reputation as a manufacturer
of high-quality, safe products and could have a material adverse
effect on its financial condition, results of operations and
cash flows.
While it is impossible to ascertain the ultimate legal and
financial liability with respect to contingent liabilities,
including lawsuits, warranty, product liability, environmental
liabilities and product recalls, the Company believes that the
aggregate amount of such liabilities, if any, in excess of
amounts provided or covered by insurance, will not have a
material adverse effect on the Companys consolidated
financial position, results of operations or liquidity. It is
possible, however, that results of operations for any particular
future period could be materially affected by changes in the
Companys assumptions or strategies related to these
contingencies or changes that are not within the Companys
control.
|
|
12.
|
SEGMENT
INFORMATION AND CONCENTRATION OF CREDIT RISK
|
The Company is a diversified manufacturer of innovative, branded
residential and commercial building products, operating within
four reporting segments:
the Residential Ventilation Products (RVP)
segment,
|
|
|
|
|
the Technology Products (TECH) segment,
|
|
|
|
the Residential Air Conditioning and Heating Products
(R-HVAC) segment and
|
|
|
|
the Commercial Air Conditioning and Heating Products
(C-HVAC) segment.
|
Through these segments, the Company manufactures and sells,
primarily in the United States, Canada and Europe, a wide
variety of products for the remodeling and replacement markets,
the residential and commercial new construction markets, the
manufactured housing market and the personal and enterprise
computer markets.
The Companys performance is significantly impacted by the
levels of residential replacement and remodeling activity, as
well as the levels of residential and non-residential new
construction. New residential and non-residential construction
activity and, to a lesser extent, residential remodeling and
replacement activity are affected by seasonality and cyclical
factors such as interest rates, credit availability, inflation,
consumer spending, employment levels and other macroeconomic
factors, over which the Company has no control.
The RVP segment primarily manufactures and sells room and whole
house ventilation and other products primarily for the
professional remodeling and replacement markets, the residential
new construction market
F-95
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
and the do-it-yourself (DIY) market. The principal
products sold by this segment include kitchen range hoods,
exhaust fans (such as bath fans and fan, heater and light
combination units) and indoor air quality products.
The TECH segment, formerly known as the Home Technology Products
(HTP) segment, manufactures and distributes a broad
array of products designed to provide convenience and security
for residential and certain commercial applications. The
principal product categories sold in this segment include
audio/video distribution and control equipment, security and
access control products, and digital display mounting and
mobility products.
The R-HVAC segment manufactures and sells heating, ventilating
and air conditioning systems for site-built residential and
manufactured housing structures and certain commercial markets.
The principal products sold by the segment are split-system and
packaged air conditioners and heat pumps, air handlers, furnaces
and related equipment.
The C-HVAC segment manufactures and sells heating, ventilating
and air conditioning systems for custom-designed commercial
applications to meet customer specifications. The principal
products sold by the segment are large custom rooftop cooling
and heating products.
Sales of the Companys kitchen range hoods and exhaust fans
within the RVP segment accounted for approximately 14.1% and
10.3%, respectively, of consolidated net sales for 2010,
approximately 14.2% and 10.3%, respectively, of consolidated net
sales in 2009 and approximately 15.0% and 10.2%, respectively,
of consolidated net sales in 2008. Sales of the Companys
commercial air handlers within the C-HVAC segment accounted for
approximately 11.8%, 11.3% and 12.5% of consolidated net sales
in 2010, 2009 and 2008, respectively. No other single product
class accounts for 10% or more of consolidated net sales.
The accounting policies of the segments are the same as those
described in Note 4, Summary of Significant
Accounting Policies. The Company evaluates segment
performance based on operating earnings before allocations of
corporate overhead costs. Intersegment net sales and
intersegment eliminations are not material for any of the
periods presented. The financial statement impact of all
purchase accounting adjustments, including intangible assets
amortization and goodwill, are reflected in the applicable
operating segment, which are the Companys reporting units.
Unallocated assets consist primarily of cash and cash
equivalents, marketable securities, prepaid and deferred income
taxes, deferred debt expense and long-term restricted
investments and marketable securities.
F-96
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Net sales and operating earnings (loss) for the Companys
segments and pre-tax (loss) earnings for the Company are
presented in the table that follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
Jan. 1, 2009 -
|
|
|
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Dec. 19, 2009
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
(Restated)
|
|
|
Dec. 31, 2008
|
|
|
|
(Amounts in millions)
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
602.7
|
|
|
$
|
15.1
|
|
|
|
$
|
567.9
|
|
|
$
|
715.9
|
|
Technology products
|
|
|
463.6
|
|
|
|
13.3
|
|
|
|
|
387.5
|
|
|
|
514.1
|
|
Residential HVAC products
|
|
|
470.5
|
|
|
|
8.9
|
|
|
|
|
417.3
|
|
|
|
524.5
|
|
Commercial HVAC products
|
|
|
362.5
|
|
|
|
6.7
|
|
|
|
|
391.2
|
|
|
|
515.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
1,899.3
|
|
|
$
|
44.0
|
|
|
|
$
|
1,763.9
|
|
|
$
|
2,269.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products(1)
|
|
$
|
56.1
|
|
|
$
|
0.7
|
|
|
|
$
|
53.3
|
|
|
$
|
(391.9
|
)
|
Technology products(2)
|
|
|
12.1
|
|
|
|
1.0
|
|
|
|
|
(275.0
|
)
|
|
|
(39.2
|
)
|
Residential HVAC products(3)
|
|
|
23.6
|
|
|
|
(0.8
|
)
|
|
|
|
16.0
|
|
|
|
(176.8
|
)
|
Commercial HVAC products(4)
|
|
|
5.7
|
|
|
|
(2.0
|
)
|
|
|
|
41.7
|
|
|
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
97.5
|
|
|
|
(1.1
|
)
|
|
|
|
(164.0
|
)
|
|
|
(573.7
|
)
|
Unallocated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-petition reorganization items
|
|
|
|
|
|
|
|
|
|
|
|
(22.5
|
)
|
|
|
|
|
Loss contingency related to the Companys indemnification
of a lease guarantee
|
|
|
|
|
|
|
|
|
|
|
|
3.9
|
|
|
|
(6.4
|
)
|
Unallocated, net(5)
|
|
|
(26.9
|
)
|
|
|
(0.1
|
)
|
|
|
|
(20.8
|
)
|
|
|
(29.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating earnings (loss)
|
|
|
70.6
|
|
|
|
(1.2
|
)
|
|
|
|
(203.4
|
)
|
|
|
(610.0
|
)
|
Interest expense
|
|
|
(95.7
|
)
|
|
|
(3.6
|
)
|
|
|
|
(135.6
|
)
|
|
|
(134.7
|
)
|
Loss from debt retirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.9
|
)
|
Investment income
|
|
|
0.1
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before gain on reorganization items, net
|
|
|
(25.0
|
)
|
|
|
(4.8
|
)
|
|
|
|
(338.8
|
)
|
|
|
(753.8
|
)
|
Gain on reorganization items, net (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
619.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
$
|
(25.0
|
)
|
|
$
|
(4.8
|
)
|
|
|
$
|
280.3
|
|
|
$
|
(753.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2010, includes a reduction in warranty reserves of
approximately $4.1 million due to the Companys change
in estimate of expected warranty claims, a decrease in product
liability expense approximately $2.1 million as compared to
2009, and charge of approximately $1.9 million related to a
product safety upgrade program. In 2009, includes approximately
$1.9 million of severance charges related to certain
reduction in workforce initiatives. |
|
(2) |
|
In 2010, includes approximately $4.5 million of severance
and other charges related to the closure of certain facilities
and a gain of approximately $3.0 million related to the
reversal of a loss contingency reserve that was previously
provided in 2009 related to one of the Companys
subsidiaries. In 2009, includes a loss contingency reserve of
approximately $3.0 million related to one of the
Companys subsidiaries and valuation reserves of
approximately $2.8 million related to certain assets of a
foreign subsidiary that was shutdown in 2010. |
F-97
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
|
|
|
(3) |
|
In 2010, includes a decrease in product liability expense
approximately $1.3 million as compared to 2009. |
|
(4) |
|
In 2010, includes a reduction in warranty reserves of
approximately $0.7 million due to the Companys change
in estimate of expected warranty claims. In 2009, includes
approximately $1.1 million of severance charges related to
certain reduction in workforce initiatives implemented,
approximately $1.3 million of expense related to early
lease termination charges, and a gain of approximately
$0.6 million related to the sale of assets related to one
of the Companys foreign subsidiaries. |
|
(5) |
|
In 2010, includes a non-cash share-based compensation expense of
approximately $2.0 million, a gain of approximately
$2.7 million relating to the reversal of a portion of a
loss contingency reserve provided in prior periods, and
approximately $2.2 million of fees and expenses associated
with the acquisition of Ergotron. In 2009, includes a gain of
approximately $0.7 million related to the favorable
settlement of litigation. |
See Note 2, Reorganization Under Chapter 11
and Current Capital Structure, Note 3,
Fresh-Start Accounting (Restated),
Note 7, Income Taxes, and Note 11,
Commitments and Contingencies, with respect
to certain other income (expense) items affecting segment
earnings (loss).
Depreciation expense, amortization expense and capital
expenditures for the Companys segments are presented in
the table that follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Jan. 1, 2010 -
|
|
|
Dec. 20, 2009 -
|
|
|
|
Jan. 1, 2009 -
|
|
|
Jan. 1, 2008 -
|
|
|
|
Dec. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
|
Dec. 19, 2009
|
|
|
Dec. 31, 2008
|
|
|
|
(Amounts in millions)
|
|
Depreciation Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
16.2
|
|
|
$
|
0.6
|
|
|
|
$
|
13.1
|
|
|
$
|
16.0
|
|
Technology products
|
|
|
5.9
|
|
|
|
0.2
|
|
|
|
|
5.7
|
|
|
|
6.3
|
|
Residential HVAC products
|
|
|
14.4
|
|
|
|
0.6
|
|
|
|
|
10.0
|
|
|
|
10.5
|
|
Commercial HVAC products
|
|
|
5.8
|
|
|
|
0.2
|
|
|
|
|
5.8
|
|
|
|
6.8
|
|
Unallocated
|
|
|
0.2
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation expense
|
|
$
|
42.5
|
|
|
$
|
1.6
|
|
|
|
$
|
35.0
|
|
|
$
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products(1)
|
|
$
|
18.4
|
|
|
$
|
1.4
|
|
|
|
$
|
7.0
|
|
|
$
|
9.0
|
|
Technology products(2)
|
|
|
18.4
|
|
|
|
1.6
|
|
|
|
|
10.3
|
|
|
|
13.0
|
|
Residential HVAC products(3)
|
|
|
1.7
|
|
|
|
0.2
|
|
|
|
|
0.7
|
|
|
|
0.8
|
|
Commercial HVAC products(4)
|
|
|
10.7
|
|
|
|
1.4
|
|
|
|
|
4.7
|
|
|
|
5.3
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated amortization expense
|
|
$
|
49.2
|
|
|
$
|
4.6
|
|
|
|
$
|
22.7
|
|
|
$
|
28.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
5.9
|
|
|
$
|
0.1
|
|
|
|
$
|
5.5
|
|
|
$
|
10.5
|
|
Technology products
|
|
|
3.3
|
|
|
|
0.1
|
|
|
|
|
2.5
|
|
|
|
3.7
|
|
Residential HVAC products
|
|
|
3.0
|
|
|
|
|
|
|
|
|
1.4
|
|
|
|
6.3
|
|
Commercial HVAC products
|
|
|
7.3
|
|
|
|
0.3
|
|
|
|
|
8.5
|
|
|
|
4.9
|
|
Unallocated
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated capital expenditures
|
|
$
|
19.8
|
|
|
$
|
0.5
|
|
|
|
$
|
17.9
|
|
|
$
|
25.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-98
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
|
|
|
(1) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $1.4 million, $0.9 million and
$0.4 million for 2010, the 2009 Successor and 2009
Predecessor Periods, respectively. |
|
(2) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $9.3 million and $1.2 million for
2010 and the 2009 Successor Period, respectively. |
|
(3) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $0.8 million, $0.2 million,
$0.1 million and $0.2 million for 2010, the 2009
Successor Period, the 2009 Predecessor Period and the
Predecessor year ended December 31, 2008, respectively. |
|
(4) |
|
Includes amortization of excess purchase price allocated to
inventory recorded as a non-cash charge to cost of products sold
of approximately $0.7 million and $0.8 million for
2010 and the 2009 Successor Period, respectively. |
Segment assets for the Companys reporting segments are
presented in the table that follows for the years ended
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
Segment Assets:
|
|
|
|
|
|
|
|
|
Residential ventilation products
|
|
$
|
706.8
|
|
|
$
|
727.5
|
|
Technology products
|
|
|
762.9
|
|
|
|
338.7
|
|
Residential HVAC products
|
|
|
199.7
|
|
|
|
210.3
|
|
Commercial HVAC products
|
|
|
199.6
|
|
|
|
205.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,869.0
|
|
|
|
1,481.5
|
|
Unallocated:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, including current restricted cash
|
|
|
57.8
|
|
|
|
90.9
|
|
Prepaid income taxes
|
|
|
16.9
|
|
|
|
25.4
|
|
Other assets, including long-term restricted investments and
marketable securities
|
|
|
27.4
|
|
|
|
21.1
|
|
|
|
|
|
|
|
|
|
|
Consolidated assets
|
|
$
|
1,971.1
|
|
|
$
|
1,618.9
|
|
|
|
|
|
|
|
|
|
|
Foreign net sales were approximately 20.0%, 14.0%, 20.1% and
21.2% of consolidated net sales for the year ended
December 31, 2010, the 2009 Successor Period, the 2009
Predecessor Period and the year ended December 31, 2008,
respectively. Foreign net sales are attributed based on the
location of the Companys subsidiary responsible for the
sale. Excluding financial instruments and deferred income taxes,
foreign long-lived assets were approximately 11.4% and 13.7% of
consolidated long-lived assets at December 31, 2010 and
2009, respectively.
The Company operates internationally and is exposed to market
risks from changes in foreign exchange rates. 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 Companys customer base and
their dispersion across many different geographical regions.
These risks are not significantly dissimilar among the
Companys four reporting
F-99
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
segments. Accounts receivable from customers related to foreign
operations was approximately 29.6% and 27.0% of total accounts
receivable at December 31, 2010 and 2009, respectively.
No single customer accounts for 10% or more of consolidated net
sales or accounts receivable.
|
|
13.
|
RESTRUCTURING
CHARGES
|
During 2010, the Company announced the formation of its new
audio/visual control company within the TECH segment called The
AVC Group, LLC (The AVC Group). Upon the formation
of The AVC Group, the operations of Niles Audio Corporation,
Elan Home Systems, L.L.C and Xantech LLC were combined to
improve the overall operational efficiencies of these companies.
In conjunction with the formation of The AVC Group, the Company
is in the process of consolidating and shutting down certain of
its facilities and, as a result, recorded net expenses of
approximately $2.8 million, of which approximately
$2.6 million was recorded to selling, general and
administrative expense, net (SG&A) and
approximately $0.2 million was recorded to cost of products
sold (COGS), for the year ended December 31,
2010, consisting of severance and other expenses. The Company
anticipates recording additional expenses related to severance
and other costs associated with this activity of approximately
$0.9 million through the first half of 2011.
In addition, the Company is in the process of shutting down its
Imerge Limited and Aigis Mechtronics, Inc. (Aigis)
facilities within the TECH segment. As a result, during the year
ended December 31, 2010, the Company has recorded expenses
of approximately $1.6 million, within SG&A related to
severance and other costs. The Company anticipates recording
additional expenses associated with the closure of Aigis of
approximately $0.1 million through the first half of 2011.
The following table sets forth restructuring activity in
accordance with ASC 420, Exit or Disposal Cost
Obligations (ASC 420) in the accompanying
consolidated statement of operations for the year ended
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
and Asset
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
12/31/09
|
|
|
Provision
|
|
|
Write Downs
|
|
|
Other
|
|
|
12/31/10
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
|
|
|
|
|
|
Employee Separation Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
|
|
$
|
0.3
|
|
|
$
|
3.0
|
|
|
$
|
(1.4
|
)
|
|
$
|
0.1
|
|
|
$
|
2.0
|
|
|
|
|
|
COGS
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Employee Separation Expenses
|
|
|
0.4
|
|
|
|
3.2
|
|
|
|
(1.6
|
)
|
|
|
0.1
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
|
|
|
1.4
|
|
|
|
1.6
|
|
|
|
(2.3
|
)
|
|
|
0.2
|
|
|
|
0.9
|
|
|
|
|
|
COGS
|
|
|
|
|
|
|
0.3
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Costs and Expenses
|
|
|
1.4
|
|
|
|
1.9
|
|
|
|
(2.6
|
)
|
|
|
0.2
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Restructuring Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
|
|
|
1.7
|
|
|
|
4.6
|
|
|
|
(3.7
|
)
|
|
|
0.3
|
|
|
|
2.9
|
|
|
|
|
|
COGS
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.8
|
|
|
$
|
5.1
|
|
|
$
|
(4.2
|
)
|
|
$
|
0.3
|
|
|
$
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation expenses are comprised of severance,
vacation, outplacement and retention bonus payments. Other
restructuring costs include expenses associated with asset
write-downs, terminating other contractual arrangements, costs
to prepare facilities for closure, and costs to move equipment
and products to other facilities.
F-100
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
|
|
14.
|
ACCRUED
EXPENSES AND TAXES, NET AND OTHER LONG-TERM
LIABILITIES
|
Accrued expenses and taxes, net, included in current liabilities
in the accompanying consolidated balance sheet, consist of the
following at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
Payroll, pension and employee benefits
|
|
$
|
50.1
|
|
|
$
|
43.9
|
|
Contingent consideration
|
|
|
|
|
|
|
1.3
|
|
Product liability reserves
|
|
|
8.6
|
|
|
|
11.1
|
|
Workers compensation reserves
|
|
|
0.8
|
|
|
|
1.9
|
|
Other insurance reserves, including employee health benefit
accruals
|
|
|
5.5
|
|
|
|
6.8
|
|
Interest
|
|
|
10.7
|
|
|
|
3.7
|
|
Product warranty
|
|
|
28.9
|
|
|
|
30.5
|
|
Sales and marketing
|
|
|
33.5
|
|
|
|
24.1
|
|
Other, net
|
|
|
55.1
|
|
|
|
51.6
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193.2
|
|
|
$
|
174.9
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses, included in other long-term liabilities in the
accompanying consolidated balance sheet, consist of the
following at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
Employee pension retirement benefit obligation
|
|
$
|
41.4
|
|
|
$
|
42.3
|
|
Product warranty
|
|
|
27.0
|
|
|
|
23.8
|
|
Post retirement health benefit obligations
|
|
|
6.5
|
|
|
|
6.4
|
|
Product liability reserves
|
|
|
57.8
|
|
|
|
38.6
|
|
Workers compensation reserves
|
|
|
1.0
|
|
|
|
0.9
|
|
Other insurance reserves
|
|
|
4.1
|
|
|
|
3.7
|
|
Other, net
|
|
|
33.3
|
|
|
|
35.8
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
171.1
|
|
|
$
|
151.5
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
SUMMARIZED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
The Company operates on a calendar year and for its interim
periods operates on a 4-4-5 fiscal calendar, where each fiscal
quarter is comprised of two 4-week periods and one 5-week
period, with each week ending on a Saturday. The Companys
fiscal year always begins on January 1 and ends on
December 31. As a result, the Companys first and
fourth quarters may have more or less days included than a
traditional 4-4-5 fiscal calendar, which consists of
91 days.
F-101
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
The table that follows summarizes unaudited quarterly financial
data for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
For the Quarter Ended
|
|
|
April 3
|
|
July 3
|
|
October 2
|
|
December 31
|
|
|
(Amounts in millions, except per share data)
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
430.9
|
|
|
$
|
509.0
|
|
|
$
|
496.6
|
|
|
$
|
462.8
|
|
Gross profit
|
|
|
111.0
|
|
|
|
138.8
|
|
|
|
135.2
|
|
|
|
122.5
|
|
Selling, general and administrative expense, net
|
|
|
96.3
|
|
|
|
101.6
|
|
|
|
100.1
|
|
|
|
101.9
|
|
Depreciation expense
|
|
|
10.5
|
|
|
|
10.4
|
|
|
|
10.5
|
|
|
|
11.1
|
|
Amortization expense
|
|
|
20.2
|
|
|
|
12.4
|
|
|
|
8.7
|
|
|
|
7.9
|
|
Operating earnings
|
|
|
4.2
|
|
|
|
27.1
|
|
|
|
26.7
|
|
|
|
12.6
|
|
Net (loss) earnings
|
|
|
(13.4
|
)
|
|
|
0.3
|
|
|
|
9.8
|
|
|
|
(10.1
|
)
|
Net (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.89
|
)
|
|
$
|
0.02
|
|
|
$
|
0.65
|
|
|
$
|
(0.67
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(0.89
|
)
|
|
$
|
0.02
|
|
|
$
|
0.64
|
|
|
$
|
(0.67
|
)
|
The table that follows summarizes unaudited quarterly financial
data for the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
Oct. 4, 2009 -
|
|
|
Successor
|
|
|
For the Quarter Ended
|
|
Dec. 19, 2009
|
|
|
Dec. 20, 2009 -
|
|
|
April 4
|
|
July 4
|
|
October 3
|
|
(Restated)
|
|
|
Dec. 31, 2009
|
|
|
(Amounts in millions, except per share data)
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
439.0
|
|
|
$
|
487.8
|
|
|
$
|
451.8
|
|
|
$
|
385.3
|
|
|
|
$
|
44.0
|
|
Gross profit
|
|
|
121.5
|
|
|
|
136.1
|
|
|
|
130.1
|
|
|
|
110.2
|
|
|
|
|
8.8
|
|
Selling, general and administrative expense, net
|
|
|
101.0
|
|
|
|
94.9
|
|
|
|
90.2
|
|
|
|
86.5
|
|
|
|
|
8.5
|
|
Pre-petition reorganization items
|
|
|
|
|
|
|
0.9
|
|
|
|
6.5
|
|
|
|
15.1
|
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
250.0
|
|
|
|
|
|
|
|
34.0
|
|
|
|
|
|
|
Depreciation expense
|
|
|
9.6
|
|
|
|
9.6
|
|
|
|
8.5
|
|
|
|
7.3
|
|
|
|
|
1.6
|
|
Amortization expense
|
|
|
5.9
|
|
|
|
6.5
|
|
|
|
5.7
|
|
|
|
4.6
|
|
|
|
|
4.6
|
|
Operating earnings (loss)
|
|
|
14.6
|
|
|
|
(215.7
|
)
|
|
|
27.7
|
|
|
|
(30.0
|
)
|
|
|
|
(1.2
|
)
|
Gain on Reorganization Items, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
619.1
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
(32.7
|
)
|
|
|
(245.4
|
)
|
|
|
(12.4
|
)
|
|
|
485.8
|
|
|
|
|
(3.4
|
)
|
Net (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(10,900.00
|
)
|
|
$
|
(81,800.00
|
)
|
|
$
|
(4,133.33
|
)
|
|
$
|
161,933.33
|
|
|
|
$
|
(0.23
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(10,900.00
|
)
|
|
$
|
(81,800.00
|
)
|
|
$
|
(4,133.33
|
)
|
|
$
|
161,933.33
|
|
|
|
$
|
(0.23
|
)
|
See Note 2, Reorganization Under Chapter 11
and Current Capital Structure, Note 3,
Fresh-Start Accounting (Restated),
Note 7, Income Taxes, Note 11,
Commitments and Contingencies, and
Note 12, Segment Information and Concentration of
Credit Risk, as well as Managements
Discussion and Analysis
F-102
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
of Financial Condition and Results of Operations included
elsewhere herein, regarding certain other quarterly transactions
which impact the operating results in the above tables,
including financing activities, new accounting pronouncements,
income taxes, acquisitions, sales volume, material costs,
rationalization and relocation of manufacturing operations,
material procurement strategies and other items.
In February 2011, management approved a plan to reduce costs and
improve production efficiencies at the Companys
subsidiary, Best. The Company anticipates incurring expenses of
approximately $1.0 million to $2.0 million in 2011
related to this plan and the related investments in research and
development, the reconfiguration of physical space, and
relocation of equipment. The Company may approve additional
plans in 2011 and may incur significant additional costs in 2011
and beyond.
|
|
17.
|
GUARANTOR
FINANCIAL STATEMENTS
|
Norteks 10% Notes and 8.5% Notes are guaranteed by
each of Norteks current and future domestic subsidiaries
that guarantee Norteks obligations under its senior
secured credit facilities (the Guarantors). The
Guarantors are wholly-owned either directly or indirectly by
Nortek and jointly and severally guarantee Norteks
obligations under the 10% Notes and 8.5% Notes. None of
Norteks foreign subsidiaries guarantee the 10% Notes
and 8.5% Notes.
Consolidating balance sheets related to Nortek, the Guarantors
and non-Guarantor subsidiaries as of December 31, 2010 and
December 31, 2009 and the related consolidating statements
of operations and cash flows for the year ended
December 31, 2010 (Successor), the period December 20,
2009 to December 31, 2009 (Successor), the period
January 1, 2009 to December 19, 2009 (Predecessor) and
the year ended December 31, 2008 (Predecessor) are
reflected below in order to comply with the reporting
requirements for guarantor subsidiaries.
F-103
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Statement of Operations
For the Year Ended December 31, 2010 (Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
1,563.6
|
|
|
$
|
504.5
|
|
|
$
|
(168.8
|
)
|
|
$
|
1,899.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold
|
|
|
|
|
|
|
1,131.4
|
|
|
|
429.1
|
|
|
|
(168.7
|
)
|
|
|
1,391.8
|
|
Selling, general and administrative expenses, net
|
|
|
26.9
|
|
|
|
300.9
|
|
|
|
72.1
|
|
|
|
|
|
|
|
399.9
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
33.7
|
|
|
|
3.3
|
|
|
|
|
|
|
|
37.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.9
|
|
|
|
1,466.0
|
|
|
|
504.5
|
|
|
|
(168.7
|
)
|
|
|
1,828.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings
|
|
|
(26.9
|
)
|
|
|
97.6
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
70.6
|
|
Interest expense
|
|
|
(92.2
|
)
|
|
|
(1.9
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
(95.7
|
)
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before charges and allocations to subsidiaries and
equity in subsidiaries (loss) earnings before income taxes
|
|
|
(119.1
|
)
|
|
|
95.7
|
|
|
|
(1.5
|
)
|
|
|
(0.1
|
)
|
|
|
(25.0
|
)
|
Charges and allocations to subsidiaries and equity in
subsidiaries (loss) earnings before income taxes
|
|
|
94.1
|
|
|
|
(65.1
|
)
|
|
|
(0.4
|
)
|
|
|
(28.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(25.0
|
)
|
|
|
30.6
|
|
|
|
(1.9
|
)
|
|
|
(28.7
|
)
|
|
|
(25.0
|
)
|
(Benefit) provision for income taxes
|
|
|
(11.6
|
)
|
|
|
8.2
|
|
|
|
6.5
|
|
|
|
(14.7
|
)
|
|
|
(11.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(13.4
|
)
|
|
$
|
22.4
|
|
|
$
|
(8.4
|
)
|
|
$
|
(14.0
|
)
|
|
$
|
(13.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-104
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Statement of Operations
For the period December 20, 2009 to December 31, 2009
(Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
38.5
|
|
|
$
|
10.3
|
|
|
$
|
(4.8
|
)
|
|
$
|
44.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold
|
|
|
|
|
|
|
29.5
|
|
|
|
10.3
|
|
|
|
(4.6
|
)
|
|
|
35.2
|
|
Selling, general and administrative expenses, net
|
|
|
|
|
|
|
7.3
|
|
|
|
1.2
|
|
|
|
|
|
|
|
8.5
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
1.4
|
|
|
|
0.1
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.2
|
|
|
|
11.6
|
|
|
|
(4.6
|
)
|
|
|
45.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
|
|
|
|
|
|
0.3
|
|
|
|
(1.3
|
)
|
|
|
(0.2
|
)
|
|
|
(1.2
|
)
|
Interest expense
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before charges and allocations to subsidiaries and
equity in subsidiaries (loss) earnings before income taxes
|
|
|
(3.5
|
)
|
|
|
0.3
|
|
|
|
(1.4
|
)
|
|
|
(0.2
|
)
|
|
|
(4.8
|
)
|
Charges and allocations to subsidiaries and equity in
subsidiaries (loss) earnings before income taxes
|
|
|
(1.3
|
)
|
|
|
(1.8
|
)
|
|
|
0.1
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before (benefit) provision for income taxes
|
|
|
(4.8
|
)
|
|
|
(1.5
|
)
|
|
|
(1.3
|
)
|
|
|
2.8
|
|
|
|
(4.8
|
)
|
(Benefit) provision for income taxes
|
|
|
(1.4
|
)
|
|
|
(0.6
|
)
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(3.4
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
2.3
|
|
|
$
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-105
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Statement of Operations
For the period January 1, 2009 to December 19, 2009
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
1,453.2
|
|
|
$
|
431.4
|
|
|
$
|
(120.7
|
)
|
|
$
|
1,763.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold
|
|
|
|
|
|
|
1,037.6
|
|
|
|
348.9
|
|
|
|
(120.5
|
)
|
|
|
1,266.0
|
|
Selling, general and administrative expenses, net
|
|
|
17.2
|
|
|
|
282.4
|
|
|
|
73.0
|
|
|
|
|
|
|
|
372.6
|
|
Pre-petition reorganization items
|
|
|
22.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.5
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
284.0
|
|
|
|
|
|
|
|
|
|
|
|
284.0
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
19.2
|
|
|
|
3.0
|
|
|
|
|
|
|
|
22.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.7
|
|
|
|
1,623.2
|
|
|
|
424.9
|
|
|
|
(120.5
|
)
|
|
|
1,967.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings
|
|
|
(39.7
|
)
|
|
|
(170.0
|
)
|
|
|
6.5
|
|
|
|
(0.2
|
)
|
|
|
(203.4
|
)
|
Interest expense
|
|
|
(132.2
|
)
|
|
|
(1.5
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
(135.6
|
)
|
Investment income
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before gain on reorganization items, net and
charges and allocations to subsidiaries and equity in
subsidiaries (loss) earnings before income taxes
|
|
|
(171.8
|
)
|
|
|
(171.5
|
)
|
|
|
4.7
|
|
|
|
(0.2
|
)
|
|
|
(338.8
|
)
|
Gain on reorganization items, net
|
|
|
470.4
|
|
|
|
109.7
|
|
|
|
39.0
|
|
|
|
|
|
|
|
619.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before charges and allocations to subsidiaries and
equity in subsidiaries earnings (loss) before income taxes
|
|
|
298.6
|
|
|
|
(61.8
|
)
|
|
|
43.7
|
|
|
|
(0.2
|
)
|
|
|
280.3
|
|
Charges and allocations to subsidiaries and equity in
subsidiaries earnings (loss) before income taxes
|
|
|
(18.3
|
)
|
|
|
(22.3
|
)
|
|
|
(0.1
|
)
|
|
|
40.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before provision (benefit) for income taxes
|
|
|
280.3
|
|
|
|
(84.1
|
)
|
|
|
43.6
|
|
|
|
40.5
|
|
|
|
280.3
|
|
Provision (benefit) for income taxes
|
|
|
85.0
|
|
|
|
94.0
|
|
|
|
25.0
|
|
|
|
(119.0
|
)
|
|
|
85.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
195.3
|
|
|
$
|
(178.1
|
)
|
|
$
|
18.6
|
|
|
$
|
159.5
|
|
|
$
|
195.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-106
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Statement of Operations
For the Year Ended December 31, 2008
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
1,845.1
|
|
|
$
|
572.3
|
|
|
$
|
(147.7
|
)
|
|
$
|
2,269.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold
|
|
|
|
|
|
|
1,356.6
|
|
|
|
464.2
|
|
|
|
(147.3
|
)
|
|
|
1,673.5
|
|
Selling, general and administrative expenses, net
|
|
|
34.8
|
|
|
|
349.5
|
|
|
|
83.7
|
|
|
|
|
|
|
|
468.0
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
698.3
|
|
|
|
11.7
|
|
|
|
|
|
|
|
710.0
|
|
Amortization of intangible assets
|
|
|
0.3
|
|
|
|
24.2
|
|
|
|
3.7
|
|
|
|
|
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.1
|
|
|
|
2,428.6
|
|
|
|
563.3
|
|
|
|
(147.3
|
)
|
|
|
2,879.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings
|
|
|
(35.1
|
)
|
|
|
(583.5
|
)
|
|
|
9.0
|
|
|
|
(0.4
|
)
|
|
|
(610.0
|
)
|
Interest expense
|
|
|
(129.2
|
)
|
|
|
(2.4
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
(134.7
|
)
|
Loss from debt retirement
|
|
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.9
|
)
|
Investment income
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before charges and allocations to subsidiaries and
equity in subsidiaries (loss) earnings before income taxes
|
|
|
(174.1
|
)
|
|
|
(585.7
|
)
|
|
|
6.4
|
|
|
|
(0.4
|
)
|
|
|
(753.8
|
)
|
Charges and allocations to subsidiaries and equity in
subsidiaries (loss) earnings before income taxes
|
|
|
(579.7
|
)
|
|
|
(43.7
|
)
|
|
|
(0.2
|
)
|
|
|
623.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before provision (benefit) for income taxes
|
|
|
(753.8
|
)
|
|
|
(629.4
|
)
|
|
|
6.2
|
|
|
|
623.2
|
|
|
|
(753.8
|
)
|
Provision (benefit) for income taxes
|
|
|
26.9
|
|
|
|
25.5
|
|
|
|
12.0
|
|
|
|
(37.5
|
)
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(780.7
|
)
|
|
$
|
(654.9
|
)
|
|
$
|
(5.8
|
)
|
|
$
|
660.7
|
|
|
$
|
(780.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-107
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Balance Sheet as of December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
ASSETS:
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
16.0
|
|
|
$
|
21.3
|
|
|
$
|
20.4
|
|
|
$
|
|
|
|
$
|
57.7
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
Accounts receivable, less allowances
|
|
|
|
|
|
|
203.6
|
|
|
|
77.2
|
|
|
|
|
|
|
|
280.8
|
|
Intercompany receivables (payables)
|
|
|
1.4
|
|
|
|
(27.4
|
)
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
|
|
|
|
|
241.1
|
|
|
|
75.9
|
|
|
|
(3.5
|
)
|
|
|
313.5
|
|
Prepaid expenses
|
|
|
2.4
|
|
|
|
9.0
|
|
|
|
4.5
|
|
|
|
|
|
|
|
15.9
|
|
Other current assets
|
|
|
6.3
|
|
|
|
18.7
|
|
|
|
8.2
|
|
|
|
(0.9
|
)
|
|
|
32.3
|
|
Prepaid income taxes
|
|
|
6.1
|
|
|
|
9.1
|
|
|
|
1.7
|
|
|
|
|
|
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
32.2
|
|
|
|
475.4
|
|
|
|
214.0
|
|
|
|
(4.4
|
)
|
|
|
717.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, at Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
0.6
|
|
|
|
157.1
|
|
|
|
77.8
|
|
|
|
|
|
|
|
235.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-term Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries and long-term receivable from (to)
subsidiaries
|
|
|
1,236.6
|
|
|
|
132.9
|
|
|
|
(20.8
|
)
|
|
|
(1,348.7
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
280.1
|
|
|
|
12.0
|
|
|
|
|
|
|
|
292.1
|
|
Intangible assets, less accumulated amortization
|
|
|
|
|
|
|
663.6
|
|
|
|
31.4
|
|
|
|
|
|
|
|
695.0
|
|
Other assets
|
|
|
16.3
|
|
|
|
14.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
31.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other long-term assets
|
|
|
1,252.9
|
|
|
|
1,090.8
|
|
|
|
23.4
|
|
|
|
(1,348.7
|
)
|
|
|
1,018.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,285.7
|
|
|
$
|
1,723.3
|
|
|
$
|
315.2
|
|
|
$
|
(1,353.1
|
)
|
|
$
|
1,971.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS INVESTMENT (DEFICIT):
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other short-term obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8.6
|
|
|
$
|
|
|
|
$
|
8.6
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
5.0
|
|
|
|
2.7
|
|
|
|
|
|
|
|
7.7
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
1.5
|
|
Accounts payable
|
|
|
4.0
|
|
|
|
83.9
|
|
|
|
87.8
|
|
|
|
|
|
|
|
175.7
|
|
Accrued expenses and taxes, net
|
|
|
19.3
|
|
|
|
123.9
|
|
|
|
50.0
|
|
|
|
|
|
|
|
193.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23.3
|
|
|
|
212.8
|
|
|
|
150.6
|
|
|
|
|
|
|
|
386.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(12.8
|
)
|
|
|
153.5
|
|
|
|
13.7
|
|
|
|
(1.7
|
)
|
|
|
152.7
|
|
Other long-term liabilities
|
|
|
38.0
|
|
|
|
116.2
|
|
|
|
16.9
|
|
|
|
|
|
|
|
171.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.2
|
|
|
|
269.7
|
|
|
|
30.6
|
|
|
|
(1.7
|
)
|
|
|
323.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes, Mortgage Notes and Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable, Less Current Maturities
|
|
|
1,078.4
|
|
|
|
13.2
|
|
|
|
10.2
|
|
|
|
|
|
|
|
1,101.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders investment (deficit)
|
|
|
158.8
|
|
|
|
1,227.6
|
|
|
|
123.8
|
|
|
|
(1,351.4
|
)
|
|
|
158.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders investment (deficit)
|
|
$
|
1,285.7
|
|
|
$
|
1,723.3
|
|
|
$
|
315.2
|
|
|
$
|
(1,353.1
|
)
|
|
$
|
1,971.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-108
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Balance Sheet as of December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
ASSETS:
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
43.6
|
|
|
$
|
11.4
|
|
|
$
|
34.6
|
|
|
$
|
|
|
|
$
|
89.6
|
|
Restricted cash
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
|
|
|
|
1.3
|
|
Accounts receivable, less allowances
|
|
|
|
|
|
|
187.8
|
|
|
|
61.3
|
|
|
|
|
|
|
|
249.1
|
|
Intercompany receivables (payables)
|
|
|
1.3
|
|
|
|
(3.2
|
)
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
|
|
|
|
|
227.3
|
|
|
|
49.9
|
|
|
|
(4.0
|
)
|
|
|
273.2
|
|
Prepaid expenses
|
|
|
9.0
|
|
|
|
6.3
|
|
|
|
2.7
|
|
|
|
|
|
|
|
18.0
|
|
Other current assets
|
|
|
1.1
|
|
|
|
4.8
|
|
|
|
7.6
|
|
|
|
|
|
|
|
13.5
|
|
Prepaid income taxes
|
|
|
8.1
|
|
|
|
16.7
|
|
|
|
0.6
|
|
|
|
|
|
|
|
25.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
63.2
|
|
|
|
451.8
|
|
|
|
159.1
|
|
|
|
(4.0
|
)
|
|
|
670.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, at Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
0.4
|
|
|
|
162.7
|
|
|
|
81.8
|
|
|
|
|
|
|
|
244.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-term Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries and long-term receivable from (to)
subsidiaries
|
|
|
993.9
|
|
|
|
49.6
|
|
|
|
(30.2
|
)
|
|
|
(1,013.3
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
142.8
|
|
|
|
12.0
|
|
|
|
|
|
|
|
154.8
|
|
Intangible assets, less accumulated amortization
|
|
|
|
|
|
|
501.9
|
|
|
|
34.7
|
|
|
|
|
|
|
|
536.6
|
|
Other assets
|
|
|
8.5
|
|
|
|
2.6
|
|
|
|
1.4
|
|
|
|
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other long-term assets
|
|
|
1,002.4
|
|
|
|
696.9
|
|
|
|
17.9
|
|
|
|
(1,013.3
|
)
|
|
|
703.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,066.0
|
|
|
$
|
1,311.4
|
|
|
$
|
258.8
|
|
|
$
|
(1,017.3
|
)
|
|
$
|
1,618.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS INVESTMENT (DEFICIT):
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other short-term obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13.4
|
|
|
$
|
|
|
|
$
|
13.4
|
|
Current maturities of long-term debt
|
|
|
25.0
|
|
|
|
2.2
|
|
|
|
5.2
|
|
|
|
|
|
|
|
32.4
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
|
|
|
|
|
|
4.1
|
|
Accounts payable
|
|
|
1.6
|
|
|
|
66.8
|
|
|
|
56.1
|
|
|
|
|
|
|
|
124.5
|
|
Accrued expenses and taxes, net
|
|
|
21.4
|
|
|
|
111.7
|
|
|
|
41.8
|
|
|
|
|
|
|
|
174.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
48.0
|
|
|
|
180.7
|
|
|
|
120.6
|
|
|
|
|
|
|
|
349.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(13.4
|
)
|
|
|
99.2
|
|
|
|
28.3
|
|
|
|
(1.5
|
)
|
|
|
112.6
|
|
Other long-term liabilities
|
|
|
42.9
|
|
|
|
99.6
|
|
|
|
9.0
|
|
|
|
|
|
|
|
151.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.5
|
|
|
|
198.8
|
|
|
|
37.3
|
|
|
|
(1.5
|
)
|
|
|
264.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes, Mortgage Notes and Obligations Payable, Less Current
Maturities
|
|
|
818.4
|
|
|
|
16.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
835.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders investment (deficit)
|
|
|
170.1
|
|
|
|
915.7
|
|
|
|
100.1
|
|
|
|
(1,015.8
|
)
|
|
|
170.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders investment (deficit)
|
|
$
|
1,066.0
|
|
|
$
|
1,311.4
|
|
|
$
|
258.8
|
|
|
$
|
(1,017.3
|
)
|
|
$
|
1,618.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-109
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Cash Flow Statement
For the Year Ended December 31, 2010 (Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(145.7
|
)
|
|
$
|
177.7
|
|
|
$
|
14.9
|
|
|
$
|
46.9
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(0.3
|
)
|
|
|
(13.4
|
)
|
|
|
(6.1
|
)
|
|
|
(19.8
|
)
|
Net cash paid for businesses acquired
|
|
|
(76.1
|
)
|
|
|
(209.1
|
)
|
|
|
|
|
|
|
(285.2
|
)
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Change in restricted cash and investments
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
0.4
|
|
|
|
1.2
|
|
Intercompany dividend paid by (received from) subsidiaries
|
|
|
10.8
|
|
|
|
4.2
|
|
|
|
(15.0
|
)
|
|
|
|
|
Other, net
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(65.4
|
)
|
|
|
(217.8
|
)
|
|
|
(20.2
|
)
|
|
|
(303.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in borrowings
|
|
|
90.1
|
|
|
|
|
|
|
|
43.0
|
|
|
|
133.1
|
|
Payment of borrowings
|
|
|
(95.0
|
)
|
|
|
(2.2
|
)
|
|
|
(51.9
|
)
|
|
|
(149.1
|
)
|
Net proceeds from the sale of the 10% Senior Unsecured
Notes due 2018
|
|
|
250.0
|
|
|
|
|
|
|
|
|
|
|
|
250.0
|
|
Long-term intercompany advance
|
|
|
(52.1
|
)
|
|
|
52.1
|
|
|
|
|
|
|
|
|
|
Fees paid in connection with debt facilities
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(9.5
|
)
|
Other, net
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
183.5
|
|
|
|
50.0
|
|
|
|
(8.9
|
)
|
|
|
224.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrestricted cash and cash equivalents
|
|
|
(27.6
|
)
|
|
|
9.9
|
|
|
|
(14.2
|
)
|
|
|
(31.9
|
)
|
Unrestricted cash and cash equivalents at the beginning of the
period
|
|
|
43.6
|
|
|
|
11.4
|
|
|
|
34.6
|
|
|
|
89.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents at the end of the period
|
|
$
|
16.0
|
|
|
$
|
21.3
|
|
|
$
|
20.4
|
|
|
$
|
57.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-110
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Cash Flow Statement
For the period December 20, 2009 to December 31, 2009
(Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
|
(Dollar amounts in millions)
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(1.6
|
)
|
|
$
|
4.0
|
|
|
$
|
4.4
|
|
|
$
|
6.8
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
Change in restricted cash and investments
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
Other, net
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
0.7
|
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in borrowings
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Payment of borrowings
|
|
|
|
|
|
|
|
|
|
|
(4.1
|
)
|
|
|
(4.1
|
)
|
Long-term intercompany advance
|
|
|
7.0
|
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
7.0
|
|
|
|
(7.0
|
)
|
|
|
(3.8
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrestricted cash and cash equivalents
|
|
|
6.1
|
|
|
|
(3.4
|
)
|
|
|
0.2
|
|
|
|
2.9
|
|
Unrestricted cash and cash equivalents at the beginning of the
period
|
|
|
37.5
|
|
|
|
14.8
|
|
|
|
34.4
|
|
|
|
86.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents at the end of the period
|
|
$
|
43.6
|
|
|
$
|
11.4
|
|
|
$
|
34.6
|
|
|
$
|
89.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-111
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Cash Flow Statement
For the period January 1, 2009 to December 19, 2009
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(183.1
|
)
|
|
$
|
175.6
|
|
|
$
|
28.9
|
|
|
$
|
21.4
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(11.3
|
)
|
|
|
(6.6
|
)
|
|
|
(17.9
|
)
|
Net cash paid for businesses acquired
|
|
|
|
|
|
|
(14.1
|
)
|
|
|
|
|
|
|
(14.1
|
)
|
Proceeds from the sale of property and equipment
|
|
|
1.3
|
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
2.2
|
|
Change in restricted cash and investments
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
(1.2
|
)
|
Other, net
|
|
|
(0.2
|
)
|
|
|
(0.9
|
)
|
|
|
(1.8
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
0.4
|
|
|
|
(25.6
|
)
|
|
|
(8.7
|
)
|
|
|
(33.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in borrowings
|
|
|
20.0
|
|
|
|
|
|
|
|
44.7
|
|
|
|
64.7
|
|
Payment of borrowings
|
|
|
(75.0
|
)
|
|
|
(7.7
|
)
|
|
|
(61.1
|
)
|
|
|
(143.8
|
)
|
Long-term intercompany advance
|
|
|
135.2
|
|
|
|
(135.2
|
)
|
|
|
|
|
|
|
|
|
Fees paid in connection with debt facilities
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(4.1
|
)
|
Other, net
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
76.1
|
|
|
|
(142.7
|
)
|
|
|
(16.4
|
)
|
|
|
(83.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrestricted cash and cash equivalents
|
|
|
(106.6
|
)
|
|
|
7.3
|
|
|
|
3.8
|
|
|
|
(95.5
|
)
|
Unrestricted cash and cash equivalents at the beginning of the
period
|
|
|
144.1
|
|
|
|
7.5
|
|
|
|
30.6
|
|
|
|
182.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents at the end of the period
|
|
$
|
37.5
|
|
|
$
|
14.8
|
|
|
$
|
34.4
|
|
|
$
|
86.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-112
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
Condensed
Consolidating Cash Flow Statement
For the Year Ended December 31, 2008
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Nortek
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(139.1
|
)
|
|
$
|
168.8
|
|
|
$
|
24.7
|
|
|
$
|
54.4
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(16.5
|
)
|
|
|
(8.9
|
)
|
|
|
(25.4
|
)
|
Net cash paid for businesses acquired
|
|
|
|
|
|
|
(32.7
|
)
|
|
|
|
|
|
|
(32.7
|
)
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
8.5
|
|
|
|
|
|
|
|
8.5
|
|
Change in restricted cash and investments
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
Intercompany dividend paid by (received from) subsidiaries
|
|
|
8.6
|
|
|
|
|
|
|
|
(8.6
|
)
|
|
|
|
|
Other, net
|
|
|
(0.9
|
)
|
|
|
(0.8
|
)
|
|
|
(0.2
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
7.7
|
|
|
|
(41.2
|
)
|
|
|
(17.7
|
)
|
|
|
(51.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in borrowings
|
|
|
265.0
|
|
|
|
|
|
|
|
14.4
|
|
|
|
279.4
|
|
Payment of borrowings
|
|
|
(79.2
|
)
|
|
|
(17.0
|
)
|
|
|
(14.8
|
)
|
|
|
(111.0
|
)
|
Net proceeds from the sale of the 10% Senior Secured Notes
due 2013
|
|
|
742.2
|
|
|
|
|
|
|
|
|
|
|
|
742.2
|
|
Redemption of Norteks senior secured credit facility
|
|
|
(755.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(755.5
|
)
|
Fees paid in connection with new debt facilities
|
|
|
(33.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(33.8
|
)
|
Equity investment by Nortek Holdings, Inc.
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Intercompany transfers
|
|
|
112.0
|
|
|
|
(112.0
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
255.0
|
|
|
|
(129.0
|
)
|
|
|
(0.4
|
)
|
|
|
125.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrestricted cash and cash equivalents
|
|
|
123.6
|
|
|
|
(1.4
|
)
|
|
|
6.6
|
|
|
|
128.8
|
|
Unrestricted cash and cash equivalents at the beginning of the
period
|
|
|
20.5
|
|
|
|
8.9
|
|
|
|
24.0
|
|
|
|
53.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents at the end of the period
|
|
$
|
144.1
|
|
|
$
|
7.5
|
|
|
$
|
30.6
|
|
|
$
|
182.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
EVENTS
SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS REPORT
(Unaudited)
|
On April 26, 2011, the Company successfully completed the
private placement of $500.0 million in aggregate principal
amount of 8.5% Senior Notes due 2021 (the
8.5% Notes). The Company also entered into a
new senior secured term loan with a final maturity in 2017 and
optional interest rates at the election of the Company,
including LIBOR, as defined, plus 4.0% with a LIBOR floor of
1.25% (the Term Loan Facility). The Company borrowed
$350.0 million aggregate principal under the Term Loan
Facility at a 5.25% interest rate on April 26, 2011, which
resulted in net debt to the Company of approximately
$348.2 million, after deducting an original issue discount
of approximately $1.8 million. The Company received
approximately $827.3 million of net proceeds in connection
with the issuance of the 8.5% Notes and Term Loan Facility,
after deducting approximately $20.9 million of underwriting
commissions and legal, accounting and other expenses incurred.
As discussed further below, the Company used approximately
$825.0 million of these net proceeds to repurchase or
redeem all of the Companys 11% Senior Secured Notes,
which included approximately $753.3 million of aggregate
outstanding principal
F-113
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
balance, approximately $37.8 million of tender and
redemption premiums and approximately $33.9 million of
accrued but unpaid interest as of the redemption dates. Net cash
from these debt transactions of approximately $2.3 million
was retained by the Company for general corporate purposes.
The following is a summary of sources and uses in the second
quarter of 2011 related to these debt transactions:
|
|
|
|
|
|
|
(Amounts in millions)
|
|
Sources:
|
|
|
|
|
Proceeds from issuance of the 8.5% Notes
|
|
$
|
500.0
|
|
Proceeds from Term Loan Facility after deducting original issue
discount of approximately $1.8 million
|
|
|
348.2
|
|
|
|
|
|
|
Total sources
|
|
|
848.2
|
|
|
|
|
|
|
Uses:
|
|
|
|
|
Repurchase or redemption of 11% Notes
|
|
|
(753.3
|
)
|
Tender and redemption premiums for 11% Notes
|
|
|
(37.8
|
)
|
Accrued and unpaid interest through the date of tender or
redemption
|
|
|
(33.9
|
)
|
|
|
|
|
|
Subtotal 11% Notes repurchase or redemption
|
|
|
(825.0
|
)
|
Underwriting commissions and legal, accounting and other expenses
|
|
|
(20.9
|
)
|
|
|
|
|
|
Total uses
|
|
|
(845.9
|
)
|
|
|
|
|
|
Net cash to Nortek
|
|
$
|
2.3
|
|
|
|
|
|
|
During the second quarter of 2011, the Company used
approximately $731.1 million of the net proceeds to
repurchase approximately 88.5% or approximately
$666.6 million aggregate principal amount of the
11% Notes through a tender offer in accordance with the
terms of the Companys purchase and consent solicitation
statement dated April 12, 2011 (the Tender
Offer), which was completed on April 26, 2011. The
Tender Offer entitled the holders of the 11% Notes to
receive $1,052.50 per $1,000 in principal amount, plus accrued
and unpaid interest, and resulted in a supplemental indenture to
the 11% Notes, which substantially eliminated all
affirmative and restrictive covenants and certain events of
default under the indenture and provided for a shorter notice
period in connection with a voluntary redemption. The Company
used approximately $93.9 million to discharge its remaining
obligations under the 11% Note indenture (approximately
$86.7 million aggregated principal amount) through a
deposit in trust funds sufficient to pay and discharge all
remaining indebtedness, including accrued and unpaid interest,
on the 11% Notes in conjunction with the notices of
redemption sent to the remaining holders of the 11% Notes.
Under the terms of the supplemental indenture to the
11% Notes, the Company was permitted to redeem
$75.0 million aggregate principal amount at 103%, plus
accrued and unpaid interest, and the remaining
$11.7 million aggregate principal amount at 105%, plus
accrued and unpaid interest.
As certain holders of the new 8.5% Notes and Term Loan
Facility had previously held the 11% Notes up to the time
of their repurchase or redemption, in accordance with Accounting
Standards Codification
470-50,
Debt Modifications and Extinguishments
(ASC
470-50),
the Company determined that, of the total approximately
$60.5 million of original issue discounts, underwriting
commissions, legal, accounting and other expenses and tender and
redemption premiums, approximately $33.8 million should be
recorded as a loss on debt retirement and that approximately
$11.2 million and $15.5 million should be recorded as
deferred debt expense and debt discount, respectively, and
amortized over the lives of the respective debt instruments. The
approximately $11.2 million of deferred debt expense was
allocated approximately $6.3 million to the 8.5% Notes and
approximately $4.9 million to the Term Loan Facility. The
approximately $15.5 million of
F-114
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
debt discount was allocated approximately $7.2 million to
the 8.5% Notes and approximately $8.3 million to the
Term Loan Facility.
In February 2011, management approved an initial plan to reduce
costs and improve production efficiencies at the Companys
subsidiary, Best, and during the third quarter of 2011, our
Board of Directors approved additional plans that are expected
to further improve the overall operational efficiencies of Best.
During the third quarter and first nine months of 2011, the
Company recorded expenses within SG&A of the RVP segment of
approximately $0.1 million and $0.6 million,
respectively, related to severance and other costs. The Company
also recorded additional severance costs of approximately
$0.4 million and $1.7 million within cost of products
sold (COGS) during the third quarter and first nine
months of 2011, respectively. In the fourth quarter of 2011, the
Company transferred certain operations from Italy to Poland in
accordance with the plan and has reached a tentative agreement
with the union regarding severance benefits, subject to the
approval of 100% of the terminated employees. The Company
anticipates recording additional expenses of between
approximately $10 million and $13 million related to
this restructuring plan consisting of severance and other
expenses in the fourth quarter of 2011 and through 2012.
In the fourth quarter of 2009, two of the Companys
subsidiaries in the TECH segment began shipping security
products to a new customer under an agreement to manufacture and
sell these security products. Under this agreement, the Company
recognized net sales of approximately $35.7 million and
$62.5 million during the third quarter and first nine
months of 2011, respectively. The Company recognized net sales
of approximately $34.2 million and $45.8 million
relating to this customer during the third quarter and first
nine months of 2010, respectively. The agreement includes
payment terms which are extended beyond the subsidiaries
normal payment terms. The Company has determined that cash basis
accounting treatment is appropriate for revenue recognition
under this agreement. Accordingly, the Company has deferred
revenue recognition on approximately $36.5 million and
$9.2 million of net sales at October 1, 2011 and
December 31, 2010, respectively, and recorded the cost
basis of related inventory shipped of approximately
$23.0 million and $6.5 million at October 1, 2011
and December 31, 2010, respectively, in other current
assets in the accompanying unaudited condensed consolidated
balance sheet. In addition, included in inventory is
approximately $6.7 million and $6.1 million at
October 1, 2011 and December 31, 2010, respectively,
of inventory related to this customer. As only limited cash
collection history was available in periods prior to
December 31, 2009, the Company recorded loss contingency
reserves of approximately $2.0 million as a reduction to
other current assets during the first nine months of 2010.
The customer has made approximately $27.3 million of
payments through December 5, 2011 in the fourth quarter of
2011, including approximately $13.3 million of delinquent
payments that were scheduled to be received in the third quarter
of 2011. In the fourth quarter, the customer notified the
Company of a product recall issue related to certain products
that the Company provided to the customer who in turn sold such
products to third parties. The Company is in the process of
negotiating a resolution of this and other contractual terms in
the customer agreement. These negotiations have not been
completed and, accordingly, the Company has recorded a warranty
reserve of approximately $6.0 million, representing the
Companys best estimate of the amount that may be
ultimately due for the product recall as of October 1,
2011. The Company made an approximate $2.9 million progress
payment to the customer for the product recall in the fourth
quarter of 2011.
Although the customer has continued to make payments, the
customer failed to make scheduled payments totaling
approximately $6.0 million through December 5, 2011,
with an additional $3.1 million of payments scheduled for
the remainder of the fourth quarter 2011. The customer has
indicated that failure to make scheduled payments was due to a
delay in the receipt of payments owed to them from their major
customer. The Companys customer has been formally notified
of the delinquent payments, and it is the Companys belief
that there is no dispute by the customer over the amounts due
based on the Companys correspondence
F-115
NORTEK,
INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2010
and discussions with the customer. The customer has since made a
payment in the fourth quarter of 2011 of approximately
$7.1 million and has withheld approximately
$1.3 million of payments pending resolution of amounts owed
by the Company for the product recall issue noted above. The
Company has collected all remaining amounts recorded in the
consolidated balance sheet as of October 1, 2011.
There can be no assurances that the Company will be able to
complete its negotiations with this customer or that the
customer will bring its account current and resume making
payments according to terms if the negotiations are not
completed. As such, it is possible that the Company may be
required to record additional reserves and may have reduced
sales and cost of sales from what would have otherwise been
recorded in the fourth quarter of 2011 related to this customer
relationship. The Company will continue to closely monitor the
situation with this customer.
As the Company records revenue on the cash basis of accounting
for this customer, the failure of the Company to receive
scheduled payments resulted in a corresponding reduction to
revenue and cost of goods sold in the Companys third
quarter 2011 operating results. If the customer brings its
account current and makes all other scheduled payments in the
fourth quarter of 2011, then sales and cost of sales will be
higher than what would otherwise have been recorded in the
fourth quarter of 2011.
F-116
To the Board of Directors and Stockholders of Nortek, Inc.:
We have audited the accompanying consolidated balance sheets of
Nortek, Inc. (the Company) as of December 31, 2010 and
2009, and the related consolidated statements of operations,
stockholders investment (deficit), and cash flows for the
year ended December 31, 2010 (Successor), the period
December 20, 2009 to December 31, 2009 (Successor),
the period January 1, 2009 to December 19, 2009
(Predecessor) and the year ended December 31, 2008
(Predecessor). These financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Nortek, Inc. at December 31, 2010 and
2009, and the consolidated results of its operations and its
cash flows for the year ended December 31, 2010
(Successor), the period December 20, 2009 to
December 31, 2009 (Successor), the period January 1,
2009 to December 19, 2009 (Predecessor) and the year ended
December 31, 2008 (Predecessor), in conformity with US
generally accepted accounting principles.
As discussed in Notes 2 and 3 to the consolidated financial
statements, on December 4, 2009, the Bankruptcy Court
entered an order confirming the plan of reorganization, which
became effective on December 17, 2009. Accordingly, the
accompanying consolidated financial statements have been
prepared in conformity with Accounting Standards Codification
852-10,
Reorganizations, for the Successor as a new entity with assets,
liabilities and a capital structure having carrying amounts not
comparable with prior periods as described in Notes 2 and 3.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 30, 2011, except for Note 3, as to which the
date is September 14, 2011,
and except for Note 17, as to which the date is
December 7, 2011
F-117
ERGOTRON,
INC. AND SUBSIDIARIES
October 2,
2010
|
|
|
|
|
|
|
2010
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,259,038
|
|
Accounts receivable, net of reserves of $2,683,048
|
|
|
35,653,979
|
|
Inventories
|
|
|
17,405,185
|
|
Prepaid expenses and other assets
|
|
|
1,331,139
|
|
Income taxes receivable
|
|
|
538,385
|
|
Deferred income taxes
|
|
|
1,881,454
|
|
|
|
|
|
|
Total current assets
|
|
|
70,069,180
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
12,284,895
|
|
OTHER ASSETS
|
|
|
|
|
Goodwill
|
|
|
192,784
|
|
Patents, net
|
|
|
557,218
|
|
Deferred income taxes
|
|
|
453,319
|
|
Other assets
|
|
|
428
|
|
|
|
|
|
|
Total other assets
|
|
|
1,203,749
|
|
|
|
|
|
|
|
|
$
|
83,557,824
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-118
ERGOTRON,
INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEET
October 2,
2010
|
|
|
|
|
|
|
2010
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
Current maturities of long-term obligations
|
|
$
|
3,393,750
|
|
Current maturities of other long-term liabilities
|
|
|
18,000
|
|
Accounts payable
|
|
|
39,970,443
|
|
Accrued expenses
|
|
|
5,325,972
|
|
Accrued royalties related party
|
|
|
788,103
|
|
Income tax payable
|
|
|
1,916,438
|
|
|
|
|
|
|
Total current liabilities
|
|
|
51,412,706
|
|
|
|
|
|
|
LONG-TERM OBLIGATIONS, less current maturities
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM LIABILITIES, less current maturities
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
Class A common stock $.01 par value;
voting 15,000,000 shares authorized,
8,599,296 shares issued and outstanding at October 2,
2010
|
|
|
85,993
|
|
Class B common stock $.01 par value;
nonvoting 2,500,000 shares authorized,
912,300 shares issued and outstanding at October 2,
2010
|
|
|
9,123
|
|
Undesignated common stock, $.01 par value
2,500,000 shares authorized, none issued and outstanding
|
|
|
|
|
Additional paid-in capital
|
|
|
14,378,120
|
|
Shareholder note and interest receivable
|
|
|
(9,189,554
|
)
|
Retained earnings
|
|
|
27,026,433
|
|
Accumulated other comprehensive loss
|
|
|
(164,997
|
)
|
|
|
|
|
|
Total stockholders equity
|
|
|
32,145,118
|
|
|
|
|
|
|
|
|
$
|
83,557,824
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-119
ERGOTRON,
INC. AND SUBSIDIARIES
Nine months ended October 2, 2010 and
October 3, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Sales
|
|
$
|
147,801,434
|
|
|
$
|
109,207,943
|
|
Cost of goods sold
|
|
|
94,446,193
|
|
|
|
70,037,255
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
53,355,241
|
|
|
|
39,170,688
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
29,699,376
|
|
|
|
25,838,944
|
|
Royalty expense related party
|
|
|
1,913,651
|
|
|
|
745,710
|
|
Amortization of patents
|
|
|
334,249
|
|
|
|
334,249
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
31,947,276
|
|
|
|
26,918,903
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
21,407,965
|
|
|
|
12,251,785
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(202,570
|
)
|
|
|
(339,520
|
)
|
Interest income
|
|
|
78,053
|
|
|
|
22,704
|
|
Other, net
|
|
|
133,960
|
|
|
|
182,160
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
21,417,408
|
|
|
|
12,117,129
|
|
Income tax expense
|
|
|
7,277,843
|
|
|
|
3,927,435
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
14,139,565
|
|
|
$
|
8,189,694
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-120
ERGOTRON,
INC. AND SUBSIDIARIES
Nine Months ended October 2, 2010 and
October 3, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
14,524,122
|
|
|
$
|
19,109,391
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(3,152,304
|
)
|
|
|
(1,876,615
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on revolving line of credit
|
|
$
|
(8,865,145
|
)
|
|
$
|
(39,484,542
|
)
|
Borrowings on revolving line of credit
|
|
|
4,129,283
|
|
|
|
29,500,047
|
|
Repayment of long-term debt
|
|
|
(187,500
|
)
|
|
|
(187,500
|
)
|
Cash advances and interest on shareholder note receivables
|
|
|
(514,057
|
)
|
|
|
(736,480
|
)
|
Issuance of common stock, net of shareholder note receivables
|
|
|
83,262
|
|
|
|
69,864
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5,354,157
|
)
|
|
|
(10,838,611
|
)
|
Net increase in cash and cash equivalents
|
|
|
6,017,661
|
|
|
|
6,394,165
|
|
Cash and cash equivalents at beginning of year
|
|
|
7,241,377
|
|
|
|
1,853,811
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
13,259,038
|
|
|
$
|
8,247,976
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
62,791
|
|
|
$
|
214,902
|
|
Income taxes
|
|
$
|
5,966,073
|
|
|
$
|
1,615,669
|
|
Cash received during the year for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
24,732
|
|
|
$
|
109,787
|
|
The impact of changes in foreign currency exchange rates on cash
was not material and has been included in net cash provided by
operating activities.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-121
ERGOTRON,
INC. AND SUBSIDIARIES
Nine
months ended October 2, 2010
|
|
NOTE A
|
INTERIM
FINANCIAL STATEMENTS
|
Ergotron, Inc. (Ergotron or the Company)
designs and manufactures digital display and computer mounting
solutions including wall and desk mount arms, desk stands,
powered and non-powered mobile carts, pivots and vertical lifts.
The Company has manufacturing and warehouse facilities in
Minnesota, the Netherlands and the Peoples Republic of China,
with sales offices, channel distribution partners and customers
throughout the world. Ergotrons core products are designed
with patented Constant Force
(CFtm)
lift-and-pivot
motion technology, and require less user effort to achieve more
motion. Ergotron is a global company focused on channel
distribution, consumer, and original equipment manufacturer
(OEM) business.
The accompanying unaudited condensed consolidated financial
statements reflect the financial position, results of operations
and cash flows of the Company after elimination of intercompany
accounts and transactions, without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature
for a fair statement of the interim periods presented. Although
certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
omitted, the Company believes that the disclosures included are
adequate to make the information presented herein not
misleading. Operating results for the nine months ended
October 2, 2010 are not necessarily indicative of the
results that may be expected for other interim periods or for
the year ending December 31, 2010.
Total comprehensive income was $14,184,051 and $8,245,043 for
the nine months ended October 2, 2010 and October 3,
2009, respectively.
On December 17, 2010, Nortek, Inc. (Nortek)
acquired all of the outstanding stock of the Company. The
acquisition of the Company was significant to Nortek under
Article 3-05
of
Regulation S-X
of the Securities and Exchange Commissions
(SEC) rules and regulations
(Rule 3-05).
In addition, the U.S. operations of the Company guarantee
Norteks 8.5% Senior Notes due 2021
(8.5% Notes), which are being registered under
this registration statement. As such, the Company is considered
to be a recently acquired subsidiary guarantor under
Article 3-10(g)
of
Regulation S-X
of the SECs rules and regulations
(Rule 3-10(g)).
Accordingly, these unaudited condensed consolidated financial
statements of the Company as of October 2, 2010 and for the
nine months ended October 2, 2010 and October 3, 2009
are included in this registration statement to satisfy
Norteks requirements under
Rule 3-05
and
Rule 3-10(g).
It is suggested that these unaudited condensed consolidated
financial statements be read in conjunction with the audited
consolidated financial statements and the related notes included
elsewhere in this registration statement.
The Company has evaluated subsequent events through the
acquisition date of December 17, 2010.
Inventories consisted of the following at October 2, 2010:
|
|
|
|
|
|
|
2010
|
|
|
Raw materials and packaging
|
|
$
|
4,933,491
|
|
Work-in-process
|
|
|
146,549
|
|
Finished goods
|
|
|
12,325,145
|
|
|
|
|
|
|
Total inventories
|
|
$
|
17,405,185
|
|
|
|
|
|
|
|
|
NOTE C
|
RELATED
PARTY TRANSACTIONS
|
Royalty
and License Agreements
In April 1999, the Company entered into a royalty and license
agreement with the majority stockholder of the Company. The
Company obtained licenses for the use of patents owned by the
majority stockholder
F-122
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
until such time as the parties terminate their respective rights
under the agreement. In return for the use of the patents, the
Company pays royalties to the majority stockholder based on a
percentage (0.50% for the first quarter in 2009, 0.75% for the
second quarter of 2009 through the first quarter of 2010 and
1.5% beginning in the second quarter of 2010). Royalty fees
charged to operations under this royalty agreement were
$1,913,651 for the nine months ended October 2, 2010 and
$745,710 for the nine months ended October 3, 2009.
|
|
NOTE D
|
SEGMENT
INFORMATION
|
The Company operates within two reporting segments:
|
|
|
|
|
The Companys Branded segment offers digital display
mounting and mobility product solutions to the consumer and
commercial business markets.
|
|
|
|
The Companys OEM and original design manufacturer
(ODM) segment is a leading supplier of stands and
lifts to OEM customers who manufacture liquid crystal displays.
|
The Company evaluates segment performance based on operating
income. Intersegment net sales and intersegment eliminations are
not material for any of the periods presented. Refer to
Note E for a split of U.S. and foreign operations.
Unaudited sales, operating income and income before income tax
expense for the Companys reporting segments for the first
nine months of 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
Oct. 2, 2010
|
|
|
Oct. 3, 2009
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
Branded products
|
|
$
|
85,347,566
|
|
|
$
|
67,262,048
|
|
ODM products
|
|
|
62,453,868
|
|
|
|
41,945,895
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
147,801,434
|
|
|
$
|
109,207,943
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Branded products
|
|
$
|
15,603,193
|
|
|
$
|
8,162,635
|
|
ODM products
|
|
|
5,804,772
|
|
|
|
4,089,150
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
|
21,407,965
|
|
|
|
12,251,785
|
|
Interest expense
|
|
|
(202,570
|
)
|
|
|
(339,520
|
)
|
Interest income
|
|
|
78,053
|
|
|
|
22,704
|
|
Other, net
|
|
|
133,960
|
|
|
|
182,160
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
$
|
21,417,408
|
|
|
$
|
12,117,129
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE E
|
GUARANTOR
INFORMATION
|
As indicated in Note A, the U.S. operations of the
Company guarantee Norteks 8.5% Senior Notes due 2021.
The Company is wholly-owned by Nortek and the
U.S. operations jointly and severally guarantee
Norteks obligations under the 8.5% Notes. The foreign
operations of the Company do not guarantee the 8.5% Notes.
A consolidating balance sheet as of October 2, 2010 and the
related statements of operations and cash flows for the nine
months ended October 2, 2010 and October 3, 2009 are
reflected below in order to comply with the reporting
requirements for guarantor subsidiaries.
F-123
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unaudited
Condensed Consolidating Balance Sheet as of October 2,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
|
|
|
Ergotron
|
|
|
|
(Guarantor)
|
|
|
(Non-Guarantor)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,295,171
|
|
|
$
|
3,963,867
|
|
|
$
|
|
|
|
$
|
13,259,038
|
|
Accounts receivable, net of reserves
|
|
|
12,517,023
|
|
|
|
23,136,956
|
|
|
|
|
|
|
|
35,653,979
|
|
Intercompany receivables (payables)
|
|
|
(34,148,485
|
)
|
|
|
34,148,485
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
11,351,523
|
|
|
|
6,912,207
|
|
|
|
(858,545
|
)
|
|
|
17,405,185
|
|
Prepaid expenses and other assets
|
|
|
338,065
|
|
|
|
993,074
|
|
|
|
|
|
|
|
1,331,139
|
|
Income taxes receivable
|
|
|
522,609
|
|
|
|
15,776
|
|
|
|
|
|
|
|
538,385
|
|
Deferred income taxes
|
|
|
1,835,799
|
|
|
|
|
|
|
|
45,655
|
|
|
|
1,881,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,711,705
|
|
|
|
69,170,365
|
|
|
|
(812,890
|
)
|
|
|
70,069,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
10,842,165
|
|
|
|
1,442,730
|
|
|
|
|
|
|
|
12,284,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
9,400,390
|
|
|
|
|
|
|
|
(9,400,390
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
192,784
|
|
|
|
|
|
|
|
192,784
|
|
Patents, net
|
|
|
557,218
|
|
|
|
|
|
|
|
|
|
|
|
557,218
|
|
Deferred income taxes
|
|
|
419,665
|
|
|
|
27,911
|
|
|
|
5,743
|
|
|
|
453,319
|
|
Other assets
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
10,377,701
|
|
|
|
220,695
|
|
|
|
(9,394,647
|
)
|
|
|
1,203,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,931,571
|
|
|
$
|
70,833,790
|
|
|
$
|
(10,207,537
|
)
|
|
$
|
83,557,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term obligations
|
|
$
|
3,393,750
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,393,750
|
|
Current maturities of other long-term liabilities
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
Accounts payable
|
|
|
37,625
|
|
|
|
39,932,818
|
|
|
|
|
|
|
|
39,970,443
|
|
Accrued expenses
|
|
|
3,109,945
|
|
|
|
2,216,027
|
|
|
|
|
|
|
|
5,325,972
|
|
Accrued royalties related party
|
|
|
788,103
|
|
|
|
|
|
|
|
|
|
|
|
788,103
|
|
Income tax payable
|
|
|
1,523,355
|
|
|
|
393,083
|
|
|
|
|
|
|
|
1,916,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,870,778
|
|
|
|
42,541,928
|
|
|
|
|
|
|
|
51,412,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
14,060,793
|
|
|
|
28,291,862
|
|
|
|
(10,207,537
|
)
|
|
|
32,145,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,931,571
|
|
|
$
|
70,833,790
|
|
|
$
|
(10,207,537
|
)
|
|
$
|
83,557,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-124
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unaudited
Condensed Consolidating Statement of Operations
For the
nine months ended October 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
|
|
|
Ergotron
|
|
|
|
(Guarantor)
|
|
|
(Non-Guarantor)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Sales
|
|
$
|
95,784,306
|
|
|
$
|
98,870,363
|
|
|
$
|
(46,853,235
|
)
|
|
$
|
147,801,434
|
|
Cost of goods sold
|
|
|
55,034,762
|
|
|
|
86,054,666
|
|
|
|
(46,643,235
|
)
|
|
|
94,446,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,749,544
|
|
|
|
12,815,697
|
|
|
|
(210,000
|
)
|
|
|
53,355,241
|
|
Operating expenses
|
|
|
25,423,771
|
|
|
|
6,523,505
|
|
|
|
|
|
|
|
31,947,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15,325,773
|
|
|
|
6,292,192
|
|
|
|
(210,000
|
)
|
|
|
21,407,965
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(192,206
|
)
|
|
|
(10,364
|
)
|
|
|
|
|
|
|
(202,570
|
)
|
Interest income
|
|
|
67,405
|
|
|
|
10,648
|
|
|
|
|
|
|
|
78,053
|
|
Other, net
|
|
|
163,950
|
|
|
|
(12,811
|
)
|
|
|
(17,179
|
)
|
|
|
133,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before intercompany charges
|
|
|
15,364,922
|
|
|
|
6,279,665
|
|
|
|
(227,179
|
)
|
|
|
21,417,408
|
|
Intercompany charges
|
|
|
(70,788
|
)
|
|
|
70,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
15,294,134
|
|
|
|
6,350,453
|
|
|
|
(227,179
|
)
|
|
|
21,417,408
|
|
Income tax expense
|
|
|
6,429,861
|
|
|
|
847,982
|
|
|
|
|
|
|
|
7,277,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
8,864,273
|
|
|
$
|
5,502,471
|
|
|
$
|
(227,179
|
)
|
|
$
|
14,139,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidating Statement of Operations
For the
nine months ended October 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
|
|
|
Ergotron
|
|
|
|
(Guarantor)
|
|
|
(Non-Guarantor)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Sales
|
|
$
|
70,317,026
|
|
|
$
|
69,979,637
|
|
|
|
(31,088,720
|
)
|
|
$
|
109,207,943
|
|
Cost of goods sold
|
|
|
42,062,093
|
|
|
|
59,063,882
|
|
|
|
(31,088,720
|
)
|
|
|
70,037,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28,254,933
|
|
|
|
10,915,755
|
|
|
|
|
|
|
|
39,170,688
|
|
Operating expenses
|
|
|
20,835,092
|
|
|
|
6,083,811
|
|
|
|
|
|
|
|
26,918,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
7,419,841
|
|
|
|
4,831,944
|
|
|
|
|
|
|
|
12,251,785
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(326,529
|
)
|
|
|
(12,991
|
)
|
|
|
|
|
|
|
(339,520
|
)
|
Interest income
|
|
|
15,988
|
|
|
|
6,716
|
|
|
|
|
|
|
|
22,704
|
|
Other, net
|
|
|
168,949
|
|
|
|
13,211
|
|
|
|
|
|
|
|
182,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before intercompany charges
|
|
|
7,278,249
|
|
|
|
4,838,880
|
|
|
|
|
|
|
|
12,117,129
|
|
Intercompany charges
|
|
|
(283,790
|
)
|
|
|
283,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
6,994,459
|
|
|
|
5,122,670
|
|
|
|
|
|
|
|
12,117,129
|
|
Income tax expense
|
|
|
3,217,189
|
|
|
|
710,246
|
|
|
|
|
|
|
|
3,927,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
3,777,270
|
|
|
$
|
4,412,424
|
|
|
$
|
|
|
|
$
|
8,189,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-125
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unaudited
Condensed Consolidated Statement of Cash Flows
Nine
Months ended October 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
|
|
|
Ergotron
|
|
|
|
(Guarantor)
|
|
|
(Non-Guarantor)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
13,104,629
|
|
|
$
|
1,419,493
|
|
|
|
|
|
|
$
|
14,524,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(2,706,617
|
)
|
|
|
(445,687
|
)
|
|
|
|
|
|
|
(3,152,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on revolving line of credit
|
|
|
(8,865,145
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,865,145
|
)
|
Borrowings on revolving line of credit
|
|
|
4,129,283
|
|
|
|
|
|
|
|
|
|
|
|
4,129,283
|
|
Repayment of long-term debt
|
|
|
(187,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(187,500
|
)
|
Cash advances and interest on shareholder note receivables
|
|
|
(514,057
|
)
|
|
|
|
|
|
|
|
|
|
|
(514,057
|
)
|
Issuance of common stock, net of shareholder note receivables
|
|
|
83,262
|
|
|
|
|
|
|
|
|
|
|
|
83,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5,354,157
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,354,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
5,043,855
|
|
|
|
973,806
|
|
|
|
|
|
|
|
6,017,661
|
|
Cash and cash equivalents at beginning of year
|
|
|
4,251,316
|
|
|
|
2,990,061
|
|
|
|
|
|
|
|
7,241,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
9,295,171
|
|
|
$
|
3,963,867
|
|
|
$
|
|
|
|
$
|
13,259,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-126
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unaudited
Condensed Consolidated Statement of Cash Flows
Nine
Months ended October 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
|
|
|
Ergotron
|
|
|
|
(Guarantor)
|
|
|
(Non-Guarantor)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
16,161,693
|
|
|
$
|
2,947,698
|
|
|
|
|
|
|
$
|
19,109,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(1,766,430
|
)
|
|
|
(110,185
|
)
|
|
|
|
|
|
|
(1,876,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on revolving line of credit
|
|
|
(39,484,542
|
)
|
|
|
|
|
|
|
|
|
|
|
(39,484,542
|
)
|
Borrowings on revolving line of credit
|
|
|
29,500,047
|
|
|
|
|
|
|
|
|
|
|
|
29,500,047
|
|
Repayment of long-term debt
|
|
|
(187,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(187,500
|
)
|
Cash advances and interest on shareholder note receivables
|
|
|
(736,480
|
)
|
|
|
|
|
|
|
|
|
|
|
(736,480
|
)
|
Issuance of common stock, net of shareholder note receivables
|
|
|
69,864
|
|
|
|
|
|
|
|
|
|
|
|
69,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(10,838,611
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,838,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
3,556,652
|
|
|
|
2,837,513
|
|
|
|
|
|
|
|
6,394,165
|
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
|
1,853,811
|
|
|
|
|
|
|
|
1,853,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,556,652
|
|
|
$
|
4,691,324
|
|
|
$
|
|
|
|
$
|
8,247,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-127
ERGOTRON,
INC. AND SUBSIDIARIES
December 31, 2009
|
|
|
|
|
|
|
2009
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,241,377
|
|
Accounts receivable, net
|
|
|
27,143,433
|
|
Inventories
|
|
|
11,980,003
|
|
Prepaid expenses and other assets
|
|
|
784,743
|
|
Income taxes receivable
|
|
|
643,359
|
|
Deferred income taxes
|
|
|
1,926,754
|
|
|
|
|
|
|
Total current assets
|
|
|
49,719,669
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
12,413,662
|
|
OTHER ASSETS
|
|
|
|
|
Goodwill
|
|
|
192,784
|
|
Patents, net
|
|
|
891,467
|
|
Deferred income taxes
|
|
|
459,406
|
|
Other assets
|
|
|
4,343
|
|
|
|
|
|
|
Total other assets
|
|
|
1,548,000
|
|
|
|
|
|
|
|
|
$
|
63,681,331
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial
statement.
F-128
ERGOTRON,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 2009
|
|
|
|
|
|
|
2009
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
Current maturities of long-term obligations
|
|
$
|
8,317,112
|
|
Current maturities of other long-term liabilities
|
|
|
207,986
|
|
Accounts payable
|
|
|
30,110,871
|
|
Accrued expenses
|
|
|
4,743,544
|
|
Accrued royalties related party
|
|
|
313,156
|
|
Income tax payable
|
|
|
1,692,492
|
|
|
|
|
|
|
Total current liabilities
|
|
|
45,385,161
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
Class A common stock $.01 par value;
voting 15,000,000 shares authorized,
8,581,396 shares issued and outstanding
|
|
|
85,814
|
|
Class B common stock $.01 par value;
nonvoting 2,500,000 shares authorized,
912,300 shares issued and outstanding
|
|
|
9,123
|
|
Undesignated common stock, $.01 par value
2,500,000 shares authorized, none issued and outstanding
|
|
|
|
|
Additional paid-in capital
|
|
|
14,199,345
|
|
Shareholder note and interest receivable
|
|
|
(8,675,497
|
)
|
Retained earnings
|
|
|
12,886,868
|
|
Accumulated other comprehensive loss
|
|
|
(209,483
|
)
|
|
|
|
|
|
Total stockholders equity
|
|
|
18,296,170
|
|
|
|
|
|
|
|
|
$
|
63,681,331
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial
statement.
F-129
ERGOTRON,
INC. AND SUBSIDIARIES
Year
ended December 31, 2009
|
|
|
|
|
|
|
2009
|
|
|
Sales
|
|
$
|
151,352,020
|
|
Cost of goods sold
|
|
|
97,045,840
|
|
|
|
|
|
|
Gross profit
|
|
|
54,306,180
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Selling, general and administrative, net
|
|
|
36,265,001
|
|
Royalty expense related party
|
|
|
1,058,863
|
|
Amortization of patents
|
|
|
445,665
|
|
|
|
|
|
|
Operating expenses
|
|
|
37,769,529
|
|
|
|
|
|
|
Operating income
|
|
|
16,536,651
|
|
Other income (expense):
|
|
|
|
|
Interest expense
|
|
|
(415,559
|
)
|
Interest income
|
|
|
46,227
|
|
Other, net
|
|
|
201,384
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
16,368,703
|
|
Income tax expense
|
|
|
5,104,646
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
11,264,057
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial
statement.
F-130
ERGOTRON,
INC. AND SUBSIDIARIES
Year
ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
Shareholder
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Note and Interest
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at December 31, 2008
|
|
|
6,758,898
|
|
|
$
|
67,589
|
|
|
|
912,300
|
|
|
$
|
9,123
|
|
|
|
5,291,578
|
|
|
$
|
|
|
|
$
|
7,369,659
|
|
|
$
|
(259,596
|
)
|
|
$
|
12,478,353
|
|
Adjustment for the adoption of uncertain tax positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
(1,000,000
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,264,057
|
|
|
|
|
|
|
|
11,264,057
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,887
|
)
|
|
|
(23,887
|
)
|
Net gain interest rate swap agreements, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,000
|
|
|
|
74,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,314,170
|
|
Cash advances and interest on shareholder notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(805,501
|
)
|
|
|
|
|
|
|
|
|
|
|
(805,501
|
)
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,746,848
|
)
|
|
|
|
|
|
|
(4,746,848
|
)
|
Issuance of Class A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to stock option agreements, net of shareholder notes
receivable
|
|
|
1,831,424
|
|
|
|
18,314
|
|
|
|
|
|
|
|
|
|
|
|
8,230,902
|
|
|
|
(7,869,996
|
)
|
|
|
|
|
|
|
|
|
|
|
379,220
|
|
Redemption and retirement of common stock
|
|
|
(8,926
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
(57,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,751
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,588
|
|
Tax benefits related to stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
545,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
545,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
8,581,396
|
|
|
$
|
85,814
|
|
|
|
912,300
|
|
|
$
|
9,123
|
|
|
$
|
14,199,345
|
|
|
$
|
(8,675,497
|
)
|
|
$
|
12,886,868
|
|
|
$
|
(209,483
|
)
|
|
$
|
18,296,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial
statement.
F-131
ERGOTRON,
INC. AND SUBSIDIARIES
Year
ended December 31, 2009
|
|
|
|
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
|
$
|
11,264,057
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
Deferred income tax
|
|
|
1,849,433
|
|
Depreciation and amortization
|
|
|
4,794,696
|
|
Stock-based compensation
|
|
|
188,588
|
|
Excess tax benefits from stock-based compensation
|
|
|
(545,939
|
)
|
Other
|
|
|
63,950
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable, net
|
|
|
(5,559,960
|
)
|
Inventories
|
|
|
4,234,671
|
|
Prepaid expenses and other assets
|
|
|
293,185
|
|
Accounts payable
|
|
|
2,138,753
|
|
Accrued expenses and accrued royalties related party
|
|
|
1,935,168
|
|
Income taxes payable
|
|
|
(255,007
|
)
|
Other long-term liabilities
|
|
|
(239,527
|
)
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
20,162,068
|
|
Cash flows from investing activities:
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(3,809,229
|
)
|
Proceeds from disposals of property, plant and equipment
|
|
|
10,050
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,799,179
|
)
|
|
|
|
|
|
F-132
ERGOTRON,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS (Continued)
Year
ended December 31, 2009
|
|
|
|
|
|
|
2009
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Payments on revolving line of credit
|
|
$
|
(39,484,542
|
)
|
Borrowings on revolving line of credit
|
|
|
34,235,909
|
|
Checks written in excess of bank balance
|
|
|
(820,496
|
)
|
Repayment of long-term debt
|
|
|
(225,000
|
)
|
Dividends paid to shareholders
|
|
|
(4,746,848
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
545,939
|
|
Redemption and retirement of common stock
|
|
|
(57,751
|
)
|
Cash advances and interest on shareholder note receivables
|
|
|
(805,501
|
)
|
Issuance of common stock, net of shareholder note receivables
|
|
|
379,220
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(10,979,070
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
3,747
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
5,387,566
|
|
Cash and cash equivalents at beginning of year
|
|
|
1,853,811
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
7,241,377
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
Interest
|
|
$
|
470,176
|
|
Income taxes
|
|
$
|
4,154,481
|
|
Cash received during the year for:
|
|
|
|
|
Interest
|
|
$
|
8,870
|
|
Income taxes
|
|
$
|
708,339
|
|
The accompanying notes are an integral part of this financial
statement.
F-133
ERGOTRON,
INC. AND SUBSIDIARIES
Year
ended December 31, 2009
|
|
NOTE A
|
NATURE OF
BUSINESS
|
Ergotron, Inc. (Ergotron or the Company)
designs and manufactures digital display and computer mounting
solutions including wall and desk mount arms, desk stands,
powered and non-powered mobile carts, pivots and vertical lifts.
The Company has manufacturing and warehouse facilities in
Minnesota, the Netherlands and the Peoples Republic of China,
with sales offices, channel distribution partners and customers
throughout the world. Ergotrons core products are designed
with patented Constant Force
(CFtm)
lift-and-pivot
motion technology, and require less user effort to achieve more
motion. Ergotron is a global company focused on channel
distribution, consumer, and original equipment manufacturer
(OEM) business.
|
|
NOTE B
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
Ergotron, Inc. and its majority owned subsidiaries. Significant
intercompany balances and transactions have been eliminated in
consolidation. Transactions in foreign currencies are translated
into United States dollars at the exchange rates at the dates of
transactions. Assets and liabilities denominated in foreign
currencies are translated into United States dollars at the
exchange rate at the balance sheet date. Revenue and expenses
are translated at the average foreign exchange rate in effect
for the period.
Credit
Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts
receivable.
Cash
and Cash Equivalents
The Company considers all highly liquid temporary investments
with an original maturity date of three months or less when
purchased to be a cash equivalent. Cash and cash equivalents are
stated at cost, which approximates market. The Company maintains
cash balances in bank deposit accounts that may exceed the
limits of, or not be covered by, federal depository insurance.
The Company has not experienced any losses in such accounts.
Management does not believe the Company is exposed to any
significant credit risk related to cash balances. Checks written
in excess of bank balances are included in accounts payable. At
December 31, 2009, $2,990,061 was held in foreign banks in
China, Japan, Canada, France, Germany, the United Kingdom and
The Netherlands.
Comprehensive
Income (Loss)
Comprehensive income (loss) represents net income adjusted for
foreign currency translation adjustments and unrealized gain or
loss on derivative instruments which is shown in the
consolidated statements of changes in stockholders equity.
Accounts
Receivable
The Companys accounts receivable are due from customers in
a variety of industries. The Company grants credit to customers
in the normal course of business, but generally does not require
collateral to support the amounts due. Accounts receivable are
stated at amounts due from customers net of allowances for
doubtful accounts, returns and sales price adjustments. Accounts
outstanding longer than the contractual payment terms are
considered past due.
F-134
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
The Company determines its allowance for doubtful accounts by
considering a number of factors, including the length of time
accounts receivable are past due, the Companys previous
loss history, the customers current ability to pay its
obligation to the Company and the condition of the general
economy and the industry as a whole. The Company writes off
accounts receivable when they become uncollectible. The
Companys uncollectible accounts experience has been within
management expectations.
Management estimates the allowances for returns and sales price
adjustments at the time of sale based on contractual
arrangements and historical experience and makes subsequent
adjustments to its estimates as actual returns and price
adjustments become known or the amounts are determinable.
Inventories
Inventories are stated at the lower of cost or market with cost
determined on the
first-in,
first-out cost method (FIFO) or the average cost method which
approximates FIFO.
Impairment
of Long-Lived Assets
The Company policy is that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. There were no
events in 2009 indicating an impairment analysis was required to
be performed and, accordingly, there were no impairment charges
during the year ended December 31, 2009.
Property,
Plant and Equipment
The components of property, plant and equipment are carried at
cost. For financial reporting purposes, the Company provides for
depreciation using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives for
leasehold improvements are the shorter of the estimated useful
life or the related lease term. For tax purposes, the Company
employs the most advantageous asset lives and methods of
depreciation allowable in the tax jurisdictions that apply to
individual assets. In general, depreciation amounts for tax
purposes differ from the amounts for financial reporting
purposes. When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized. The cost
of maintenance and repairs is expensed as incurred while
significant renewals and betterments are capitalized.
Goodwill
The Company tests recoverability of goodwill annually, or more
frequently if impairment indicators arise. The Company has
elected to perform its annual tests of goodwill impairment as of
December 31 of each year. The Company uses a two-phase process
for impairment testing of goodwill. The first phase screens for
impairment, while the second phase (if necessary) measures the
impairment. Based on the first phase test, the Companys
fair value exceeds the carrying value, resulting in no goodwill
impairment as of December 31, 2009.
Patents
Patents are reported net of accumulated amortization of
$2,627,918 as of December 31, 2009. Patents are amortized
using the straight-line method over their estimated useful lives
of seven years. Patent amortization
F-135
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
expense charged to operations was $445,665 in 2009. The
weighted-average remaining life of patents is approximately two
years. Patent amortization expense for each of the years ending
December 31, 2010 through 2011 is expected to be $445,665.
Income
Taxes
Income tax amounts in the consolidated financial statements are
provided to reflect the tax effects of transactions reported in
the consolidated financial statements and consist of both
currently payable and deferred income taxes. Deferred income
taxes arise from temporary differences between the financial and
tax bases of certain assets and liabilities. Temporary
differences that result in deferred income taxes include
allowance for doubtful accounts, inventory valuation, deferred
compensation, stock-based compensation, reserve for warranty
costs, accrued legal expenses and depreciation.
Effective January 1, 2009, the Company recognizes the
financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely
than not sustain the position following an audit. For tax
positions meeting the more likely than not threshold, the amount
recognized in the financial statements is the largest benefit
that has a greater than 50 percent likelihood of being
realized upon ultimate settlement with the relevant tax
authority. The Company recognized $1,000,000 of tax benefits for
uncertain tax positions on January 1, 2009, as an
adjustment to retained earnings. The December 31, 2009
liability for unrecognized tax benefits, not including accrued
interest and penalties remained unchanged.
The total amount of interest and penalties recognized during
2009 in the Companys consolidated statements of operations
was $0. The total amount of interest and penalties recognized at
December 31, 2009 in the Companys consolidated
balance sheets was $257,000. The Company recognizes interest and
penalties related to unrecognized tax benefits in the provision
for income taxes.
The amount of unrecognized tax benefits is not expected to
significantly increase or decrease during the twelve months
beginning January 1, 2010.
The Company files income tax returns in the United States
federal jurisdiction and in various states and foreign
jurisdictions. In most cases, the Company is no longer subject
to United States federal, state, and local, or
non-United
States income tax examination by tax authorities for years
before 2006.
Revenue
Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, title and risk of loss passes to the
customer, generally upon shipment of goods, the price is fixed
and collectibility is reasonably assured.
Shipping and handling charges billed to customers are included
in sales. Shipping and handling costs incurred by the Company
for the delivery of goods to customers are included in cost of
goods sold. Sales and value added taxes are presented on a net
basis and excluded from sales.
Warranty
The Company estimates warranty cost at the time of sale based on
historical rates and trends and makes subsequent adjustments to
its estimates as actual claims become known or the amounts are
determinable. The Company had accrued warranties, included in
accrued expenses, of $1,400,000 at December 31, 2009.
Product
Development and Advertising
Product development and advertising costs are expensed as
incurred. Product development costs were $4,847,445 in 2009.
Advertising costs were $1,769,769 in 2009.
F-136
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
Stock-Based
Compensation
The Company recognizes compensation expense for all share-based
payment awards made to employees and non-employees in the
consolidated statement of operations based on the fair value at
the date of grant. Stock-based compensation expense is
recognized on a straight-line basis over the vesting period for
all awards, net of an estimated forfeiture rate, resulting in
the recognition of compensation expense for only those shares
expected to vest. Compensation expense is recognized for all
awards over the vesting period to the extent the employees or
non-employees meet the requisite service requirements, whether
or not the award is ultimately exercised. Conversely when an
employee or non-employee does not meet the requisite service
requirements and forfeits the award prior to vesting, any
compensation expense previously recognized for the award is
reversed.
Derivative
Instruments and Hedging Activities
The Company accounts for all derivatives, including those
embedded in other contracts, to be recognized as either assets
or liabilities and that those financial instruments be measured
at fair value. The accounting for changes in the fair value of
derivatives depends on their intended use and designation. The
Company has interest rate swap agreements in conjunction with
its credit agreement (Note F). The aggregate fair value
liability of $144,000 is included in current maturities of other
long term liabilities as of December 31, 2009.
Fair
Value Measurements
The Company defines fair value as the price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. There are three levels of
inputs that are used by the Company to measure fair value:
|
|
|
|
|
Level 1 quoted prices in active markets
for identical assets and liabilities
|
|
|
|
Level 2 observable inputs other than
quoted prices in active markets for identical assets and
liabilities
|
|
|
|
Level 3 unobservable inputs in which
there is little or no market data available, which require the
reporting entity to develop its own assumptions
|
The fair value of the Companys interest rate swap
agreements were determined based on Level 2 inputs.
Estimates
Preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
regarding the reported amounts of assets and liabilities at the
date of the consolidated financial statements, the disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of
sales and expenses during the reporting period. Actual results
could differ from those estimates.
Subsequent
Events
The Company adopted requirements within ASC 855,
Subsequent Events, which introduces new terminology,
defines a date through which management must evaluate subsequent
events, and lists the circumstances under which an entity must
recognize and disclose events or transactions occurring after
the balance sheet date.
F-137
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
The Company evaluated its 2009 consolidated financial statements
for subsequent events through December 7, 2011 the date the
financial statements were available to be issued. The Company is
not aware of any subsequent events which would require
recognition or disclosure in the consolidated financial
statements, except for the acquisition of the Company by Nortek
on December 17, 2010.
Other
New Accounting Pronouncements
Other new accounting pronouncements that became effective during
the period from January 1, 2010 to the acquisition date of
December 17, 2010 were either not applicable to the Company
or were not expected to have a material impact on the
Companys financial condition or results of operations.
Subsequent to December 17, 2010, the Company became a
wholly owned subsidiary of Nortek and is included in
Norteks consolidated financial statements.
|
|
NOTE C
|
ACCOUNTS
RECEIVABLE
|
Accounts receivable consisted of the following at December 31:
|
|
|
|
|
|
|
2009
|
|
|
Trade accounts receivable
|
|
$
|
29,480,154
|
|
Less allowance for doubtful accounts
|
|
|
(33,311
|
)
|
Less allowance for returns and sales price adjustments
|
|
|
(2,303,410
|
)
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
27,143,433
|
|
|
|
|
|
|
The Company had three customers each representing ten percent or
more of sales for the year ended December 31, 2009 and, in
the aggregate, totaling approximately 49% of sales. These
customers represent approximately 55% of accounts receivable at
December 31, 2009.
Inventories consisted of the following at December 31:
|
|
|
|
|
|
|
2009
|
|
|
Raw materials and packaging
|
|
$
|
2,871,462
|
|
Work-in-process
|
|
|
25,450
|
|
Finished goods
|
|
|
9,083,091
|
|
|
|
|
|
|
Total inventories
|
|
$
|
11,980,003
|
|
|
|
|
|
|
F-138
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
|
|
NOTE E
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property, plant and equipment consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
Estimated Life
|
|
|
|
|
|
|
in Years
|
|
|
2009
|
|
|
Land
|
|
|
|
|
|
$
|
655,000
|
|
Building and building improvements
|
|
|
10-40
|
|
|
|
6,161,617
|
|
Furniture, office equipment, and leasehold improvements
|
|
|
3-10
|
|
|
|
2,717,270
|
|
Tooling, machinery and equipment
|
|
|
2-10
|
|
|
|
14,044,492
|
|
Computer equipment
|
|
|
3-10
|
|
|
|
6,762,287
|
|
Vehicles
|
|
|
4-5
|
|
|
|
74,159
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment at cost
|
|
|
|
|
|
|
30,414,825
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
18,001,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,413,662
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense charged to operations related to property,
plant and equipment was $4,343,811 in 2009.
|
|
NOTE F
|
FINANCING
ARRANGEMENTS
|
The Companys financing arrangements consisted of the
following at December 31:
|
|
|
|
|
|
|
2009
|
|
|
Long-term obligations:
|
|
|
|
|
Mortgage loan, payable in monthly installments of $18,750
through November 2010, plus interest
|
|
$
|
3,581,250
|
|
Revolving line of credit, variable interest, effective rate of
4.5% at December 31, 2009, due July 31, 2010
|
|
|
4,735,862
|
|
|
|
|
|
|
|
|
|
8,317,112
|
|
Less current maturities of long-term obligations
|
|
|
8,317,112
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
The Company has a credit agreement with Wells Fargo Bank
National Association consisting of a mortgage loan and a
revolving line of credit. The credit agreement incorporates
security agreements pledging all rights to payment, inventory,
and equipment as security for the loans. The mortgage loan is
secured by real property located at the Companys world
headquarters in Eagan, Minnesota.
Mortgage
Loan
The mortgage loan bears interest at a fluctuating rate equal to
daily LIBOR plus 1.75%. At December 31, 2009 the effective
interest rate was 1.919%. In conjunction with the mortgage loan,
the Company entered into two interest rate swap agreements in
the total notional amount of $3,581,250 at December 31,
2009, at a weighted-average fixed rate of 6.66%. These swap
agreements have been designated as an interest rate hedge
against the floating LIBOR rate associated with the mortgage
loan, effectively fixing the mortgage loan at the
weighted-average fixed swap rate. The total notional amount of
the swap agreements will decrease by $18,750 per month through
October 2010, with a final reduction of the balance in November
2010.
F-139
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
Revolving
Line of Credit
The revolving line of credit provides for available borrowings
of $18,000,000 through January 1, 2010. After
January 1, 2010, the available borrowings are reduced to
$13,500,000 through July 31, 2010. Interest under the new
line of credit is at a fluctuating rate of 2.25% above
30 day LIBOR subject to a minimum interest rate of 4.5%.
Borrowings under the line of credit are not limited to any
borrowing base calculation. The Company expects to renew its
revolving line of credit in 2010 under similar terms and
conditions.
All amounts due on the revolving line of credit and long-term
obligations may be paid in part or in full at any time prior to
maturity without penalty. The interest rate swap agreements if
sold or terminated prior to maturity will result in gain or loss
to the Company. The credit agreement requires the Company to
meet certain financial covenants as defined in the agreement. At
December 31, 2009, the Company was in compliance with all
covenants and terms of the agreement.
|
|
NOTE G
|
LEASE
COMMITMENTS
|
Company
as Lessee
The Company leases office space, various vehicles and equipment
used to conduct business operations, which are accounted for as
operating leases. Aggregate monthly rental payments for these
leases total approximately $101,000 and expire between February
2010 and February 2014. Rent expense for operating leases was
$1,128,284 in 2009.
Approximate future minimum lease payments for operating leases
as of December 31, 2009, are as follows:
|
|
|
|
|
Year Ending December 31
|
|
|
|
2010
|
|
$
|
822,000
|
|
2011
|
|
|
352,000
|
|
2012
|
|
|
248,000
|
|
2013
|
|
|
201,000
|
|
2014
|
|
|
34,000
|
|
Company
as Lessor
The Company rents office and warehouse space under an operating
lease agreement that requires monthly base rental payments to
the Company plus the tenants pro rata share of real estate
taxes and operating costs. Aggregate monthly base rental
payments total approximately $12,000 and expire in March 2011.
Rental income including the pro rata share of real estate taxes
and operating costs was $189,434 in 2009.
Approximate future minimum rental receipts under the lease at
December 31, 2009 are as follows:
|
|
|
|
|
Year Ending December 31
|
|
|
|
2010
|
|
$
|
148,000
|
|
2011
|
|
|
37,000
|
|
F-140
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
Income tax expense consisted of the following for the year ended
December 31:
|
|
|
|
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
Federal
|
|
$
|
2,247,880
|
|
State and foreign
|
|
|
1,502,454
|
|
|
|
|
|
|
Current portion of income tax expense
|
|
|
3,750,334
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
Federal
|
|
|
1,233,020
|
|
State and foreign
|
|
|
121,292
|
|
|
|
|
|
|
Deferred portion of income tax expense
|
|
|
1,354,312
|
|
|
|
|
|
|
|
|
$
|
5,104,646
|
|
|
|
|
|
|
A reconciliation of income tax expense to the amount computed
using the U.S. federal statutory tax rate of 34% is as
follows for the year ended December 31:
|
|
|
|
|
|
|
2009
|
|
|
Income taxes computed at the statutory rate of 34%
|
|
$
|
5,629,047
|
|
State and foreign income taxes net of federal benefit
|
|
|
(555,409
|
)
|
Excluded foreign income
|
|
|
577
|
|
Patent amortization
|
|
|
155,983
|
|
Research and development credits
|
|
|
(175,000
|
)
|
Stock-based compensation
|
|
|
65,391
|
|
Other
|
|
|
(15,943
|
)
|
|
|
|
|
|
Total income tax expense
|
|
$
|
5,104,646
|
|
|
|
|
|
|
F-141
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
Amounts and types of temporary differences creating current and
non-current deferred income tax assets and liabilities are as
follows at December 31:
|
|
|
|
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
Royalties and compensation
|
|
$
|
139,920
|
|
Accounts receivable allowances
|
|
|
866,922
|
|
Accrued warranty and accounts payable
|
|
|
539,104
|
|
Inventory valuation
|
|
|
480,033
|
|
Other
|
|
|
(99,225
|
)
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
1,926,754
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
Depreciation
|
|
$
|
379,145
|
|
Net operating losses of foreign subsidiaries
|
|
|
33,998
|
|
Amortization
|
|
|
46,263
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
459,406
|
|
|
|
|
|
|
|
|
NOTE I
|
EMPLOYEE
RETIREMENT SAVINGS 401(K) PLAN
|
The Company has established a 401(k) plan for all eligible
employees. The plan allows employees to defer up to 100% of
compensation subject to the maximum statutory dollar limit. For
employees who meet certain eligibility requirements, the Company
may contribute to the plan a matching percentage of employee
contributions. The Company matching percentage was 50% in 2009.
The amount of the Companys matching contribution is
limited to a maximum of three percent of each employees
eligible compensation, although additional contributions may be
made by resolution of the plans trustees. Company
contributions vest to employees ratably over five years. During
a portion of 2009 the Company temporarily suspended the matching
contribution. Expense for Company matching contributions and
administrative costs related to the employee retirement savings
401(k) plan was $259,187 in 2009.
|
|
NOTE J
|
STOCK-BASED
COMPENSATION
|
The Companys 1997 Incentive Stock Option Plan (the
1997 Plan) provided for the granting of options to
both employees and non-employees for the purchase of up to
3,307,642 shares of the Companys Class A common
stock. The 1997 Plan expired in December 2007 and no further
options may be granted thereunder. During 2008, the Board of
Directors approved the 2008 Incentive Stock Option Plan (the
2008 Plan) and authorized 500,000 shares for
grant under the plan. There were 27,720 shares available
for future grant under the 2008 Plan as of December 31,
2009. The 2008 Plan expires in 2018 at which time no further
options may be granted under the Plan. Under both plans, the
terms of options granted are determined by the Board of
Directors, but in no event shall the exercise period exceed ten
years from the date of grant. The exercise price is established
by the terms of the individual plan agreements and is equal to
the fair market value of the stock at the date of grant, as
determined by the Board of Directors. Options issued become
exercisable over vesting periods ranging from zero to five years
as provided in the individual plan agreements. Upon a change in
control of the Company, as defined in the Plans, all options
outstanding on the date of the change in control become fully
exercisable.
F-142
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
Total stock-based compensation for options granted to employees
included in operating expense was $188,588 in 2009. As of
December 31, 2009, approximately $87,400 of total
unrecognized compensation costs related to non-vested awards is
expected to be recognized over a weighted-average period of
approximately one year.
The fair value of each stock option award was estimated on the
date of grant using the Black-Scholes option pricing model in
2009. The following assumptions were used to estimate the fair
value of options:
|
|
|
|
|
Assumptions:
|
|
2009
|
|
Expected dividend yield
|
|
|
0%
|
|
Expected life
|
|
|
1 year
|
|
Expected volatility
|
|
|
30%
|
|
Risk-free interest rate
|
|
|
0.33% to 0.66%
|
|
The weighted-average fair value of options granted during the
year ended December 31, 2009 was $0.25.
A summary of activity related to common stock options is as
follows for the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Common Stock
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options outstanding at December 31, 2008
|
|
|
2,966,180
|
|
|
$
|
4.49
|
|
Granted
|
|
|
289,800
|
|
|
|
6.72
|
|
Canceled
|
|
|
(107,255
|
)
|
|
|
4.55
|
|
Exercised
|
|
|
(1,831,424
|
)
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2009
|
|
|
1,317,301
|
|
|
$
|
4.95
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2009
|
|
|
976,626
|
|
|
$
|
4.76
|
|
|
|
|
|
|
|
|
|
|
Information regarding weighted-average exercise prices, number
of options outstanding, and number of options exercisable as of
December 31, 2009, under the stock option plan is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Range of
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
Weighted-average
|
|
exercise prices
|
|
Number
|
|
|
exercise price
|
|
|
Number
|
|
|
exercise price
|
|
|
$0.46 $2.52
|
|
|
1,000
|
|
|
$
|
2.52
|
|
|
|
1,000
|
|
|
$
|
2.52
|
|
$3.00 $3.70
|
|
|
120,750
|
|
|
$
|
3.11
|
|
|
|
120,750
|
|
|
$
|
3.11
|
|
$4.23 $5.50
|
|
|
917,241
|
|
|
$
|
4.84
|
|
|
|
768,756
|
|
|
$
|
4.83
|
|
$5.76 $6.35
|
|
|
188,270
|
|
|
$
|
5.78
|
|
|
|
26,920
|
|
|
$
|
5.78
|
|
$6.47 $8.24
|
|
|
90,040
|
|
|
$
|
6.73
|
|
|
|
59,200
|
|
|
$
|
6.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,317,301
|
|
|
$
|
4.95
|
|
|
|
976,626
|
|
|
$
|
4.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE K
|
RELATED
PARTY TRANSACTIONS
|
Royalty
and License Agreements
In April 1999, the Company entered into a royalty and license
agreement with the majority stockholder of the Company. The
Company obtained licenses for the use of patents owned by the
majority stockholder until such time as the parties terminate
their respective rights under the agreement. In return for the
use of the
F-143
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
patents, the Company pays royalties to the majority stockholder
based on a percentage (0.50% for the first quarter in 2009 and
0.75% for the remaining three quarters in 2009) of net
product sales. Royalty fees charged to operations under this
royalty agreement were $1,058,863 in 2009. Royalty payments will
be based on a percentage of 1.5% of net product sales beginning
in the second quarter of 2010.
The Company is currently not subject to any pending or
threatened litigation, other than routine litigation arising in
the ordinary course of business, none of which is expected to
have a material adverse effect on the financial condition or
results of operations.
|
|
NOTE M
|
DEFERRED
COMPENSATION AND SALARY ARRANGEMENTS
|
The Company entered into a Salary Continuation Plan and
Agreement with the Companys founder and former Chairman of
the Board of Directors in 2002. Under the terms of that
agreement the Company has been obligated to pay to his widow or
lineal descendants $20,000 per month and continuing through
April 2010 at which time payments under the agreement will
cease. In 2005, the Company recognized deferred compensation
expense for the present value of the cash payments. Current
maturities of other long-term liabilities include $63,986 at
December 31, 2009.
|
|
NOTE N
|
SHAREHOLDER
NOTES AND INTEREST RECEIVABLE
|
During 2009, $8,638,140 was loaned to certain executives of the
Company under notes secured by 1,685,233 shares of the
Companys common stock together with all rights related
thereto. The notes are due in full on July 23, 2012.
Interest at a fixed rate of one percent annually accrues
quarterly and the Company retains its security interest and
rights regarding note repayment until they are paid in full. At
December 31, 2009, the shareholder note and interest
receivable was $8,675,497. The amount of interest in 2009 was
approximately $37,000.
In October 2009, the Board of Directors of the Company declared
a dividend of $0.50 per share payable to shareholders of record
on December 18, 2009. Dividends totaling $4,746,848 were
paid on December 30, 2009.
|
|
NOTE P
|
SEGMENT
INFORMATION
|
The Company operates within two reporting segments:
|
|
|
|
|
The Companys Branded segment offers digital display
mounting and mobility product solutions to the consumer and
commercial business markets.
|
|
|
|
The Companys OEM and original design manufacturer
(ODM) segment is a leading supplier of stands and
lifts to OEM customers who manufacture liquid crystal displays.
|
The accounting policies of the segments are the same as those
described in Note B. The Company evaluates segment
performance based on operating income. Intersegment net sales
and intersegment eliminations are not material for any of the
periods presented. Unallocated assets consist primarily of cash
and cash equivalents, income taxes receivable, current and
long-term deferred income taxes and certain components of
property, plant and equipment and other assets that are used by
both segments. Refer to Note Q for a split of U.S. and
foreign operations.
F-144
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
Sales, operating income, income before income tax expense,
depreciation and amortization expense, and capital expenditures
for the Companys reporting segments for 2009 were as
follows:
|
|
|
|
|
|
|
2009
|
|
|
Net sales:
|
|
|
|
|
Branded products
|
|
$
|
91,971,825
|
|
ODM products
|
|
|
59,380,195
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
151,352,020
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
Branded products
|
|
$
|
10,657,021
|
|
ODM products
|
|
|
5,879,630
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
16,536,651
|
|
|
|
|
|
|
Depreciation and Amortization Expense:
|
|
|
|
|
Branded products
|
|
$
|
3,391,915
|
|
ODM products
|
|
|
1,402,781
|
|
|
|
|
|
|
Consolidated depreciation and amortization expense
|
|
$
|
4,794,696
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
Branded products
|
|
$
|
2,147,661
|
|
ODM products
|
|
|
1,361,505
|
|
Unallocated
|
|
|
300,063
|
|
|
|
|
|
|
Consolidated capital expenditures
|
|
$
|
3,809,229
|
|
|
|
|
|
|
Segment assets for the Companys reporting segments as of
December 31, 2009 were as follows:
|
|
|
|
|
|
|
2009
|
|
|
Segment Assets:
|
|
|
|
|
Branded products
|
|
$
|
18,358,272
|
|
ODM products
|
|
|
25,924,650
|
|
|
|
|
|
|
|
|
|
44,282,922
|
|
Other unallocated assets(1)
|
|
|
19,398,409
|
|
|
|
|
|
|
Consolidated assets
|
|
$
|
63,681,331
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes certain cash, income tax receivables, deferred income
taxes, patents, property, plant and equipment and other assets
that are used by both segments. |
|
|
NOTE Q
|
GUARANTOR
INFORMATION
|
The Company is wholly-owned by Nortek and the
U.S. operations jointly and severally guarantee
Norteks obligations under the 8.5% Notes. The foreign
operations of the Company do not guarantee the 8.5% Notes.
A consolidating balance sheet as of December 31, 2009 and
the related statements of operations and cash flows for the year
ended December 31, 2009 are reflected below in order to
comply with the reporting requirements for guarantor
subsidiaries.
F-145
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
Consolidating
Balance Sheet as of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
|
|
|
Ergotron
|
|
|
|
(Guarantor)
|
|
|
(Non-Guarantor)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,251,316
|
|
|
$
|
2,990,061
|
|
|
$
|
|
|
|
$
|
7,241,377
|
|
Accounts receivable, net
|
|
|
9,589,386
|
|
|
|
17,554,047
|
|
|
|
|
|
|
|
27,143,433
|
|
Intercompany receivables (payables)
|
|
|
(26,850,047
|
)
|
|
|
26,850,047
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
8,935,227
|
|
|
|
3,693,321
|
|
|
|
(648,545
|
)
|
|
|
11,980,003
|
|
Prepaid expenses and other assets
|
|
|
293,782
|
|
|
|
490,961
|
|
|
|
|
|
|
|
784,743
|
|
Income taxes receivable
|
|
|
522,609
|
|
|
|
120,750
|
|
|
|
|
|
|
|
643,359
|
|
Deferred income taxes
|
|
|
1,881,099
|
|
|
|
|
|
|
|
45,655
|
|
|
|
1,926,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
(1,376,628
|
)
|
|
|
51,699,187
|
|
|
|
(602,890
|
)
|
|
|
49,719,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
10,859,800
|
|
|
|
1,553,862
|
|
|
|
|
|
|
|
12,413,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
9,400,390
|
|
|
|
|
|
|
|
(9,400,390
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
192,784
|
|
|
|
|
|
|
|
192,784
|
|
Patents, net
|
|
|
891,467
|
|
|
|
|
|
|
|
|
|
|
|
891,467
|
|
Deferred income taxes
|
|
|
419,665
|
|
|
|
33,998
|
|
|
|
5,743
|
|
|
|
459,406
|
|
Other assets
|
|
|
4,343
|
|
|
|
|
|
|
|
|
|
|
|
4,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
10,715,865
|
|
|
|
226,782
|
|
|
|
(9,394,647
|
)
|
|
|
1,548,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,199,037
|
|
|
$
|
53,479,831
|
|
|
$
|
(9,997,537
|
)
|
|
$
|
63,681,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term obligations
|
|
$
|
8,317,112
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,317,112
|
|
Current maturities of other long-term liabilities
|
|
|
207,986
|
|
|
|
|
|
|
|
|
|
|
|
207,986
|
|
Accounts payable
|
|
|
2,416,608
|
|
|
|
27,694,263
|
|
|
|
|
|
|
|
30,110,871
|
|
Accrued expenses
|
|
|
2,328,823
|
|
|
|
2,414,721
|
|
|
|
|
|
|
|
4,743,544
|
|
Accrued royalties related party
|
|
|
313,156
|
|
|
|
|
|
|
|
|
|
|
|
313,156
|
|
Income tax payable
|
|
|
1,164,427
|
|
|
|
528,065
|
|
|
|
|
|
|
|
1,692,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,748,112
|
|
|
|
30,637,049
|
|
|
|
|
|
|
|
45,385,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
5,450,925
|
|
|
|
22,842,782
|
|
|
|
(9,997,537
|
)
|
|
|
18,296,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,199,037
|
|
|
$
|
53,479,831
|
|
|
$
|
(9,997,537
|
)
|
|
$
|
63,681,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-146
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
Consolidating
Statement of Operations
For the year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
|
|
|
Ergotron
|
|
|
|
(Guarantor)
|
|
|
(Non-Guarantor)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Sales
|
|
$
|
97,583,022
|
|
|
$
|
96,275,238
|
|
|
$
|
(42,506,240
|
)
|
|
$
|
151,352,020
|
|
Cost of goods sold
|
|
|
58,393,526
|
|
|
|
81,201,465
|
|
|
|
(42,549,151
|
)
|
|
|
97,045,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
39,189,496
|
|
|
|
15,073,773
|
|
|
|
42,911
|
|
|
|
54,306,180
|
|
Operating expenses
|
|
|
29,026,201
|
|
|
|
8,743,328
|
|
|
|
|
|
|
|
37,769,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10,163,295
|
|
|
|
6,330,445
|
|
|
|
42,911
|
|
|
|
16,536,651
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(402,432
|
)
|
|
|
(13,127
|
)
|
|
|
|
|
|
|
(415,559
|
)
|
Interest income
|
|
|
37,585
|
|
|
|
8,642
|
|
|
|
|
|
|
|
46,227
|
|
Other, net
|
|
|
217,334
|
|
|
|
(15,950
|
)
|
|
|
|
|
|
|
201,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before intercompany charges
|
|
|
10,015,782
|
|
|
|
6,310,010
|
|
|
|
42,911
|
|
|
|
16,368,703
|
|
Intercompany charges
|
|
|
(498,755
|
)
|
|
|
498,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
9,517,027
|
|
|
|
6,808,765
|
|
|
|
42,911
|
|
|
|
16,368,703
|
|
Income tax expense
|
|
|
4,012,850
|
|
|
|
1,078,397
|
|
|
|
13,399
|
|
|
|
5,104,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
5,504,177
|
|
|
$
|
5,730,368
|
|
|
$
|
29,512
|
|
|
$
|
11,264,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-147
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year
ended December 31, 2009
Consolidated
Statement of Cash Flows
For the year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
|
|
|
Ergotron
|
|
|
|
(Guarantor)
|
|
|
(Non-Guarantor)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
18,867,061
|
|
|
$
|
1,295,007
|
|
|
$
|
|
|
|
$
|
20,162,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(3,646,725
|
)
|
|
|
(162,504
|
)
|
|
|
|
|
|
|
(3,809,229
|
)
|
Proceeds from disposals of property, plant and equipment
|
|
|
10,050
|
|
|
|
|
|
|
|
|
|
|
|
10,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,636,675
|
)
|
|
|
(162,504
|
)
|
|
|
|
|
|
|
(3,799,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on revolving line of credit
|
|
|
(39,484,542
|
)
|
|
|
|
|
|
|
|
|
|
|
(39,484,542
|
)
|
Borrowings on revolving line of credit
|
|
|
34,235,909
|
|
|
|
|
|
|
|
|
|
|
|
34,235,909
|
|
Checks written in excess of bank balance
|
|
|
(820,496
|
)
|
|
|
|
|
|
|
|
|
|
|
(820,496
|
)
|
Repayment of long-term debt
|
|
|
(225,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(225,000
|
)
|
Dividends paid to shareholders
|
|
|
(4,746,848
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,746,848
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
545,939
|
|
|
|
|
|
|
|
|
|
|
|
545,939
|
|
Redemption and retirement of common stock
|
|
|
(57,751
|
)
|
|
|
|
|
|
|
|
|
|
|
(57,751
|
)
|
Cash advances and interest on shareholder note receivables
|
|
|
(805,501
|
)
|
|
|
|
|
|
|
|
|
|
|
(805,501
|
)
|
Issuance of common stock, net of shareholder note receivables
|
|
|
379,220
|
|
|
|
|
|
|
|
|
|
|
|
379,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(10,979,070
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,979,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
3,747
|
|
|
|
|
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
4,251,316
|
|
|
|
1,136,250
|
|
|
|
|
|
|
|
5,387,566
|
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
|
1,853,811
|
|
|
|
|
|
|
|
1,853,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4,251,316
|
|
|
$
|
2,990,061
|
|
|
$
|
|
|
|
$
|
7,241,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-148
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Ergotron, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
Ergotron, Inc. (a Minnesota Corporation) and Subsidiaries (the
Company) as of December 31, 2009, and the
related consolidated statements of operations,
stockholders equity and cash flows for the year ended
December 31, 2009. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatements. The Company is not required to have nor
were we engaged to perform as audit of its internal control over
financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Ergotron, Inc. and Subsidiaries as of
December 31, 2009, and the results of their operations and
their cash flows for the year ended December 31, 2009 in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
December 7, 2011
F-149
ERGOTRON,
INC. AND SUBSIDIARIES
December 31, 2008
|
|
|
|
|
|
|
2008
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,853,811
|
|
Accounts receivable, net
|
|
|
21,933,671
|
|
Inventories
|
|
|
16,214,673
|
|
Prepaid expenses and other assets
|
|
|
724,061
|
|
Income taxes receivable
|
|
|
919,313
|
|
Deferred income taxes
|
|
|
2,295,952
|
|
|
|
|
|
|
Total current assets
|
|
|
43,941,481
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
12,947,880
|
|
OTHER ASSETS
|
|
|
|
|
Goodwill
|
|
|
192,784
|
|
Patents, net
|
|
|
1,337,132
|
|
Deferred income taxes
|
|
|
1,392,519
|
|
Other assets
|
|
|
9,563
|
|
|
|
|
|
|
Total other assets
|
|
|
2,931,998
|
|
|
|
|
|
|
|
|
$
|
59,821,359
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial
statement.
F-150
ERGOTRON,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 2008
|
|
|
|
|
|
|
2008
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
Current maturities of long-term obligations
|
|
$
|
225,000
|
|
Current maturities of other long-term liabilities
|
|
|
217,527
|
|
Accounts payable
|
|
|
28,790,167
|
|
Accrued expenses
|
|
|
2,833,080
|
|
Accrued royalties related party
|
|
|
253,634
|
|
Income tax payable
|
|
|
1,227,867
|
|
|
|
|
|
|
Total current liabilities
|
|
|
33,547,275
|
|
LONG-TERM OBLIGATIONS, less current maturities
|
|
|
13,565,745
|
|
OTHER LONG-TERM LIABILITIES, less current maturities
|
|
|
229,986
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
Class A common stock $.01 par value;
voting 15,000,000 shares authorized,
6,758,898 shares issued and outstanding
|
|
|
67,589
|
|
Class B common stock $.01 par value;
nonvoting 2,500,000 shares authorized,
912,300 shares issued and outstanding
|
|
|
9,123
|
|
Undesignated common stock, $.01 par value
2,500,000 shares authorized, none issued and outstanding
|
|
|
|
|
Additional paid-in capital
|
|
|
5,291,578
|
|
Retained earnings
|
|
|
7,369,659
|
|
Accumulated other comprehensive loss
|
|
|
(259,596
|
)
|
|
|
|
|
|
Total stockholders equity
|
|
|
12,478,353
|
|
|
|
|
|
|
|
|
$
|
59,821,359
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial
statement.
F-151
ERGOTRON,
INC. AND SUBSIDIARIES
Years
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Sales
|
|
$
|
145,207,710
|
|
|
$
|
132,243,130
|
|
Cost of goods sold
|
|
|
97,536,099
|
|
|
|
86,560,255
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
47,671,611
|
|
|
|
45,682,875
|
|
Operating expenses
|
|
|
37,032,156
|
|
|
|
37,027,152
|
|
Litigation costs
|
|
|
8,314,262
|
|
|
|
338,113
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,325,193
|
|
|
|
8,317,610
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(742,542
|
)
|
|
|
(436,779
|
)
|
Interest income
|
|
|
32,692
|
|
|
|
217,342
|
|
Other, net
|
|
|
174,669
|
|
|
|
80,126
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
1,790,012
|
|
|
|
8,178,299
|
|
Income tax expense
|
|
|
270,971
|
|
|
|
2,504,000
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,519,041
|
|
|
$
|
5,674,299
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-152
ERGOTRON,
INC. AND SUBSIDIARIES
Years
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at December 31, 2006
|
|
|
7,994,017
|
|
|
$
|
79,940
|
|
|
|
956,882
|
|
|
$
|
9,569
|
|
|
$
|
5,044,231
|
|
|
$
|
13,576,681
|
|
|
$
|
125,014
|
|
|
$
|
18,835,435
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,674,299
|
|
|
|
|
|
|
|
5,674,299
|
|
Other comprehensive income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,950
|
|
|
|
259,950
|
|
Net loss interest rate swap agreements, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,859,249
|
|
Issuance of Class A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to stock option agreements
|
|
|
177,835
|
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
541,565
|
|
|
|
|
|
|
|
|
|
|
|
543,343
|
|
Acquisition of affiliated company
|
|
|
80,000
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
439,200
|
|
|
|
|
|
|
|
|
|
|
|
440,000
|
|
Exchange of Class A common stock for Class B common
stock
|
|
|
(43,586
|
)
|
|
|
(436
|
)
|
|
|
43,586
|
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption and retirement of common stock
|
|
|
(1,479,047
|
)
|
|
|
(14,790
|
)
|
|
|
(88,168
|
)
|
|
|
(882
|
)
|
|
|
(1,080,705
|
)
|
|
|
(13,400,362
|
)
|
|
|
|
|
|
|
(14,496,739
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,167
|
|
|
|
|
|
|
|
|
|
|
|
97,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
6,729,219
|
|
|
|
67,292
|
|
|
|
912,300
|
|
|
|
9,123
|
|
|
|
5,041,458
|
|
|
|
5,850,618
|
|
|
|
309,964
|
|
|
|
11,278,455
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,519,041
|
|
|
|
|
|
|
|
1,519,041
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(478,560
|
)
|
|
|
(478,560
|
)
|
Net loss interest rate swap agreements, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,000
|
)
|
|
|
(91,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
949,481
|
|
Issuance of Class A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to stock option agreements
|
|
|
29,679
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
83,346
|
|
|
|
|
|
|
|
|
|
|
|
83,643
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,774
|
|
|
|
|
|
|
|
|
|
|
|
166,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
6,758,898
|
|
|
$
|
67,589
|
|
|
|
912,300
|
|
|
$
|
9,123
|
|
|
$
|
5,291,578
|
|
|
$
|
7,369,659
|
|
|
$
|
(259,596
|
)
|
|
$
|
12,478,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-153
ERGOTRON,
INC. AND SUBSIDIARIES
Years
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,519,041
|
|
|
$
|
5,674,299
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Deferred income tax
|
|
|
(2,219,353
|
)
|
|
|
36,579
|
|
Depreciation and amortization
|
|
|
4,054,284
|
|
|
|
3,374,330
|
|
Equity in income of unconsolidated affiliate
|
|
|
|
|
|
|
(125,767
|
)
|
Stock-based compensation
|
|
|
166,774
|
|
|
|
97,162
|
|
Other
|
|
|
(80,857
|
)
|
|
|
(31,015
|
)
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(488,829
|
)
|
|
|
923,553
|
|
Inventories
|
|
|
(3,218,497
|
)
|
|
|
(121,258
|
)
|
Prepaid expenses and other assets
|
|
|
(372,676
|
)
|
|
|
(44,043
|
)
|
Other assets
|
|
|
42,162
|
|
|
|
(78,469
|
)
|
Accounts payable
|
|
|
1,002,960
|
|
|
|
7,412,371
|
|
Accrued expenses and accrued royalties related party
|
|
|
(2,599,840
|
)
|
|
|
(394,135
|
)
|
Income taxes payable
|
|
|
356,420
|
|
|
|
523,190
|
|
Other long-term liabilities
|
|
|
(492,783
|
)
|
|
|
(470,770
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,331,194
|
)
|
|
|
16,776,027
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(4,654,754
|
)
|
|
|
(3,123,951
|
)
|
Proceeds from disposals of property, plant and equipment
|
|
|
28,692
|
|
|
|
|
|
Business acquisition, net of acquired cash, minority interest
and excess net assets acquired over purchase price
|
|
|
|
|
|
|
244,556
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,626,062
|
)
|
|
|
(2,879,395
|
)
|
F-154
ERGOTRON,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
Years
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on revolving line of credit
|
|
$
|
(96,254,508
|
)
|
|
$
|
(3,733,485
|
)
|
Borrowings on revolving line of credit
|
|
|
97,544,422
|
|
|
|
12,428,065
|
|
Net change in related party note payable
|
|
|
|
|
|
|
(390,790
|
)
|
Checks written in excess of bank balance
|
|
|
(129,538
|
)
|
|
|
856,675
|
|
Repayment of long-term debt
|
|
|
(600,000
|
)
|
|
|
(1,125,000
|
)
|
Redemption and retirement of common stock
|
|
|
|
|
|
|
(14,496,739
|
)
|
Issuance of common stock
|
|
|
83,643
|
|
|
|
983,343
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
644,019
|
|
|
|
(5,477,931
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(451,642
|
)
|
|
|
62,328
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(6,764,879
|
)
|
|
|
8,481,029
|
|
Cash and cash equivalents at beginning of year
|
|
|
8,618,690
|
|
|
|
137,661
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
1,853,811
|
|
|
$
|
8,618,690
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
644,069
|
|
|
$
|
437,100
|
|
Income taxes
|
|
$
|
2,482,371
|
|
|
$
|
2,114,775
|
|
Cash received during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
32,693
|
|
|
$
|
217,342
|
|
Income taxes
|
|
$
|
177,715
|
|
|
$
|
159,613
|
|
The accompanying notes are an integral part of these financial
statements.
F-155
ERGOTRON,
INC. AND SUBSIDIARIES
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
|
|
NOTE A
|
NATURE OF
BUSINESS
|
Ergotron, Inc. (Ergotron or the Company)
designs and manufactures digital display and computer mounting
solutions including wall and desk mount arms, desk stands,
powered and non-powered mobile carts, pivots and vertical lifts.
The Company has manufacturing and warehouse facilities in
Minnesota, the Netherlands and the Peoples Republic of China,
with sales offices, channel distribution partners and customers
throughout the world. Ergotrons core products are designed
with patented Constant Force
(CFtm)
lift-and-pivot
motion technology, and require less user effort to achieve more
motion. Ergotron is a global company focused on channel
distribution, consumer, and original equipment manufacturer
(OEM) business.
|
|
NOTE B
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
Ergotron, Inc. and its majority owned subsidiaries. Significant
intercompany balances and transactions have been eliminated in
consolidation. Transactions in foreign currencies are translated
into United States dollars at the exchange rates at the dates of
transactions. Assets and liabilities denominated in foreign
currencies are translated into United States dollars at the
exchange rate at the balance sheet date.
Credit
Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts
receivable.
Cash
and Cash Equivalents
The Company considers all highly liquid temporary investments
with an original maturity date of three months or less when
purchased to be a cash equivalent. Cash and cash equivalents are
stated at cost, which approximates market. The Company maintains
cash balances in bank deposit accounts that may exceed the
limits of, or not be covered by, federal depository insurance.
The Company has not experienced any losses in such accounts.
Management does not believe the Company is exposed to any
significant credit risk related to cash balances. Checks written
in excess of bank balances are included in accounts payable. At
December 31, 2008, $1,853,811 was held in foreign banks in
China, Japan, Canada, France, Germany, the United Kingdom and
The Netherlands.
Comprehensive
Income (Loss)
Comprehensive income (loss) represents net income adjusted for
foreign currency translation adjustments and unrealized gain or
loss on derivative instruments which is shown in the
consolidated statements of changes in stockholders equity.
Accounts
Receivable
The Companys accounts receivable are due from customers in
a variety of industries. The Company grants credit to customers
in the normal course of business, but generally does not require
collateral to support the amounts due. Accounts receivable are
stated at amounts due from customers net of allowances for
doubtful accounts, returns and sales price adjustments. Accounts
outstanding longer than the contractual payment terms are
considered past due.
The Company determines its allowance for doubtful accounts by
considering a number of factors, including the length of time
accounts receivable are past due, the Companys previous
loss history, the
F-156
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
customers current ability to pay its obligation to the
Company and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable
when they become uncollectible. The Companys uncollectible
accounts experience has been within management expectations.
Management estimates the allowances for returns and sales price
adjustments at the time of sale based on contractual
arrangements and historical experience and makes subsequent
adjustments to its estimates as actual returns and price
adjustments become known or the amounts are determinable.
Inventories
Inventories are stated at the lower of cost or market with cost
determined on the
first-in,
first-out cost method (FIFO) or the average cost method which
approximates FIFO.
Impairment
of Long-Lived Assets
The Company policy is that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. There were no
events in 2008 or 2007 indicating an impairment analysis was
required to be performed and, accordingly, there were no
impairment charges during the years ended December 31, 2008
and 2007.
Property,
Plant and Equipment
The components of property, plant and equipment are carried at
cost. For financial reporting purposes, the Company provides for
depreciation using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives for
leasehold improvements are the shorter of the estimated useful
life or the related lease term. For tax purposes, the Company
employs the most advantageous asset lives and methods of
depreciation allowable in the tax jurisdictions that apply to
individual assets. In general, depreciation amounts for tax
purposes differ from the amounts for financial reporting
purposes. When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized. The cost
of maintenance and repairs is expensed as incurred while
significant renewals and betterments are capitalized.
Investment
in Unconsolidated Affiliate
During 2005, the Company invested in a joint venture resulting
in a 25% ownership interest. The Company acquired a controlling
interest in the joint venture in July 2007. Prior to acquiring
the controlling interest, the Company accounted for its
investment in the joint venture in accordance with the equity
method. Accordingly, the Company recognized income of $125,767
in 2007 for the Companys share of joint venture operating
results.
Goodwill
The Company tests recoverability of goodwill annually, or more
frequently if impairment indicators arise. The Company has
elected to perform its annual tests of goodwill impairment as of
December 31 of each year. The Company uses a two-phase process
for impairment testing of goodwill. The first phase screens for
impairment, while the second phase (if necessary) measures the
impairment. Based on the first phase test, the
F-157
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
Companys fair value exceeds the carrying value, resulting
in no goodwill impairment as of December 31, 2008 and 2007.
Patents
Patents are reported net of accumulated amortization of
$2,182,253 as of December 31, 2008. Patents are amortized
using the straight-line method over their estimated useful lives
of seven years. Patent amortization expense charged to
operations was $445,665 in 2008 and 2007. The weighted-average
remaining life of patents is approximately three years. Patent
amortization expense for each of the years ending
December 31, 2009 through 2011 is expected to be $445,665.
Income
Taxes
Income tax amounts in the consolidated financial statements are
provided to reflect the tax effects of transactions reported in
the consolidated financial statements and consist of both
currently payable and deferred income taxes. Deferred income
taxes arise from temporary differences between the financial and
tax bases of certain assets and liabilities. Temporary
differences that result in deferred income taxes include
allowance for doubtful accounts, inventory valuation, deferred
compensation, stock-based compensation, reserve for warranty
costs, accrued legal expenses and depreciation.
In December 2008, the Financial Accounting Standards Board
issued FASB Staff Position (FSP)
FIN 48-3,
Effective Date of FASB Interpretation No. 48 for
Certain Nonpublic Enterprises. FSP
FIN 48-3
permits an entity within its scope to defer the effective date
of FASB Interpretation 48 (Interpretation 48),
Accounting for Uncertainty in Income Taxes, to its annual
financial statements for fiscal years beginning after
December 15, 2008. The Company has elected to defer the
application of Interpretation 48 for the year ending
December 31, 2008. The Company evaluates its uncertain tax
positions using the provisions of FASB Statement 5,
Accounting for Contingencies. Accordingly, a loss
contingency is recognized when it is probable that a liability
has been incurred as of the date of the financial statements and
the amount of the loss can be reasonably estimated. The amount
recognized is subject to estimate and management judgement with
respect to the likely outcome of each uncertain tax position.
The amount that is ultimately sustained for an individual
uncertain tax position or for all uncertain tax positions in the
aggregate could differ from the amount recognized.
The Company files income tax returns in the United States
federal jurisdiction and in various states and foreign
jurisdictions. In most cases, the Company is no longer subject
to United States federal, state, and local, or
non-United
States income tax examination by tax authorities for years
before 2005.
Revenue
Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, title and risk of loss passes to the
customer, generally upon shipment of goods, the price is fixed
and collectibility is reasonably assured.
Shipping and handling charges billed to customers are included
in sales. Shipping and handling costs incurred by the Company
for the delivery of goods to customers are included in cost of
goods sold. Sales and value added taxes are presented on a net
basis and excluded from sales.
Warranty
The Company estimates warranty cost at the time of sale based on
historical rates and trends and makes subsequent adjustments to
its estimates as actual claims become known or the amounts are
determinable. The Company had accrued warranties, included in
accrued expenses, of $575,000 at December 31, 2008.
F-158
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
Product
Development and Advertising
Product development and advertising costs are expensed as
incurred. Product development costs were $5,053,569 and
$5,253,047 in 2008 and 2007, respectively. Advertising costs
were $1,338,136 and $1,432,400 in 2008 and 2007, respectively.
Stock-Based
Compensation
The Company recognizes compensation expense for all share-based
payment awards made to employees and non-employees in the
consolidated statement of operations based on the fair value at
the date of grant. Stock-based compensation expense is
recognized on a straight-line basis over the vesting period for
all awards, net of an estimated forfeiture rate, resulting in
the recognition of compensation expense for only those shares
expected to vest. Compensation expense is recognized for all
awards over the vesting period to the extent the employees or
non-employees meet the requisite service requirements, whether
or not the award is ultimately exercised. Conversely when an
employee or non-employee does not meet the requisite service
requirements and forfeits the award prior to vesting, any
compensation expense previously recognized for the award is
reversed.
Derivative
Instruments and Hedging Activities
The Company accounts for all derivatives, including those
embedded in other contracts, to be recognized as either assets
or liabilities and that those financial instruments be measured
at fair value. The accounting for changes in the fair value of
derivatives depends on their intended use and designation. The
Company has interest rate swap agreements in conjunction with
its credit agreement (Note G). The aggregate fair value
liability of $166,000 is included in other long-term liabilities
as of December 31, 2008.
Fair
Value Measurements
The Company defines fair value as the price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. There are three levels of
inputs that are used by the Company to measure fair value:
|
|
|
|
|
Level 1 quoted prices in active markets
for identical assets and liabilities
|
|
|
|
Level 2 observable inputs other than
quoted prices in active markets for identical assets and
liabilities
|
|
|
|
Level 3 unobservable inputs in which
there is little or no market data available, which require the
reporting entity to develop its own assumptions
|
The fair value of the Companys interest rate swap
agreements were determined based on Level 2 inputs.
Estimates
Preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
regarding the reported amounts of assets and liabilities at the
date of the consolidated financial statements, the disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of
sales and expenses during the reporting period. Actual results
could differ from those estimates.
F-159
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
|
|
NOTE C
|
ACQUISITION
OF AFFILIATE
|
In 2005, the Company entered into a joint venture agreement with
Min Aik Technology Company Ltd (MAT) to form International
Capital Holding Co., Ltd. (ICH) for the purpose of achieving
low-cost manufacturing capabilities in The Peoples Republic of
China for the manufacture of the Companys products.
Initially, the Company owned a 25% interest in ICH. On
December 16, 2006, the Board of Directors of the Company
approved a plan to acquire an additional 26% percent ownership
in ICH in exchange for 80,000 shares of the Companys
Class A Common Stock. The purchase was completed in July
2007, which resulted in the Company owning a 51% controlling
interest in ICH. The value of the stock as established by the
Board of Directors on the date of the acquisition was $5.50 per
share for a total price of $440,000. The Companys Board of
Directors approved a plan to acquire the remaining 49% of ICH in
exchange for cash of $3,000,000, which was completed in December
2007. Upon the acquisition of the remaining ownership in the
joint venture entity, the Company terminated the joint venture
agreement with MAT. The acquisition of ICH gives the Company
greater control over the manufacturing process and cost
structure, and improves the strategic value of the
Companys supply chain.
Prior to acquiring the controlling interest in ICH, the Company
had invested $775,000 in the joint venture and recorded income
using the equity method totaling $125,767 for the six-month
period ended June 30, 2007 for its 25% share of the joint
ventures annual operating results. The Company has been
consolidating ICHs financial information since July 2007.
The Company purchased finished goods and tooling totaling
$22,965,124 from the joint venture during the six months ended
June 30, 2007.
The 2007 acquisitions were accounted for as a step acquisition
under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 141, Business
Combinations. The purchase price was allocated as follows:
|
|
|
|
|
Cash
|
|
$
|
3,400,066
|
|
Accounts receivable (due from the Company)
|
|
|
13,746,023
|
|
Inventories
|
|
|
1,899,364
|
|
Other assets and property and equipment
|
|
|
1,819,612
|
|
Liabilities assumed
|
|
|
(16,307,666
|
)
|
Less value of Companys previous 25% interest
|
|
|
(1,039,829
|
)
|
|
|
|
|
|
Net assets acquired and contributed
|
|
|
3,517,570
|
|
Less gain realized on acquisition
|
|
|
(77,570
|
)
|
|
|
|
|
|
Total merger purchase price
|
|
$
|
3,440,000
|
|
|
|
|
|
|
F-160
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
|
|
NOTE D
|
ACCOUNTS
RECEIVABLE
|
Accounts receivable consisted of the following at December 31,
2008:
|
|
|
|
|
|
|
2008
|
|
|
Trade accounts receivable
|
|
$
|
23,944,212
|
|
Less allowance for doubtful accounts
|
|
|
(33,285
|
)
|
Less allowance for returns and sales price adjustments
|
|
|
(2,327,635
|
)
|
|
|
|
|
|
Net trade accounts receivable
|
|
|
21,583,292
|
|
Other accounts receivable
|
|
|
350,379
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
21,933,671
|
|
|
|
|
|
|
The Company had three customers each representing ten percent or
more of sales for the year ended December 31, 2008 and, in
the aggregate, totaling approximately 48%. These customers
represent approximately 21% of accounts receivable at
December 31, 2008.
Inventories consisted of the following at December 31, 2008:
|
|
|
|
|
|
|
2008
|
|
|
Raw materials and packaging
|
|
$
|
6,241,518
|
|
Work-in-process
|
|
|
82,922
|
|
Finished goods
|
|
|
9,890,233
|
|
|
|
|
|
|
Total inventories
|
|
$
|
16,214,673
|
|
|
|
|
|
|
|
|
NOTE F
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property, plant and equipment consisted of the following at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Estimated Life
|
|
|
|
|
|
|
in Years
|
|
|
2008
|
|
|
Land
|
|
|
|
|
|
$
|
655,000
|
|
Building and building improvements
|
|
|
10-40
|
|
|
|
6,161,617
|
|
Furniture, office equipment, and leasehold improvements
|
|
|
3-10
|
|
|
|
2,720,442
|
|
Tooling, machinery and equipment
|
|
|
2-10
|
|
|
|
10,799,144
|
|
Computer equipment
|
|
|
3-10
|
|
|
|
6,664,732
|
|
Vehicles
|
|
|
4-5
|
|
|
|
74,159
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment at cost
|
|
|
|
|
|
|
27,075,094
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
14,127,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,947,880
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense charged to operations related to property,
plant and equipment was $3,603,398 in 2008 and $2,922,330 in
2007.
F-161
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
|
|
NOTE G
|
FINANCING
ARRANGEMENTS
|
The Companys financing arrangements consisted of the
following at December 31, 2008:
|
|
|
|
|
|
|
2008
|
|
|
Long-term obligations:
|
|
|
|
|
Mortgage loan, payable in monthly installments of $18,750
through November 2010, plus interest
|
|
$
|
3,806,250
|
|
Revolving line of credit, variable interest, effective rate of
1.65% at December 31, 2008, due July 31, 2010
|
|
|
9,984,495
|
|
|
|
|
|
|
|
|
|
13,790,745
|
|
Less current maturities of long-term obligations
|
|
|
225,000
|
|
|
|
|
|
|
|
|
$
|
13,565,745
|
|
|
|
|
|
|
The Company has a credit agreement with Wells Fargo Bank
National Association consisting of a mortgage loan and a
revolving line of credit. The credit agreement incorporates
security agreements pledging all rights to payment, inventory,
and equipment as security for the loans. The mortgage loan is
secured by real property located at the Companys world
headquarters in Eagan, Minnesota.
Mortgage
Loan
The mortgage loan bears interest at a fluctuating rate equal to
daily LIBOR plus 1.75%. At December 31, 2008 the effective
interest rate was 1.885%. In conjunction with the mortgage loan,
the Company entered into two interest rate swap agreements in
the total notional amount of $3,806,250 at December 31,
2008, at a weighted-average fixed rate of 6.66%. These swap
agreements have been designated as an interest rate hedge
against the floating LIBOR rate associated with the mortgage
loan, effectively fixing the mortgage loan at the
weighted-average fixed swap rate. The total notional amount of
the swap agreements will decrease by $18,750 per month through
October 2010, with a final reduction of the balance in November
2010.
Revolving
Line of Credit
The revolving line of credit provided for available borrowings
of up to $22,500,000 through January 1, 2009 at which time
maximum available borrowings under the line decreased to
$18,000,000. As of December 31, 2008, the Company had
approximately $12,500,000 of available borrowings. At the
Companys option, borrowings under the revolving line of
credit bear interest at a fluctuating rate equal to 0.75% below
the prime rate, at a fluctuating rate equal to 1.4% above daily
LIBOR, or at a fixed rate per annum of 1.4% above a monthly
LIBOR rate in effect on the first day of an applicable fixed
rate term of one to twelve months. In March 2009, the Company
replaced the line of credit with a new revolving line of credit
with available borrowings of $18,000,000 through January 1,
2010. After January 1, 2010, the available borrowings are
reduced to $13,500,000 through July 31, 2010. Interest
under the new line of credit is at a fluctuating rate of 2.25%
above 30 day LIBOR subject to a minimum interest rate of
4.5%. Borrowings under both the old and the new line of credit
are not limited to any borrowing base calculation.
Prior to December 2007, the Company had a revolving line of
credit limited to maximum borrowings of $6,500,000. The amount
of available borrowings were subject to a borrowing base
restriction based on advance rates of eligible accounts
receivable and inventory. At the Companys option,
borrowings under the revolving line of credit bore interest at a
fluctuating rate equal to 0.5% below the prime rate, at a
fluctuating rate equal to 1.5% above daily LIBOR or at a fixed
rate per annum of 1.5% above a monthly LIBOR rate in effect on
the first day of an applicable fixed rate term of one to twelve
months.
F-162
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
Term
loan
The term loan was paid in full during 2008. The term loan was
payable in equal monthly payments of $75,000 plus interest at
30-day LIBOR
plus 1.75%. At December 31, 2007 the effective interest
rate was 6.605%. In conjunction with the term loan, the Company
entered into an interest rate swap agreement in the notional
amount of $375,000 at December 31, 2007 at a fixed rate of
5.93%, which had been designated as an interest rate hedge
against the floating LIBOR rate associated with the term loan,
effectively fixing the rate on a portion of the term loan that
is equal to the notional amount of the swap at the swap rate.
Under the terms of the swap agreement the notional amount
equaled the principal balance of the term loan at
December 31, 2007 and decreased by $75,000 per month
thereafter in order to coincide with the scheduled principal
balance of the term loan through its maturity.
All amounts due on the revolving line of credit and long-term
obligations may be paid in part or in full at any time prior to
maturity without penalty. The interest rate swap agreements if
sold or terminated prior to maturity will result in gain or loss
to the Company. The credit agreement requires the Company to
meet certain financial covenants as defined in the agreement. At
December 31, 2008, the Company was in default of two of the
financial covenants. In March 2009, the Company and the bank
amended the terms of the credit agreement in which the bank
granted a waiver of the defaults. Management believes that the
Company will remain in compliance with all covenants and terms
of the agreement as amended.
Future maturities of long-term obligations at December 31,
2008 were as follows:
|
|
|
|
|
Year Ending December 31
|
|
|
|
2009
|
|
$
|
225,000
|
|
2010
|
|
|
13,565,745
|
|
|
|
|
|
|
Total future maturities of long-term obligations
|
|
$
|
13,790,745
|
|
|
|
|
|
|
|
|
NOTE H
|
LEASE
COMMITMENTS
|
Company
as Lessee
The Company leases office space, various vehicles and equipment
used to conduct business operations, which are accounted for as
operating leases. Aggregate monthly rental payments for these
leases total approximately $112,000 and expire between February
2009 and March 2013. Rent expense for operating leases was
$1,428,123 and $961,834 in 2008 and 2007.
Approximate future minimum lease payments for operating leases
as of December 31, 2008, are as follows:
|
|
|
|
|
Year Ending December 31
|
|
|
|
2009
|
|
$
|
1,033,000
|
|
2010
|
|
|
845,000
|
|
2011
|
|
|
187,000
|
|
2012
|
|
|
71,000
|
|
2013
|
|
|
4,000
|
|
Company
as Lessor
The Company rents office and warehouse space under an operating
lease agreement that requires monthly base rental payments to
the Company plus the tenants pro rata share of real estate
taxes and operating costs. Aggregate monthly base rental
payments total approximately $12,000 and expire in March 2009.
Rental
F-163
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
income including the pro rata share of real estate taxes and
operating costs was $190,963 and $184,460 in 2008 and 2007.
Approximate future minimum rental receipts under the lease at
December 31, 2008 are $36,000:
Income tax expense (benefit) consisted of the following for the
year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,217,293
|
|
|
$
|
2,321,573
|
|
State and foreign
|
|
|
1,273,031
|
|
|
|
145,848
|
|
|
|
|
|
|
|
|
|
|
Current portion of income tax expense
|
|
|
2,490,324
|
|
|
|
2,467,421
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,969,929
|
)
|
|
|
36,427
|
|
State and foreign
|
|
|
(249,424
|
)
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
Deferred portion of income tax expense (benefit)
|
|
|
(2,219,353
|
)
|
|
|
36,579
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
270,971
|
|
|
$
|
2,504,000
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax expense to the amount computed
using the U.S. federal statutory tax rate of 34% is as
follows for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Income taxes computed at the statutory rate of 34%
|
|
$
|
600,168
|
|
|
$
|
2,780,622
|
|
State and foreign income taxes net of federal
benefit and change in valuation allowance
|
|
|
(278,394
|
)
|
|
|
(3,372
|
)
|
Excluded foreign income
|
|
|
(57,469
|
)
|
|
|
(278,974
|
)
|
Patent amortization
|
|
|
151,526
|
|
|
|
151,526
|
|
Research and development credits
|
|
|
(299,522
|
)
|
|
|
(122,000
|
)
|
Stock-based compensation
|
|
|
56,703
|
|
|
|
(159,843
|
)
|
Other
|
|
|
97,959
|
|
|
|
136,041
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
270,971
|
|
|
$
|
2,504,000
|
|
|
|
|
|
|
|
|
|
|
F-164
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
Amounts and types of temporary differences creating current and
non-current deferred income tax assets and liabilities are as
follows at December 31:
|
|
|
|
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
Royalties and compensation
|
|
$
|
175,556
|
|
Accounts receivable allowances
|
|
|
879,686
|
|
Accrued warranty and accounts payable
|
|
|
1,020,869
|
|
Inventory valuation
|
|
|
484,109
|
|
Other
|
|
|
(264,268
|
)
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
2,295,952
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
Deferred compensation
|
|
$
|
85,694
|
|
Depreciation
|
|
|
(106,019
|
)
|
Accounts payable
|
|
|
1,314,127
|
|
Net operating losses of foreign subsidiaries
|
|
|
42,390
|
|
Amortization
|
|
|
56,327
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
1,392,519
|
|
|
|
|
|
|
Management established a valuation allowance for net operating
losses of a foreign subsidiary at December 31, 2007 as the
realization of the related future tax benefits was uncertain.
During 2008, the nature of the business activities of the
subsidiary changed resulting in the lapse of any future tax
benefit of the losses under the laws of the applicable tax
jurisdiction.
|
|
NOTE J
|
EMPLOYEE
RETIREMENT SAVINGS 401(K) PLAN
|
The Company has established a 401(k) plan for all eligible
employees. The plan allows employees to defer up to 100% of
compensation subject to the maximum statutory dollar limit. For
employees who meet certain eligibility requirements, the Company
may contribute to the plan a matching percentage of employee
contributions. The Company matching percentage was 50% in 2008
and 2007. The amount of the Companys matching contribution
is limited to a maximum of three percent of each employees
eligible compensation, although additional contributions may be
made by resolution of the plans trustees. Company
contributions vest to employees ratably over five years. Expense
for Company matching contributions and administrative costs
related to the employee retirement savings 401(k) plan was
$406,262 in 2008 and $389,196 in 2007.
|
|
NOTE K
|
STOCK-BASED
COMPENSATION
|
The Companys 1997 Incentive Stock Option Plan (the
1997 Plan) provided for the granting of options to
both employees and non-employees for the purchase of up to
3,307,642 shares of the Companys Class A common
stock. The 1997 Plan expired in December 2007 and no further
options may be granted thereunder. During 2008, the Board of
Directors approved the 2008 Incentive Stock Option Plan (the
2008 Plan) and authorized 500,000 shares for
grant under the plan. There were 316,180 shares available
for future grant under the 2008 Plan as of December 31,
2008. The 2008 Plan expires in 2018 at which time no further
options may be granted under the Plan. Under both plans, the
terms of options granted are determined by the Board of
Directors, but in no event shall the exercise period exceed ten
years from the date of grant. The exercise price is established
by the terms of the individual plan agreements and is equal to
the fair market value of the stock at the date of grant, as
determined by the Board of Directors. Options issued become
exercisable over vesting
F-165
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
periods ranging from zero to five years as provided in the
individual plan agreements. Upon a change in control of the
Company, as defined in the Plans, all options outstanding on the
date of the change in control become fully exercisable.
Total stock-based compensation for options granted to employees
included in operating expense was $153,636 in 2008 and $84,018
in 2007. As of December 31, 2008, approximately $168,000 of
total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted-average
period of approximately two years.
Prior to the Companys adoption of SFAS 123R on
January 1, 2006, the Company granted 37,190 options to
outside parties during fiscal year 2005 which remain outstanding
at December 31, 2008. The Company records compensation
expense based on the fair value of these options within
operating expenses upon the vesting of the optioned shares.
During fiscal years 2008 and 2007, the Company recorded
compensation expense of $13,138 and $13,144. As of
December 31, 2008 these options have been fully expensed
and no further compensation expense will be recognized in future
years.
The fair value of each stock option award was estimated on the
date of grant using the Black-Scholes option pricing model in
2008 and 2007. The following assumptions were used to estimate
the fair value of options:
|
|
|
|
|
|
|
|
|
Assumptions:
|
|
2008
|
|
2007
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Expected life
|
|
|
2 years
|
|
|
|
3 years
|
|
Expected volatility
|
|
|
30%
|
|
|
|
30%
|
|
Risk-free interest rate
|
|
|
1.5% to 2.5%
|
|
|
|
3.9% to 4.8%
|
|
The weighted-average fair value of options granted during the
years ended December 31, 2008 and 2007 were $1.07 and
$1.75, respectively.
A summary of activity related to common stock options is as
follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Common Stock
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding at December 31, 2006
|
|
|
3,115,721
|
|
|
$
|
4.29
|
|
Granted
|
|
|
67,608
|
|
|
|
5.54
|
|
Canceled
|
|
|
(93,880
|
)
|
|
|
4.24
|
|
Exercised
|
|
|
(177,835
|
)
|
|
|
3.06
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
2,911,614
|
|
|
|
4.39
|
|
Granted
|
|
|
186,860
|
|
|
|
5.79
|
|
Canceled
|
|
|
(102,615
|
)
|
|
|
4.72
|
|
Exercised
|
|
|
(29,679
|
)
|
|
|
2.82
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2008
|
|
|
2,966,180
|
|
|
|
4.49
|
|
|
|
|
|
|
|
|
|
|
F-166
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
Information regarding weighted-average exercise prices, number
of options outstanding, and number of options exercisable as of
December 31, 2008, under the stock option plan is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Range of
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
Weighted-average
|
|
exercise prices
|
|
|
Number
|
|
|
exercise price
|
|
|
Number
|
|
|
exercise price
|
|
|
$
|
0.46-$2.52
|
|
|
|
227,474
|
|
|
$
|
1.80
|
|
|
|
227,474
|
|
|
$
|
1.80
|
|
$
|
3.00-$3.70
|
|
|
|
302,300
|
|
|
$
|
3.07
|
|
|
|
297,900
|
|
|
$
|
3.07
|
|
$
|
4.23-$5.50
|
|
|
|
2,223,046
|
|
|
$
|
4.83
|
|
|
|
1,660,028
|
|
|
$
|
4.82
|
|
$
|
5.76-$6.35
|
|
|
|
213,360
|
|
|
$
|
5.78
|
|
|
|
7,456
|
|
|
$
|
5.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,966,180
|
|
|
$
|
4.49
|
|
|
|
2,192,858
|
|
|
$
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE L
|
RELATED
PARTY TRANSACTIONS
|
Royalty
and License Agreements
In April 1999, the Company entered into a royalty and license
agreement with the majority stockholder of the Company. The
Company obtained licenses for the use of patents owned by the
majority stockholder until such time as the parties terminate
their respective rights under the agreement. In return for the
use of the patents, the Company pays royalties to the majority
stockholder based on a percentage (0.75% in 2008 and
2007) of net product sales. Royalty fees charged to
operations under this royalty agreement were $1,083,153 in 2008
and $993,039 in 2007.
In July 2006, a patent infringement suit was filed against the
Company and three of its customers in United States District
Court for the Eastern District of Texas. The Company has agreed
to indemnify the three customers for costs and damages. In
November 2008, the suit was heard by a jury which delivered a
damages awarded in favor of the plaintiff. The Companys
Consolidated Statements of Operations includes costs of
$8,314,262 for the damages and defense costs in 2008, and
$338,113 in 2007.
Except as noted in the above paragraph, the Company is currently
not subject to any pending or threatened litigation, other than
routine litigation arising in the ordinary course of business,
none of which is expected to have a material adverse effect on
the financial condition or results of operations.
|
|
NOTE N
|
DEFERRED
COMPENSATION AND SALARY ARRANGEMENTS
|
The Company entered into a Salary Continuation Plan and
Agreement with the Companys founder and former Chairman of
the Board of Directors in 2002. Under the terms of that
agreement the Company has been obligated to pay to his widow or
lineal descendants $20,000 per month and continuing through
April 2010 at which time payments under the agreement will
cease. In 2005, the Company recognized deferred compensation
expense for the present value of the cash payments. Current
maturities of other long-term liabilities include $217,527 at
December 31, 2008.
|
|
NOTE O
|
STOCK
REDEMPTION
|
In October 2007, the Board of Directors approved a plan to
repurchase stock of the Company for up to an aggregate purchase
price of $30,000,000 at $9.25 per share. The Company engaged an
independent specialist to determine the estimated fair value of
the Company on a fully-diluted, controlling-interest basis in
determining the purchase price per share. The Company provided a
disclosure document and stock tender offer to all eligible
shareholders in October 2007. Eligible shareholders consisted of
shareholders of record as well
F-167
ERGOTRON,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2008 and for the years ended December 31,
2008 and 2007
as vested option holders at the close of business on
October 26, 2007. In addition, additional shareholders who
were not shareholders of record on October 26, 2007 but
subsequently acquired stock in private purchases were allowed to
participate, provided the shareholder executed and delivered to
the Company a waiver of notice period and all other documents
required by the Company for the repurchase. The Company
established November 28, 2007 as the final date for
shareholders to deliver executed stock sale agreements to the
Company. Option holders who wished to sell were also required to
exercise options and render payment for the full exercise price
by that date. As a result, the Company repurchased and retired a
total of 1,567,215 shares of common stock totaling
$14,496,739 in 2007. There was no stock redemption activity in
2008.
F-168
Report of
Independent Certified Public Accountants
Board of Directors and Stockholders
Ergotron, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
Ergotron, Inc. (a Minnesota Corporation) and Subsidiaries (the
Company) as of December 31, 2008, and the
related consolidated statements of operations,
stockholders equity and cash flows for the years ended
December 31, 2008 and 2007. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America as
established by the American Institute of Certified Public
Accountants. 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 consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Ergotron, Inc. and Subsidiaries as of
December 31, 2008, and the results of their operations and
their cash flows for the years ended December 31, 2008 and
2007 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
April 29, 2009
F-169
NORTEK, INC.
Offer to Exchange
$500,000,000 aggregate
principal amount of its 8.5% Senior Notes due 2021, the
issuance of which has been registered under the Securities Act
of 1933, as amended,
for
any and all of its outstanding
8.5% Senior Notes due 2021.
PROSPECTUS