-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H1IM3NDD01kKqLqYiShRzekeSe1r+0yI1XMEUaD7YsuguYCcRRiIyKiyl5mmsStp lJfFXfpNExsyD7kpa5t6QQ== 0000072423-00-000017.txt : 20000310 0000072423-00-000017.hdr.sgml : 20000310 ACCESSION NUMBER: 0000072423-00-000017 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTEK INC CENTRAL INDEX KEY: 0000072423 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 050314991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06112 FILM NUMBER: 564583 BUSINESS ADDRESS: STREET 1: 50 KENNEDY PLZ CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4017511600 MAIL ADDRESS: STREET 1: 50 KENNEDY PLAZA CITY: PROVIDENCE STATE: RI ZIP: 02903 10-K405 1 NORTEK 1999 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- Form 10-K 405 (Mark One) ------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ____________ Commission file number: 1-6112 ------------------------ Nortek, Inc. (exact name of Registrant as specified in its charter) Delaware 05-0314991 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 50 Kennedy Plaza Providence, Rhode Island 02903-2360 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (401) 751-1600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, $1.00 par value New York Stock Exchange Preference Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of Class Special Common Stock, $1.00 par value Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. 1 The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 25, 2000 was $216,942,255. (See Item 12.) The number of shares of Common Stock outstanding asof February 25, 2000 was 10,947,164. The number of shares of Special Common Stock outstanding as of February 25, 2000 was 549,780 Documents Incorporated byReferencePortions of the registrant's Proxy Statement for use at its 2000 Annual Meeting of Shareholders are incorporated by reference into Part III. 2 NORTEK, INC. AND SUBSIDIARIES PART I ITEM 1. BUSINESS General - ------- The Company is a diversified manufacturer of residential and commercial building products, operating within three principal segments: the Residential Building Products Segment; the Air Conditioning and Heating Products Segment; and the Windows, Doors and Siding Products Segment. Through these segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. (As used in this report, the terms "Company" and "Nortek" refer to Nortek, Inc., together with its subsidiaries, unless the context indicates otherwise. Such terms as "Company" and "Nortek" are used for convenience only and are not intended as a precise description of any of the separate corporations, each of which manages its own affairs.) The Company's performance is dependent to a significant extent upon the levels of residential replacement and remodeling, new residential construction and non-residential construction, which are affected by such factors as interest rates, inflation seasonality, consumer spending habits and unemployment. Additional information concerning the Company's business is set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, Item 7 of Part II of this report, incorporated herein by reference. Information on foreign and domestic operations is set forth in Note 10 of the Notes to Consolidated Financial Statements, Item 8 of Part II of this report, incorporated herein by reference. Residential Building Products Segment - -------------------------------- The Residential Building Products Segment manufactures and distributes built-in products primarily for the residential new construction, do-it-yourself and professional remodeling and renovation markets. The principal products sold by the Segment are kitchen range hoods, built-in exhaust fans (such as bath fans and fan, heater and light combination units), indoor air quality products, bath cabinets, radio intercoms and central vacuum systems. The Segment is the largest supplier in North America of range hoods, bath fans and combination units, indoor air quality products (such as continuous-ventilation systems and energy-recovery ventilators) 3 NORTEK, INC. AND SUBSIDIARIES and one of the leading suppliers in Western Europe, South America and the Middle East of luxury "Eurostyle" range hoods. Products are sold under the Broan(R), NuTone(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R) and Best(R) brand names, among others, to distributors and dealers of electrical and lighting products, kitchen and bath dealers, retail home centers and original equipment manufacturers (OEMs). Customers for the Segment's products include residential and electrical contractors, professional remodelers and do-it-yourself homeowners. Other products sold by this Segment include, among others, wireless security products, audio speakers, door chimes, ceiling fans, multi-room video distribution equipment and infrared control equipment. The Company's sales of kitchen range hoods and exhaust fans accounted for approximately 10.2% and 10.5%, respectively, of the Company's consolidated net sales in 1999. A key component of the Segment's operating strategy is the introduction of new products which capitalize on the strong Broan(R), NuTone(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R) and Best(R) brand names and the extensive distribution system of the Segment's businesses. Products sold under these brand names include the Broan Allure(TM) and Rangemaster(R) range hoods, Sensaire(R), Solitaire(R) and Solitaire Ultra Silent(R) fans and fan lights, LoSone(R) and Select(TM) fans, the Best by Broan(R) "Eurostyle" luxury range hoods, the Venmar(R) and vanEE(R) Super Compact line of indoor air quality systems, NuTone SenSonic(TM) stereo speakers and Whispaire(TM) range hoods and the Broan 12" wide trash compactor. With respect to certain product lines, several private label customers account for a substantial portion of net sales. In 1999, approximately 7.6% of the total sales of the Segment were made to private label customers. Production 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 (motors, fan blades, heating elements, wiring harnesses, controlling devices, glass, mirrors, lighting fixtures, lumber, wood and polyethylene components, speakers, grilles and similar electronic components, and compact disc and tape player mechanisms) and painting, finishing and packaging. The Segment offers a broad array of products with various features and styles across a range of price points. The Company believes that the Segment's variety of product offerings helps the Segment maintain and improve its market position for its principal products. At the same time, the Company believes that the Segment's status as a low-cost producer, in large part as a result of advanced manufacturing processes, provides the Segment with a competitive advantage. 4 NORTEK, INC. AND SUBSIDIARIES The Segment's primary products compete with many domestic and international suppliers in their various markets. The Segment competes with suppliers of competitive products primarily on the basis of quality, distribution, delivery and price. Although the Segment believes it competes favorably among other suppliers of the Segment's products, certain of these suppliers have greater financial and marketing resources than the Segment. The Segment had 18 manufacturing plants and employed approximately 3,750 full-time people as of December 31, 1999, 180 of whom are covered by collective bargaining agreements which expire in 2000 and 2001 and 729 of whom are covered by collective bargaining agreements which expire in 2004 and 2005. The Company believes that the Segment's relationships with its employees are satisfactory. Air Conditioning and Heating Products Segment - --------------------------------------------- The Air Conditioning and Heating Products Segment manufactures and sells heating, ventilating and air conditioning systems ("HVAC") for custom-designed commercial applications and for manufactured and site-built residential housing. Commercial Products The Segment's commercial products consist of HVAC systems which are custom-designed to meet customer specifications for commercial offices, manufacturing and educational facilities, hospitals, retail stores and governmental buildings. Such systems are primarily designed to operate on building rooftops (including large self-contained walk-in-units) or on individual floors within a building, and range from 40 to 600 tons of cooling capacity. The Segment markets its commercial products under the Governair(R), Mammoth(R), Temtrol(TM), Aston, Venmar(R), Ventrol(R) and Webco(TM) brand names. The market for commercial HVAC equipment is segmented between standard and custom-designed equipment. Standard equipment can be manufactured at a lower cost and therefore offered at substantially lower initial prices than custom-designed equipment. As a result, suppliers of standard equipment generally have a larger share of the overall commercial HVAC market than suppliers of custom-designed equipment, including the Segment. However, because of certain building designs, shapes or other characteristics, the Company believes there are many applications for which custom-designed equipment is required or is more cost effective over the life of the building. 5 NORTEK, INC. AND SUBSIDIARIES Unlike standard equipment, the Segment's commercial HVAC equipment can be designed to match the exact space, capacity and performance requirements of the customer. The Segment's packaged rooftop and self-contained walk-in equipment rooms maximize a building's rentable floor space because they are located outside the building. In addition, factors relating to the manner of construction and timing of installation of commercial HVAC equipment can often favor custom-designed rather than standard systems. As compared with site-built and factory built HVAC systems, the Segment's 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 Segment's commercial systems can be installed later in the construction process than site-built systems, thereby saving the owner or developer construction and labor costs. The Segment sells its commercial products primarily to contractors, owners and developers of commercial office buildings, manufacturing and educational facilities, hospitals, retail stores and governmental buildings. The Segment seeks to maintain 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 the Segment's custom-designed equipment. The Company estimates that about half of the Segment's commercial sales in 1999 were attributable to replacement and retrofit activity, which typically is less cyclical than new construction activity and generally commands higher margins. The Segment continues to develop product and marketing programs to increase penetration in the growing replacement and retrofit market. The Segment's commercial products are marketed through independently-owned manufacturers' representatives and an in-house sales, marketing and engineering group of approximately 185 persons as of December 31, 1999. The independent representatives are typically HVAC engineers, a factor which is significant in marketing the Segment's commercial products because of the design intensive nature of the market segment in which the Segment competes. The Company believes that the Segment is among the largest suppliers of custom-designed commercial HVAC products in the United States. The Segment's three largest competitors in the commercial HVAC market are York International Corporation (which sells under the "Pace" and "Miller-Picking" trade names), McQuay International (a subsidiary of OYL Corporation), and The Trane Company (a subsidiary of American Standard Inc.). The Segment 6 NORTEK, INC. AND SUBSIDIARIES competes primarily on the basis of engineering support, quality, flexibility in design and construction and total installed system cost. Although the Company believes that the Segment competes favorably with respect to certain of these factors, most of the Segment's competitors have greater financial and marketing resources than the Segment and enjoy greater brand awareness. However, the Company believes that the Segment's ability to produce equipment that meets the performance characteristics required by the particular product application provides it with advantages not enjoyed by certain of these competitors. Residential Products The Segment manufactures air conditioners, heat pumps and furnaces for the residential and light commercial markets. For site-built homes and light commercial structures, the Segment markets its products under the licensed names, Frigidaire(R), Tappan(R), Philco(R), Kelvinator(R) and Gibson(R) names. Within the residential market the Segment is one of the largest suppliers of these products for manufactured homes in the United States and Canada. In the manufactured housing market, the Segment markets its products under the Intertherm(R) and Miller(R) brand names. The principal factors affecting the market for the Segment's residential HVAC products are the demand for replacement and modernization of existing equipment and the levels of manufactured housing shipments and housing starts. The Company anticipates that the replacement market will continue to expand as a large number of previously installed heating and cooling products become outdated or reach the end of their useful lives. This growth may be accelerated by a tendency among consumers to replace older heating and cooling products with higher efficiency models prior to the end of such equipment's useful life. The market for residential cooling products, including those sold by the Segment, is affected by spring and summer temperatures. The Segment does not sell window air conditioners, a segment of the market which is highly seasonal and especially affected by spring and summer temperatures. The Company believes that the Segment's ability to offer both heating and cooling products helps offset the effects of seasonality of the Segment's sales. The Segment sells its manufactured housing products to builders of manufactured housing and through distributors, to manufactured housing retailers and owners of such housing. The majority of sales to builders of manufactured housing consist of furnaces designed and engineered to meet or exceed certain standards 7 NORTEK, INC. AND SUBSIDIARIES mandated by federal agencies, including HUD. These standards differ in several important respects from the standards for furnaces used in site-built residential homes. The after market channel of distribution includes sales of both new and replacement air conditioning units and heat pumps and replacement furnaces. The Company believes that the Segment has one major competitor in the furnace segment of this market, Evcon Industries, a subsidiary of York International Corporation, which markets its products primarily under the Coleman name. The Segment competes with most major industry manufacturers for the air conditioning segment of the market. Residential HVAC products for use in site-built homes are sold 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, Rheem Manufacturing Company, Lennox Industries, The Trane Company, York International Corporation, and Goodman Manufacturing. The Segment competes in both the manufactured housing and site-built markets on the basis of breadth and quality of its product line, distribution, product availability and price. The Segment believes that the Segment competes favorably with respect to these factors. The Company estimates that more than half of the Segment's sales of residential HVAC products in 1999 were attributable to the replacement market, which tends to be less cyclical than the new construction market. The Segment had 14 manufacturing plants and employed approximately 2,700 full-time people as of December 31, 1999, 245 of whom are covered by a collective bargaining agreement which expires in 2001. The Company believes that the Segment's relationships with its employees are satisfactory. Windows, Doors and Siding Products Segment - ------------------------------------------ The Windows, Doors and Siding Products Segment is a manufacturer and distributor of vinyl, wood and composite windows, vinyl, wood, steel and composite patio and entry doors, vinyl siding, skirting, soffit and accessories, aluminum trim coil, siding, soffit and accessories, blocks, vents, shutters, sunrooms and vinyl fencing, railings and decking for use in the residential construction, do-it-yourself and professional renovation markets. The Company's sales of windows accounted for approximately 16.2% of the Company's consolidated net sales in 1999. The Company's sales of siding and skirting products accounted for approximately 11.3% of the Company's consolidated net sales in 1999. The Segment competes with many other manufacturers in the sale of its products. 8 NORTEK, INC. AND SUBSIDIARIES Windows and Doors The Segment manufactures and sells wood, clad, composition (wood and vinyl) and vinyl windows and patio doors, steel and composite entry doors, glass and polycarbonate skylights, and wooden interior bifold doors and sunrooms under the Crestline(R), Vetter(R), Kenergy(R), AWC(R), Great Lakes Gold(R), PLY GEM(R), Uniframe(R), Monitor(TM), Napco(R), Napco Premium(TM), Napco Prime(TM), Peachtree(R), Vintage(TM), Image(TM), Thermal-Gard(R), CWD(TM), Ambassador(TM), Regency(TM), Diplomat(TM), Envoy(TM) and Consul(TM) brand names. The products are marketed to both the home improvement and new construction markets through wholesale, millwork and specialty distributors, large contractors, home centers and lumber yards. The Segment differentiates itself from its competition with a multiple brand strategy, multiple channels of distribution, an established distribution network utilizing custom design and manufacturing capabilities, and a trained field sales and service support network. Its ability to sell in full truckload and less than truckload quantities is tailored to the desires of large home center chains which prefer to purchase windows directly from the manufacturer. The Segment's ability to offer a broad product line is also important to the Segment's sales and marketing strategy together with the Segment's focus on one of the fastest growing segments in the industry - home centers. Siding and Exterior Products The Segment is also a manufacturer of vinyl siding, skirting, soffit and accessories, aluminum trim coil, siding, soffit and accessories and vinyl fencing, railing and decking. These products are available in a variety of colors and/or woodgrains. Aluminum trim coil is a product that is used to cover wood products on the exterior areas of a home in which there is no vinyl substitute available. The Segment's products are used in both remodeling and new construction applications, including manufactured housing and light commercial. Vinyl siding's share of the overall exterior market continues to grow due to its low maintenance, durability, high performance and ease of installation compared to alternative siding materials (including wood, metal and masonry). The Segment's products are marketed under the Variform(R), Timber Oak(R), Varigrain Preferred(R), Camden Pointe(TM), Duragrain(R), Hampton III(R), Contractors Choice(R), Nostalgia Series(TM), Varitek(TM), Varibest(R), Proguard(TM), Georgia-Pacific(R), Chateau(R), Chateau Legacy(R), Chateau Nobility(R), Napco(R), American Splendor(TM), American Herald(R), American 76 Collection(R), Sunnybrook(R), Olde Providence(TM), Richwood(R), Kroy(R), Timberlast(TM), Classic Manor(TM) and Finyl Rail(TM) brand names. 9 NORTEK, INC. AND SUBSIDIARIES Vinyl siding and accessories are sold to specialty distributors (one-step distribution) who, in turn, sell directly to remodeling contractors and builders, or to wholesale distributors of building materials (two-step distribution), who sell to home centers and lumberyards who, in turn, sell to remodeling contractors, builders and consumers. The Company believes that it is able to compete on favorable terms as a result of its distribution coverage, high quality, innovative products and production efficiency. The Segment also manufactures a line of injection molded siding components for the remodeling and new construction markets. Siding components include blocks, which allow for the flush mounting of items like light fixtures to the exterior of a home, and gable vents that provide attic ventilation. These products are sold to home centers, lumberyards and wholesale distributors of building materials. The Segment operates 16 manufacturing plants in the United States and employed approximately 5,400 full-time people as of December 31, 1999, 1,528 of whom are covered by collective bargaining agreements which expire in 2000 and 2001. The Company believes that the Segment's relationships with its employees are satisfactory. Other Operations The Company manufactures and distributes preservative and fire retardant treated lumber and plywood products. These products are marketed to cooperative buying groups, lumberyards and independent wholesale distributors for use generally in residential decking, roofing, siding and landscaping as well as various commercial construction applications. GENERAL CONSIDERATIONS Employees The Company employed approximately 12,100 persons at December 31, 1999. 10 NORTEK, INC. AND SUBSIDIARIES Backlog Backlog expected to be filled during 2000 was approximately $168,415,000 at December 31, 1999 ($148,213,000 at December 31, 1998). Backlog is not regarded as a significant factor for operations where orders are generally for prompt delivery. While backlog stated for December 31, 1999 is believed to be firm, the possibility of cancellations makes it difficult to assess the firmness of backlog with certainty. Research and Development The Company's research and development activities are principally new product development and represent approximately .9% of net sales. Patents and Trademarks The Company holds numerous design and process patents that it considers important, but no single patent is material to the overall conduct of its business. It is the Company's policy to obtain and protect patents whenever such action would be beneficial to the Company. The Company owns or licenses numerous trademarks that it considers material to the marketing of its products, including Broan(R), NuTone(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R), Best(R), Crestline(R), Vetter(R), AWC(R), Kenergy(R), Variform(R), Timber Oak(R), Varigrain Preferred(R), Camden Pointe(TM), Duragrain(R), Hampton III(R), Contractors Choice(R), Nostalgia Series(TM), Varitek(TM), Varibest(R), Proguard(TM), Georgia-Pacific(R), Chateau(R), Chateau Legacy(R), Chateau Nobility(R), Napco(R), American Splendor(TM), American Herald(R), American 76 Collection(R), Sunnybrook(R), Olde Providence(TM), Richwood(R), Kroy(R), Timberlast(TM), Classic Manor(TM), Finyl Rail(TM), Great Lakes Gold(R), PLY GEM(R), Uniframe(R), Monitor(TM), Napco Premium(TM), Napco Prime(TM), Peachtree(R), Vintage(TM), Image(TM), Thermal-Gard(R), CWD(TM), Ambassador(TM), Regency(TM), Diplomat(TM), Envoy(TM), Consul(TM), Governair(R), Mammoth(R), Temtrol(R), Miller(R), Intertherm(R), Frigidaire(R), Tappan(R), Philco(R), Kelvinator(R), Gibson(R), Ventrol(R), Webco(TM), Linear(R), Channel Plus(R), Multi-Code(R) and Xantech(R). The Company believes that its rights in these trademarks are adequately protected. Raw Materials The Company purchases raw materials and most components used in its various manufacturing processes. The principal raw materials purchased by the Company are rolled sheet, formed and galvanized steel, copper, aluminum, plate mirror glass, PVC, polypropylene, glass, vinyl extrusions, particle board, fiberboard, lumber, plywood, various chemicals, paints, resins, and plastics. 11 NORTEK, INC. AND SUBSIDIARIES The materials, molds and dyes, subassemblies and components purchased from other manufacturers, and other materials and supplies used in manufacturing processes have generally been available from a variety of sources. Whenever practical, the Company establishes multiple sources for the purchase of raw materials and components to achieve competitive pricing, ensure flexibility and protect against supply disruption. From time to time increases in raw material costs can affect future supply availability due in part to raw material demands by other industries. 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. During 1999, the Company experienced an increase in the level of working capital in the Air Conditioning and Heating Products Segment as a result of an expansion of distribution of HVAC residential site-built products. The Company expects further increases in working capital levels in the year 2000 as its distribution of these products continues to expand. The demand for the Company's 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. Many of the businesses in the Company's Windows, Doors and Siding Products Segment have in the past been more seasonal in nature than the Company's other businesses. As a result, the demand for working capital of the Company's subsidiaries is greater from late in the first quarter until early in the fourth quarter. See "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated herein by reference. 12 NORTEK, INC. AND SUBSIDIARIES Executive Officers of the Registrant Name Age Position Richard L. Bready 55 Chairman, President and Chief Executive Officer Almon C. Hall 53 Vice President, Controller and Chief Accounting Officer Richard J. Harris 63 Vice President and Treasurer Kenneth J. Ortman 64 Senior Vice President - Segment Operations Kevin W. Donnelly 45 Vice President, General Counsel and Secretary The Executive Officers have served in the same or substantially similar executive positions with the Company for at least the past five years. Executive Officers are elected annually by the Board of Directors of the Company and serve until their successors are chosen and qualified. Mr. Bready has an employment agreement with the Company providing for his employment as Chief Executive Officer through January 1, 2003, and at the end of each year during the term of his employment the agreement will be extended for an additional year until either party gives notice it will not be further extended. The Company's executive officers include only those officers of the Company who perform policy-making functions for the Company as a whole and have managerial responsibility for major aspects of the Company's overall operations. A number of other individuals who serve as officers of the Company's subsidiaries perform policy-making functions and have managerial responsibilities for the subsidiary or division by which they are employed, although not for the Company overall. Certain of these individuals could, depending on earnings of such unit, be more highly compensated than some executive officers of the Company. 13 NORTEK, INC. AND SUBSIDIARIES ITEM 2. 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 the Company, all of which the Company considers to be in satisfactory repair. All properties are owned, except for those indicated by an asterisk, which are leased. Approximate Location Description Square Feet Residential Building Products Segment: - -------------------------------------- Union, IL Manufacturing/Warehouse/Administrative 197,000 Hartford, WI Manufacturing/Warehouse/Administrative 477,000 Mississauga, ONT Manufacturing/Administrative 110,000 Brea, CA Manufacturing/Administrative 34,000* Sylmar, CA Manufacturing/Administrative 35,000* Carlsbad, CA Administrative 30,000 Xiang, Boaon, PRC Manufacturing 106,000* Fabriano, Italy Manufacturing/Administrative 97,500* Cerreto D'Esi, Italy Manufacturing/Administrative 56,000 Montefano, Italy Manufacturing/Administrative 140,000 Cleburne, TX Manufacturing/Administrative 210,000 Los Angeles, CA Manufacturing/Administrative 177,000 Drummondville, QUE Manufacturing/Administrative 76,000 Cincinnati, OH Manufacturing 836,000 Coppell, TX Manufacturing 144,000* Saint-Ouen l'Aumone, France Manufacturing/Administrative 43,000* Air Conditioning and Heating Products Segment: - --------------------------------------------- St. Leonard d'Aston, QUE Manufacturing/Administrative 86,000 St. Peters, MO Warehouse/Administrative 250,000* St. Louis, MO Manufacturing 214,000 St. Louis, MO Manufacturing 103,000* Boonsville, MO Manufacturing 250,000 Tipton, MO Manufacturing 50,000 Chaska, MN Manufacturing/Administrative 230,000* Oklahoma City, OK Manufacturing/Administrative 127,000 Okarche, OK Manufacturing/Administrative 203,000 Saskatoon, Canada Manufacturing 49,000 Springfield, MO Manufacturing 47,000* Montreal, QUE Manufacturing 66,000* 14 NORTEK, INC. AND SUBSIDIARIES Approximate Location Description Square Feet Windows, Doors and Siding Products Segment: - ------------------------------------------- Calgary, Alberta Manufacturing/Administrative 282,000 Toledo, OH Manufacturing/Warehouse/Administrative 258,000 Kearney, MO Manufacturing/Administrative 145,000 Martinsburg, WV Manufacturing 162,000 Jasper, TN Manufacturing 110,000 Mosinee, WI Manufacturing/Warehouse/Administrative 825,000* Stevens Point, WI Manufacturing 107,000 Huntington, WV Manufacturing/Warehouse 286,000* Butler, PA Manufacturing 110,000 York, NE Manufacturing/Administrative 94,000 Sarver, PA Manufacturing 126,000 Valencia, PA Manufacturing 174,000 Gainsville, GA Manufacturing/Administrative 430,000 Punxsutawney, PA Manufacturing/Administrative 133,000 Commerce, TX Manufacturing/Administrative 86,000 Other: - ------ Pine Bluff, AR Manufacturing 35 Acres Thomson, GA Manufacturing 29 Acres Milford, VA Manufacturing 45 Acres Detroit, MI Manufacturing 10 Acres Providence, RI Administrative 23,900* 15 NORTEK, INC. AND SUBSIDIARIES ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Company and its subsidiaries are subject to numerous federal, state and local laws and regulations, including environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with the material laws and regulations applicable to it. The Company is involved in current, and may become involved in future, remedial actions under federal and state environmental laws and regulations which impose liability on companies to clean up, or contribute to the cost of cleaning up, sites at which their hazardous wastes or materials were disposed of or released. Such claims may relate to properties or business lines acquired by the Company after a release has occurred. In other instances, the Company may be partially liable under law or contract to other parties that have acquired businesses or assets from the Company for past practices relating to hazardous substances management. The Company believes that all such claims asserted against it, or such obligations incurred by it, will not have a material adverse effect upon the Company's financial condition or results of operations. Expenditures in 1998 and 1999 to evaluate and remediate such sites were not material. However, the Company is presently unable to estimate accurately its ultimate financial exposure in connection with identified or yet to be identified remedial actions due among other reasons to: (i) uncertainties surrounding the nature and application of environmental regulations, (ii) the Company's lack of information about additional sites to which it may be listed as a potentially responsible party ("PRP"), (iii) the level of clean-up that may be required at specific sites and choices concerning the technologies to be applied in corrective actions and (iv) the time periods over which remediation may occur. Furthermore, since liability for site remediation is joint and several, each PRP is potentially wholly liable for other PRPs that become insolvent or bankrupt. Thus, the solvency of other PRPs could directly affect the Company's ultimate aggregate clean-up costs. In certain circumstances, the Company's liability for clean-up costs may be covered in whole or in part by insurance or indemnification obligations of third parties. In addition to the legal matters described above, the Company and its subsidiaries are parties to various legal proceedings incident to the conduct of their businesses. None of these proceedings is expected to have a material adverse effect, either individually or in the aggregate, on the Company's financial position or results of operations (See Note 8 of the Notes to the Consolidated Financial Statements, Item 8 of Part II of this report, incorporated herein by reference). 16 NORTEK, INC. AND SUBSIDIARIES A subsidiary of the Company is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated wood products. Many of the suits have been resolved by dismissal or settlement with amounts being paid out of insurance proceeds or other third party recoveries. The subsidiary continues to vigorously defend the remaining suits. Certain defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement with suppliers of material used in the production of the treated wood products. The subsidiary has engaged in coverage litigation with certain insurers and has settled coverage claims with several of the insurers. The Company believes that the remaining coverage disputes will be resolved on a satisfactory basis and additional coverage will be available. In reaching this belief, the Company analyzed insurance coverage and the status of the coverage litigation, considered the history of settlements with primary and excess insurers and consulted with counsel. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------------------- Stockholders of record of Nortek Common and Special Common Stock at February 25, 2000, numbered 2,666 and 2,162, respectively. There were no dividends declared on the Common and Special Common Stock in 1999 or 1998. The high and low sales prices of Nortek's Common Stock traded on the New York Stock Exchange in each quarter of 1999 and 1998 were: 1999 Quarter High Low First 31 1/8 24 1/8 Second 32 25 Third 41 31 1/8 Fourth 35 22 1/4 1998 Quarter High Low First 34 1/2 25 Second 33 1/4 28 3/4 Third 36 1/16 22 13/16 Fourth 30 3/8 20 See Note 6 of the Notes to the Consolidated Financial Statements, Item 8 of Part II of this report, incorporated herein by reference. 17 NORTEK, INC. AND SUBSIDIARIES ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA For the Five Years Ended December 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Consolidated Summary of (In millions except ratios and per share amounts) Operations: Net sales $1,992.8 $1,738.3 $1,134.1 $841.6 $656.8 Operating earnings 178.5 133.1 83.0 61.0 43.0 Gain on Businesses sold --- 4.0 --- --- --- Earnings from continuing operations before extraordinary loss 49.3 34.0 26.4 23.7 17.5 Earnings (loss) from discontinued operations --- 1.2 (5.2) (1.7) (2.5) Extraordinary loss from debt retirements --- (.2) --- --- --- Net earnings 49.3 35.0 21.2 22.0 15.0 Financial Position: Unrestricted cash, investments and marketable securities $ 115.1 $209.6 $161.8 $ 92.1 $103.3 Working capital 324.5 337.2 341.8 163.1 180.2 Total assets 1,809.7 1,690.0 1,304.6 590.2 605.0 Total debt-- Current 14.0 17.7 17.7 36.5 41.9 Long-term 1,023.6 1,007.1 835.8 243.8 240.1 Current ratio 1.9:1 2.0:1 2.3:1 1.9:1 1.9:1 Debt to equity ratio 4.0:1 4.7:1 6.7:1 2.4:1 2.1:1 Depreciation and amorti- tion expense including non-cash interest 59.2 45.3 28.4 21.0 16.2 Capital expenditures 42.5 41.4 22.5 19.8 15.7 Stockholders' investment 259.8 217.6 128.1 118.8 131.3 Common and Special Common shares outstanding 11.5 11.7 9.5 9.9 12.1 Per Share: Earnings from continuing operations Basic $ 4.19 $ 3.11 $ 2.75 $ 2.26 $ 1.41 Diluted $ 4.11 $ 3.06 $ 2.68 $ 2.23 $ 1.39 Net earnings Basic $ 4.19 $ 3.20 $ 2.21 $ 2.10 $ 1.21 Diluted $ 4.11 $ 3.15 $ 2.15 $ 2.07 $ 1.19 Stockholders' investment $22.60 $18.59 $13.48 $12.03 $10.87 See Notes 2, 9 to 11 and 13 of the Notes to the Consolidated Financial Statements, and Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere herein, regarding the effect on operating results of acquisitions, discontinued operations, Businesses sold and other matters. There have not been any cash dividends declared or paid on the Company's Common or Special Common Stock during the past five years. 18 NORTEK, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The Company is a diversified manufacturer of residential and commercial building products, operating within three principal segments: the Residential Building Products Segment, the Air Conditioning and Heating Products Segment, and the Windows, Doors and Siding Products Segment. In the results of operations presented below, Other includes corporate related items, results of insignificant operations and certain income and expense not allocable to reportable segments. The results of operations and other data relating to Businesses sold have been presented separately. (See Notes 2 and 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Through its principal segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the residential and commercial construction, manufactured housing, the do-it-yourself ("DIY") and professional remodeling and renovation markets. The Residential Building Products Segment manufactures and distributes built-in products primarily for the residential new construction, DIY and professional remodeling and renovation markets. The principal products sold by the Segment include, kitchen range hoods, bath fans and combination units (fan, heater and light combinations). The Air Conditioning and Heating Products Segment manufactures and sells heating, ventilating, and air conditioning systems ("HVAC") for custom-designed commercial applications and for manufactured and site-built residential housing. The Windows, Doors and Siding Products Segment principally manufactures and distributes vinyl, wood and composite windows, vinyl, wood, steel and composite patio and entry doors, vinyl siding, skirting, soffit and accessories, aluminum trim coil, siding, soffit and accessories, blocks, vents, shutters, sunrooms, fencing, railing and decking for use in the residential construction, DIY and professional renovation markets. 19 NORTEK, INC. AND SUBSIDIARIES The Company acquired Webco, Inc. ("Webco") on March 8, 1999. On April 23, 1999, the Company acquired three businesses from Caradon plc of the United Kingdom: Peachtree Windows and Doors, Thermal-Gard and CWD Windows and Doors (the "Caradon Acquired Companies"). Other 1999 acquisitions included Multiplex Technologies, Inc. ("Multiplex") on May 28, 1999, Kroy Building Products, Inc. ("Kroy") on September 9, 1999 and Xantech Corporation ("Xantech") on December 3, 1999. During 1998 the Company acquired NuTone, Inc. ("NuTone") on July 31, 1998 and Napco, Inc. and an affiliate ("Napco") on October 9, 1998. The Company acquired Ply Gem Industries, Inc. ("Ply Gem") and its subsidiaries on August 26, 1997. These acquisitions have been accounted for under the purchase method of accounting. Accordingly, the results of Webco, the Caradon Acquired Companies, Multiplex, Kroy, Xantech, NuTone, Napco and Ply Gem are included in the Company's consolidated results since the date of their acquisition. (See "Liquidity and Capital Resources" and Note 2 of the Notes to the Consolidated Financial Statements included elsewhere herein). In the fourth quarter of 1997, the Company adopted a plan to discontinue its plumbing products business. Accordingly, the results of the plumbing products business have been excluded from earnings from continuing operations and classified separately as discontinued operations for each of the three years ended December 31, 1999. On July 10, 1998, the Company sold its plumbing products business for approximately $33,700,000 in cash. (See Note 9 of the Notes to the Consolidated Financial Statements included elsewhere herein). 20 NORTEK, INC. AND SUBSIDIARIES During 1998, the Company made several dispositions of non-strategic assets acquired in the 1997 acquisition of Ply Gem. On May 8, 1998, the Company sold Studley Products, Inc. ("Studley"). Studley was treated as an operation held for sale since the acquisition of Ply Gem and accordingly Studley's operating results are not included in the Company's consolidated financial results. Four additional Ply Gem subsidiaries were sold during 1998: on May 22, 1998, the Company sold Sagebrush Sales Inc.; on July 2, 1998, the Company sold Goldenberg Group Inc.; on July 31, 1998 the Company sold the Ply Gem Manufacturing division of Ply Gem; and on December 10, 1998, the Company sold Allied Plywood Corporation. Additionally, on December 30, 1998 the Company sold its M&S Systems LP and Moore-O-Matic, Inc. subsidiaries. The operating results of these 1998 dispositions are included in the Company's 1998 consolidated results to the date of sale. The combined net sales, operating earnings and earnings before provision for income taxes of these dispositions for the period from January 1, 1998 to the date of sale were approximately $192,000,000, $6,400,000 and $6,400,000, respectively. (See Notes 2, 9 and 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 21 NORTEK, INC. AND SUBSIDIARIES Results of Operations - --------------------- The tables that follow present the net sales and operating earnings for the Company's principal segments for the three years ended December 31, 1999, and the dollar amount and percentage change of such results as compared to the prior year. Net Change Year Ended December 31, 1999 to 1998 1998 to 1997 ----------------------- ------------ ------------ 1999 1998 1997 $ % $ % ---- ---- ---- ----- ------ ----- ----- (Dollar amounts in millions) Net Sales: Residential Building Products $ 637.8 $ 475.0 $ 381.8 $162.8 34.3% $ 93.2 24.4% Air Conditioning and Heating Products 540.6 465.2 419.4 75.4 16.2 45.8 10.9 Windows, Doors and Siding Products 738.4 536.8 189.0 201.6 37.6 347.8 184.0 Other 76.0 69.3 21.3 6.7 9.7 48.0 225.4 ------ -------- -------- ------ ------ 1,992.8 1,546.3 1,011.5 446.5 28.9 534.8 52.9 Businesses sold --- 192.0 122.6 (192.0) (100.0) 69.4 56.6 ------- -------- -------- ------ ------ $1,992.8 $1,738.3 $1,134.1 $254.5 14.6% $604.2 53.3% ======== ======== ======== ====== ====== Operating Earnings: Residential Building Products $94.7 $ 53.7 $ 40.3 $41.0 76.4% $13.4 33.3% Air Conditioning and Heating Products 67.0 55.7 41.3 11.3 20.3 14.4 34.9 Windows, Doors and Siding Products 37.2 31.5 9.0 5.7 18.1 22.5 250.0 Other (20.4) (14.2) (14.5) (6.2) (43.7) 0.3 2.1 ------ ------ ------- ----- ----- 178.5 126.7 76.1 51.8 40.9 50.6 66.5 Businesses sold --- 6.4 6.9 (6.4) (100.0) (0.5) (7.2) ------ ------ ------- ---- ----- $178.5 $133.1 $ 83.0 $45.4 34.1% $50.1 60.4% ====== ====== ======== ===== ===== 22 NORTEK, INC. AND SUBSIDIARIES The tables that follow set forth, for the three years ended December 31, 1999, (a) certain consolidated operating results, (b) the percentage change of such results as compared to the prior year, (c) the percentage which such results bear to net sales and (d) the change of such percentages as compared to the prior year: Percentage Change 1999 1998 Year Ended December 31, To to 1999 1998 1997 1998 1997 ------ ------ ------ ------- ------- (Dollar amounts in millions) Net sales $1,992.8 $1,738.3 $1,134.1 14.6% 53.3% Cost of products sold 1,433.1 1,275.3 825.8 (12.4) (54.4) Selling, general and administrative expense 360.7 315.5 219.4 (14.3) (43.8) Amortization of goodwill and intangible assets 20.5 14.4 5.9 (42.4) (144.1) Operating earnings 178.5 133.1 83.0 34.1 60.4 Gain on Businesses sold --- 4.0 --- (100.0) --- Interest expense (96.5) (86.3) (50.2) (11.8) (71.9) Investment income 8.0 10.5 9.9 (23.8) 6.1 Earnings from continuing operations before provision for income taxes 90.0 61.3 42.7 46.8 43.6 Provision for income taxes 40.7 27.3 16.3 (49.1) (67.5) Earnings from continuing operations before extraordinary loss 49.3 34.0 26.4 45.0 28.8 Earnings (loss) from discontinued operations --- 1.2 (5.2)(100.0) 123.1 Extraordinary loss from debt retirements --- (0.2) --- 100.0 --- Net earnings $49.3 $35.0 $21.2 40.9% 65.1% 23 NORTEK, INC. AND SUBSIDIARIES Percentage Change Percentage of Net Sales 1999 1998 Year Ended December 31, to to 1999 1998 1997 1998 1997 ------ ------ ------ ---- ---- Net sales 100.0% 100.0% 100.0% ---% ---% Cost of products sold 71.9 73.4 72.8 1.5 (0.6) Selling, general and administrative expense 18.1 18.1 19.4 --- 1.3 Amortization of goodwill and intangible assets 1.0 0.8 0.5 (0.2) (0.3) Operating earnings 9.0 7.7 7.3 1.3 0.4 Gain on Businesses sold --- 0.2 --- (0.2) 0.2 Interest expense (4.9) (5.0) (4.4) 0.1 (0.6) Investment income 0.4 0.6 0.9 (0.2) (0.3) Earnings from continuing operations before provision for income taxes 4.5 3.5 3.8 1.0 (0.3) Provision for income taxes 2.0 1.6 1.4 (0.4) (0.2) Earnings from continuing operations before extraordinary loss 2.5 1.9 2.4 0.6 (0.5) Earnings (loss) from discontinued operations --- 0.1 (0.5) (0.1) 0.6 Extraordinary loss from debt retirements --- --- --- --- --- Net earnings 2.5 2.0 1.9 0.5 0.1 24 NORTEK, INC. AND SUBSIDIARIES Year Ended December 31, 1999 as Compared to the Year Ended December 31, 1998 - ------------------------------------------------------------------------------ Net sales increased approximately $254,500,000 or approximately 14.6%(or increased approximately $257,400,000 or approximately 14.8% excluding the effect of changes in foreign exchange rates) as compared to 1998. Net sales increased in 1999, principally as a result of acquisitions and higher sales volume, partially offset by the effect of Businesses sold. Acquisitions contributed approximately $127,400,000 of the total increase in net sales of approximately $162,800,000 ($165,700,000 increase excluding the effect of changes in foreign exchange rates) in the Residential Building Products Segment in 1999. Increased domestic sales volume, partially offset by the effects of changes in foreign exchange rates accounted for the balance of the increase in this segment. Net sales in the Air Conditioning and Heating Products Segment increased approximately $75,400,000 or 16.2% in 1999. The increase in net sales in this segment is principally as a result of higher sales volume of products sold to customers serving the residential site built and commercial markets partially offset by lower sales of products to customers serving the manufactured housing market in this segment. In the second half of 1999, this segment began to feel the impact of a slowdown in the manufactured housing industry. It is anticipated that the weakness in the manufactured housing industry will continue into the year 2000 and will have an adverse effect on this segment's sales during the next several quarters. This segment's sales of air conditioning and heating products sold to manufactured housing customers should improve as the manufactured housing industry takes steps to reduce its retail inventories of manufactured homes. Approximately $12,100,000 of the increase in net sales in this segment in 1999 was from an acquisition. Net sales of the Windows, Doors and Siding Products Segment increased approximately $201,600,000 in 1999. The increase arose primarily from net sales of acquired companies which contributed approximately $215,900,000 in 1999. The increase in net sales in this segment was partially offset by the effect of lower sales volume of certain lower margin vinyl window products which were relocated to a lower cost manufacturing facility as this operation closely controlled its sales as it continues to implement cost control measures and improve operating systems. These overall net increases in net sales in the Company's three principal segments were partially offset by the effect of approximately $192,000,000 of net sales attributable to Businesses sold in 1998. As a result of the acquisitions in the second and third quarters of 1999 in the Windows, Doors and Siding Products Segment, the performance of this segment will be more seasonal than in prior years due to the effect of winter weather conditions normally experienced in the fourth and first quarters in the U.S. and Canada. The Securities and Exchange Commission released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB No. 101), on December 3, 1999. This SAB provides additional guidance on the accounting for revenue recognition including both broad conceptual discussions as well as certain industry-specific guidance. The Company is in the process of accumulating the information necessary to quantify the potential impact, if any, of this new guidance. 25 NORTEK, INC. AND SUBSIDIARIES Cost of products sold as a percentage of net sales decreased from approximately 73.4% in 1998 to approximately 71.9% in 1999. Changes in the percentages were, in large part, as a result of acquisitions and Businesses sold in 1998. Excluding the effect of Businesses sold, cost of products sold as a percentage of net sales decreased from approximately 72.9% in 1998 to approximately 71.9% in 1999. The decrease in the percentage principally resulted from acquisitions in the Residential Building Products Segment partially offset by acquisitions in the Windows, Doors and Siding Products Segment (which, on a combined basis had a net lower level of cost of sales than the overall group of businesses owned prior to such acquisitions). To a lesser extent, the effect of higher sales levels in the Residential Building Products Segment without a proportionate increase in costs also contributed to the decrease in the percentage. These decreases in the percentages were partially offset by the effect of higher vinyl resin cost, due to higher oil prices, without a proportionate increase in sales prices, in the Windows, Doors and Siding Products Segment. In the year 2000, the rising cost of vinyl resin is also expected to adversely impact cost of sales percentages. This situation should be mitigated as price increases for this segment's vinyl products are implemented over the next several quarters. Had all year-end inventory values been stated on a FIFO basis, year-end inventory would have been approximately $2,252,000 higher in 1999, $3,640,000 higher in 1998 and $5,041,000 higher in 1997. Overall, changes in the cost of products sold as a percentage of net sales for one period as compared to another period may reflect a number of factors, including changes in the relative mix of products sold, the effect of changes in sales prices, material costs and changes in productivity levels. Selling, general and administrative expense as a percentage of net sales remained unchanged at approximately 18.1% in 1998 and 1999. Excluding the effect of Businesses sold, selling, general and administrative expense as a percentage of net sales increased slightly from approximately 18.0% in 1998 to approximately 18.1% in 1999. This increase in the percentage is principally as a result of acquisitions in the Residential Building Products Segment (which have a higher level of expense as a percentage of net sales then the overall group of businesses owned prior to such acquisitions) partially offset by an increase in net sales in the Air Conditioning and Heating Products Segment without a proportionate increase in expense, a reduction in the level of expense in the Windows, Doors and Siding Products Segment, including the effect of acquisitions (which, for the most part, had a lower level of expense as a percentage of net sales than the overall group of businesses owned prior to such acquisitions). Amortization of goodwill and intangible assets, as a percentage of net sales, increased from approximately .8% of net sales in 1998 to approximately 1.0% of net sales in 1999, principally as a result of acquisitions. 26 NORTEK, INC. AND SUBSIDIARIES Consolidated operating earnings increased approximately $45,400,000 from approximately $133,100,000 in 1998 to approximately $178,500,000 in 1999. Businesses acquired in 1999 contributed approximately $30,900,000 of the increase, of which approximately $18,500,000 was in the Residential Building Products Segment, $900,000 was in the Air Conditioning and Heating Products Segment and $11,500,000 was in the Windows, Doors and Siding Products Segment. The increase in operating earnings for 1999 includes approximately $14,000,000 of estimated synergies and cost reductions realized from the integration of NuTone into the Company's Residential Building Products Segment, net of approximately $3,400,000 of costs and expenses. Consolidated operating earnings have been reduced by depreciation and amortization expense (other than amortization of deferred debt expense and debt discount) of approximately $55,500,000 and $42,100,000 for 1999 and 1998, respectively. Businesses acquired contributed approximately $10,500,000 of the increase in depreciation and amortization expense in 1999, of which approximately $5,300,000 was in the Residential Building Products Segment, $300,000 was in the Air Conditioning and Heating Products Segment and $4,900,000 was in the Windows, Doors and Siding Products Segment. Depreciation and amortization expense relating to the operating results of Businesses sold in 1998 was approximately $1,700,000 for 1998. (See Note 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) The increase in operating earnings was also due, in part, to increased sales volume without a proportionate increase in costs and expenses in the Residential Building Products Segment of approximately $22,600,000 excluding the contribution from acquisitions; and increased sales volume without a proportionate increase in costs and expenses in the Air Conditioning and Heating Products Segment of approximately $10,300,000 excluding the contribution from acquisitions. The increase in operating earnings in the Air Conditioning and Heating Products Segment arose from higher sales levels of commercial and site-built residential products, partially offset in the second half of 1999, by lower operating earnings of air conditioning and heating products sold to the manufactured housing market as compared to the prior year due to a slowdown in the manufactured housing industry as noted above. The slowdown in the manufactured housing industry is expected to adversely effect this segment's operating earnings during the next several quarters. It is anticipated that this segment's operating earnings will begin to improve from increased sales of air conditioning and heating products once the manufactured housing industry takes steps to reduce its retail inventories of manufactured homes. It is also expected, that over the next several quarters, the effect of this slowdown will continue to be somewhat offset by increased earnings from higher sales levels of site-built residential air conditioning products. Operating earnings in 1999 in the Windows, Doors and Siding Products Segment decreased approximately $5,800,000 excluding the contribution from acquisitions, principally as a result of higher vinyl resin costs and lower sales volume of certain vinyl windows as noted above. The overall increase in the Company's operating earnings was partially offset by the effect of approximately $6,400,000 of operating earnings of Businesses sold in 1998. The integration of 27 NORTEK, INC. AND SUBSIDIARIES the recently acquired Caradon Acquired Companies is taking longer than expected and resulted in a lower contribution to earnings in 1999 than anticipated. The Company anticipates lower earnings levels during the next several quarters in the Windows, Doors and Siding Products Segment due to the seasonality of this segment's 1999 acquisitions and as the effects of the integration of the Caradon Acquired Companies and the lower sales levels of certain vinyl windows, noted above, continue to be felt. The Company also expects future operating earnings in this segment to be adversely affected by higher vinyl resin costs until increases in sales prices to customers can be implemented. Operating earnings of foreign operations, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries which manufacture built-in ventilation products and windows and doors, were approximately 7.4% and 6.5% of operating earnings (before corporate overhead) in 1999 and 1998, respectively. The increase in foreign operating earnings as a percentage of operating earnings in 1999 as compared to 1998 is principally a result of the increased operating earnings from foreign acquisitions. Sales and earnings derived from the international market are subject to the risks of, among other factors, currency fluctuations. Interest expense in 1999 increased approximately $10,200,000 or approximately 11.8% as compared to 1998, primarily as a result of the sale of the 8 7/8% Senior Notes due 2008 ("8 7/8% Notes") on July 31, 1998. This increase was partially offset by the paydown of approximately $27,700,000 of debt with a portion of the proceeds from the sale of businesses in 1998. Investment income decreased approximately $2,500,000 or approximately 23.8% in 1999 as compared 1998. The decrease in 1999 is principally due to lower average invested balances as a result of funds used for acquisitions and lower yields earned on short-term investments and marketable securities. The provision for income taxes was approximately $40,700,000 for 1999, as compared to $27,300,000 for 1998. The income tax rates differed from the United States Federal statutory rate of 35% principally as a result of state income tax provisions, nondeductible amortization expense (for tax purposes), the effect of foreign income tax on foreign source income, changes in tax reserves and the effect of product development tax credits from foreign operations. (See Note 4 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 28 NORTEK, INC. AND SUBSIDIARIES Year Ended December 31, 1998 as Compared to the Year Ended December 31, 1997 - ---------------------------------------------------------------------------- Net sales increased approximately $604,200,000 or approximately 53.3%, as compared to 1997 (or increased approximately $610,400,000 or approximately 53.8% excluding the effect of changes in foreign exchange rates). Net sales increased in 1998 principally as a result of acquisitions. The acquisition of NuTone on July 31, 1998 contributed approximately $82,200,000 of the $93,200,000 increase ($99,400,000 increase excluding the effect of changes in foreign exchange rates) in net sales in the Residential Building Products Segment in 1998. The balance of the increase in net sales in this segment is as a result of higher sales levels of higher margin built-in ventilation products in North America, partially offset by lower sales levels of certain lower margin products. The increase in net sales in the Air Conditioning and Heating Products Segment of approximately $45,800,000 or 10.9%, is principally as a result of higher sales volume related to products sold to the residential and manufactured housing markets, partially offset by slightly lower sales of commercial HVAC products, in part, as a result of a seven week strike in 1998 at one of this segment's manufacturing facilities. The increase in net sales in the Windows, Doors and Siding Products Segment principally arose in connection with the August 26, 1997 acquisition of Ply Gem (a full twelve months of operating results in 1998 as compared to four months in 1997). The acquisition of Napco on October 9, 1998 contributed approximately $21,000,000 to this segment's increase in net sales in 1998. The net sales of Businesses sold increased approximately $69,400,000 principally as a result of certain non-strategic businesses, acquired in connection with the August 26, 1997 acquisition of Ply Gem, which were sold in 1998. Cost of products sold as a percentage of net sales increased from approximately 72.8% in 1997 to approximately 73.4% in 1998. Changes in the percentages were, in large part, affected by acquisitions and will be affected in the future by the effect of Businesses sold in 1998. The Ply Gem businesses have a higher level of cost of sales as a percentage of net sales than the overall group of businesses owned prior to the Ply Gem acquisition while NuTone's level of cost of sales as a percentage of net sales is lower. Excluding the effect of Businesses sold, cost of products sold as a percentage of net sales increased from approximately 72.4% in 1997 to approximately 72.9% in 1998. This increase in the percentage principally resulted from the acquisitions of Ply Gem and, to a lesser extent, Napco in the Windows, Doors and Siding Products Segment, partially offset by the acquisition of NuTone and the effect of higher sales levels in the Residential Building Products and Air Conditioning and Heating Product Segments without a proportionate increase in costs. Had all year-end inventory values been stated on a FIFO basis, year-end inventory would have been approximately $3,640,000 higher in 1998, approximately $5,041,000 higher in 1997 and approximately $6,015,000 higher in 1996. Overall, changes in the cost of products sold as a percentage of net sales for one period as compared to another period may reflect a number of factors including changes in the relative mix of products sold, the effect of changes in sales prices, the material cost of products sold and changes in productivity levels. 29 NORTEK, INC. AND SUBSIDIARIES Selling, general and administrative expense as a percentage of net sales decreased from approximately 19.4% in 1997 to approximately 18.1% in 1998. This decrease in the percentage was principally affected as a result of acquisitions and will be affected in the future by the effect of Businesses sold in 1998. Ply Gem and Napco have a lower level of selling, general and administrative expense as a percentage of net sales than the overall group of businesses owned prior to the acquisitions and NuTone has a higher level of expense as a percentage of net sales. Excluding the effect of Businesses sold, selling, general and administrative expense as a percentage of net sales decreased from approximately 19.5% in 1997 to approximately 18.0% in 1998. The Air Conditioning and Heating Products Segment, and to a lesser extent the Residential Building Products Segment, contributed to the decrease in the percentage as a result of the increases in sales noted above without a proportionate increase in expense. This was partially offset by increased corporate overhead, principally as a result of the acquisition of Ply Gem. Amortization of goodwill and intangible assets, as a percentage of net sales, increased from approximately .5% of net sales in 1997 to approximately .8% of net sales in 1998, principally as a result of the acquisitions of Ply Gem and NuTone. Consolidated operating earnings increased approximately $50,100,000 from approximately $83,000,000 in 1997 as compared to approximately $133,100,000 in 1998. Businesses acquired in 1998 contributed approximately $12,600,000 of the increase, of which approximately $2,300,000 was in the Windows, Doors and Siding Products Segment, and $10,300,000 was in the Residential Building Products Segment. Operating earnings increased substantially in 1998 in the Windows, Doors and Siding Products Segment, principally due to the effect of the August 26, 1997 acquisition of Ply Gem (a full twelve months of operating results in 1998 as compared to four months in 1997). Consolidated operating earnings have been reduced by depreciation and amortization expense of approximately $42,100,000 and approximately $26,700,000 for 1998 and 1997, respectively. Businesses acquired in 1998 contributed approximately $4,300,000 of the increase in depreciation and amortization expense in 1998, of which approximately $500,000 was in the Windows, Doors and Siding Products Segment and $3,800,000 was in the Residential Building Products Segment. Depreciation and amortization expense for the year ended December 31, 1998 related to the operating results of Businesses sold in 1998 was approximately $1,700,000. (See Note 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) The increase in operating earnings was also due to increased sales volume without a proportionate increase in cost and expense in the Air Conditioning and Heating Products Segment (approximately $14,400,000 or 34.9%) and, to a lesser extent, the Residential Building Products Segment (approximately $3,100,000 excluding the contribution from NuTone), as noted above, partially offset by increased other expense principally as a result of increased corporate overhead as a result of the acquisition of Ply Gem. 30 NORTEK, INC. AND SUBSIDIARIES Operating earnings of foreign operations, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries which manufacture built-in ventilating products, were approximately 6.5% and 9.0% of operating earnings (before corporate overhead) in 1998 and 1997, respectively. The decline in foreign operating earnings as a percentage of net sales is principally as a result of the increased domestic sales and operating earnings from the Ply Gem acquisition. Sales and earnings derived from the international market are subject to the risks of currency fluctuations. The gain on Businesses sold before provision for income taxes in 1998 of approximately $4,000,000 arose in connection with the sale of M&S and MOM. Interest expense in 1998 increased approximately $36,100,000 or approximately 71.9% as compared to 1997, primarily as a result of the sale of the 9 1/4% Notes on March 17, 1997, the sale of the 9 1/8% Notes on August 26, 1997, indebtedness of Ply Gem existing at the date of acquisition and the sale of the 8 7/8% Notes on July 31, 1998. This increase was partially offset by the refinancing of certain outstanding indebtedness of the Company's subsidiaries in 1997. (See Notes 2 and 5 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Investment income in 1998 increased approximately $600,000 or approximately 6.1% as compared to 1997, principally due to higher average invested balances partially offset by slightly lower yields earned on short-term investments and marketable securities. The provision for income taxes was approximately $27,300,000 for 1998, as compared to approximately $16,300,000 for 1997. The income tax rates differed from the United States Federal statutory rate of 35% principally as a result of state income tax provisions, nondeductible amortization expense (for tax purposes), changes in tax reserves, the effect of foreign income tax on foreign source income and the effect of product development tax credits from foreign operations. (See Note 4 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Earnings from discontinued operations were approximately $1,200,000 in 1998 as compared to a loss of approximately $5,200,000 in 1997. In the fourth quarter of 1997, the Company adopted a plan of disposition of the plumbing products business and on July 10, 1998, this business was sold. The following is a comparison of the operating results of discontinued operations for the two years ended December 31, 1998. (See Note 9 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 31 NORTEK, INC. AND SUBSIDIARIES For the years ended December 31, 1998 1997 -------- -------- (Amounts in thousands) Loss before income taxes $(2,800) $(3,800) Allocated corporate interest expense (1,000) (1,900) ------- ------- (3,800) (5,700) Income tax benefit 5,000 2,100 ------- ------- 1,200 (3,600) Reserve for future operating expenses net of tax benefit of $900,000 --- (1,600) ------- ------- Earnings (loss) from discontinued operations $ 1,200 $(5,200) ======= ======= The income tax benefit in 1998 includes approximately $800,000 recorded as a result of the realization of a portion of the tax capital loss arising from the sale of the plumbing products business. Liquidity and Capital Resources - ------------------------------- The Company is highly leveraged and expects to continue to be highly leveraged for the foreseeable future. At December 31, 1999, the Company had consolidated debt of approximately $1,037,600,000 consisting of (i) $14,000,000 of short-term borrowings and current maturities of long-term debt, (ii) $128,300,000 of notes, mortgage notes and other indebtedness, (iii) $209,300,000 of the 8 7/8% Notes, (iv) $307,900,000 of the 9 1/8% Senior Notes due 2007 ("9 1/8% Notes") (v) $174,200,000 of the 9 1/4% Senior Notes due 2007 ("9 1/4% Notes") and (vi) $203,900,000 of the 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes"). At December 31, 1999, the Company had consolidated unrestricted cash, cash equivalents and marketable securities of approximately $115,100,000 as compared to approximately $209,600,000 at December 31, 1998 and the Company's debt to equity ratio was approximately 4.0:1 at December 31, 1999 as compared to 4.7:1 at December 31, 1998. The Company's ability to pay interest on or to refinance its indebtedness depends on the successful integration of the operations of recent acquisitions and the Company's future performance, which is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. There can be no assurance that the Company will generate sufficient cash flow from the operation of its subsidiaries or that future financings will be available on acceptable terms or in amounts sufficient to enable the Company to service or refinance its indebtedness, or to make necessary capital expenditures. 32 NORTEK, INC. AND SUBSIDIARIES The Company has evaluated and expects to continue to evaluate possible acquisition transactions and possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions. The indentures and other agreements governing the Company and its subsidiaries' indebtedness (including the indentures for the 8 7/8% Notes, the 9 7/8% Notes, the 9 1/4% Notes and the 9 1/8% Notes and the credit agreement for the Ply Gem credit facility) contain restrictive financial and operating covenants including covenants that restrict the ability of the Company and its subsidiaries to complete acquisitions, pay dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions. The Company expects to meet its cash flow requirements through fiscal 2000 from cash generated from operations, existing cash, cash equivalents and marketable securities, and financings, which may include securitization of accounts receivable and mortgage or capital lease financings. On March 8, 1999 the Company acquired Webco, a designer and manufacturer of custom air handling equipment. For the year ended October 31, 1998, Webco had net sales of approximately $13,900,000. On April 23, 1999, the Company acquired the Caradon Acquired Companies from Caradon America Inc. and Caradon Limited, which are wholly owned subsidiaries of Caradon plc, a United Kingdom company. The Caradon Acquired Companies manufacture and sell residential windows, entry doors and patio doors to both the new construction and replacement markets. For the year ended December 31, 1998, the Caradon Acquired Companies had combined net sales of approximately $169,700,000. On May 28, 1999, the Company acquired Multiplex, a manufacturer and designer of high-performance, multi-room video distribution equipment for home automation and home entertainment. Multiplex had net sales of approximately $10,000,000 for the year ended December 31, 1998. On September 9, 1999 the Company acquired Kroy, a manufacturer of vinyl fencing, railing profiles and vinyl decking systems for residential and light commercial applications. Kroy had net sales of approximately $26,000,000 during the twelve months ended June 30, 1999. On December 3, 1999 the Company acquired Xantech, a designer and manufacturer of residential infrared remote control systems for extending control of VCR, cable, satellite and stereo systems to multiple rooms throughout an entire household. Xantech had net sales of approximately $13,000,000 for the twelve months ended November 30, 1999. 33 NORTEK, INC. AND SUBSIDIARIES Acquisitions in 1999 were principally funded through the use of unrestricted cash, investments, the issuance of notes payable to sellers and the issuance of common stock. As the Company integrates its recent acquisitions into its businesses, it expects to achieve incremental synergies, cost savings and reductions during 2000, partially offset by certain costs and expenses. As of December 31, 1999, plans for eliminating certain activities have been finalized for all significant acquisitions with the exception of certain severence arrangements which the Company estimates will be approximately $1,000,000 and will be finalized in the first half of 2000. Acquisition integration liabilities and adjustments relate principally to additional employee terminations and other exit costs of certain products and the consolidation of certain functions and operations at the acquired businesses. The total future expenditures associated with exit costs related to the integration effort at December 31, 1999 are expected to be funded from the Company's operating cash flow. The integration of the acquisitions within the Windows, Doors and Siding Products Segment is taking longer than originally planned. If significant difficulty is encountered with the integration of acquisitions within the Windows, Doors and Siding Products Segment or acquisitions within other segments, or if synergies and cost savings are not realized, the results of operations, cash flow and financial condition of the Company likely will be adversely affected. There can be no assurance that the Company will be able to successfully manage and integrate recent acquisitions. (See Note 2 and 12 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Unrestricted cash and cash equivalents decreased from approximately $87,876,000 at December 31, 1998 to approximately $80,893,000 at December 31, 1999. Marketable securities available for sale decreased from approximately $121,757,000 at December 31, 1998 to approximately $34,219,000 at December 31, 1999. The Company's investment in marketable securities at December 31, 1999 consisted primarily of certificates of deposit, commercial paper and bank issued money market instruments. At December 31, 1999, approximately $26,917,000 (of which approximately $11,240,000 is included in current assets) of the Company's cash, investments and marketable securities were pledged as collateral for insurance, employee benefits and other requirements and are classified as restricted in the Company's accompanying consolidated balance sheet. Capital expenditures were approximately $42,000,000 in 1999 and are expected to range between $50,000,000 and $55,000,000 in 2000. The Company's Board of Directors has authorized a number of programs to purchase shares of the Company's Common and Special Common Stock. The most recent of these programs was announced on May 20, 1999, and allows the Company to purchase up to 500,000 shares of the Company's Common and Special Common Stock in open market or negotiated transactions, subject to market conditions, cash availability and provisions of the Company's outstanding debt instruments. As of February 25, 2000, the Company has purchased approximately 377,300 shares of its Common and Special Common Stock under this program for approximately $10,800,000 and accounted for such share purchases as Treasury Stock. 34 NORTEK, INC. AND SUBSIDIARIES At February 25, 2000, approximately $87,700,000 was available for the payment of cash dividends, stock purchases or other restricted payments as defined under the terms of the Company's most restrictive Indenture. (See Note 5 of the Notes to the Consolidated Financial Statements included elsewhere herein.) The Company's working capital and current ratio decreased slightly from approximately $337,207,000 and 2.0:1, respectively, at December 31, 1998 to approximately $324,492,000 and 1.9:1, respectively, at December 31, 1999, principally as a result of payments related to acquisitions partially offset by working capital acquired from such acquisitions and net of the factors described below. Accounts receivable increased approximately $38,404,000 or approximately 18.7%, between December 31, 1998 and December 31, 1999, while net sales increased approximately $50,504,000 or approximately 11.5% in the fourth quarter of 1999 as compared to the fourth quarter of 1998. These increases are a result of the 1999 acquisitions, which contributed approximately $54,941,000 to net sales in the fourth quarter of 1999 and approximately $29,124,000 to accounts receivable in 1999. The rate of change in accounts receivable in certain periods may be different than the rate of change in sales in such periods principally due to the timing of net sales. Increases or decreases in net sales near the end of any period generally result in significant changes in the amount of accounts receivable on the date of the balance sheet at the end of such period, as was the situation on December 31, 1999 as compared to December 31, 1998. The Company did not experience any significant overall changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in 1999. Inventories increased approximately $49,971,000 or approximately 30.7%, between December 31, 1998 and December 31, 1999. Acquisitions contributed approximately $28,693,000 to the increase in inventory for 1999. A substantial portion of the balance of the increase in inventories is as a result of expanded distribution of HVAC residential site-built products by the Company's Air Conditioning and Heating Products Segment. Accounts payable increased approximately $29,671,000 or approximately 24.7%, between December 31, 1998 and December 31, 1999. Acquisitions contributed approximately $16,322,000 to the increase in accounts payable. A substantial portion of the balance of the increase in accounts payable occurred in the Company's Air Conditioning and Heating Products Segment as a result of increased distribution of residential site-built products. The Company expects further increases in working capital levels in the year 2000 as its distribution of HVAC residential site-built products by the Company's Air Conditioning and Heating Products Segment continues to expand. 35 NORTEK, INC. AND SUBSIDIARIES Unrestricted cash and cash equivalents decreased approximately $6,983,000 from December 31, 1998 to December 31, 1999, principallyas a result of the following: Condensed Consolidated Cash Flows(*) -------------- Operating Activities-- Cash flow from operations, net.............. $125,617,000 Increase in accounts receivable, net........ (7,899,000) Increase in inventories ..................... (21,434,000) Increase in prepaids and other current assets. (2,072,000) Increase in accounts payable ............... 20,760,000 Decrease in accrued expenses and taxes...... (12,399,000) Investing Activities--- Net cash paid for businesses acquired........ (125,788,000) Proceeds from the sale of marketable securities, net............................ 88,349,000 Capital expenditures......................... (42,013,000) Increase in restricted cash and investments.. (7,952,000) Financing Activities--- Payment of borrowings, net.................... (1,713,000) Purchase of Nortek Common and Special Common Stock .............................. (14,524,000) Other, net ................................... (5,915,000) ------------ $(6,983,000) ============ (*) Prepared from the Company's Consolidated Statement of Cash Flows for the year ended December 31, 1999. (See Nortek, Inc. and Subsidiaries Consolidated Financial Statements for 1999 included elsewhere herein.) The impact of changes in foreign currency exchange rates on cash was not material and has been included in other, net. The Company's debt-to-equity ratio decreased from approximately 4.7:1 at December 31, 1998 to 4.0:1 at December 31, 1999, primarily as a result of the increase in equity due to net earnings for 1999 and the issuance of Common Stock as partial consideration for an acquisition. This was partially offset by the effect of the purchase of Nortek Common and Special Common Stock, changes in currency translation and the net increase in borrowings. (See the Consolidated Statement of Stockholders' Investment included elsewhere herein.) 36 NORTEK, INC. AND SUBSIDIARIES As a result of changes in the U.S. Federal income tax regulations in 1999, the Company will utilize approximately $40,000,000 of net operating losses in its 1999 federal tax return, which resulted in approximately $14,000,000 lower than expected federal income tax payments for 1999. At December 31, 1999, the Company's wholly owned subsidiary, Ply Gem, had a net operating loss carry forward of approximately $21,300,000 that expires in 2011 and is subject to certain limitations imposed by the Internal Revenue Code. To the extent that the Company has consolidated federal taxable income beginning in the year 2000, the Company will be able to utilize this remaining net operating loss. Utilization of this net operating loss is limited to approximately $17,500,000 annually. Inflation, Trends and General Considerations - -------------------------------------------- The Company has evaluated and expects to continue to evaluate possible acquisition transactions and the possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions. The Company's performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation and unemployment. In the near term, the Company expects to operate in an environment of relatively stable levels of construction and remodeling activity. However, increases in interest rates could have a negative impact on the level of housing construction and remodeling activity. The demand for the Company's 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. The Company's lower sales levels usually occur during the first and fourth quarters. Since a high percentage of the Company's manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels. As a result of the recent acquisitions in the Windows, Doors and Siding Products Segment, the performance of this Segment will be more seasonal than in prior years due to the number of businesses that are affected by winter weather conditions. In addition, the demand for cash to fund the working capital of the Company's subsidiaries is greater from late in the first quarter until early in the fourth quarter. Market Risk - ----------- As discussed more specifically below, the Company is exposed to market risks related to changes in interest rates, foreign currencies and commodity pricing. The Company uses derivative financial instruments on a limited basis to hedge economic exposures. The Company does not enter into derivative financial instruments or other financial instruments for trading purposes. 37 NORTEK, INC. AND SUBSIDIARIES A. Interest Rate Risk The Company is exposed to market risk from changes in interest rates primarily through its investing and borrowing activities. In addition, the Company's ability to finance future acquisition transactions may be impacted if the Company is unable to obtain appropriate financing at acceptable interest rates. The Company's 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 money market accounts and corporate commercial paper with original maturities of 90 days or less. At December 31, 1999, the fair value of the Company's short-term investments approximated market value. Marketable securities primarily consist of certificates of deposit and bank issued money market instruments, all with original maturities of between 91 and 180 days. Restricted investments and marketable securities primarily consist of money market accounts, certificates of deposit and commercial paper with original maturities of 90 days or less. At December 31, 1999, the fair value of the Company's unrestricted and restricted investments and marketable securities approximated market value. The Company manages its borrowing exposure to changes in interest rates by optimizing the use of fixed rate debt with extended maturities. In addition, as of December 31, 1999, the Company through its Ply Gem subsidiary hedged its exposure on a substantial portion of its variable rate debt by entering into an interest rate collar transaction to lock in the interest rate between a floor of 5.76% and a cap of 7%. At December 31, 1999, approximately 95% of the carrying values of the Company's long-term debt were either at fixed interest rates or covered by the interest rate collar agreement. See the table set forth in item D (Long-term Debt) below and Notes 1 and 5 of the Notes to the Consolidated Financial Statements included elsewhere herein for further disclosure of the terms of the Company's debt and interest rate collar agreement. B. Foreign Currency Risk The Company's 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 Italian Lira and the Canadian Dollar. In 1999, the net impact of foreign currency changes was not material to the Company's financial condition or results of operations. The Company manages its exposure to foreign currency exchange risk principally by trying to minimize the Company's net investment in foreign assets through 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 December 31, 1999 consist primarily of short-term borrowings by certain of the Company's foreign subsidiaries. At December 31, 1999, the Company's net investment in foreign assets was approximately $83,300,000. An overall unfavorable change in foreign exchange rates of 10% would result in an approximate $7,600,000 reduction in 38 NORTEK, INC. AND SUBSIDIARIES equity as a result of the impact on the cumulative translation adjustment. The Company generally does not enter into derivative financial instruments to manage foreign currency exposure. At December 31, 1999, the Company did not have any outstanding foreign currency hedging contracts. C. Commodity Pricing Risk The Company is subject to significant market risk with respect to the pricing of its principal raw materials, which include, among others, steel, copper, packaging material, plastics, resins, glass, wood and aluminum. If prices of these raw materials were to increase dramatically, the Company may not be able to pass such increases on to its customers and, as a result, gross margins could decline significantly. The Company manages its exposure to commodity pricing risk by continuing to diversify its product mix, strategic buying programs and vendor partnering. The Company generally does not enter into derivative financial instruments to manage commodity-pricing exposure. At December 31, 1999, the Company did not have any outstanding commodity forward contracts. See the discussion elsewhere herein under Management's Discussion and Analysis of Financial Condition and Results of Operations, with respect to the increase in the cost of resin material over the second half of 1999. D. Long-term Debt The table that follows sets forth as of December 31, 1999, the Company's long-term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market values. Approximately 1.5% of the Company's total indebtedness is denominated in foreign currencies. The weighted average interest rates for variable rate debt are based on December 31, 1999 interest rates. In addition, the table that follows sets forth the outstanding notional amounts by year and floor and cap interest rates of the Company's interest rate collar agreement. 39 NORTEK, INC. AND SUBSIDIARIES Long-term Debt: Scheduled Maturity Average Interest Rate Fixed Variable Fixed Variable Year Ending Rate Rate Total Rate Rate Total - ----------- ---- ---- ----- ---- ---- ----- (Dollar amounts in millions) December 31, 2000 $ 3.0 $ 2.6 $ 5.6 6.51% 5.90% 6.23% 2001 6.9 2.9 9.8 8.07 6.25 7.53 2002 1.7 80.7 82.4 5.90 6.44 6.43 2003 1.5 2.2 3.7 5.78 7.84 6.98 2004 210.0 2.2 212.2 9.83 8.12 9.81 Thereafter (1) 709.4 10.6 720.0 9.00 5.91 8.95 ------ ------ -------- ---- ---- ---- Total Principal 932.5 101.2 1,033.7 9.16 6.43 8.89 Unamortized Debt Discount (4.5) --- (4.5) ------ ------ -------- Total Long-term Debt at December 31, 1999 $928.0 $101.2 $1,029.2 ====== ====== ======== Fair Market Value of Long-term Debt at December 31, 1999 $908.3 $101.2 $1,009.5 ====== ====== ======== 1) Senior notes with a total principal of $695,000,000 and a weighted average interest rate of 9.08% mature at various times from 2007 through 2008. (See Note 5 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Interest Rate Collar: Notional Floor Cap Outstanding at Amount Rate Rate ---------- -------- ------- (Dollar amounts in millions) December 31, 2000 $45.0 5.76% (2) 7% (3) 2001 45.0 5.76% (2) 7% (3) Fair Market Value of the asset related to Interest Rate Collar at December 31, 1999 $.3 2) If the interest rate is below 5.76% then the Company will pay the difference. 3) If the interest rate is above 7% then the Company is entitled to receive the difference. 40 NORTEK, INC. AND SUBSIDIARIES Year 2000 Disclosure - -------------------- The following Year 2000 statements constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. As of March 3, 2000, none of the Company's subsidiaries had experienced any significant Year 2000 related problems. There have been no instances where mission-critical and non-mission-critical systems have failed to perform correctly. However, the Year 2000 issue still poses several potential risks to the Company and its subsidiaries. A number of the Company's customers and suppliers (third parties) utilize computers and computer software to varying degrees in conjunction with the operation of their businesses. The customers and suppliers of those businesses may utilize computers as well. Should the Company's customers and suppliers, or the businesses on which they depend experience any Year 2000 related computer problems, such third parties' cash flow could be disrupted, adversely affecting their ability to pay the Company, if a customer, or, if a supplier, their ability to pay their suppliers for goods needed to supply the Company. Such disruptions could have adverse affects on the Company and its subsidiaries. The Company assessed its Year 2000 third party exposure through the use of questionnaires and personal interviews during 1999. As of March 3, 2000, the Company was not aware of any supply or credit problems related to the Year 2000 issue. Should Year 2000 related problems occur which cause any of the systems of certain third parties upon which the Company and its subsidiaries depends become inoperative, increased personnel costs could be incurred if additional staff is required to perform functions that the inoperative systems would have otherwise performed. As of March 3, 2000, the Company had not experienced any disruptions of third party services related to the Year 2000 issue. The Company's expenditures for remediation directly related to correcting Year 2000 issues were approximately $6,000,000, including businesses acquired in 1999. The total expenditures of approximately $6,000,000 consisted of approximately $2,000,000 of IT computer hardware equipment costs, approximately $3,000,000 of IT software and non-IT computer hardware expenditures and approximately $1,000,000 of other non-IT expenditures. All of the Company's Year 2000 compliance expenditures have been funded from the Company's operating cash flow. 41 NORTEK, INC. AND SUBSIDIARIES The Company's Year 2000 compliance budget does not include significant amounts for hardware replacement because the Company has historically employed a strategy to continually upgrade its computer systems. Consequently, the Company's Year 2000 compliance budget has not required the diversion of funds from or the postponement of the implementation of other planned IT projects. The Company believes it is not possible to estimate the potential lost revenue due to the remaining potential Year 2000 problems discussed above as the occurrence, extent and longevity of such potential problems cannot be predicted. As of March 3, 2000 the Company believes that it has not experienced any lost revenue related to the Year 2000 issue. Forward-Looking Statements - -------------------------- This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this discussion and throughout this document, words, such as "intends," "plans," "estimates," "believes," "anticipates" and "expects" or similar expressions are intended to identify forward-looking statements. These statements are based on the Company's current plans and expectations and involve risks and uncertainties, over which the Company has no control, that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and operating results to differ include the availability and cost of certain raw materials, (including, among others, steel, copper, packaging materials, plastics, resins, glass, wood and aluminum) and purchased components, the level of domestic and foreign construction and remodeling activity affecting residential and commercial markets, interest rates, employment, inflation, foreign currency fluctuations, consumer spending levels, exposure to foreign economies, the rate of sales growth, price, and product and warranty liability claims. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Readers are also urged to carefully review and consider the various disclosures made by the Company, in this document, as well as the Company's periodic reports on Forms 10-K, 10-Q, 10-Q/A and 8-K, filed with the Securities and Exchange Commission ("SEC"). 42 NORTEK, INC. AND SUBSIDIARIES ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Quantitative and qualitative disclosure about market risk required by this Item 7A is set forth in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in item 14(a) included elsewhere herein. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See Election of Directors in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Stockholders, incorporated herein by reference. See also Part I, Item 1, Business-General Considerations-Executive Officers of the Registrant. ITEM 11. EXECUTIVE COMPENSATION See Executive Compensation in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Stockholders, incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Security Ownership of Certain Beneficial Owners and Management in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Stockholders, incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Election of Directors in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Stockholders, incorporated herein by reference. 43 NORTEK, INC. AND SUBSIDIARIES PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules ----------------------------------- The following documents are filed as part of this report: 1. Financial Statements: Page No. Consolidated Statement of Operations for the three years ended December 31, 1999 46 Consolidated Balance Sheet as of December 31, 1999 and 1998 47 Consolidated Statement of Cash Flows for the three years ended December 31, 1999 49 Consolidated Statement of Stockholders' Investment for the three years ended December 31, 1999 51 Notes to Consolidated Financial Statements 54 Report of Independent Public Accountants 90 2. Financial Statement Schedules: Schedule I Condensed Financial Information of Registrant 91 Schedule II Valuation and Qualifying Accounts 92 3. The exhibits are listed in the Exhibit Index, which is incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report. 44 NORTEK, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 9, 2000. NORTEK, INC. /s/ Richard L. Bready ------------------------- Richard L. Bready Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, as of March 9, 2000. /s/ Richard L. Bready /s/ J. Peter Lyons - ------------------------ ---------------------- Richard L. Bready, Chairman J. Peter Lyons, of the Board and President Director (principal executive officer) /s/ Richard J. Harris /s/ William I. Kelly - ------------------------ ---------------------- Richard J. Harris, Vice President William I. Kelly, and Treasurer (principal financial Director officer) and Director /s/ Almon C. Hall /s/ Phillip L. Cohen - ------------------------ ---------------------- Almon C. Hall, Vice President Phillip L. Cohen, and Controller (principal Director accounting officer) 45 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 1999 1998 1997 ------ ------ ------ (In thousands except per share amounts) Net Sales $1,992,820 $1,738,343 $1,134,129 ---------- ---------- ---------- Costs and Expenses: Cost of products sold 1,433,129 1,275,350 825,805 Selling, general and administrative expense 360,674 315,449 219,376 Amortization of goodwill and intangible assets 20,499 14,416 5,967 --------- ---------- ---------- 1,814,302 1,605,215 1,051,148 --------- ---------- ---------- Operating earnings 178,518 133,128 82,981 Gain on Businesses sold --- 4,000 --- Interest expense (96,490) (86,298) (50,210) Investment income 7,972 10,470 9,929 --------- ---------- ---------- Earnings from continuing operations before provision for income taxes 90,000 61,300 42,700 Provision for income taxes 40,700 27,300 16,300 --------- ---------- ---------- Earnings from continuing operations before extraordinary loss 49,300 34,000 26,400 Earnings (loss) from discontinued operations --- 1,200 (5,200) Extraordinary loss from debt retirements --- (200) --- --------- ------ --------- Net Earnings $ 49,300 $ 35,000 $ 21,200 ========= ========== ========== Earnings (loss) Per Share: Earnings from continuing operations: Basic $4.19 $3.11 $2.75 ===== ===== ===== Diluted $4.11 $3.06 $2.68 ===== ===== ===== Earnings (loss) from discontinued operations: Basic $ --- $ .11 $(.54) ===== ===== ===== Diluted $ --- $ .11 $(.53) ===== ===== ===== Extraordinary loss from debt retirements: Basic $ --- $(.02) $ --- ===== ===== ===== Diluted $ --- $(.02) $ --- ===== ===== ===== Net Earnings: Basic $4.19 $3.20 $2.21 ===== ===== ===== Diluted $4.11 $3.15 $2.15 ===== ===== ===== Weighted Average Number of Shares: Basic 11,763 10,923 9,605 ====== ====== ===== Diluted 11,982 11,113 9,855 ====== ====== =====
The accompanying notes are an integral part of these consolidated financial statements. 46 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31, 1999 1998 ------ ------ (Amounts in thousands) ASSETS Current Assets: Unrestricted Cash and cash equivalents $ 80,893 $ 87,876 Marketable securities available for sale 34,219 121,757 Restricted Cash, investments and marketable securities at cost, which approximates market 11,240 13,818 Accounts receivable, less allowances of $13,019,000 and $10,657,000 243,763 205,359 Inventories Raw materials 89,581 69,247 Work in process 20,844 13,010 Finished goods 102,253 80,450 ---------- ---------- 212,678 162,707 Prepaid expenses 11,864 10,938 Other current assets 16,787 15,513 Prepaid income taxes 66,824 54,163 ---------- ---------- Total current assets 678,268 672,131 ---------- ---------- PROPERTY AND EQUIPMENT, AT COST: Land 16,270 12,628 Buildings and improvements 127,736 102,455 Machinery and equipment 348,445 294,551 ---------- ---------- 492,451 409,634 Less accumulated depreciation 163,834 130,010 ---------- ---------- Total property and equipment, net 328,617 279,624 ---------- ---------- OTHER ASSETS: Goodwill, less accumulated amortization of $56,942,000 and $41,204,000 589,532 598,823 Intangible assets, less accumulated amorti- zation of $15,956,000 and $11,235,000 133,040 73,441 Deferred debt expense 22,068 24,845 Restricted investments and marketable securities 15,677 --- Other 42,482 41,129 ---------- ---------- 802,799 738,238 ---------- ---------- $1,809,684 $1,689,993 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 47 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATION BALANCE SHEET
December 31, 1999 1998 ------- ------- (Amounts in thousands) LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Notes payable and other short-term obligations 8,476 $ 10,962 Current maturities of long-term debt 5,564 6,776 Accounts payable 149,772 120,101 Accrued expenses and taxes, net 189,964 197,085 ---------- --------- Total current liabilities 353,776 334,924 ---------- --------- Other Liabilities: Deferred income taxes 73,499 26,040 Other 98,976 104,306 ---------- --------- 172,475 130,346 ---------- --------- NOTES, MORTGAGE NOTES AND OBLIGATIONS PAYABLE, LESS CURRENT MATURITIES 1,023,616 1,007,113 ---------- --------- Commitments and Contingencies (Note 8) STOCKHOLDERS' INVESTMENT: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common stock, $1 par value; authorized 40,000,000 shares; 18,738,292 and 18,427,595 shares issued 18,738 18,428 Special common stock, $1 par value; authorized 5,000,000 shares; 840,436 and 854,935 shares issued 841 855 Additional paid-in capital 208,755 201,626 Retained earnings 143,266 93,966 Accumulated other comprehensive loss (11,822) (11,596) Less --treasury common stock at cost, 7,793,217 and 7,290,335 shares (97,894) (83,711) --treasury special common stock at cost, 290,054 and 286,009 shares (2,067) (1,958) Total stockholders' investment 259,817 217,610 ---------- ---------- $1,809,684 $1,689,993 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 48 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended Decem