item 14 exhibits financial statement schedules reports form 8k financial statements schedules following documents filed part report 1 financial statements page report independent public accountants consolidated statement operations three years ended december 31 1993 consolidated balance sheet december 31 1993 1992 consolidated statement cash flows three years ended december 31 1993 consolidated statement stockholders investment three years ended december 31 1993 notes consolidated financial statements 2 financial statement schedules schedule marketable securities schedule ii notes accrued interest receivable employees schedule v property equipment schedule vi accumulated depreciation amorti zation property equipment schedule viii valuation qualifying accounts schedule ix shortterm borrowings schedule x supplementary profit loss infor mation schedules iii iv vii xi xii xiii xiv omitted applicable required rules regulation sx 3the exhibits listed exhibit index incorporated herein reference b reports form 8k following reports form 8k filed registrant last quarter period covered report october 12 1993 item 5 events item 7 financial statements pro forma financial information exhibits december 15 1993 item 5 events signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 25 1994 nortek inc srichard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 25 1994 srichard l bready sd stevens mcvoy richard l bready chairman stevens mcvoy director board president principal executive officer srichard j harris sj peter lyons richard j harris vice president j peter lyons director treasurer principal financial officer director salmon c hall sdennis j mcgillicuddy almon c hall vice president dennis j mcgillicuddy director controller principal accounting officer sphilip b brooks sbarry silverstein philip b brooks director barry silverstein director report independent public accountants nortek inc audited accompanying consolidated financial statements nortek inc delaware corporation subsidiaries listed item 14a1 form 10k financial statements schedules referred responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position nortek inc subsidiaries december 31 1993 1992 results operations cash flows three years period ended december 31 1993 conformity generally accepted accounting principles explained note 6 consolidated financial statements effective january 1 1993 company changed method accounting post retirement benefits pensions audit made purpose forming opinion basic financial statements taken whole schedules listed item 14a2 presented purposes complying securities exchange commissions rules part basic financial statements schedules subjected auditing procedures applied audit basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen co boston massachusetts march 24 1994 nortek inc subsidiaries consolidated statement operations three years ended december 31 1993 1992 1991 thousands except per share amounts net sales 744113 799979 917049 costs expenses cost products sold 532488 595177 693091 selling general administrative expense 181279 184366 212943 713767 779543 906034 operating earnings 30346 20436 11015 interest expense 26519 29232 39184 interest dividend income 3223 4446 8769 net gain investment marketable securities 1650 850 400 settlement litigation 11500 loss businesses sold held sale 20300 14500 15200 loss continuing operations provision credit income taxes 11600 18000 45700 provision credit income taxes 1000 3000 11000 loss continuing operations 12600 21000 34700 loss discontinued operations 3300 loss extraordinary gain loss 12600 24300 34700 extraordinary gain loss debt retirements 6100 100 7600 loss cumulative effect accounting change 18700 24200 27100 cumulative effect accounting change 2100 net loss 2080024200 27100 net earnings loss per share continuing operations primary 100 167 257 fully diluted 100 167 257 discontinued operations primary 26 fully diluted 26 loss extraordinary gain loss primary 100 193 257 fully diluted 100 193 257 extraordinary gain loss primary 49 01 56 fully diluted 49 01 56 cumulative effect accounting change primary 17 fully diluted 17 net loss primary 166 192 201 fully diluted 166 192 201 weighted average number shares primary 12622 12645 13460 fully diluted 13362 13411 14312 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet december 31 1993 1992 assets 1993 1992 amounts thousands current assets unrestricted cash investments cost approximates market 34006 23467 shortterm investments held redemption debentures 22600 marketable securities 25892 50281 restricted cash investments cost approximates market 6687 8187 accounts receivable less allowances 4198000 3961000 84843 78363 inventories raw materials 27603 27269 work process 9227 9792 finished goods 45183 39082 82013 76143 current assets business held sale 23736 18990 insurance claims receivable 14500 prepaid expenses current assets 7541 8069 u federal prepaid income taxes 17000 22000 total current assets 318818 285500 property equipment cost land 5833 7376 buildings improvements 52309 54416 machinery equipment 108983 103246 167125 165038 lessaccumulated depreciation 76546 66469 total property equipment net 90579 98569 assets goodwill less accumulated amortization 19180000 16857000 75599 78406 noncurrent assets business held sale 11987 30785 12226 22113 99812 131304 509209 515373 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet december 31 1993 1992 1993 1992 amounts thousands liabilities stockholders investment current liabilities notes payable current maturities longterm debt shortterm obligations 14957 6810 11 12 senior subordinated debentures net 22582 accounts payable 46923 45052 accrued expenses taxes net 91422 92276 current liabilities business held sale 11769 8775 insurance claims advances 13239 total current liabilities 200892 152913 liabilities deferred income taxes 18000 29696 8100 3995 26100 33691 notes mortgage notes debentures payable less current maturities 169664 192938 mortgage notes payable business held sale 8546 8925 commitments contingencies note 7 stockholders investment preference stock 1 par value authorized 7000000 shares none issued common stock 1 par value authorized 40000000 shares 15758974 15602142 shares issued 15759 15602 special common stock 1 par value authorized 5000000 shares 849575 990007 shares issued 849 990 additional paidin capital 134627 134599 retained earnings accumulated deficit 17034 3766 cumulative translation pension adjustments 2143 less treasury common stock cost 3795028 shares 26371 treasury special common stock cost 271574 shares 1680 total stockholders investment 104007 126906 509209 515373 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement cash flows three years ended december 31 1993 1992 1991 amounts thousands cash flows operating activities net loss 20800 24200 27100 adjustments reconcile net loss cash depreciation amortization 20726 23644 28373 gain sale investment marketable securities 1650 850 400 gain loss debt retirements 9275 150 12600 loss businesses sold held sale 20300 19500 15200 settlement litigation 11500 cumulative effect accounting change 3100 deferred federal income tax credit continuing operations 6300 1700 9350 deferred federal income tax credit extraordinary loss 3175 changes certain assets liabilities net effects acquisitions dispositions accounts receivable net 11033 7323 8862 prepaids current assets 937 2443 2019 u federal income tax refund 1803 16401 inventories 2854 2807 11703 net assets discontinued operations 1797 accounts payable 4360 1638 18735 accrued expenses taxes 3913 3398 3087 longterm assets liabilities net 5326 21 673 total adjustments net loss 33225 36299 66718 net cash provided operating activities 12425 12099 39618 cash flows investing activities capital expenditures 10436 8804 15902 proceeds sale property equipment 5242 1045 3573 purchase investments marketable securities 87922 94671 195677 purchase restricted investments marketable securities 603 proceeds sale investments marketable securities 113961 72280 203133 proceeds sale restricted investments marketable securities 2972 net cash proceeds payments relating businesses sold discontinued 2420 38813 38496 change restricted cash investments 2552 13030 13972 net 777 1080 296 net cash provided investing activities 20200 22773 50260 cash flows financing activities purchase debentures notes payable 1383 21693 43444 increase borrowings 7348 4197 15860 payment borrowings 4124 5692 73911 cash dividends paid 324 purchase nortek common special common stock 2006 713 net 1327 2720 2357 net cash provided used financing activities 514 27914 104889 net increase decrease unre stricted cash investments 33139 6958 15011 unrestricted cash investments beginning year 23467 16509 31520 unrestricted cash investments end year 56606 23467 16509 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement stockholders investment three years ended december 31 1993 cumulative translation addi retained pension special tional earnings common paidin accumulat adjusttreasury stock capital ed deficit ments stock amounts thousands balance december 31 1990 15312 1203 134493 55066 25331 126817 shares special common stock converted 126817 shares common stock 126 432292 shares common treasury stock 777 shares special common treasury stock acquired 714 net loss 27100 balance december 31 1991 15438 1077 134493 27966 26045 86345 shares special common stock converted 86345 shares common stock 87 631701 shares common treasury stock acquired net 2006 77837 shares common stock issued upon exercise stock options 77 106 net loss 24200 balance december 31 1992 15602 990 134599 3766 28051 140432 shares special common stock converted 140432 shares common stock 141 16400 shares common stock issued upon exercise stock options 16 28 translation adjustment 1337 pension adjustment 806 net loss 20800 balance december 31 1993 15759 849 134627 17034 214328051 accompanying notes integral part financial statements nortek inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts nortek inc significant whollyowned subsidiaries company nortek elimination intercompany accounts transactions certain amounts prior years financial statements reclassified conform presentation december 31 1993 october 2 1993 company began account dixieline lumber company inc subsidiary dixieline business held sale business company conducts retail home center operations result dixielines assets liabilities separately reflected companys accompanying consolidated balance sheet dixielines operating results october 2 1993 included companys consolidated statement operations year ended december 31 1993 company intends operate business sale consummated see note 9 cash investments marketable securities investments consist shortterm maturities less 30 days highly liquid investments readily convertible cash investments marketable securities carried lower aggregate cost approximate market price company classified restricted certain cash investments marketable securities fully available use operations december 31 1993 approximately 6687000 cash investments pledged collateral insurance requirements classified restricted current assets accompanying consolidated balance sheet disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash investments carrying amount approximates fair value short maturity instruments marketable securities fair value marketable securities based quoted market prices december 31 1993 fair value marketable securities approximated amount companys consolidated balance sheet longterm debt fair value longterm indebtedness estimated based prices related transactions involving companys longterm indebtedness companys 1994 debt redemptions see note 4 december 31 1993 fair value longterm indebtedness approximates amount companys consolidated balance sheet nortek inc subsidiaries notes consolidated financial statements continued inventories accompanying consolidated balance sheet valued lower cost market december 31 1993 1992 approximately 53154000 45834000 total inventories respectively valued lastin firstout method lifo firstin firstout method fifo accounting inventories would 4982000 11735000 greater december 31 1993 1992 respectively inventories valued fifo method increase amount lifo inventories 1993 primarily results change accounting income taxes see note 3 sales recognition company recognizes sales upon shipment products net applicable provisions discounts allowances company also provides estimate warranty bad debts time shipment selling general administrative expense foreign currency translation company translates assets liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using exchange rates effect year gains losses foreign currency translation credited charged cumulative translation adjustment included stockholders investment accompanying consolidated balance sheet gains losses foreign currency transactions material 1992 1991 depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows buildings improvements 1035 years machinery equipment including leases 315 years leasehold improvements term lease expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost accumulated depreciation eliminated resulting gain loss recognized goodwill company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions goodwill amortized straightline method 40 years amortization charged continuing operations amounted 2418000 2548000 2759000 1993 1992 1991 respectively balance sheet date company evaluates realizability goodwill based upon expectations nondiscounted cash flows operating income subsidiary material goodwill balance based upon recent nortek inc subsidiaries notes consolidated financial statements continued analysis company believes material impairment goodwill exists december 31 1993 net earnings loss per share net earnings loss per share amounts computed using weighted average number common equivalent shares outstanding year earnings loss per share calculations periods presented include effect common stock equivalents convertible debentures reduction related interest expense assumed exercise stock options conversion debentures antidilutive net loss per share amounts special common stock treated equivalent common stock determining earnings per share results 2 cash flows interest paid 26981000 27436000 38658000 1993 1992 1991 respectively following table summarizes activity businesses sold discontinued included accompanying consolidated statement cash flows year ended december 31 1993 1992 1991 amounts thousands fair value assets sold 52793 58624 liabilities assumed purchaser 13329 11530 notes receivable noncash proceeds received part proceeds 316 10090 cash paid received relating businesses sold discontinued 2420 335 1492 net cash proceeds payments relating businesses sold discontinued 2420 38813 38496 following summarizes noncash financing investing activities year ended december 31 1992 1991 amounts thousands use restricted cash investments settlement certain litigation see note 7 11800 exchange debentures see note 7 4050 settlement 11 subordinated notes receivable see note 7 2576 noncompete agreement 540 capitalized lease obligations incurred 113 1556 1174 noncash financing investing activities significant year ended december 31 1993 nortek inc subsidiaries notes consolidated financial statements continued 3 income taxes first quarter 1993 company adopted sfas 109 change accounting method prior year financial statements restated reflect new accounting method effect adopting new accounting method first quarter 1993 significant provision income taxes compared prior accounting method years december 31 1992 provision credit income taxes computed accordance comprehensive income tax allocation method recognizes tax effects income expense transactions included years consolidated statement operations regardless year transactions reported tax purposes effect change accounting method result charge operations cumulative effect accounting change result changes certain account balances january 1 1993 relating principally net deferred income tax liabilities arising acquisitions netted certain asset liability balances companys consolidated balance sheet december 31 1992 follows effect accounting change amounts thousands increase inventory net 5347 increase property equipment net 1883 decrease accrued liabilities taxes net 1833 increase liabilities 99 decrease u federal prepaid income taxes 3578 increase deferred income tax liabilities 5386 tax effect temporary differences gave rise significant portions deferred income tax assets liabilities january 1 1993 december 31 1993 adjusted adoption sfas 109 follows dec 31 jan 1 1993 amounts thousands u federal prepaid deferred income tax assets arising accounts receivable 1387 1353 inventory 666 2229 insurance reserves 4576 4682 reserves liabilities assets net 11725 13162 net 22 32 17000 nortek inc subsidiaries notes consolidated financial statements continued dec 31 jan 1 1993 amounts thousands deferred prepaid income tax liabilities arising property equipment net 11709 16188 prepaid pension assets 1666 1977 unamortized debt discount 102 2369 insurance reserves 1024 556 reserves liabilities assets net 844 3621 capital loss carryforward 6217 5925 unrealized loss business held sale 3405 net operating loss carryforward 1350 contribution carryforward 544 alternative minimum tax carryforward 509 valuation allowances 14326 11714 net 1 15 18000 27000 december 31 1993 company capital loss carryforward approximately 17700000 expires year 1997 company provided valuation allowance equal tax effect capital loss carryforwards certain deferred income tax assets since realization deferred income tax assets part dependent future taxable income cannot reasonably assured december 31 1993 company approximately 8000000 net us federal prepaid income tax assets expected realized future operating earnings december 31 1992 prior accounting method prepaid income taxes approximately 22000000 relating principally accruals deductible currently classified current asset cumulative deferred income tax liabilities approximately 29696000 relating principally depreciation differences classified noncurrent liability accompanying consolidated balance sheet following summary components loss continuing operations income tax credit year ended december 31 1993 1992 1991 amounts thousands domestic 17000 24400 52900 foreign 5400 6400 7200 11600 18000 45700 nortek inc subsidiaries notes consolidated financial statements continued following summary provision credit income taxes continuing operations included accompanying consolidated statement operations year ended december 31 1993 1992 1991 amounts thousands federal income taxes current 2800 600 5400 deferred 6300 1700 9350 3500 1100 14750 foreign 2600 3200 3000 state 1900 900 750 1000 3000 11000 deferred federal income tax credit continuing operations includes following timing differences year ended december 31 1993 1992 1991 amounts thousands business held sale 7277 change valuation reserve 2618 accelerated depreciation 1378 1550 1320 accruals deductible currently 426 1625 3975 capitalization inventory tax purposes 35 250 25 effect capital loss 1400 alternative minimum income tax 275 3750 net 654 350 280 total deferred federal income tax credit continuing operations 6300 1700 9350 income tax payments refunds net approximately 11950000 1600000 5700000 1993 1992 1991 respectively nortek inc subsidiaries notes consolidated financial statements continued table reconciles federal statutory income tax rate effective tax rate continuing operations approximately 86 167 241 1993 1992 1991 respectively year ended december 31 1993 1992 1991 amounts thousands income tax credit continuing operations federal statutory rate 4060 6120 15538 net change statutory rate change valuation reserve 2618 effect unrecognized capital losses 3990 state taxes net federal tax effect 1235 594 495 amortization deductible tax purposes 746 552 358 businesses sold 172 2827 968 foreign source deemed income 700 648 2182 tax effect foreign income 196 479 546 net 263 30 11 income tax provision credit continuing operations 1000 3000 11000 company recorded 1000000 income tax credit principally deferred first quarter 1993 relating cumulative effect accounting change certain postretirement benefits fourth quarter 1993 company recorded 3175000 deferred income tax credit relating extraordinary loss arising indebtedness called redemption see note 4 1991 company recorded 5000000 current income tax provision relating extraordinary gain debt retirements nortek inc subsidiaries notes consolidated financial statements continued 4 notes mortgage notes debentures payable notes mortgage notes debentures payable accompanying consolidated balance sheet december 31 1993 1992 consist following december 31 1993 1992 amounts thousands notes payable banks 7348 mortgage notes payable 8188 11676 1141 4085 9 34 senior notes due 1997 9 34 senior notes net unamortized original issue discount 293000 6967000 51152 44478 13 12 senior subordinated debentures due 1997 13 12 debentures net unamortized original issue discount 53000 438000 79305 79685 11 12 senior subordinated debentures due 1994 11 12 debentures net unamortized original issue discount 18000 69000 22582 22531 11 subordinated sinking fund debentures due 2004 11 debentures net unamortized debt discount 18000 666000 19406 18758 10 subordinated sinking fund debentures due 1999 10 debentures net unamortized debt discount 8000 269000 2587 2742 7 12 convertible sinking fund debentures due 2006 7 12 convertible debentures 15494 15793 207203 199748 less amounts included current liabilities 37539 6810 169664 192938 january 14 1994 company redeemed 22600000 principal amount 1112 debentures called redemption december 1993 classified current liability accompanying consolidated balance sheet nortek inc subsidiaries notes consolidated financial statements continued february 1994 company sold public offering 218500000 9 78 senior subordinated notes due 2004 978 notes discount approximately 1717000 amortized life issue net proceeds sale 978 notes deducting underwriting commissions expenses amounted approximately 207695000 portion proceeds used redeem march 24 1994 companys outstanding principal amount indebtedness pay accrued interest 51445000 934 senior notes 79358000 1312 debentures 2595000 10 debentures 19424000 11 debentures called redemption february 22 1994 1312 debentures redeemed 1015 outstanding principal amount thereof issues redeemed par call debt redemptions resulted extraordinary loss approximately 6100000 49 per share net income tax credit approximately 3175000 recorded fourth quarter 1993 unaudited pro forma consolidated loss continuing operations fully diluted loss per share would 11800000 94 respectively year ended december 31 1993 adjusted pro forma effect financing redemption companys indebtedness transactions completed january 1 1993 pro forma data purport indicative results would actually reported may reported future pro forma data includes net aftertax loss approximately 14900000 119 per share result valuation reserve provided dixieline see note 9 computing pro forma loss continuing operations interest expense indebtedness redeemed period indebtedness outstanding excluded operating results average interest rate approximately 133 including amortization debt discounts deferred debt expense net tax effect interest expense included notes rate approximately 978 plus amortization deferred debt expense debt discount net tax effect investment income assumed earned remaining cash proceeds debt financing rate 35 978 notes redeemable option company whole part time 104214 march 1 1999 declining 100 march 1 2002 thereafter companys canadian subsidiary 15200000 secured line credit approximately 11200000 aggregate available company december 31 1993 approximately 7000000 outstanding proceeds borrowings advanced company secured line credit bearing interest rates approximate prime rate interest march 15 1994 approximately 2346000 outstanding borrowings secured line credit line credit facility subject review april 30 1994 canadian subsidiary pays commitment fee 25 per annum unutilized portion line credit payable monthly pro rata basis borrowings available nortek inc subsidiaries notes consolidated financial statements continued working capital general corporate purposes approximately 3850000 march 15 1994 available nortek subsidiaries requirements mortgage notes payable include various mortgage notes related indebtedness payable installments 1998 bearing interest rates ranging 2 135 approximately 8038000 indebtedness collateralized property equipment aggregate net book value approximately 5901000 december 31 1993 obligations include borrowings relating equipment purchases borrowings bearing interest 2 5 maturing various dates 2001 approximately 1141000 indebtedness collateralized property equipment aggregate net book value approximately 1338000 december 31 1993 mortgage notes payable business held sale principally include various mortgage notes payable dixieline installments 1997 bearing interest adjustable rate equal three points u treasury bill rate december 31 1993 current interest rate approximately 623 mortgage notes payable approximately 8546000 indebtedness collateralized property equipment aggregate net book value 10095000 december 31 1993 maturities indebtedness 255000 1995 2769000 1996 5522000 1997 1993 company acquired discount open market transactions approximately 1202000 principal amount various notes debentures purchases result gain loss 1992 1991 company acquired discount open market negotiated transactions approximately 26398000 56485000 respectively principal amount various notes debentures transactions resulted extraordinary gain 200000 net income taxes 150000 01 per share second quarter 1992 extraordinary loss 100000 net income tax credit 100000 01 per share third quarter 1992 extraordinary gains 3500000 net income taxes 2500000 26 per share first quarter 1991 1200000 net income taxes 650000 09 per share second quarter 1991 2900000 net income taxes 1850000 22 per share fourth quarter 1991 discount deferred costs relating various notes debentures 1993 principally amortized original life issues amortization discount deferred costs approximately 2100000 2000000 1993 1992 1991 respectively fourth quarter 1993 result call redemption certain companys indebtedness described company wrote approximately nortek inc subsidiaries notes consolidated financial statements continued 8100000 unamortized deferred debt expense debt discount provided redemption premium approximately 1175000 recorded extraordinary loss indenture governing 978 notes restricts among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indenture upon certain asset sales defined indenture company required offer purchase 100 principal amount plus accrued interest date purchase 978 notes principal amount equal net cash proceeds defined indenture invested properties assets used primarily related business owned operated company issue date 978 notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indenture governing 7 12 convertible debentures limits payment cash dividends stock payments requires company maintain minimum net worth defined 100000000 net worth end two consecutive fiscal quarters falls minimum last day fiscal quarter accelerated payment date next following second fiscal quarter company required accelerate outstanding principal amount due accelerated payment date redemptions continue companys net worth exceeds 100000000 7 12 convertible debentures redeemed redemption price 7 12 convertible debentures principal amount plus accrued interest accelerated payment date company may credit obligation redeem 7 12 convertible debentures upon accelerated payment date principal amount 7 12 convertible debentures acquired company surrendered cancellation including converted 7 12 convertible debentures ii 7 12 convertible debentures redeemed called redemption otherwise operation sinking fund redemption accelerated payment date event shall failure meet minimum net worth stated end fiscal quarter counted toward one acceleration sinking fund payment sinking fund requirements 7 12 convertible debentures met 7 12 convertible debentures redeemable option company whole time part 10225 december 31 1993 declining 100 may 1 1996 december 31 1993 1992 7 12 convertible debentures convertible shares common stock company 2156 per share subject adjustment certain conditions nortek inc subsidiaries notes consolidated financial statements continued following summary maturities companys debt obligations excluding unamortized debt discount due december 31 1994 adjusted pro forma effect financing redemption companys indebtedness march 24 1994 amounts thousands 1995 498 1996 533 1997 527 1998 488 thereafter 234223 236269 redemption march 24 1994 certain indebtedness noted indenture governing 712 convertible debentures restrictive companys loan agreements indentures payment cash dividends stock payments prohibited december 31 1993 subsequently thereafter 5 common stock special common stock options deferred compensation share special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting companys board directors remaining 75 elected combined vote classes shares special common stock generally nontransferable freely convertible shareforshare basis shares common stock company rights plan provides right purchase 75 one onehundredth share 100 par value series participating preference stock right held rights currently exercisable attached share common stock may redeemed directors 01 per share time shareholder acquires beneficial ownership 17 companys common stock special common stock rights trade separately become exercisable entitling rights holder acquire additional shares companys common stock market value equal twice amount exercise price right addition person group acquiring company commences tender offer announces intention acquire 30 companys common stock special common stock rights trade separately certain circumstances permit rights holder acquire common stock acquiring company market value equal twice amount exercise price right december 31 1993 total 2360521 shares common stock reserved follows conversion convertible debentures 718646 stock option plans 792300 conversion special common stock 849575 2360521 nortek inc subsidiaries notes consolidated financial statements continued december 31 1993 total 43500 shares special common stock reserved stock option plans company several stock option plans provide granting options certain officers employees nonemployee directors company options granted plans vest periods ranging five years expire eight ten years date grant plans provide issuance 1183333 shares companys common stock special common stock december 31 1993 options outstanding covering 503900 shares common special common stock 233200 options currently exercisable options 65100 41400 shares common special common stock became exercisable 1993 1992 respectively proceeds options exercised credited common stock additional paidin capital following table summarizes common special common stock option transactions three years ended december 31 1993 option price number shares per share total options outstanding december 31 1990 354300 2251569 1529634 granted 30000 288 86250 canceled 7800 288 22425 options outstanding december 31 1991 376500 2251569 1593459 exercised 85700 225288 240613 canceled 50500 225869 288008 options outstanding december 31 1992 240300 2251569 1064838 granted 280000 875 2450000 exercised 16400 2252875 44000 options outstanding december 31 1993 503900 2251569 3470838 january 31 1992 company acquired 625000 shares common stock negotiated transaction approximately 1975000 including expenses see note 4 respect limitations payment cash dividends stock payments 6 pension retirement profit sharing plans postretirement benefits company subsidiaries various pension retirement profit sharing plans requiring contributions qualified trusts union administered funds pension profit sharing expense charged operations aggregated approximately 1683000 1993 2130000 1992 1938000 1991 companys policy fund currently actuarially determined annual contribution nortek inc subsidiaries notes consolidated financial statements continued companys net pension expense credit defined benefit plans 1993 1992 1991 consists following components year ended december 31 1993 1992 1991 amounts thousands service costs 1685 1584 1213 interest cost 1989 1967 1818 actual net income plan assets 3295 3173 4762 net amortization deferred items 822 1070 2635 net pension expense 1201 1448 904 following table sets forth funded status companys defined benefit plans amounts recognized companys consolidated balance sheet dec 31 dec 31 1993 1992 plan assets accumulated plan assets exceeding benefit exceeding accumulated obligation accumulated benefit exceeding benefit obligation plan assets obligation amounts thousands actuarial present value benefit obligations september 30 vested benefits 17799 4221 17535 nonvested benefits 434 305 552 accumulated benefit obligation 18233 4526 18087 effect projected future compensation levels 5936 5829 projected benefit obligation 24169 4526 23916 plan assets fair value september 30 24055 3678 26065 plan assets excess less projected benefit obligation 114 848 2149 unrecognized net loss 7294 806 5930 unrecognized transition net asset january 1 2971 3320 unrecognized prior service costs 312 652 985 additional minimum liability 1458 prepaid pension costs liability december 31 4521 848 5744 plan assets include commingled funds marketable securities insurance contracts cash shortterm investments weighted average discount rate increase future compensation levels used determining actuarial present value projected benefit obligation 7125 percent 55 percent respectively 1993 8 percent 6 percent respectively 1992 1991 expected longterm rate return nortek inc subsidiaries notes consolidated financial statements continued assets 85 percent 1993 95 percent 1992 1991 1993 minimum pension liability intangible asset certain plans recognized resulting reduction companys stockholders investment approximately 806000 certain companys subsidiaries provided health care related benefits modified 1993 qualified active retired beneficiaries benefits net reimbursement medicare insurance coverages effective january 1 1993 company adopted accounting requirements statement financial accounting standards sfas 106 employers accounting postretirement benefits pensions recorded accumulated postretirement benefit obligation apbo approximately 3100000 income tax credit approximately 1000000 january 1 1993 charge operations 17 per share net tax cumulative effect accounting change previously benefits charged operating results period benefits paid approximately 950000 apbo paid 1993 result certain plan modifications annual expense 1993 adopting sfas 106 approximately equal expense would recorded previous accounting method discount rate used determining apbo january 1 1993 8 percent 17 percent annual rate increase per capita cost health care related benefits assumed determining apbo january 1 1993 decreasing gradually 6 percent year 2009 assumed health care related cost trend rates increased 1 percent future years apbo january 1 1993 could increased 10 percent december 31 1993 actuarially determined apbo remaining plan benefits approximately 1400000 relating principally one subsidiary company annual expense liability related benefits significant companys operations financial position 7 commitments contingencies company provides accruals direct indirect costs associated estimated resolution contingencies earliest date incurrence liability deemed probable amount liability reasonably estimated companys air conditioning heating products groups plant st louis missouri manufactures products residential manufactured housing markets experienced damage result flooding mississippi river july 1993 plant closed several weeks returned full operation late august 1993 december 31 1993 company accrued estimated losses 14500000 related flooding recorded receivable approximately 14500000 casualty property damage business interruption insurance claims due insurance carrier recorded liability approximately 13200000 cash advances received relating claims company believes adequate insurance coverage expect event material adverse effect companys financial condition results operations july 1992 derivative litigation company directors challenging transactions involving retirement 1990 companys nortek inc subsidiaries notes consolidated financial statements continued former chairman settled connection settlement company recorded net aftertax gain discontinued operations third quarter approximately 900000 07 per share resulting exchange certain notes carried approximately 2576000 norteks books date exchange due company controlled norteks former chairman held company 4050000 principal amount nortek 1312 debentures held company controlled norteks former chairman december 1991 company recorded 11500000 pretax charge 47 per share net tax connection settlement litigation former selling shareholders companys former bend millwork systems company december 31 1993 company subsidiaries excluding dixieline obligated lease agreements rental certain real estate machinery equipment used operations minimum annual rental expense aggregates approximately 12728000 december 31 1993 obligations payable follows 1994 4966000 1995 2431000 1996 1691000 1997 1416000 1998 1343000 thereafter 881000 certain lease agreements provide increased payments based changes consumer price index rental expense continuing operations accompanying consolidated statement operations excluding dixieline years ended december 31 1993 1992 1991 approximately 6562000 8716000 10583000 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes december 31 1993 dixieline obligated lease agreements rental certain real estate machinery equipment used operations minimum rental expense net minimum sub lease rental income approximately 9327000 aggregates approximately 25086000 december 31 1993 obligations payable follows 1994 2190000 1995 1863000 1996 1596000 1997 1513000 1998 1492000 thereafter 16432000 certain lease obligations provide increased payments based changes consumer price index dixielines rental expense net continuing operations included companys accompanying consolidated statement operations years ended december 31 1993 1992 1991 approximately 1225000 1910000 1851000 respectively certain lease agreements dixieline obligated pay insurance taxes nortek inc subsidiaries notes consolidated financial statements continued december 31 1993 company contingently liable obligations approximately 7500000 industrial revenue bond agreements irbs relating facilities previously owned subsidiaries 1992 company notified events default relating failure one previously owned subsidiaries obligated 7100000 irbs make interest payments approximately 800000 due march september 1992 75000 payment principal interest due may 1992 february 1993 company informed former subsidiary filed protection federal bankruptcy laws company informed actions might taken holders bonds possible may call acceleration payment bonds march 1994 company paid approximately 1594000 trustee irbs interest payments date company believes liability may ultimately result resolution matter excess amounts provided material adverse effect financial position results operations company subject contingencies including additional legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided material adverse effect consolidated financial position results operations company 8 operating segment information concentration credit risk company operates one industry segment residential commercial building products single customer accounts 10 consolidated net sales 90 net sales identifiable segment assets related companys domestic operations financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising companys customer base dispersion across many different geographical regions december 31 1993 company significant concentrations credit risk nortek inc subsidiaries notes consolidated financial statements continued 9 businesses sold held sale october 1993 company decided sell dixieline provided pretax valuation reserve approximately 20300000 119 per share net tax third quarter 1993 reduce companys net investment business estimated net realizable value january 2 1992 companys dixieline products inc subsidiary sold assets subject certain liabilities subsidiary l j smith inc l j smith approximately 24000000 company recorded pretax gain sale l j smith approximately 8000000 34 per share net tax first quarter 1992 october 2 1992 company sold capital stock whollyowned subsidiary bend millwork systems inc bend approximately 17200000 cash recorded pretax loss sale third quarter 1992 approximately 20500000 143 per share net tax fourth quarter 1992 company provided additional reserves approximately 2000000 17 per share net tax connection sale bend related purchase price negotiations settlements combined unaudited net sales pretax loss businesses sold held sale 1993 1992 included consolidated statement operations company approximately 83205000 600000 respectively year ended december 31 1993 approximately 185431000 2250000 respectively year ended december 31 1992 10 discontinued operations results discontinued operations include income expense items relating businesses discontinued prior years including increase reserves approximately 1400000 third quarter 5000000 fourth quarter 1992 results discontinued operations 1991 include income expense items relating businesses discontinued prior years including proceeds received settlement certain litigation pending prior sale 1989 companys former bradfordwhite corporation subsidiary resulted pretax gain approximately 700000 first quarter 1991 03 per share net tax 11 net gain loss investment marketable securities 1993 company recorded pretax gain investment marketable securities 1000000 005 per share net tax first quarter pretax gain 450000 002 per share net tax second quarter 900000 pretax gain 005 per share net tax third quarter pretax loss 700000 004 per share net tax fourth quarter nortek inc subsidiaries notes consolidated financial statements continued 1992 company recorded pretax loss investment marketable securities 500000 03 per share net tax first quarter pre tax gain 850000 04 per share net tax second quarter 1050000 pretax gain 06 per share net tax third quarter pretax loss 550000 04 per share net tax fourth quarter 1991 company recorded pretax gain investment marketable securities approximately 200000 01 per share net tax first quarter pretax loss 1850000 09 per share net tax second quarter pretax gain 350000 02 per share net tax third quarter pretax gain 1700000 09 per share net tax fourth quarter pretax loss second quarter includes 1600000 pretax loss 07 per share net tax sale companys investment stanley interiors preferred stock previously recorded assets approximately 1000000 cash 12 selling general administrative expense fourth quarter 1993 companys plumbing products group recorded pretax loss approximately 2800000 15 per share net tax connection curtailment certain product lines third quarter 1993 company recorded pretax loss approximately 1600000 08 per share net tax result sale october 1993 certain real property provided pretax reserve approximately 700000 04 per share net tax connection consolidation certain manufacturing facilities 1991 company increased reserves primarily related businesses sold bad debts warranties recorded net aftertax charges approximately 800000 06 per share first quarter 600000 04 per share second quarter 600000 04 per share third quarter 800000 06 per share fourth quarter also 1991 company recorded net aftertax charges approximately 400000 03 per share second quarter 800000 06 per share third quarter 200000 01 per share fourth quarter connection various litigation matters 13 accrued expenses taxes net accrued expenses taxes net consist following december 31 1993 1992 december 31 1993 1992 amounts thousands interest 4759 4840 insurance 17677 18071 payroll management incentive accrued employee benefits 11647 10567 businesses sold discontinued 8650 12963 net 48689 45835 91422 92276 nortek inc subsidiaries notes consolidated financial statements continued 14 summarized quarterly financial data unaudited following summarizes unaudited quarterly financial data years ended december 31 1993 december 31 1992 quarters ended april 3 july 3 oct 2 dec 31 thousands except per share amounts net sales 178707 195058 202030 168318 gross profit 49545 54665 56985 50430 earnings loss continuing operations 1400 1500 12900 200 earnings loss per share continuing operations primary 11 12 103 02 fully diluted 11 12 103 02 net earnings loss 3500 1500 12900 5900 net earnings loss per share primary 28 12 103 47 fully diluted 28 12 103 47 quarters ended march 28 june 27 sept 26 dec 31 thousands except per share amounts net sales 188868 215862 212500 182749 gross profit 46017 54239 51317 53229 earnings loss continuing operations 100 19800 1400 earnings loss per share continuing operations primary 01 158 11 fully diluted 01 158 11 net earnings loss 100 300 19900 4700 net earnings loss per share primary 01 02 159 37 fully diluted 01 02 159 37 companys earnings loss continuing operations 1993 includes approximately 14900000 net tax loss 119 per share third quarter relating valuation reserve reduce companys investment dixieline estimated net realizable value see notes 1 9 net earnings loss 1993 also includes approximately 2100000 net aftertax loss 017 per share related cumulative effect accounting change first quarter see note 6 approximately 6100000 aftertax extraordinary loss 049 per share fourth quarter related call debt redemption first quarter 1994 see note 4 companys earnings loss continuing operations 1992 includes net aftertax gain approximately 4200000 34 per share first quarter net aftertax loss approximately 18200000 143 per share nortek inc subsidiaries notes consolidated financial statements continued third quarter net aftertax loss approximately 2000000 17 per share fourth quarter businesses sold companys net loss fourth quarter 1992 also includes 3300000 aftertax loss 27 per share discontinued operations see notes 7 9 see notes 4 5 9 10 11 12 regarding certain quarterly transactions included operating results table lower net sales 1993 1992 compared prior year principally reflect effect businesses sold held sale partially offset increased net sales ongoing operations part resulting slight improvement residential housing market see managements discussion analysis financial condition results operations schedule nortek inc subsidiaries marketable securities december 31 1993 number shares market amount units cost value principal balance description amount issue sheet dollar amounts thousands unrestricted marketable securities u governmental agency securities 26000 26321 25892 schedule ii nortek inc subsidiaries notes accrued interest receivable employees years ended december 31 1993 1992 1991 balance deductions balance beginning amounts end year name year additions collected written current noncurrent ralph r papittoc 32494027253a 352193 ralph r papittoc 35219327253a 379446 ralph r papittoc 37944622711a 402157b accrued interest rate 895 b amounts forgiven recorded compensation expense c connection retirement settlement employment agreement matters involving companys former chairman remaining principal balance accrued interest forgiven october 31 1993 schedule v nortek inc subsidiaries property equipment e balance changes balance beginning additions debit end classification year cost credit year amounts thousands year ended december 31 1991 land 23797 33 822 a23043 430 b 465 c buildings 2647 improvements 95113 2201 8997 b89027 3357 c 2575 machinery 18054 b equipment 133658 13781 5304 c121506 252568 16015 35007 233576 year ended december 31 1992 94 land 23043 10 1409 b20822 728 c buildings 1104 improvements 89027 316 9915 b71388 6936 c 4162 machinery 12790 b equipment 121506 8478 1154 c111878 233576 8804 38292 204088 year ended december 31 1993 land 20822 60 1603 c 5833 13446 103 buildings 902 c improvements 71388 305 18379 d52309 2649 machinery 2146 c equipment 111878 10444 8544 d108983 204088 10809 47772 167125 sale retirement transfers property equipment b sale businesses c transfer property equipment dixieline noncurrent assets business held sale e total amount property equipment december 1992 approximately 204088000 includes approximately 39050000 dixieline property equipment classified noncurrent assets business held sale accompanying consolidated balance sheet schedule vi nortek inc subsidiaries accumulated depreciation amortization property equipment additions balance atcharged toretirements balance beginning costs end classification year expenses year amounts thousands year ended december 31 1991 buildings improvements 19737 5189 3004 21922 machinery equipment 46722 15563 9574 52711 66459 20752 12578 74633 year ended december 31 1992 buildings improvements 21922 4241 5797 20366 machinery equipment 52711 13041 10811 54941 74633 17282 16608 75307 year ended december 31 1993 buildings improvements 20366 3596 7777 16185 machinery equipment 54941 11397 5977 60361 75307 14993 13754 76546 total amount accumulated depreciation december 31 1992 approximately 75307000 includes approximately 8838000 dixieline accumulated depreciation classified noncurrent assets business held sale accompanying consolidated balance sheet schedule viii nortek inc subsidiaries valuation qualifying accounts balance charged costs charged deductions balance beginning end classification year expenses accounts reserves year amounts thousands year ended december 31 1991 allowances doubtful accounts sales allowances 4633 33491160b2189a 4633 year ended december 31 1992 allowances doubtful accounts sales allowances 4633 2362 573b2354a 4068 year ended december 31 1993 allowances doubtful accounts sales allowances 4068 1832 125c1577a 4198 amounts written net recoveries b sale businesses c transfer allowances doubtful accounts dixieline current assets business held sale schedule ix nortek inc subsidiaries shortterm borrowings december 31 1993 weighted maximum average amount average interest category balance rate standing rate aggregate short end term borrowings year dollar amounts thousands year ended december 31 1991 credit line borrowingsa 15600 10900 1038 margin borrowingsb 9000 year ended december 31 1992 margin borrowingsb 13100 4831 634 year ended december 31 1993 credit line borrowingsc 7000 615 7000 615 margin borrowingsb 7000 5293 550 1991 companys canadian subsidiary approximately 15600000 borrowings secured line credit average amount outstanding average interest rate year calculated based outstanding balances weighted average interest rates month end year respectively b 1991 company margin borrowings outstanding 9000000 three days 775 1992 company margin borrowings outstanding 141 days weighted average interest rate approximately 634 weighted average amount outstanding approximately 4831000 1993 company margin borrowings outstanding 51 days weighted average interest rate approximately 550 weighted average amount outstanding approximately 5293000 borrowings outstanding december 31 1993 c december 30 1993 companys canadian subsidiary borrowed approximately 7000000 secured line credit borrowings advanced nortek inc see note 4 notes consolidated financial statements included elsewhere herein schedule x nortek inc subsidiaries supplementary profit loss information year ended december 31 1993 1992 1991 amounts thousands maintenance repairs 8258 10955 11640 advertising 12186 10963 11945 adepreciation amortization intangible assets similar deferrals disclosed separately registrants consolidated financial statements three years ended december 31 1993 taxes payroll income taxes royalties reported related consolidated statement operations exceed 1 net sales therefore required disclosed separately consent independent public accountants nortek inc independent public accountants hereby consent incorporation report dated march 24 1994 included form 10k companys previously filed registration statements form s8 file nos 3322527 3347897 form s3 file 334693 arthur andersen co boston massachusetts march 24 1994 exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangement 31 restated certificate incorporation nortek inc exhibit 2 form 8k filed april 23 1987 file 16112 32 amendment restated certificate incorporation nortek inc effective may 10 1989 exhibit 32 form 10k filed march 30 1990 file 16112 33 bylaws nortek inc amended november 30 1993 41 indenture dated may 1 1986 company fleet national bank relating 7 12 convertible debentures due 2006 exhibit 41 registration statement 334693 filed april 23 1986 42 first supplemental indenture dated april 23 1987 company fleet national bank supplementing indenture dated may 1 1986 relating 7 12 convertible debentures due 2006 exhibit 411 form 10k filed march 30 1988 file 16112 43 rights agreement dated march 31 1986 amended restated march 18 1991 company state street bank trust company rights agent exhibit 1 form 8k filed march 26 1991 file 16112 44 amendment 1 dated october 6 1993 amended restated rights agreement dated march 18 1991 exhibit 1 form 8k filed october 12 1993 file 16112 45 indenture dated february 14 1994 company state street bank trust company trustee relating 9 78 senior subordinated notes due 2004 101 employment agreement richard l bready company dated january 1 1984 exhibit 102 form 10k filed march 31 1986 file 16112 102 amendment dated march 3 1988 employment agreement richard l bready company dated january 1 1984 exhibit 192 form 10q filed may 17 1988 file 16112 103 second amendment dated november 1 1990 employment agreement richard l bready company dated january 1 1984 exhibit 103 form 10k filed april 1 1991 file 16112 104 deferred compensation agreement dated march 7 1983 richard l bready company exhibit 104 registration statement 3369778 filed february 9 1994 105 deferred compensation agreement dated march 7 1983 almon c hall company exhibit 105 registration statement 3369778 filed february 9 1994 106 deferred compensation agreement dated march 7 1983 richard j harris company exhibit 106 registration statement 3369778 filed february 9 1994 107 1984 stock option plan amended may 27 1987 exhibit 282 registration statement 3322527 filed june 15 1988 108 change control severance benefit plan key employees adopted february 10 1986 form agreement employees exhibit 1019 form 10k filed march 31 1986 file 16112 109 1987 stock option plan exhibit 283 registration statement 3322527 filed june 15 1988 1010 form indemnification agreement company directors certain officers appendix c proxy statement dated march 23 1987 annual meeting nortek stockholders file 16112 1011 1988 general stock option plan appendix proxy statement dated april 1 1988 annual meeting nortek stockholders file 16112 1012 1988 general stock option plan iii appendix c proxy statement dated april 12 1989 annual meeting nortek stockholders file 16112 1013 registration rights agreement dated october 31 1990 company bready associates exhibit 4 schedule 13d filed november 13 1990 bready associates relating common stock par value 100 per share company 1014 1990 general stock option plan appendix proxy statement dated april 17 1991 annual meeting nortek stockholders file 16112 111 calculation shares used determining earnings per share 221 list subsidiariesitem 14 exhibits financial statement schedules reports form 8k financial statements schedules following documents filed part report 1 financial statements page consolidated statement operations three years ended december 31 1995 36 consolidated balance sheet december 31 1995 1994 37 consolidated statement cash flows three years ended december 31 1995 39 consolidated statement stockholders investment three years ended december 31 1995 40 notes consolidated financial statements 41 report independent public accountants 59 2 financial statement schedules schedule ii valuation qualifying accounts 60 schedules iii iv v omitted applicable required rules regulation sx 3the exhibits listed exhibit index incorporated herein reference b reports form 8k following reports form 8k filed registrant last quarter period covered report october 12 1995 item 5 events item 7 financial statements exhibits november 9 1995 item 2 acquisition disposition assets item 7 financial statements exhibits signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 7 1996 nortek inc bysrichard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 7 1996 srichard l bready sd stevens mcvoy richard l bready chairman stevens mcvoy director board president principal executive officer srichard j harris sj peter lyons richard j harris vice president j peter lyons director treasurer principal financial officer director salmon c hall dennis j mcgillicuddy almon c hall vice president dennis j mcgillicuddy director controller principal accounting officer philip b brooks barry silverstein philip b brooks director barry silverstein director nortek inc subsidiaries consolidated statement operations years ended december 31 1995 1994 1993 thousands except per share amounts net sales 776210 737160 744113 costs expenses cost products sold 574929 520328 532488 selling general administrative expense 160197 166815 181279 735126 687143 713767 operating earnings 41084 50017 30346 interest expense 24918 26162 26519 interest income 6134 5295 3223 net gain investment marketable securities 2000 1650 loss businesses sold 1750 20300 earnings loss provision income taxes 24300 27400 11600 provision income taxes 9300 10200 1000 earnings loss extraordinary gain loss 15000 17200 12600 extraordinary gain loss debt retirements 200 6100 earnings loss cumulative effect accounting changes 15000 17400 18700 cumulative effect accounting changes 400 2100 net earnings loss 15000 17800 20800 net earnings loss per share earnings extraordinary gain loss primary 119 135 100 fully diluted 119 134 100 extraordinary gain loss primary 02 49 fully diluted 02 49 cumulative effect accounting changes primary 03 17 fully diluted 03 17 net earnings loss primary 119 140 166 fully diluted 119 139 166 weighted average number shares primary 12569 12707 12622 fully diluted 12620 13144 13362 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet december 31 assets 1995 1994 amounts thousands current assets unrestricted cash investments cost approximates market 82756 77106 marketable securities available sale 20557 27974 restricted cash investments marketable securities cost approximates market 9411 9337 accounts receivable less allowances 4546000 4030000 118017 91687 inventories raw materials 42601 32660 work process 14319 9497 finished goods 53132 53191 110052 95348 prepaid expenses current assets 16927 7542 us federal prepaid income taxes 19100 19800 total current assets 376820 328794 property equipment cost land 6508 6069 buildings improvements 69125 55639 machinery equipment 157884 123848 233517 185556 less accumulated depreciation 97255 87475 total property equipment net 136262 98081 assets goodwill less accumulated amortization 23978000 21459000 91347 72682 deferred debt expense 7574 8502 13476 11158 112397 92342 625479 519217 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet december 31 1995 1994 amounts thousands liabilities stockholders investment current liabilities notes payable shortterm obligations 30226 51 current maturities longterm debt 11824 4578 accounts payable 73047 52697 accrued expenses taxes net 100970 98009 total current liabilities 216067 155335 liabilities deferred income taxes 27780 18232 9945 7909 37725 26141 notes mortgage notes obligations payable less current maturities 240396 219951 commitments contingencies note 8 stockholders investment preference stock 1 par value authorized 7000000 shares none issued common stock 1 par value authorized 40000000 shares 15883427 15814246 shares issued 15883 15814 special common stock 1 par value authorized 5000000 shares 774366 802097 shares issued 774 802 additional paidin capital 134690 134627 retained earnings 15766 766 cumulative translation pension adjustments 2742 6168 less treasury common stock cost 4306706 3795028 shares 31351 26371 treasury special common stock cost 276784 271574 shares 1729 1680 total stockholders investment 131291 117790 625479 519217 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement cash flows years ended december 31 1995 1994 1993 amounts thousands cash flows operating activities net earnings loss 15000 17800 20800 adjustments reconcile net earnings loss cash depreciation amortization 18977 17960 20726 net gain investment marketable securities 2000 1650 extraordinary gain loss debt retirements 250 9275 loss businesses sold 1750 20300 cumulative effect accounting changes 400 3100 deferred federal income tax provision credit extraordinary items 1300 300 6300 deferred federal income tax provision discontinued operations 2200 deferred federal income tax provision credit extraordinary items 1350 3175 changes certain assets liabilities net effects acquisitions dispositions accounts receivable net 4496 5501 11033 prepaids current assets 289 4361 937 inventories 5820 12593 2854 accounts payable 5614 6364 4360 accrued expenses taxes 4894 4242 3913 longterm assets liabilities net 1051 2682 5326 total adjustments net earnings loss 18847 8379 33225 net cash provided operating activities 33847 26179 12425 cash flows investing activities capital expenditures 16091 19424 10436 net cash paid businesses acquired 27543 proceeds sale property equipment 1831 114 5242 purchase investments marketable securities 10086 5032 87922 proceeds sale investments marketable securities 20772 113961 net cash proceeds payments relating businesses sold discontinued 1129 12465 2420 change restricted cash investments 331 2475 2552 net 1499 51 777 net cash provided used investing activities 31818 14301 20200 cash flows financing activities sale notes net 209195 purchase debentures notes payable 191582 1383 increase borrowings 10763 7348 payment borrowings 1656 8962 4124 purchase nortek common special common stock 4664 net 822 29 1327 net cash provided financing activities 3621 8622 514 net increase unrestricted cash investments 5650 20500 33139 unrestricted cash investments beginning year 77106 56606 23467 unrestricted cash investments end year 82756 77106 56606 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement stockholders investment three years ended december 31 1995 cumulative translation addi retained pension special tional earnings common paidin accumulat adjusttreasury stock capital ed deficit ments stock balance december 31 amounts thousands 1992 15602 990 134599 3766 28051 140432 shares special common stock converted 140432 shares common stock 141 16400 shares common stock issued upon exercise stock options 16 28 translation adjustment 1337 pension adjustment 806 net loss 20800 balance december 31 1993 15759 849 134627 17034 2143 28051 47478 shares special common stock converted 47478 shares common stock 47 7794 shares common stock issued upon exercise stock options 8 translation adjustment 780 pension adjustment 134 cumulative effect accounting change 400 unrealized decline marketable securities 2979 net earnings 17800 balance december 31 1994 15814 802 134627 766 6168 28051 27731 shares special common stock converted 27731 shares common stock 28 41450 shares common stock issued upon exercise stock options 41 63 511671 shares treasury stock acquired 5029 translation adjustment 701 pension adjustment 244 unrealized appreciation marketable securities 2969 net earnings 15000 balance december 31 1995 15883 774 134690 15766 274233080 accompanying notes integral part financial statements nortek inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts nortek inc significant whollyowned subsidiaries company nortek elimination intercompany accounts transactions certain amounts prior years financial statements reclassified conform presentation december 31 1995 october 2 1993 company began account dixieline lumber company inc subsidiary dixieline business held sale result dixielines operating results longer included companys consolidated operating results subsequent october 2 1993 company sold business march 31 1994see note 2 cash investments marketable securities investments consist shortterm highly liquid investments readily convertible cash investments marketable securities carried approximate market price company classified restricted current assets accompanying consolidated balance sheet certain cash investments marketable securities fully available use operations december 31 1995 approximately 9411000 cash investments marketable securities pledged collateral insurance requirements disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash investments carrying amount approximates fair value short maturity instruments marketable securities fair value marketable securities based quoted market prices december 31 1995 fair value marketable securities approximated amount companys consolidated balance sheet longterm debt december 31 1995 fair value longterm indebtedness approximately 7200000 lower amount companys consolidated balance sheet based quoted market prices see note 5 nortek inc subsidiaries notes consolidated financial statements continued inventories accompanying consolidated balance sheet valued lower cost market december 31 1995 1994 approximately 56221000 64589000 total inventories respectively valued lastin firstout method lifo firstin firstout method fifo accounting inventories would approximately 10550000 6710000 greater december 31 1995 1994 respectively inventories valued fifo method sales recognition company recognizes sales upon shipment products net applicable provisions discounts allowances company also provides estimate warranty bad debts time shipment selling general administrative expense foreign currency translation company translates assets liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using exchange rates effect year gains losses foreign currency translation credited charged cumulative translation adjustment included stockholders investment accompanying consolidated balance sheet transaction gains losses recorded selling general administrative expense material depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows buildings improvements 1035 years machinery equipment including leases 315 years leasehold improvements term lease expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost accumulated depreciation eliminated resulting gain loss recognized goodwill company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions goodwill amortized straightline method 40 years amortization charged continuing operations amounted 2519000 2407000 2418000 1995 1994 1993 respectively balance sheet date company evaluates realizability goodwill based expectations nondiscounted cash flows operating income subsidiary material goodwill balance based recent nortek inc subsidiaries notes consolidated financial statements continued analysis company believes material impairment goodwill exists december 31 1995 recent accounting pronouncements march 1995 financial accounting standards board issued sfas 121 accounting impairment longlived assets longlived assets disposed become effective company 1996 sfas 121 requires longlived assets certain identifiable intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable statement also requires certain longlived assets identifiable intangibles disposed reported lower carrying amount fair value less cost sell company completed analysis respect provisions sfas 121 accordingly determined effect companys consolidated financial condition results operations net earnings loss per share net earnings loss per share amounts computed using weighted average number common equivalent shares outstanding year earnings loss per share calculations 1993 include effect common stock equivalents convertible debentures reduction related interest expense assumed exercise stock options conversion debentures antidilutive net loss per share amounts special common stock treated equivalent common stock determining earnings per share results 2 acquisitions businesses sold acquisitions accounted purchases accordingly included companys consolidated results operations since acquisition date purchase price allocations subject refinement pertinent information regarding acquisitions obtained fourth quarter 1995 several companys wholly owned subsidiaries completed acquisition assets subject certain liabilities rangaire company cleburne texas rangaire capital stock best spa fabriano italy related entities best capital stock venmar ventilation inc drummondville quebec canada venmar aggregate purchase price acquisitions approximately 36500000 consisting cash approximately 33400000 future payments approximately 3100000 selling shareholders certain acquisitions entitled additional purchase price payments approximately 7800000 depending subsequent operating results acquisitions approximately 9600000 cash borrowed terms line credit one companys subsidiaries nortek inc subsidiaries notes consolidated financial statements continued march 31 1994 company sold capital stock dixieline approximately 18800000 cash 6000000 preferred stock purchaser third quarter 1993 company provided valuation reserve approximately 20300000 119 per share net tax reduce companys net investment dixieline estimated net realizable value additional loss 1994 incurred connection sale see note 1 combined unaudited net sales pretax loss businesses sold 1993 included consolidated statement operations company approximately 83205000 600000 respectively year ended december 31 1993 third quarter 1995 company sold investment preferred stock dixieline resulted pre tax gain approximately 2200000 17 per share net tax included net gain investment marketable securities companys accompanying consolidated statement operations january 1995 company paid approximately 1750000 14 per share net tax final purchase price adjustment related one businesses sold recorded charge earnings fourth quarter 1994 following table presents approximate unaudited pro forma operating results company year ended december 31 1995 december 31 1994 adjusted pro forma effect acquisitions discussed debt financing debt redemptions discussed note 5 assuming transactions occurred january 1 1994 year ended december 31 1995 1994 amounts thousands except per share amounts net sales 886210 851249 operating earnings 47355 59965 earnings extraordinary gain 15100 20900 fully diluted earnings per share 120 162 computing pro forma earnings extraordinary gain earnings reduced net interest income aggregate cash portion purchase price acquisitions historical rates earned company interest expense indebtedness incurred connection acquisitions net tax effect earnings extraordinary gain also reduced amortization goodwill reflect net adjustments depreciation expense result increase estimated fair market value property equipment respect effect debt financing debt redemptions discussed note 5 interest expense indebtedness redeemed period indebtedness outstanding excluded operating results average interest rate approximately 135 including amortization debt discount deferred debt expense periods presented net tax effect interest expense included 9 78 notes rate approximately 9 78 plus nortek inc subsidiaries notes consolidated financial statements continued amortization deferred debt expense debt discount periods presented net tax effect investment income assumed earned remaining cash proceeds debt financing rate 35 pro forma information presented purport indicative results would reported transactions occurred january 1 1994 may reported future 3 cash flows interest paid 23228000 22119000 26981000 1995 1994 1993 respectively following table summarizes activity businesses acquired purchase transactions included accompanying consolidated statement cash flows year ended december 31 1995 amounts thousands fair value assets acquired 129652 liabilities assumed created 96224 cash paid acquisitions 33428 less cash acquired 5885 net cash paid acquisitions 27543 following table summarizes activity businesses sold discontinued included accompanying consolidated statement cash flows year ended december 31 1995 1994 1993 amounts thousands fair value assets sold 39439 liabilities assumed purchaser 16143 notes receivable noncash proceeds received part proceeds 6000 cash proceeds sale dixieline preferred stock 2874 cash payments relating businesses sold discontinued net 1745 4831 2420 net cash proceeds payments relating businesses sold discontinued 1129 12465 2420 significant noncash financing investing activities excluded accompanying consolidated statement cash flows include capitalized lease additions approximately 806000 1995 increase approximately 2969000 decline approximately 2979000 fair market value marketable securities available sale 1995 1994 respectively noncash financing investing activities significant year ended december 31 1993 nortek inc subsidiaries notes consolidated financial statements continued 4 income taxes following summary components earnings loss provision credit income taxes extraordinary gain loss year ended december 31 1995 1994 1993 amounts thousands domestic 21600 23100 17000 foreign 2700 4300 5400 24300 27400 11600 following summary provision credit income taxes extraordinary gain loss included accompanying consolidated statement operations year ended december 31 1995 1994 1993 amounts thousands federal income taxes current 5700 7125 2800 deferred 1300 300 6300 7000 7425 3500 foreign 1300 1500 2600 state 1000 1275 1900 9300 10200 1000 income tax payments net refunds approximately 3739000 10895000 11950000 1995 1994 1993 respectively table reconciles federal statutory income tax rate effective tax rate earnings extraordinary gain loss approximately 383 372 86 1995 1994 1993 respectively year ended december 31 1995 1994 1993 amounts thousands income tax provision credit extraordinary gain loss federal statutory rate 8505 9590 4060 net change statutory rate change valuation reserve net 1100 1625 2618 state taxes net federal tax effect 650 829 1235 amortization deductible tax purposes 868 737 746 businesses sold 613 172 foreign source deemed income 700 tax effect foreign income 79 164 196 net 298 108 263 9300 10200 1000 nortek inc subsidiaries notes consolidated financial statements continued company recorded 1000000 income tax credit principally deferred first quarter 1993 relating cumulative effect accounting change certain postretirement benefits fourth quarter 1993 company recorded 3175000 deferred income tax credit relating extraordinary loss arising indebtedness called redemption see note 5 tax effect temporary differences gave rise significant portions deferred income tax assets liabilities december 31 1995 december 31 1994 follows december 31 1995 1994 amounts thousands prepaid deferred income tax assets arising accounts receivable 1425 1399 inventory 577 468 insurance reserves 6036 7688 reserves liabilities assets net 12216 11181 19100 19800 deferred prepaid income tax liabilities arising property equipment net 15233 12406 prepaid pension assets 1323 1230 insurance reserves 273 643 reserves liabilities assets net 8797 2476 capital loss carryforward 7260 6217 unrealized loss business sold 604 tax assets 1658 3642 valuation allowances 11618 13226 27780 18232 december 31 1995 company us federal capital loss carryforwards approximately 19600000 17700000 expires year 1997 company provided valuation allowance equal tax effect capital loss carryforwards certain tax assets since realization tax assets cannot reasonably assured december 31 1995 company approximately 1800000 net us federal prepaid income tax assets expected realized future operating earnings nortek inc subsidiaries notes consolidated financial statements continued 5 notes mortgage notes obligations payable shortterm obligations december 31 1995 1994 consist following december 31 1995 1994 amounts thousands secured revolving lines credit canadian subsidiary 4173 51 secured lines credit bank advances companys european subsidiaries 21972 secured revolving lines credit one companys u subsidiaries 3830 obligations 251 30226 51 shortterm obligations principally relate subsidiaries acquired 1995 secured approximately 38000000 accounts receivable inventory borrowings average weighted interest rate approximately 111 since date acquisition notes mortgage notes debentures payable accompanying consolidated balance sheet december 31 1995 1994 consist following december 31 1995 1994 amounts thousands mortgage notes payable 17055 6774 net 750000 unamortized discount 1995 18185 887 9 78 senior subordinated notes due 2004 9 78 notes net unamortized original issue discount 1520000 1632000 216980 216868 252220 224529 less amounts included current liabilities 11824 4578 240396 219951 february 1994 company sold public offering 218500000 9 78 senior subordinated notes due 2004 discount approximately 1717000 amortized life issue net proceeds sale 9 78 notes deducting underwriting commissions expenses amounted approximately 207695000 march 24 1994 portion proceeds used redeem approximately 153000000 certain companys outstanding principal amount indebtedness pay accrued interest expense net interest income first quarter 1994 approximately 1300000 greater would debt redemption occurred day financing call debt redemptions resulted extraordinary loss nortek inc subsidiaries notes consolidated financial statements continued approximately 6100000 49 per share net income tax credit approximately 3175000 recorded fourth quarter 1993 see note 2 respect pro forma effect debt redemptions indenture governing 9 78 notes restricts among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indenture upon certain asset sales defined indenture company required offer purchase 100 principal amount plus accrued interest date purchase 9 78 notes principal amount equal net cash proceeds defined indenture invested properties assets used primarily related business owned operated company issue date 9 78 notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indenture 9 78 notes redeemable option company whole part time 104214 march 1 1999 declining 100 march 1 2002 thereafter december 31 1995 approximately 30200000 available payment cash dividends stock payments terms companys indenture governing 9 78 notes see note 6 first half 1994 company purchased 9121000 principal amount 7 12 convertible debentures resulted extraordinary gain approximately 300000 net income taxes approximately 150000 october 24 1994 company redeemed remaining outstanding 6373000 principal amount 7 12 convertible debentures plus paid accrued interest slight redemption premium redemption resulted extraordinary loss approximately 100000 net income taxes 100000 third quarter 1994 purchases redemptions resulted net extraordinary gain 200000 02 per share year ended december 31 1994 fourth quarter 1993 result call redemption certain companys indebtedness described company wrote approximately 8100000 unamortized deferred debt expense debt discount provided redemption premium approximately 1175000 recorded extraordinary loss mortgage notes payable approximately 17055000 outstanding december 31 1995 include various mortgage notes related indebtedness payable installments 2009 bearing interest rates ranging 75 135 collateralized property equipment aggregate net book value approximately 19920000 december 31 1995 nortek inc subsidiaries notes consolidated financial statements continued obligations 18185000 outstanding december 31 1995 include borrowings relating equipment purchases borrowings bearing interest rates primarily ranging 9 14 maturing various dates 2002 approximately 12881000 indebtedness collateralized property equipment aggregate net book value approximately 25305000 december 31 1995 following summary maturities companys debt obligations excluding unamortized debt discount due december 31 1996 amounts thousands 1997 5406 1998 5566 1999 4926 2000 3449 thereafter 223319 242666 amortization discount deferred costs approximately 1100000 1400000 2100000 1995 1994 1993 respectively 6 common stock special common stock options deferred compensation share special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting remaining 75 elected combined vote classes shares special common stock generally nontransferable freely convertible shareforshare basis shares common stock company rights plan expires april 11 1996 provides right purchase 75 one onehundredth share 100 par value series participating preference stock right held rights currently exercisable attached share common stock may redeemed directors 01 per share time shareholder acquires beneficial ownership 17 companys common stock special common stock rights trade separately become exercisable entitling rights holder acquire additional shares companys common stock market value equal twice amount exercise price right addition person group acquiring company commences tender offer announces intention acquire 30 companys common stock special common stock nortek inc subsidiaries notes consolidated financial statements continued rights trade separately certain circumstances permit rights holder acquire common stock acquiring company market value equal twice amount exercise price right december 31 1995 total 1514266 shares common stock reserved follows stock option plans 739900 conversion special common stock 774366 1514266 december 31 1995 43500 shares special common stock reserved stock option plans company several stock option plans provide granting options certain officers employees nonemployee directors company options granted plans vest periods ranging five years expire eight ten years date grant december 31 1995 419000 options currently exercisable 288400 additional options available grant plans options 200100 50100 shares common special common stock became exercisable 1995 1994 respectively proceeds options exercised credited common stock additional paidin capital following table summarizes common special common stock option transactions three years ended december 31 1995 number option price shares per share total options outstanding december 31 1992 240300 2251569 1064838 granted 280000 875 2450000 exercised 16400 2252875 44000 options outstanding december 31 1993 503900 2251569 3470838 exercised 9800 2875 28175 options outstanding december 31 1994 494100 2251569 3442663 exercised 42600 2252875 119850 options outstanding december 31 1995 451500 2251569 3322813 february 13 1996 company purchased first quarter approximately 428800 shares common stock approximately 4898771 cash negotiated open market transactions account shares treasury stock nortek inc subsidiaries notes consolidated financial statements continued 7 pension retirement profit sharing plans company subsidiaries various pension retirement profit sharing plans requiring contributions qualified trusts union administered funds pension profit sharing expense charged operations aggregated approximately 1377000 1995 2883000 1994 1683000 1993 companys policy fund currently actuarially determined annual contribution fourth quarter 1995 benefits related companys existing defined benefit plans frozen companys net pension expense defined benefit plans 1995 1994 1993 consists following components year ended december 31 1995 1994 1993 amounts thousands service costs 1273 1647 1685 interest cost 2364 2261 1989 actual net income plan assets 3204 2155 3295 net amortization deferred items 790 10 822 net gain freezing plan benefits 581 total expense 642 1763 1201 following tables set forth funded status companys defined benefit plans amounts recognized companys consolidated balance sheet december 31 1995 1994 plan assets exceeding benefit obligation 1995 1994 actuarial present value benefit amounts thousands obligations september 30 vested benefits 22259 18149 nonvested benefits 630 accumulated benefit obligation 22259 18779 effect projected future compensation levels 5373 projected benefit obligation 22259 24152 plan assets fair value september 30 25673 24486 plan assets excess projected benefit obligation 3414 334 unrecognized net loss 5401 unrecognized net assets 2412 unrecognized prior service costs 129 3414 3194 nortek inc subsidiaries notes consolidated financial statements continued accumulated benefit obligation exceeding plan assets 1995 1994 amounts thousands actuarial present value benefit obligations september 30 vested benefits 5069 4199 nonvested benefits 232 accumulated benefit obligation 5069 4431 plan assets fair value september 30 4407 3691 plan assets less accumulated benefit obligation 662 740 unrecognized net loss 916 807 unrecognized prior service costs 602 additional minimum liability 916 1409 662 740 plan assets include commingled funds marketable securities insurance contracts cash shortterm investments weighted average discount rate increase future compensation levels used determining actuarial present value benefit obligations 7 12 percent 5 percent respectively 1995 8 percent 5 12 percent respectively 1994 7 18 percent 5 12 percent respectively 1993 expected longterm rate return assets 8 12 percent 1995 1994 1993 1995 minimum pension liability resulted reduction stockholders investment approximately 916000 1994 1993 minimum pension liability intangible asset certain plans recognized resulting reduction companys stockholders investment approximately 672000 806000 respectively late 1995 company adopted supplemental retirement plan certain employees effective january 1 1996 actuarial present value unfunded accumulated benefit obligation plan approximately 3500000 result additional minimum pension liability intangible asset recorded 1996 nortek inc subsidiaries notes consolidated financial statements continued 8 commitments contingencies company provides accruals direct indirect costs associated estimated resolution contingencies earliest date incurrence liability deemed probable amount liability reasonably estimated december 31 1995 company subsidiaries obligated lease agreements rental certain real estate machinery equipment used operations minimum annual rental expense aggregates approximately 29992000 december 31 1995 obligations payable follows 1996 5047000 1997 4429000 1998 3802000 1999 2824000 2000 1713000 thereafter 12177000 certain lease agreements provide increased payments based changes consumer price index rental expense continuing operations accompanying consolidated statement operations excluding dixieline years ended december 31 1995 1994 1993 approximately 6900000 7000000 6600000 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes company subject contingencies including additional legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated nortek inc subsidiaries notes consolidated financial statements continued impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided material adverse effect consolidated financial position results operations company preparation financial statements conformity generally accepted accounting principles involves estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts income expenses reporting periods operating results future could vary amounts derived estimates assumptions 9 operating geographic segment information concentration credit risk company operates one industry segment residential commercial building products single customer accounts 10 consolidated net sales prior 1995 90 net sales identifiable assets related companys domestic operations result acquisitions 1995 following information geographic area presented 1995 net identifiable sales earnings assets geographic areas domestic operations 733264 45742 341555 european operations 13298 769 71180 foreign operations 42432 2189 68056 eliminations 12784 8258 776210 48700 472533 unallocated 7616 152946 interest expense 24918 interest income 6134 net gain investment marketable securities 2000 consolidated totals 776210 24300 625479 unallocated assets consist primarily cash investments marketable securities u federal prepaid income taxes financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising companys customer base dispersion across many different geographical regions december 31 1995 company significant concentrations credit risk nortek inc subsidiaries notes consolidated financial statements continued 10 net gain loss marketable securities january 1 1994 company adopted accounting requirements sfas 115 accounting certain investments debt equity securities recorded income accumulated unrealized marketable security reserve recorded december 31 1993 approximately 400000 03 per share cumulative effect accounting change new accounting method company records unrealized gains losses investment securities adjustments stockholders investment previously gains losses recorded companys consolidated statement operations second quarter 1995 company recorded pretax loss approximately 200000 02 per share net tax sale marketable securities december 31 1995 1994 reduction companys stockholders investment new accounting method gross unrealized losses approximately 410000 3379000 respectively december 31 1995 gross unrealized gains companys marketable securities prior periods restated companys marketable securities december 31 1995 consist primarily u government treasury notes due follows fair principal market due amount cost value amounts thousands 15 years 16000 16295 15969 510 years 4537 4672 4588 20537 20967 20557 1993 company recorded pretax gain investment marketable securities 1000000 05 per share net tax first quarter pretax gain 450000 02 per share net tax second quarter 900000 pretax gain 05 per share net tax third quarter pretax loss 700000 04 per share net tax fourth quarter 11 selling general administrative expense second quarter 1994 company recorded net pretax income approximately 3200000 14 per share net tax resulting settlement certain insurance claims disputes nortek inc subsidiaries notes consolidated financial statements continued fourth quarter 1993 companys plumbing products group recorded pretax loss approximately 2800000 15 per share net tax connection restructure certain product lines third quarter 1993 company recorded pretax loss approximately 1600000 08 per share net tax result sale october 1993 certain real property provided pretax reserve approximately 700000 04 per share net tax connection consolidation certain manufacturing facilities 12 accrued expenses taxes net accrued expenses taxes net consist following december 31 1995 1994 december 31 1995 1994 amounts thousands insurance 22496 23483 payroll management incentive accrued employee benefits 17463 14609 interest 8077 7446 accrued product warranty expense 6850 6968 businesses sold discontinued 1750 net 46084 43753 100970 98009 13 summarized quarterly financial data unaudited following summarizes unaudited quarterly financial data years ended december 31 1995 december 31 1994 quarters ended april 1 july 1 sept 30 dec 31 thousands except per share amounts net sales 184809 194206 193567 203628 gross profit 49369 49505 49676 52731 earnings extraordinary gain loss 2500 3200 5200 4100 net earnings 2500 3200 5200 4100 earnings per share extraordinary gain loss primary 20 25 41 33 fully diluted 20 25 41 33 net earnings per share primary 20 25 41 33 fully diluted 20 25 41 33 nortek inc subsidiaries notes consolidated financial statements continued quarters ended april 2 july 2 oct 1 dec 31 thousands except per share amounts net sales 169020 193722 197012 177406 gross profit 49718 57678 58075 51361 earnings extraordinary gain loss 700 5500 6400 4600 net earnings 1500 5400 6300 4600 earnings per share extraordinary gain loss primary 06 44 50 36 fully diluted 06 43 50 36 net earnings per share primary 12 43 49 36 fully diluted 12 42 49 36 see notes 2 5 10 11 regarding certain quarterly transactions included operating results table increased net sales fourth quarter 1995 compared fourth quarter 1994 reflect effect businesses acquired 1995 see managements discussion analysis financial condition results operations note 2 report independent public accountants nortek inc audited accompanying consolidated financial statements nortek inc delaware corporation subsidiaries listed item 14a1 form 10k financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position nortek inc subsidiaries december 31 1995 1994 results operations cash flows three years period ended december 31 1995 conformity generally accepted accounting principles explained note 10 consolidated financial statements effective january 1 1994 company changed method accounting marketable securities audit made purpose forming opinion basic financial statements taken whole schedule listed item 14a2 presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp boston massachusetts february 20 1996 schedule ii nortek inc subsidiaries valuation qualifying accounts balance charged costs charged deductions balance beginning acqui end classification year sitions expenses accounts reserves year amounts thousands year ended december 31 1993 allowances doubtful accounts sales allowances 4068 1832 125b 1577a 4198 year ended december 31 1994 allowances doubtful accounts sales allowances 4198 762 147 c 1077a 4030 year ended december 31 1995 allowances doubtful accounts sales allowances 4030 719 1069 389 c 1661a 4546 amounts written net recoveries b transfer allowances doubtful accounts dixieline current assets business held sale c exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangement 31 restated certificate incorporation nortek inc exhibit 2 form 8k filed april 23 1987 file 16112 32 amendment restated certificate incorporation nortek inc effective may 10 1989 exhibit 32 form 10k filed march 30 1990 file 16112 33 bylaws nortek inc amended november 30 1993 exhibit 33 form 10k filed march 25 1994 file 16112 41 rights agreement dated march 31 1986 amended restated march 18 1991 company state street bank trust company rights agent exhibit 1 form 8k filed march 26 1991 file 16112 42 amendment 1 dated october 6 1993 amended restated rights agreement dated march 18 1991 exhibit 1 form 8k filed october 12 1993 file 16112 43 amendment 2 dated september 27 1995 amended restated rights agreement dated march 18 1991 exhibit 1 form 8k filed october 12 1995 file 16112 44 indenture dated february 14 1994 company state street bank trust company trustee relating 9 78 senior subordinated notes due 2004 exhibit 45 form 10k filed march 25 1994 file 16112 101 employment agreement richard l bready company dated january 1 1984 exhibit 102 form 10k filed march 31 1986 file 16112 102 amendment dated march 3 1988 employment agreement richard l bready company dated january 1 1984 exhibit 192 form 10q filed may 17 1988 file 16112 103 second amendment dated november 1 1990 employment agreement richard l bready company dated january 1 1984 exhibit 103 form 10k filed april 1 1991 file 16112 104 deferred compensation agreement dated march 7 1983 richard l bready company exhibit 104 registration statement 3369778 filed february 9 1994 105 deferred compensation agreement dated march 7 1983 almon c hall company exhibit 105 registration statement 3369778 filed february 9 1994 106 deferred compensation agreement dated march 7 1983 richard j harris company exhibit 106 registration statement 3369778 filed february 9 1994 107 1984 stock option plan amended may 27 1987 exhibit 282 registration statement 3322527 filed june 15 1988 108 change control severance benefit plan key employees adopted february 10 1986 form agreement employees exhibit 1019 form 10k filed march 31 1986 file 16112 109 1987 stock option plan exhibit 283 registration statement 3322527 filed june 15 1988 1010 form indemnification agreement company directors certain officers appendix c proxy statement dated march 23 1987 annual meeting nortek stockholders file 16112 1011 1988 general stock option plan appendix proxy statement dated april 1 1988 annual meeting nortek stockholders file 16112 1012 1988 general stock option plan iii appendix c proxy statement dated april 12 1989 annual meeting nortek stockholders file 16112 1013 registration rights agreement dated october 31 1990 company bready associates exhibit 4 schedule 13d filed november 13 1990 bready associates relating common stock par value 100 per share company 1014 1990 general stock option plan appendix proxy statement dated april 17 1991 annual meeting nortek stockholders file 16112 111 calculation shares used determining earnings per share 211 list subsidiaries 231 consent independent public accountants 271 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k financial statements schedules following documents filed part report 1 financial statements page consolidated statement operations three years ended december 31 1996 27 consolidated balance sheet december 31 1996 1995 28 consolidated statement cash flows three years ended december 31 1996 30 consolidated statement stockholders investment three years ended december 31 1996 31 notes consolidated financial statements 33 report independent public accountants 52 2 financial statement schedules schedule ii valuation qualifying accounts 53 3 exhibits listed exhibit index incorporated herein reference b reports form 8k following report form 8k filed registrant last quarter period covered report october 25 1996 item 5 events signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized february 18 1997 nortek inc srichard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 18 1997 srichard l bready sjpeter lyons richard l bready chairman j peter lyons director board president principal executive officer srichard j harris swilliam kelly richard j harris vice president william kelly director treasurer principal financial officer director salmon c hall sphillip l cohen almon c hall vice president phillip l cohen director controller principal accounting officer nortek inc subsidiaries consolidated statement operations years ended december 31 1996 1995 1994 thousands except per share amounts net sales 969798 776210 737160 costs expenses cost products sold 709875 574929 520328 selling general administrative expense 199871 160197 166815 909746 735126 687143 operating earnings 60052 41084 50017 interest expense 30113 24918 26162 interest income 5311 6134 5295 net gain investment marketable securities 750 2000 loss business sold 1750 earnings provision income taxes 36000 24300 27400 provision income taxes 14000 9300 10200 earnings extraordinary gain 22000 15000 17200 extraordinary gain debt retirements 200 earnings cumulative effect accounting change 22000 15000 17400 cumulative effect accounting change 400 net earnings 22000 15000 17800 net earnings per share earnings extraordinary gain primary 207 119 135 fully diluted 205 119 134 extraordinary gain primary 02 fully diluted 02 cumulative effect accounting change primary 03 fully diluted 03 net earnings primary 207 119 140 fully diluted 205 119 139 weighted average number shares primary 10641 12569 12707 fully diluted 10722 12620 13144 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet december 31 assets 1996 1995 amounts thousands current assets unrestricted cash equivalents 41042 37211 marketable securities available sale 51051 66102 restricted investments marketable securities cost approximates market 5681 9411 accounts receivable less allowances 4356000 4546000 122176 118017 inventories raw materials 36765 42601 work process 12717 14319 finished goods 48176 53132 97658 110052 prepaid expenses current assets 14940 16927 prepaid income taxes 20000 19100 total current assets 352548 376820 property equipment cost land 7046 6508 buildings improvements 72954 69125 machinery equipment 174064 157884 254064 233517 less accumulated depreciation 112645 97255 total property equipment net 141419 136262 assets goodwill less accumulated amortization 26948000 23978000 91578 91347 deferred debt expense 6647 7574 16924 13476 115149 112397 609116 625479 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet continued december 31 1996 1995 amounts thousands liabilities stockholders investment current liabilities notes payable shortterm obligations 25334 30226 current maturities longterm debt 11230 11824 accounts payable 74945 73047 accrued expenses taxes net 97565 100970 total current liabilities 209074 216067 liabilities deferred income taxes 22588 27780 14698 9945 37286 37725 notes mortgage notes obligations payable less current maturities 243961 240396 commitments contingencies note 8 stockholders investment preference stock 1 par value authorized 7000000 shares none issued common stock 1 par value authorized 40000000 shares 15965585 15883427 shares issued 15966 15883 special common stock 1 par value authorized 5000000 shares 784169 774366 shares issued 784 774 additional paidin capital 135028 134690 retained earnings 37766 15766 cumulative translation pension adjustments 3212 2742 less treasury common stock cost 6599645 4306706 shares 65805 31351 treasury special common stock cost 276910 276784 shares 1732 1729 total stockholders investment 118795 131291 609116 625479 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement cash flows years ended december 31 1996 1995 1994 amounts thousands cash flows operating activities net earnings 22000 15000 17800 adjustments reconcile net earnings cash depreciation amortization 23726 18977 17960 net gain investments marketable securities 750 2000 extraordinary gain debt retirements 250 loss business sold 1750 cumulative effect accounting change 400 deferred federal income tax benefit provision extraordinary items 1800 1300 300 deferred federal income tax provision discontinued operations 2200 deferred federal income tax provision extraordinary items 1350 changes certain assets liabilities net effects acquisitions dispositions accounts receivable net 3626 4496 5501 prepaids current assets 4620 289 4361 inventories 12196 5820 12593 accounts payable 2090 5614 6364 accrued expenses taxes 8840 4894 4242 longterm assets liabilities net 312 1051 2682 total adjustments net earnings 27304 18847 8379 net cash provided operating activities 49304 33847 26179 cash flows investing activities capital expenditures 21683 16091 19424 net cash paid businesses acquired 27543 proceeds sale property equipment 1325 1831 114 purchase investments marketable securities 66901 104762 110231 proceeds sale investments marketable securities 82435 112173 62929 net cash proceeds relating businesses sold discontinued 1129 12465 change restricted investments marketable securities 331 2475 net 2214 1499 51 net cash used investing activities 7038 35093 56571 cash flows financing activities sale notes net 209195 purchase debentures notes payable 191582 increase borrowings 9609 10763 payment borrowings 13701 1656 8962 purchase nortek common special common stock 34822 4664 net 479 822 29 net cash used provided financing activities 38435 3621 8622 net increase decrease unrestricted cash equivalents 3831 2375 21770 unrestricted cash equivalents beginning year 37211 34836 56606 unrestricted cash equivalents end year 41042 37211 34836 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement stockholders investment three years ended december 31 1996 cumulative translation addi retained pension special tional earnings common paidin accumulat adjust treasury stock capital ed deficit ments stock amounts thousands balance december 31 1993 15759 849 134627 17034 2143 28051 47478 shares special common stock converted 47478 shares common stock 47 7794 shares common stock issued upon exercise stock options 8 translation adjustment 780 pension adjustment 134 cumulative effect accounting change 400 unrealized decline marketable securities 2979 net earnings 17800 balance december 31 1994 15814 802 134627 766 6168 28051 27731 shares special common stock converted 27731 shares common stock 28 41450 shares common stock issued upon exercise stock options 41 63 511671 shares treasury stock acquired 5029 translation adjustment 701 pension adjustment 244 unrealized appreciation marketable securities 2969 net earnings 15000 balance december 31 1995 15883 774 134690 15766 2742 33080 27697 shares special common stock converted 27697 shares common stock 28 54461 shares common stock 37500 shares special common stock issued upon exercise stock options 55 38 338 2293065 shares treasury stock acquired 34457 translation adjustment 138 pension adjustment 127 unrealized decline marketable securities 481 net earnings 22000 balance december 31 1996 15966 784 135028 37766 3212 67537 accompanying notes integral part financial statements nortek inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies company diversified manufacturer residential commercial building products operating within three principal product groups residential building products group air conditioning heating products group plumbing products group product groups company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets principles consolidation consolidated financial statements include accounts nortek inc significant whollyowned subsidiaries company nortek elimination intercompany accounts transactions certain amounts prior years financial statements reclassified conform presentation december 31 1996 risks uncertainties preparation financial statements conformity generally accepted accounting principles involves estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts income expense reporting periods operating results future could vary amounts derived estimates assumptions cash investments marketable securities cash equivalents consist shortterm highly liquid investments original maturities three months less readily convertible cash company classified restricted current assets accompanying consolidated balance sheet certain investments marketable securities fully available use operations december 31 1996 approximately 5681000 investments marketable securities pledged collateral insurance requirements disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents carrying amount approximates fair value short maturity instruments marketable securities fair value marketable securities based quoted market prices december 31 1996 fair value marketable securities approximated amount companys consolidated balance sheet longterm debt december 31 1996 fair value longterm indebtedness approximated amount original issue discount companys consolidated balance sheet see note 5 inventories accompanying consolidated balance sheet valued lower cost market december 31 1996 1995 approximately 61641000 69967000 total inventories respectively valued lastin firstout method lifo firstin firstout method fifo accounting inventories would approximately 8482000 10550000 greater december 31 1996 1995 respectively inventories valued fifo method sales recognition company recognizes sales upon shipment products net applicable provisions discounts allowances company also provides estimate warranty bad debts time shipment selling general administrative expense foreign currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency company translates assets liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using average exchange rates effect year gains losses foreign currency translation credited charged cumulative translation adjustment included stockholders investment accompanying consolidated balance sheet transaction gains losses recorded selling general administrative expense material depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows buildings improvements 1035 years machinery equipment including leases 315 years leasehold improvements term lease expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost accumulated depreciation eliminated resulting gain loss recognized nortek inc subsidiaries notes consolidated financial statements continued goodwill company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions goodwill amortized straightline method 40 years amortization charged operations amounted 2970000 2519000 2407000 1996 1995 1994 respectively balance sheet date company evaluates realizability goodwill based expectations nondiscounted cash flows operating income subsidiary material goodwill balance based recent analysis company believes material impairment goodwill exists december 31 1996 recent accounting pronouncements january 1 1996 company adopted accounting requirements statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed sfas 121 requires longlived assets certain identifiable intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable statement also requires certain longlived assets identifiable intangibles disposed reported lower carrying amount fair value less cost sell application sfas 121 significant impact companys results operations financial condition january 1 1996 company adopted accounting requirements sfas 123 stockbased compensation sfas 123 requires employee stock based compensation either recorded disclosed fair value company continue account stockbased compensation accounting principles board apb 25 adopt new accounting provisions stockbased compensation sfas 123 include additional required disclosures see note 6 net earnings per share net earnings per share amounts computed using weighted average number common equivalent shares outstanding year special common stock treated equivalent common stock determining earnings per share results 2 acquisitions businesses sold acquisitions accounted purchases accordingly included companys consolidated results operations since acquisition date purchase price allocations subject refinement pertinent information regarding acquisitions obtained nortek inc subsidiaries notes consolidated financial statements continued fourth quarter 1995 several companys wholly owned subsidiaries completed acquisition assets subject certain liabilities rangaire company rangaire capital stock best spa related entities best capital stock venmar ventilation inc venmar aggregate purchase price acquisitions approximately 36500000 consisting cash approximately 33400000 future payments approximately 3100000 selling shareholders certain acquisitions entitled additional purchase price payments approximately 2000000 depending subsequent operating results acquisitions march 31 1994 company sold capital stock one businesses approximately 18800000 cash 6000000 preferred stock purchaser third quarter 1995 company sold investment preferred stock resulted pretax gain approximately 2200000 17 per share net tax included net gain investment marketable securities companys accompanying consolidated statement operations january 1995 company paid approximately 1750000 14 per share net tax final purchase price adjustment related one businesses sold recorded charge earnings fourth quarter 1994 approximate unaudited pro forma net sales operating earnings extraordinary gain fully diluted earnings per share company year ended december 31 1995 adjusted pro forma effect acquisitions discussed assuming transactions occurred january 1 1995 approximately 886210000 47355000 15100000 120 respectively computing pro forma earnings extraordinary gain earnings reduced net interest income aggregate cash portion purchase price acquisitions historical rates earned company interest expense indebtedness incurred connection acquisitions net tax effect earnings extraordinary gain also reduced amortization goodwill reflect net adjustments depreciation expense result increase estimated fair market value property equipment nortek inc subsidiaries notes consolidated financial statements continued pro forma information presented purport indicative results would reported transactions occurred january 1 1995 may reported future 3 cash flows interest paid 30581000 23228000 22119000 1996 1995 1994 respectively following table summarizes activity businesses acquired purchase transactions included accompanying consolidated statement cash flows year ended december 31 1995 amounts thousands fair value assets acquired 129652 liabilities assumed created 96224 cash paid acquisitions 33428 less cash acquired 5885 net cash paid acquisitions 27543 following table summarizes activity businesses sold discontinued included accompanying consolidated statement cash flows year ended december 31 1995 1994 amounts thousands fair value assets sold 39439 liabilities assumed purchaser 16143 notes receivable noncash proceeds received part proceeds 6000 cash proceeds sale preferred stock 2874 cash payments relating businesses sold discontinued net 1745 4831 net cash proceeds relating businesses sold discontinued 1129 12465 nortek inc subsidiaries notes consolidated financial statements continued significant noncash financing investing activities excluded accompanying consolidated statement cash flows include capitalized lease additions approximately 500000 1996 decline approximately 481000 increase approximately 2969000 decline approximately 2979000 fair market value marketable securities available sale 1996 1995 1994 respectively 4 income taxes following summary components earnings provision income taxes extraordinary gain year ended december 31 1996 1995 1994 amounts thousands domestic 32500 21600 23100 foreign 3500 2700 4300 36000 24300 27400 following summary provision benefit income taxes extraordinary gain included accompanying consolidated statement operations year ended december 31 1996 1995 1994 amounts thousands federal income taxes current 12950 5700 7125 deferred 1800 1300 300 11150 7000 7425 foreign 1300 1500 state 1550 1000 1275 14000 9300 10200 income tax payments net refunds approximately 18611000 3739000 10895000 1996 1995 1994 respectively following reconciles federal statutory income tax rate effective tax rate earnings extraordinary gain approximately 389 383 372 1996 1995 1994 respectively nortek inc subsidiaries notes consolidated financial statements continued year ended december 31 1996 1995 1994 amounts thousands income tax provision extraordinary gain federal statutory rate 12600 8505 9590 net change statutory rate change valuation reserve net 481 1100 1625 state taxes net federal tax effect 1008 650 829 amortization deductible tax purposes 1040 868 737 business sold 613 product development tax credit foreign operations 478 tax effect foreign income 56 79 164 net 255 298 108 14000 9300 10200 tax effect temporary differences gave rise significant portions deferred income tax assets liabilities december 31 1996 december 31 1995 follows december 31 1996 1995 amounts thousands prepaid deferred income tax assets arising accounts receivable 1246 1425 inventory 610 577 insurance reserves 2972 6036 reserves liabilities assets net 16392 12216 20000 19100 deferred prepaid income tax liabilities arising property equipment net 15400 15233 prepaid pension assets 593 1323 insurance reserves 10 273 reserves liabilities assets net 5787 8797 capital loss carryforward 6462 7260 tax assets 1772 1658 valuation allowances 10238 11618 22588 27780 nortek inc subsidiaries notes consolidated financial statements continued december 31 1996 company us federal capital loss carryforwards approximately 18500000 approximately 16600000 expires year 1997 company provided valuation allowance equal tax effect capital loss carryforwards certain tax assets since realization tax assets cannot reasonably assured 5 notes mortgage notes obligations payable shortterm obligations december 31 1996 1995 consist following december 31 1996 1995 amounts thousands secured revolving lines credit canadian subsidiary 2472 4173 secured lines credit bank advances companys european subsidiaries 22118 21972 secured revolving lines credit one companys u subsidiaries 742 3830 obligations 2 251 25334 30226 shortterm obligations principally relate subsidiaries acquired 1995 december 31 1996 secured approximately 56900000 accounts receivable inventory borrowings average weighted interest rate approximately 10925 notes mortgage notes obligations payable accompanying consolidated balance sheet december 31 1996 1995 consist following december 31 1996 1995 amounts thousands mortgage notes payable net 316000 unamortized discount 1996 20878 17055 net 548000 750000 unamortized discount 17209 18185 9 78 senior subordinated notes due 2004 9 78 notes net unamortized original issue discount 1396000 1520000 217104 216980 255191 252220 less amounts included current liabilities 11230 11824 243961 240396 nortek inc subsidiaries notes consolidated financial statements continued indenture governing 9 78 notes restricts among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indenture upon certain asset sales defined indenture company required offer purchase 100 principal amount plus accrued interest date purchase 9 78 notes principal amount equal net cash proceeds defined indenture invested properties assets used primarily related business owned operated company issue date 9 78 notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indenture 9 78 notes redeemable option company whole part time 104214 march 1 1999 declining 100 march 1 2002 thereafter february 7 1997 approximately 683607 available payment cash dividends stock payments terms companys indenture governing 9 78 notes see note 6 mortgage notes payable approximately 20879000 outstanding december 31 1996 include various mortgage notes related indebtedness payable installments 2006 bearing interest rates ranging 625 115 collateralized property equipment aggregate net book value approximately 42900000 december 31 1996 obligations approximately 17209000 outstanding december 31 1996 include borrowings relating equipment purchases borrowings bearing interest rates primarily ranging 56 14 maturing various dates 2002 approximately 12599000 indebtedness collateralized property equipment aggregate net book value approximately 29072000 december 31 1996 following summary maturities companys debt obligations excluding unamortized debt discount due december 31 1997 amounts thousands 1998 7277 1999 5056 2000 4789 2001 3245 thereafter 225854 246221 nortek inc subsidiaries notes consolidated financial statements continued amortization discount deferred costs net amortization discount marketable securities 1996 approximately 1200000 1100000 1400000 1996 1995 1994 respectively 6 common stock special common stock options share special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting remaining 75 elected combined vote classes shares special common stock generally nontransferable freely convertible shareforshare basis shares common stock april 1 1996 company extended amended shareholder rights plan march 31 2006 amended plan right previously issued plan effect date subsequently issued amended restated plan entitles shareholders buy 1100 share new series preference stock nortek exercise price 72 per share subject adjustments stock dividends splits similar events rights currently exercisable attached share common stock may redeemed directors 01 per share time shareholder acquires beneficial ownership 17 companys common stock special common stock rights trade separately become exercisable entitling rights holder acquire additional shares companys common stock market value equal twice amount exercise price right addition person group acquiring company commences tender offer announces intention acquire 30 companys common stock special common stock rights trade separately certain circumstances permit rights holder acquire common stock acquiring company market value equal twice amount exercise price right december 31 1996 total 1428869 shares common stock reserved follows stock option plans 644700 conversion special common stock 784169 1428869 december 31 1996 281000 shares special common stock reserved stock option plans nortek inc subsidiaries notes consolidated financial statements continued company several stock option plans provide granting options certain officers employees nonemployee directors company options granted plans vest periods ranging five years expire ten years date grant december 31 1996 15900 additional options available grant plans options 27500 200100 shares common special common stock became exercisable 1996 1995 respectively following summarizes common special common stock option transactions three years ended december 31 1996 weighted average number option price exercise shares per share price options outstanding december 31 1993 503900 2251569 689 exercised 9800 2875 288 options outstanding december 31 1994 494100 2251569 697 exercised 42600 2252875 281 options outstanding december 31 1995 451500 2251569 736 granted 275000 1475 exercised 95200 22579375 507 canceled 2500 875 options outstanding december 31 1996 628800 28751569 1093 51800 628800 options outstanding december 31 1996 exercise price 2875 weighted average contractual life 28 years options exercisable 296000 options exercise prices 6125 938 weighted average exercise price 869 weighted average remaining contractual life 65 years options exercisable remaining 281000 options 6000 exercisable exercise prices 1475 1569 weighted average exercise price 1477 remaining contractual life 98 years nortek inc subsidiaries notes consolidated financial statements continued company accounts stock option plans apb opinion 25 compensation cost recognized since options granted exercise prices equal fair market value common stock date grant compensation cost plans determined consistent sfas 123 companys unaudited pro forma net earnings fully diluted earnings per share year ended december 31 1996 would approximately 21634000 202 respectively fair value option grant estimated date grant using blackscholes option pricing model following assumptions used grants 1996 riskfree interest rate 7 expected life 5 years expected volatility 33 dividend yield 0 1995 1996 companys board directors authorized number programs purchase shares companys common special common stock subject market conditions cash availability programs included purchase 1189809 shares common stock approximately 106 outstanding shares april 26 1996 approximately 20200000 three directors also resigned companys board directors recent program announced october 28 1996 purchase 500000 shares companys common special common stock open market negotiated transactions subject market conditions cash availability november 16 1995 december 31 1996 company purchased 2476719 shares common special common stock approximately 36319000 accounted share purchases treasury stock shares purchased january 1 1995 unaudited pro forma net earnings fully diluted net earnings per share would year ended dec 31 dec 31 1996 1995 amounts thousands except per share amounts net earnings 21600 13800 fully diluted net earnings per share 214 137 february 7 1997 company purchased first quarter approximately 280700 shares common special common stock approximately 6530000 cash negotiated open market transactions nortek inc subsidiaries notes consolidated financial statements continued 7 pension retirement profit sharing plans company subsidiaries various pension retirement profit sharing plans requiring contributions qualified trusts union administered funds pension profit sharing expense charged operations aggregated approximately 4420000 1996 1377000 1995 2883000 1994 companys policy fund currently actuarially determined annual contribution fourth quarter 1995 benefits related companys existing defined benefit plans frozen january 1 1996 company adopted supplemental retirement plan certain officers actuarial present value unfunded accumulated benefit obligation pension costs plan included tables companys net expense defined benefit plans 1996 1995 1994 consists following components year ended december 31 1996 1995 1994 amounts thousands service costs 453 1273 1647 interest cost 2543 2364 2261 actual net income plan assets 4345 3204 2155 net amortization deferred items 2341 790 10 net gain freezing plan benefits 581 total expense 992 642 1763 following sets forth funded status companys defined benefit plans amounts recognized companys consolidated balance sheet december 31 1996 1995 plan assets exceeding benefit obligations 1996 1995 amounts thousands actuarial present value benefit obligations september 30 vested benefits accumulated benefit obligation 23945 22259 plan assets fair value september 30 28040 25673 plan assets excess accumulated benefit obligation 4095 3414 unrecognized net gain 452 3643 3414 nortek inc subsidiaries notes consolidated financial statements continued benefit obligations exceeding plan assets 1996 1995 amounts thousands actuarial present value benefit obligations september 30 vested benefits 9707 5069 nonvested benefits 520 accumulated benefit obligation 10227 5069 effect projected future compensation levels 2439 projected benefit obligation 12666 5069 plan assets fair value september 30 4813 4407 projected obligation excess plan assets 7853 662 unrecognized net loss 1043 916 unrecognized prior service costs 6335 additional minimum liability 4939 916 5414 662 plan assets include commingled funds marketable securities insurance contracts cash shortterm investments weighted average discount rate increase future compensation levels used determining actuarial present value benefit obligations 7 12 percent 5 percent respectively 1996 1995 8 percent 5 12 percent respectively 1994 expected longterm rate return assets 8 12 percent 1996 1995 1994 recognition minimum pension liability intangible asset certain plans resulted reduction companys stockholders investment approximately 1043000 916000 672000 1996 1995 1994 respectively 8 commitments contingencies company provides accruals direct indirect costs associated estimated resolution contingencies earliest date incurrence liability deemed probable amount liability reasonably estimated nortek inc subsidiaries notes consolidated financial statements continued december 31 1996 company subsidiaries obligated lease agreements rental certain real estate machinery equipment used operations minimum annual rental expense aggregates approximately 26761000 december 31 1996 obligations payable follows 1997 4916000 1998 4173000 1999 3104000 2000 1953000 2001 1319000 thereafter 11296000 certain lease agreements provide increased payments based changes consumer price index rental expense charged operations accompanying consolidated statement operations approximately 6725000 6900000 7000000 years ended december 31 1996 1995 1994 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes company subject contingencies including legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided material adverse effect consolidated financial position results operations company 9 operating geographic segment information concentration credit risk company operates one industry segment residential commercial building products single customer accounts 10 consolidated net sales prior 1995 90 net sales identifiable assets related companys domestic operations result acquisitions 1995 following information geographic area presented 1996 1995 year ended december 31 1996 net pretax identifiable sales earnings assets amounts thousands geographic areas domestic operations 834789 65538 334927 european operations 82363 3520 73285 foreign operations 67503 4886 64609 eliminations 14857 5663 969798 73944 467158 unallocated 13892 141958 interest expense 30113 interest income 5311 net gain investment marketable securities 750 consolidated totals 969798 36000 609116 year ended december 31 1995 net pretax identifiable sales earnings assets amounts thousands geographic areas domestic operations 733264 45742 341555 european operations 13298 769 71180 foreign operations 42432 2189 68056 eliminations 12784 8258 776210 48700 472533 unallocated 7616 152946 interest expense 24918 interest income 6134 net gain investment marketable securities 2000 consolidated totals 776210 24300 625479 unallocated assets consist primarily cash investments marketable securities u federal prepaid income taxes company operates internationally exposed market risks changes foreign exchange rates financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising companys customer base dispersion across many different geographical regions december 31 1996 company significant concentrations credit risk nortek inc subsidiaries notes consolidated financial statements continued 10 net gain loss marketable securities january 1 1994 company adopted accounting requirements sfas 115 accounting certain investments debt equity securities recorded income accumulated unrealized marketable security reserve recorded december 31 1993 approximately 400000 03 per share cumulative effect accounting change new accounting method company records unrealized gains losses investment securities adjustments stockholders investment previously gains losses recorded companys consolidated statement operations december 31 1996 1995 reduction companys stockholders investment new accounting method gross unrealized losses approximately 891000 410000 respectively december 31 1996 gross unrealized gains companys marketable securities companys marketable securities december 31 1996 consist primarily u government treasury notes bank issued money market instruments due follows fair principal amortized market amount cost value amounts thousands u government notes due 15 years 11000 11207 10806 due 510 years 4000 4123 3880 15000 15330 14686 bank issued money market instruments due within 1 year 35900 36612 36365 50900 51942 51051 11 selling general administrative expense second quarter 1994 company recorded net pretax income approximately 3200000 14 per share net tax resulting settlement certain insurance claims disputes nortek inc subsidiaries notes consolidated financial statements continued 12 accrued expenses taxes net accrued expenses taxes net consist following december 31 1996 1995 december 31 1996 1995 amounts thousands insurance 12084 22496 payroll management incentive accrued employee benefits 25939 17463 interest 7749 8077 accrued product warranty expense 8134 6850 net 43659 46084 97565 100970 13 summarized quarterly financial data unaudited following summarizes unaudited quarterly financial data years ended december 31 1996 december 31 1995 quarters ended march 30 june 29 sept 28 dec 31 thousands except per share amounts net sales 220985 260235 248227 240351 gross profit 55398 68612 66419 69494 net earnings 2400 5800 6500 7300 net earnings per share primary 20 55 64 72 fully diluted 20 55 64 72 quarters ended april 1 july 1 sept 30 dec 31 thousands except per share amounts net sales 184809 194206 193567 203628 gross profit 49369 49505 49676 52731 net earnings 2500 3200 5200 4100 net earnings per share primary 20 25 41 33 fully diluted 20 25 41 33 nortek inc subsidiaries notes consolidated financial statements continued see notes 2 11 regarding certain quarterly transactions included operating results table increased net sales 1996 compared 1995 reflect effect businesses acquired fourth quarter 1995 operating results third quarter 1996 adversely affected extended shutdown period factors companys european subsidiaries net sales gross profit margins increased fourth quarter 1996 fourth quarter 1995 overall increases due part effect continued strong shipments seasonal basis several companys businesses especially ventilation hvac products positive effect relative mix products sold changes productivity levels see managements discussion analysis financial condition results operations note 2 report independent public accountants nortek inc audited accompanying consolidated balance sheets nortek inc delaware corporation subsidiaries listed item 14a1 form 10 k december 31 1996 1995 related statements operations shareholders investment cash flows three years period ended december 31 1996 financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position nortek inc subsidiaries december 31 1996 1995 results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles audit made purpose forming opinion basic financial statements taken whole schedule listed item 14a2 presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp boston massachusetts february 12 1997 schedule ii nortek inc subsidiaries valuation qualifying accounts balance charged costs charged deductions balance beginning acqui end classification year sitions expenses accounts reserves year amounts thousands year ended december 31 1994 allowances doubtful accounts sales allowances 4198 762 147b 1077a 4030 year ended december 31 1995 allowances doubtful accounts sales allowances 4030 719 1069 389b 1661a 4546 year ended december 31 1996 allowances doubtful accounts sales allowances 4546 1701 119 2010 4356 amounts written net recoveries b exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangement 31 restated certificate incorporation nortek inc exhibit 2 form 8k filed april 23 1987 file 16112 32 amendment restated certificate incorporation nortek inc effective may 10 1989 exhibit 32 form 10k filed march 30 1990 file 16112 33 bylaws nortek inc amended september 19 1996 exhibit 33 form 10q filed november 5 1996 file 16112 41 second amended restated rights agreement dated april 1 1996 company state street bank trust company rights agent exhibit 1 form 8k filed april 2 1996 file 16112 42 indenture dated february 14 1994 company state street bank trust company trustee relating 9 78 senior subordinated notes due 2004 exhibit 45 form 10k filed march 25 1994 file 16112 101 employment agreement richard l bready company dated january 1 1984 exhibit 102 form 10k filed march 31 1986 file 16112 102 amendment dated march 3 1988 employment agreement richard l bready company dated january 1 1984 exhibit 192 form 10q filed may 17 1988 file 16112 103 second amendment dated november 1 1990 employment agreement richard l bready company dated january 1 1984 exhibit 103 form 10k filed april 1 1991 file 16112 104 deferred compensation agreement dated march 7 1983 richard l bready company exhibit 104 registration statement 3369778 filed february 9 1994 105 deferred compensation agreement dated march 7 1983 almon c hall company exhibit 105 registration statement 3369778 filed february 9 1994 106 deferred compensation agreement dated march 7 1983 richard j harris company exhibit 106 registration statement 3369778 filed february 9 1994 107 1984 stock option plan amended may 27 1987 exhibit 282 registration statement 3322527 filed june 15 1988 108 change control severance benefit plan key employees adopted february 10 1986 form agreement employees exhibit 1019 form 10k filed march 31 1986 file 16112 109 1987 stock option plan exhibit 283 registration statement 3322527 filed june 15 1988 1010 form indemnification agreement company directors certain officers appendix c proxy statement dated march 23 1987 annual meeting nortek stockholders file 16112 111 calculation shares used determining earnings per share 211 list subsidiaries 231 consent independent public accountants 271 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k financial statements schedules following documents filed part report 1 financial statements page consolidated statement operations three years ended december 31 1997 29 consolidated balance sheet december 31 1997 1996 30 consolidated statement cash flows three years ended december 31 1997 32 consolidated statement stockholders investment three years ended december 31 1997 33 notes consolidated financial statements 35 report independent public accountants 55 2 financial statement schedules schedule condensed financial information registrant 56 schedule ii valuation qualifying accounts 62 3 exhibits listed exhibit index incorporated herein reference b reports form 8k reports form 8k filed registrant last quarter period covered report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 26 1998 nortek inc srichard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 26 1998 srichard l bready sj peter lyons richard l bready chairman j peter lyons director board president principal executive officer srichard j harris swilliam kelly richard j harris vice president william kelly director treasurer principal financial officer director salmon c hall sphillip l cohen almon c hall vice president phillip l cohen director controller principal accounting officer nortek inc subsidiaries consolidated statement operations years ended december 31 1997 1996 1995 thousands except per share amounts net sales 1134129 841557 656800 costs expenses cost products sold 831772 600298 472286 selling general administrative expense 219376 180308 141541 1051148 780606 613827 operating earnings 82981 60951 42973 interest expense 50210 28400 22993 investment income 9929 6049 8120 earnings continuing operations provision income taxes 42700 38600 28100 provision income taxes 16300 14900 10600 earnings continuing operations 26400 23700 17500 loss discontinued operations 5200 1700 2500 net earnings 21200 22000 15000 earnings per share earnings continuing operations basic 275 226 141 diluted 268 223 139 loss discontinued operations basic 54 16 20 diluted 53 16 20 net earnings basic 221 210 121 diluted 215 207 119 weighted average number shares basic 9605 10485 12445 diluted 9855 10641 12569 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet december 31 assets 1997 1996 amounts thousands current assets unrestricted cash equivalents 125842 41042 marketable securities available sale 35988 51051 restricted investments marketable securities cost approximates market 6348 5681 accounts receivable less allowances 11047000 3656000 180414 108202 inventories raw materials 72693 35160 work process 18399 11688 finished goods 85161 43141 176253 89989 prepaid expenses 8391 4736 current assets 12627 9209 net assets discontinued operation 22386 24789 prepaid income taxes 46800 20000 total current assets 615049 354699 property equipment cost land 12081 6461 buildings improvements 96606 62756 machinery equipment 250677 152454 359364 221671 less accumulated depreciation 116841 100124 total property equipment net 242523 121547 assets goodwill less accumulated amortization 31773000 26615000 378232 90679 intangible assets 8752 4263 notes receivable investments 10235 1379 deferred income taxes 10022 deferred debt expense 20170 6647 19563 11019 446974 113987 1304546 590233 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet december 31 1997 1996 amounts thousands liabilities stockholders investment current liabilities notes payable shortterm obligations 11770 25334 current maturities longterm debt 5969 11152 accounts payable 91488 66828 accrued expenses taxes net 164001 88252 total current liabilities 273228 191566 liabilities deferred income taxes 17637 67390 18466 67390 36103 notes mortgage notes obligations payable less current maturities 835840 243769 commitments contingencies note 8 stockholders investment preference stock 1 par value authorized 7000000 shares none issued common stock 1 par value authorized 40000000 shares 16050794 15965585 shares issued 16051 15966 special common stock 1 par value authorized 5000000 shares 767287 784169 shares issued 767 784 additional paidin capital 135345 135028 retained earnings 58966 37766 cumulative translation pension adjustments 5327 3212 less treasury common stock cost 7032497 6599645 shares 75779 65805 treasury special common stock cost 285304 276910 shares 1935 1732 total stockholders investment 128088 118795 1304546 590233 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement cash flows years ended december 31 1997 1996 1995 amounts thousands cash flows operating activities net earnings continuing operations 26400 23700 17500 net loss discontinued operations 5200 1700 2500 net earnings 21200 22000 15000 adjustments reconcile net earnings cash depreciation amortization 26696 19831 15155 noncash interest expense 1711 1164 1070 net gain investments marketable securities 200 750 2000 deferred federal income tax provision benefit 4000 3000 1200 deferred federal income tax benefit provision discontinued operations 1000 1200 100 changes certain assets liabilities net effects acquisitions dispositions accounts receivable net 10259 3729 2302 prepaids current assets 5699 3280 781 inventories 6524 11828 5405 net assets discontinued operations 4934 817 1666 accounts payable 16359 1699 5299 accrued expenses taxes 25968 7550 2698 longterm assets liabilities net 4317 583 2219 total adjustments net earnings 63915 25373 18339 net cash provided operating activities 85115 47373 33339 cash flows investing activities capital expenditures 22464 19267 14859 net cash paid businesses acquired 407419 27543 purchase investments marketable securities 283918 66901 104762 proceeds sale investments marketable securities 298158 82435 112173 net 7738 1477 108 net cash used investing activities 423381 5210 35099 cash flows financing activities sale notes net 466214 increase borrowings 612 9609 10763 payment borrowings 33966 13598 1142 purchase nortek common special common stock 10177 34822 4664 net 383 479 822 net cash provided used financing activities 423066 38332 4135 net increase unrestricted cash equivalents 84800 3831 2375 unrestricted cash equivalents beginning year 41042 37211 34836 unrestricted cash equivalents end year 125842 41042 37211 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement stockholders investment three years ended december 31 1997 cumulative translation addi pension special tional common paidin retained adjust treasury stock capital earnings ments stock balance december 31 1994 15814 802 134627 766 616828051 27731 shares special common stock converted 27731 shares common stock 28 41450 shares common stock issued upon exercise stock options 41 63 511671 shares treasury stock acquired 5029 translation adjustment 701 pension adjustment 244 unrealized appreciation marketable securities 2969 net earnings 15000 balance december 31 1995 15883 774 134690 15766 274233080 27697 shares special common stock converted 27697 shares common stock 28 54461 shares common stock 37500 shares special common stock issued upon exercise stock options 55 38 338 2293065 shares treasury stock acquired 34457 translation adjustment 138 pension adjustment 127 unrealized decline marketable securities 481 net earnings 22000 balance december 31 1996 15966 784 135028 37766 321267537 nortek inc subsidiaries consolidated statement stockholders investment 22690 shares special common stock converted 22690 shares common stock 23 62519 shares common stock 5808 shares special common stock issued upon exercise stock options 62 6 317 441246 shares treasury stock acquired 10177 translation adjustment 3815 pension adjustment 919 unrealized appreciation value marketable securities 781 net earnings 21200 balance december 31 1997 16051 767 135345 58966 5327 77714 accompanying notes integral part financial statements nortek inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies company diversified manufacturer residential commercial building products operating within four principal product groups residential building products group air conditioning heating products group windows doors siding group specialty products distribution group product groups company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets principles consolidation consolidated financial statements include accounts nortek inc significant whollyowned subsidiaries company nortek elimination intercompany accounts transactions certain amounts prior years financial statements reclassified conform presentation december 31 1997 use estimates preparation financial statements conformity generally accepted accounting principles involves estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts income expense reporting periods actual results could vary amounts derived estimates assumptions cash investments marketable securities cash equivalents consist shortterm highly liquid investments original maturities three months less readily convertible cash company classified restricted current assets accompanying consolidated balance sheet certain investments marketable securities fully available use operations december 31 1997 approximately 6348000 cash investments marketable securities pledged collateral insurance requirements disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents carrying amount approximates fair value short maturity instruments marketable securities fair value marketable securities based quoted market prices december 31 1997 fair value marketable securities approximated amount companys consolidated balance sheet nortek inc subsidiaries notes consolidated financial statements continued longterm debt december 31 1997 fair value longterm indebtedness approximately 14000000 higher amount original issue discount companys consolidated balance sheet see note 5 inventories accompanying consolidated balance sheet valued lower cost market december 31 1997 1996 approximately 53817000 53933000 total inventories respectively valued lastin firstout method lifo firstin firstout method fifo accounting inventories would approximately 5041000 6015000 greater december 31 1997 1996 respectively inventories valued fifo method sales recognition company recognizes sales upon shipment products net applicable provisions discounts allowances company also provides estimate warranty bad debts time sale selling general administrative expense foreign currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency company translates assets liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using average exchange rates effect year gains losses foreign currency translation credited charged cumulative translation adjustment included stockholders investment accompanying consolidated balance sheet transaction gains losses recorded selling general administrative expense material depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows buildings improvements 1035 years machinery equipment including leases 315 years leasehold improvements term lease expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost accumulated depreciation eliminated resulting gain loss recognized nortek inc subsidiaries notes consolidated financial statements continued goodwill company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions goodwill amortized straightline method 40 years amortization charged operations amounted 5319000 2940000 2489000 1997 1996 1995 respectively balance sheet date company evaluates realizability goodwill based expectations nondiscounted cash flows operating income subsidiary material goodwill balance based recent analysis company believes material impairment goodwill exists december 31 1997 earnings per share 1997 company adopted provisions sfas 128 earnings per share statement issued fasb february 1997 establishes standards computing presenting earnings per share eps applies entities publicly held common stock potential common stock statement replaces presentation primary eps presentation basic eps requires dual presentation basic diluted eps face statement operations entities complex capital structures requires reconciliation numerators denominators basic diluted eps computations statement also requires restatement priorperiod eps data presented basic earnings per share amounts computed using weighted average number common equivalent shares outstanding year special common stock treated equivalent common stock determining earnings per share results diluted earnings per share amounts computed using weighted average number common equivalent shares dilutive potential common shares outstanding year reconciliation basic diluted earnings per share follows years ending december 31 1997 1996 1995 thousands except per share amounts earnings continuing operations 26400 23700 17500 basic eps basic common shares 9605 10485 12445 basic eps 275 226 141 diluted eps basic common shares 9605 10485 12445 plus impact stock options note 6 250 156 124 diluted common shares 9855 10641 12569 diluted eps 268 223 139 nortek inc subsidiaries notes consolidated financial statements continued comprehensive income june 1997 fasb issued sfas 130 reporting comprehensive income effective companys financial statements issued fiscal year ending december 31 1998 statement establishes standards reporting display comprehensive income components revenues expenses gains losses components comprehensive income net earnings changes currently reflected stockholders investment statement requires enterprise classify items comprehensive income nature financial statement b display accumulated balance comprehensive income separately retained earnings additional paidin capital equity section statement financial position segment information june 1997 fasb issued sfas 131 disclosures segments enterprise related information effective companys financial statements fiscal year ending december 31 1998 statement establishes standards reporting information segments annual interim financial statements statement introduces new model segment reporting called management approach management approach based way chief operating decisionmaker organizes segments within company making operating decisions assessing performance reportable segments based products services geography legal structure management structure 2 acquisitions businesses sold acquisitions accounted purchases accordingly included companys consolidated results operations since acquisition date purchase price allocations subject refinement pertinent information regarding acquisitions obtained august 26 1997 wholly owned subsidiary company completed acquisition ply gem industries inc ply gem tender offer cash price 1950 per outstanding share common stock aggregate purchase price including expenses settlement stock options approximately 444300000 prior accepting payment tendered shares ply gem august 26 1997 company sold 310000000 principal amount 9 18 senior notes due september 2007 9 18 notes slight discount see note 5 company used portion net proceeds together available cash purchase shares ply gem fund approximate 45000000 payment terminate ply gems existing accounts receivable securitization program pay certain fees expenses since acquisition date company realized expects continue realize cost savings result acquisition savings result several actions including elimination expenses associated ply gems new york headquarters ii consolidation nortek certain ply gems corporate functions accounting legal risk management iii identification rationalization performing product lines pro forma earnings see adjusted pro forma effect estimated cost reductions directly attributable acquisition expected pretax savings total approximately 4000000 period january 1 1997 date acquisition year ended december 31 1997 approximately 7800000 year ended december 31 1996 adjusted earnings see adjusted include cost reductions directly attributable acquisition additional estimated cost savings operating efficiencies management expects result acquisition additional pretax cost savings total approximately 12600000 approximately 13500000 periods january 1 1997 date acquisition year ended december 31 1997 year ended december 31 1996 respectively actual cost savings achieved since acquisition ply gem reflected companys historical consolidated operating results period acquisition date december 31 1997 pro forma earnings also include approximately 24900000 net aftertax charges approximately 41500000 income taxes recorded ply gem perio january 1 1997 august 25 1997 provide certain valuation reserves conform accounting policies companys nonrecurring charges excluded adjusted results following presents approximate unaudited pro forma adjusted net sales operating earnings continuing operations diluted earnings per share company periods presented gives pro forma effect acquisition ply gem sale 310000000 principal amount 9 18 notes extension credit ply gem credit facility refinance certain existing indebtedness termination ply gems accounts receivable securitization program sale 175000000 principal amount 9 14 notes refinancing certain subsidiary indebtedness reflects estimated cost reductions described transactions adjustments occurred january 1 1996 date acquisition pro forma adjusted results include actual results ply gem since august 26 1997 accordance purchase method accounting acquisition years ended december 31 1997 1996 pro forma amounts thousands except per share amounts unaudited net sales 1650052 1616485 operating earnings 54600 94400 earnings loss continuing operations 11600 7700 diluted earnings loss continuing operations per share 121 72 adjusted net sales 1650052 1616485 operating earnings 108700 107900 earnings continuing operations 21600 16400 diluted earnings continuing operations per share 219 154 computing pro forma earnings reduced net interest income aggregate cash portion purchase price acquisition historical rate earned company interest expense indebtedness incurred connection acquisition refinancing nortek inc subsidiaries notes consolidated financial statements continued repayment certain indebtedness ply gem earnings reduced amortization goodwill reflect net adjustments depreciation expense result increase estimated fair market value property equipment changes depreciable lives interest expense subsidiary indebtedness refinanced funds 9 14 notes offering excluded average interest rate consistent indebtedness outstanding refinanced periods presented net tax effect interest expense included 9 14 notes rate approximately 9 14 plus amortization deferred debt expense debt discount net tax effect 9 18 notes rate approximately 9 18 plus amortization deferred debt expense debt discount periods presented net tax effect pro forma information presented purport indicative results would reported transactions occurred january 1 1996 may reported future fourth quarter 1995 several companys wholly owned subsidiaries completed acquisition assets subject certain liabilities rangaire company rangaire capital stock best spa related entities best capital stock venmar ventilation inc venmar aggregate purchase price acquisitions approximately 36500000 consisting cash approximately 33400000 future payments approximately 3100000 selling shareholders certain acquisitions entitled additional purchase price payments approximately 2000000 depending subsequent operating results acquisitions 3 cash flows interest paid 35921000 30568000 23203000 1997 1996 1995 respectively fair value assets acquired 672311000 129652000 1997 1995 respectively liabilities assumed created businesses acquired 264892000 96224000 1997 1995 respectively cash paid acquisitions net cash acquired 407419000 27543000 1997 1995 respectively cash proceeds businesses sold totaled 1129000 1995 included 2874000 proceeds sale preferred stock net 1745000 payments made relation businesses sold significant noncash financing investing activities excluded accompanying consolidated statement cash flows include capitalized lease additions approximately 500000 1996 approximately 800000 1995 increase approximately 781000 decline approximately 481000 increase approximately 2969000 fair market value marketable securities available sale 1997 1996 1995 respectively nortek inc subsidiaries notes consolidated financial statements continued 4 income taxes following summary components earnings continuing operations provision income taxes years ended december 31 1997 1996 1995 amounts thousands domestic 37000 35100 25400 foreign 5700 3500 2700 42700 38600 28100 following summary provision benefit income taxes continuing operations included accompanying consolidated statement operations years ended december 31 1997 1996 1995 amounts thousands federal income taxes current 9000 15050 7100 deferred 4000 3000 1200 13000 12050 8300 foreign 1000 1300 state 2300 1550 1000 16300 14900 10600 income tax payments net refunds approximately 7977000 18611000 3739000 1997 1996 1995 respectively nortek inc subsidiaries notes consolidated financial statements continued following reconciles federal statutory income tax rate continuing operations effective tax rate earnings approximately 382 386 377 1997 1996 1995 respectively years ended december 31 1997 1996 1995 amounts thousands income tax provision continuing operations federal statutory rate 14945 13510 9835 net change statutory rate change tax reserves net 1540 481 1100 state income taxes net federal tax effect 1520 1008 650 amortization deductible income tax purposes 1827 1040 868 product development income tax credit foreign operations 264 478 tax effect foreign income 86 56 79 effect change foreign tax law 766 net 664 245 268 16300 14900 10600 tax effect temporary differences gave rise significant portions deferred income tax assets liabilities december 31 1997 december 31 1996 follows december 31 1997 1996 amounts thousands prepaid income tax assets arising net operating losses ply gem 6000 accounts receivable 4038 1246 inventory 7201 610 insurance reserves 9624 4985 reserves liabilities assets net 19937 14379 46800 20000 deferred prepaid income tax assets liabilities arising property equipment net 30032 15400 reserves liabilities assets net 19547 608 capital loss carryforward 655 6462 net operating losses ply gem 21580 valuation allowances 7771 10238 tax assets 6043 931 10022 17637 nortek inc subsidiaries notes consolidated financial statements continued december 31 1997 company approximately 60800000 net us federal prepaid income tax assets expected realized future operating earnings december 31 1997 companys wholly owned subsidiary ply gem net operating loss carryforward approximately 78800000 expires 2011 subject certain limitations imposed internal revenue code losses may utilized future income ply gem group utilization losses limited approximately 17500000 per year 5 notes mortgage notes obligations payable shortterm bank obligations december 31 1997 1996 consist following december 31 1997 1996 amounts thousands secured revolving lines credit canadian subsidiary 2472 secured lines credit bank advances companys european subsidiaries 11318 22118 obligations 452 744 shortterm bank obligations 11770 25334 short term bank obligations secured approximately 29600000 accounts receivable inventory borrowings average weighted interest rate approximately 9475 notes mortgage notes obligations payable accompanying consolidated balance sheet december 31 1997 1996 consist following december 31 1997 1996 amounts thousands 9 14 senior notes due 2007 9 14 note net unamortized original issue discount 961000 174039 9 18 senior notes due 2007 9 18 notes net unamortized original issue discount 2451000 307549 9 78 senior subordinated notes due 2004 9 78 notes net unamortized original issue discount 1259000 1396000 217241 217104 ply gem credit agreement 103940 mortgage notes payable 16882 20878 22158 16939 841809 254921 less amounts included current liabilities 5969 11152 835840 243769 nortek inc subsidiaries notes consolidated financial statements continued march 17 1997 company sold 175000000 9 14 senior notes due march 15 2007 9 14 notes discount approximately 1011500 amortized life issue net proceeds sale 9 14 notes deducting underwriting commissions expenses amounted approximately 168945000 portion used refinance certain outstanding indebtedness companys subsidiaries 9 14 notes redeemable option company whole part time march 15 2002 104625 declining 100 march 15 2005 thereafter august 26 1997 company sold 310000000 9 18 senior notes due september 1 2007 9 18 notes discount approximately 2505000 amortized life issue net proceeds sale 9 18 notes deducting underwriting commissions expenses amounted approximately 297269000 9 18 notes redeemable option company whole part time september 1 2002 104563 declining 100 september 1 2005 thereafter company used portion net proceeds together available cash purchase shares ply gem see note 2 indenture governing 9 78 notes companys restrictive indenture restricts among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indenture upon certain asset sales defined indenture company required offer purchase 100 principal amount plus accrued interest date purchase 9 78 notes principal amount equal net cash proceeds defined indenture invested properties assets used primarily related business owned operated company issue date 9 78 notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indenture 9 78 notes redeemable option company whole part time 104214 march 1 1999 declining 100 march 1 2002 thereafter march 1 1998 approximately 6872000 available payment cash dividends stock payments terms companys indenture governing 9 78 notes see note 6 companys ply gem subsidiary credit facility syndicate banks provides ply gem term loan letter credit facility interest borrowings varying rates based ply gems option london interbank offered rate libor plus spread b higher 5 federal funds rate ii banks prime rate ply gem pays facility fee quarterly fluctuates 20 30 aggregate principal amount available facility average weighted interest rate credit facility period inception august 26 1997 december 31 1997 675 credit facility includes customary covenants including covenants limiting ply gems ability pledge assets incur liens assets maintain certain financial covenants borrowings credit facility collateralized common stock inventory accounts receivable ply gems principal subsidiaries nortek inc subsidiaries notes consolidated financial statements continued companys ply gem subsidiary 75 million interest rate swap agreements whereby ply gem pay counterparties interest fixed rate 553 counterparties pay company interest floating rate equal one month libor two year period ending december 3 1998 option counterparties termination date may extended december 3 1999 upon notice ply gem amounts paid received interest rate swap agreements accrued interest rates change recognized life swap agreements adjustment interest expense companys ply gem subsidiary also 75 million interest rate cap agreements entitles ply gem receive counterparties monthly basis amount libor interest rate 75 million floating rate debt exceeds 7 period december 5 1998 december 5 1999 cost interest rate cap agreements amortized interest expense life cap payments received result cap agreements reduce interest expense unamortized costs cap agreements included assets impact arrangements material companys consolidated operating results mortgage notes payable approximately 16882000 outstanding december 31 1997 include various mortgage notes related indebtedness payable installments 2012 bearing interest rates ranging 3875 93 collateralized property equipment aggregate net book value approximately 36700000 december 31 1997 obligations approximately 22158000 outstanding december 31 1997 include borrowings relating equipment purchases borrowings bearing interest rates primarily ranging 35 130 maturing various dates 2017 approximately 18400000 indebtedness collateralized property equipment aggregate net book value approximately 21400000 december 31 1997 following summary maturities companys debt obligations excluding unamortized debt discount due december 31 1997 amounts thousands 1999 8923 2000 9315 2001 9512 2002 92755 thereafter 720006 840511 nortek inc subsidiaries notes consolidated financial statements continued 6 common stock special common stock options deferred compensation share special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting remaining 75 elected combined vote classes shares special common stock generally nontransferable freely convertible shareforshare basis shares common stock april 1 1996 company extended amended shareholder rights plan march 31 2006 amended plan right previously issued plan effect date subsequently issued amended restated plan entitles shareholders buy 1100 share new series preference stock nortek exercise price 72 per share subject adjustments stock dividends splits similar events rights currently exercisable attached share common stock may redeemed directors 01 per share time shareholder acquires beneficial ownership 17 companys common stock special common stock rights trade separately become exercisable entitling rights holder acquire additional shares companys common stock market value equal twice amount exercise price right addition person group acquiring company commences tender offer announces intention acquire 30 companys common stock special common stock rights trade separately certain circumstances permit rights holder acquire common stock acquiring company market value equal twice amount exercise price right december 31 1997 total 1804134 shares common stock reserved follows stock option plans 1036847 conversion special common stock 767287 1804134 december 31 1997 755000 shares special common stock reserved stock option plans company several stock option plans provide granting options certain officers employees nonemployee directors company options granted plans vest periods ranging five years expire ten years date grant december 31 1997 51067 additional options available grant plans options 427915 27500 shares common special common stock became exercisable 1997 1996 respectively nortek inc subsidiaries notes consolidated financial statements continued following summarizes common special common stock option transactions three years ended december 31 1997 weighted average number option price exercise shares per share price options outstanding december 31 1994 494100 2251569 697 exercised 42600 2252875 281 options outstanding december 31 1995 451500 2251569 736 granted 275000 1475 exercised 95200 22579375 507 canceled 2500 875 options outstanding december 31 1996 628800 28751569 1093 granted 435600 1952700 2298 exercised 71953 28751569 666 canceled 6667 2269 options outstanding december 31 1997 985780 28752700 1648 22100 985780 options outstanding december 31 1997 exercise price 2875 weighted average contractual life 28 years options exercisable 259747 options exercise prices 769 938 weighted average exercise price 875 weighted average remaining contractual life 60 years options exercisable 275000 options exercisable exercise price 1475 remaining contractual life 90 years remaining 428933 options 152915 exercisable exercise prices 1950 2700 weighted average exercise price 22976 remaining contractual life 10 years company accounts stock option plans apb opinion 25 compensation cost recognized since options granted exercise prices equal fair market value common stock date grant compensation cost plans determined consistent sfas 123 companys earnings continuing operations diluted earnings per share continuing operations would approximately 24100000 245 1997 approximately 23300000 219 1996 respectively net earnings diluted net earnings per share would approximately 19000000 192 1997 approximately 21600000 203 1996 respectively nortek inc subsidiaries notes consolidated financial statements continued weighted average grant date fair value options granted 982 615 1997 1996 respectively fair value option grant estimated date grant using blackscholes option pricing model following assumptions used 1997 1996 riskfree interest rate 575 673 7 expected life 5 years 5 years expected volatility 37 33 expected dividend yield 0 companys board directors authorized program purchase 500000 shares companys common special common stock open market negotiated transactions subject market conditions cash availability provisions companys outstanding debt instruments february 28 1998 company purchased approximately 316500 shares common special common stock approximately 9314000 program accounted share purchases treasury stock 7 pension retirement profit sharing plans company subsidiaries various pension retirement profit sharing plans requiring contributions qualified trusts union administered funds pension profit sharing expense charged operations aggregated approximately 6624000 1997 approximately 4310000 1996 approximately 828000 1995 companys policy fund currently actuarially determined annual contribution fourth quarter 1995 benefits related companys existing defined benefit plans frozen january 1 1996 company adopted supplemental retirement plan certain officers actuarial present value unfunded accumulated benefit obligation pension costs plan included tables companys net expense defined benefit plans 1997 1996 1995 consists following components years ended december 31 1997 1996 1995 amounts thousands service costs 485 358 1156 interest cost 2655 2226 2069 actual net income plan assets 9157 3944 2640 net amortization deferred items 7361 2218 434 net gain freezing plan benefits 581 total expense 1344 858 438 nortek inc subsidiaries notes consolidated financial statements continued following sets forth funded status companys defined benefit plans amounts recognized companys consolidated balance sheet december 31 1997 1996 plan assets exceeding benefit obligations 1997 1996 amounts thousands actuarial present value benefit obligations september 30 vested benefits 33958 23945 nonvested benefits 585 accumulated benefit obligation 34543 23945 effect projected future compensation levels 2394 projected benefit obligation 36937 23945 plan assets fair value september 30 48673 28040 plan assets excess projected benefit obligation 11736 4095 unrecognized net gain 6026 452 5710 3643 benefit obligations exceeding plan assets 1997 1996 amounts thousands actuarial present value benefit obligations september 30 vested benefits 11027 5359 nonvested benefits 810 520 accumulated benefit obligation 11837 5879 effect projected future compensation levels 3662 2439 projected benefit obligation 15499 8318 plan assets fair value september 30 3639 804 projected benefit obligation excess 11860 7514 plan assets unrecognized net loss 1707 212 unrecognized prior service costs 7125 6335 additional minimum liability 5341 4108 8369 5075 plan assets include commingled funds marketable securities insurance contracts cash shortterm investments weighted average discount rate increase future compensation levels used determining actuarial present value benefit obligations 7 12 percent 5 percent respectively 1997 1996 1995 expected longterm rate return assets 8 12 percent 1997 1996 1995 recognition minimum pension liability intangible asset certain plans resulted cumulative reduction companys stockholders investment approximately 124000 1043000 916000 1997 1996 1995 respectively nortek inc subsidiaries notes consolidated financial statements continued 8 commitments contingencies company provides accruals direct indirect costs associated estimated resolution contingencies earliest date incurrence liability deemed probable amount liability reasonably estimated december 31 1997 company subsidiaries obligated lease agreements rental certain real estate machinery equipment used operations minimum annual rental expense aggregates approximately 110427000 december 31 1997 obligations payable follows 1998 18203000 1999 15094000 2000 11250000 2001 8026000 2002 6933000 thereafter 50921000 certain lease agreements provide increased payments based changes consumer price index rental expense charged operations accompanying consolidated statement operations approximately 8700000 6725000 6900000 years ended december 31 1997 1996 1995 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes company subject contingencies including legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided material adverse effect consolidated financial position results operations company nortek inc subsidiaries notes consolidated financial statements continued 9 discontinued operations fourth quarter 1997 company adopted plan disposition plumbing products group following unaudited summary results discontinued operations three years ended december 31 1997 years ended december 31 1997 1996 1995 amounts thousands net sales 104467 128241 119410 loss income taxes 5700 2600 3800 income tax benefit 2100 900 1300 loss discontinued operations 3600 1700 2500 reserve future operating expenses net income tax benefit 900000 1600 loss discontinued operations 5200 1700 2500 loss discontinued operations income taxes includes allocation corporate interest expense approximately 1900000 1700000 1900000 1997 1996 1995 respectively 10 operating geographic segment information concentration credit risk company operates one industry segment residential commercial building products single customer accounts 10 consolidated net sales following information geographic area presented 1997 1996 companys continuing operations year ended december 31 1997 pretax earnings net continuing identifiable sales operations assets amounts thousands geographic areas domestic operations 998049 86491 976891 european operations 76564 3467 60743 foreign operations 75700 7046 57527 eliminations 16184 7986 1134129 97004 1087175 unallocated 14023 217371 interest expense 50210 investment income 9929 consolidated totals 1134129 42700 1304546 nortek inc subsidiaries notes consolidated financial statements continued year ended december 31 1996 pretax earnings net continuing identifiable sales operations assets amounts thousands geographic areas domestic operations 706548 66514 303273 european operations 82363 3520 73285 foreign operations 67503 4886 64609 eliminations 14857 5663 841557 74920 435504 unallocated 13969 154729 interest expense 28400 investment income 6049 consolidated totals 841557 38600 590233 unallocated assets consist primarily cash investments marketable securities u federal prepaid income taxes company operates internationally exposed market risks changes foreign exchange rates financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising companys customer base dispersion across many different geographical regions december 31 1997 company significant concentrations credit risk 11 net gain loss marketable securities december 31 1997 1996 reduction companys stockholders investment gross unrealized losses approximately 110000 891000 respectively december 31 1997 gross unrealized gains companys marketable securities companys unrestricted marketable securities december 31 1997 consist primarily u government treasury notes certificates deposit bank issued money market instruments approximately 26006000 mature within one year approximately 5978000 mature within one five years approximately 4004000 mature within five ten years nortek inc subsidiaries notes consolidated financial statements continued 12 accrued expenses taxes net accrued expenses taxes net consist following december 31 1997 1996 december 31 1997 1996 amounts thousands insurance 23880 12205 payroll management incentive accrued employee benefits 37600 23136 interest 22049 7749 accrued product warranty expense 9471 7770 net 71001 37392 164001 88252 13 subsequent events march 9 1998 company whollyowned subsidiary entered agreement purchase nutone inc whollyowned subsidiary williams plc approximately 242500000 cash acquisition subject requirements hartscottrodino antitrust improvements act connection review transaction act federal trade commission ftc issued second request certain additional information ftc taken position respect transaction assurance transaction proposed consummated acquisition consummated company expects would incur approximately 3000000 031 per diluted share net tax charge earnings result fees expenses acquisition related costs nortek inc subsidiaries notes consolidated financial statements continued 14 summarized quarterly financial data unaudited following summarizes unaudited quarterly financial data years ended december 31 1997 december 31 1996 quarters ended march 29 june 28 sept 27 dec 31 thousands except per share amounts net sales 194238 223795 300380 415716 gross profit 56540 64353 78872 102592 earnings continuing operations 4700 7700 8400 5600 earnings per share continuing operations basic 48 80 88 59 diluted 47 78 86 57 net earnings 3700 6700 7700 3100 net earnings per share basic 38 70 80 33 diluted 37 68 78 32 quarters ended march 30 june 29 sept 28 dec 31 thousands except per share amounts net sales 189762 226737 215624 209434 gross profit 51225 63892 61687 64455 earnings continuing operations 3200 6000 6700 7800 earnings per share continuing operations basic 27 58 67 78 diluted 27 57 66 77 net earnings 2400 5800 6500 7300 net earnings per share basic 20 56 65 73 diluted 20 55 64 72 see notes 2 9 regarding certain quarterly transactions included operating results table increased net sales third fourth quarters 1997 compared 1996 reflect primarily effect ply gem acquisition see note 2 report independent public accountants nortek inc audited accompanying consolidated balance sheets nortek inc delaware corporation subsidiaries listed item 14a1 form 10 k december 31 1997 1996 related statements operations stockholders investment cash flows three years period ended december 31 1997 financial statements schedules referred responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position nortek inc subsidiaries december 31 1997 1996 results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles audit made purpose forming opinion basic financial statements taken whole schedules listed item 14a2 presented purposes complying securities exchange commissions rules part basic financial statements schedules subjected auditing procedures applied audit basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp boston massachusetts march 9 1998 nortek incparent company schedule condensed financial information registrant condensed balance sheet december 31 1997 1996 assets amounts thousands current assets unrestricted cash investments cost approximates market 91644 29974 marketable securities 35988 50688 restricted cash investments cost approximates market 3548 2104 marketable securities 2800 3423 notes receivable accounts receivable net 4283 3422 prepaid expenses current assets 16331 18885 net assets discontinued operations 22386 24789 us federal income taxes receivable 4200 3600 total current assets 181180 136885 property equipment cost 1588 1522 less accumulated depreciation 1211 1090 total property equipment net 377 432 investments assets net intercompany balance investment subsidiaries 681425 217974 deferred debt expense net 20139 6519 25798 14196 727362 238689 908919 376006 accompanying notes integral part financial statements nortek inc parent company schedule condensed financial information registrant condensed balance sheet continued december 31 1997 1996 amounts thousands liabilities stockholders investment current liabilities accounts payable 557 619 accrued expenses taxes net 49311 22578 total current liabilities 49868 23197 liabilities deferred income taxes 5300 4500 26834 12410 32134 16910 senior notes 481588 senior subordinated notes 217241 217104 commitments contingencies note 2 stockholders investment preference stock 1 par value authorized 7000000 shares none issued common stock 1 par value authorized 40000000 shares 16050794 15965585 shares issued 16051 15966 special common stock 1 par value authorized 5000000 shares 767287 784169 shares issued 767 784 additional paidin capital 135345 135028 retained earnings 58966 37766 cumulative translation pension adjustments 5327 3212 less treasury common stock cost 7032497 6599645 shares 75779 65805 treasury special common stock cost 285304 276910 shares 1935 1732 total stockholders investment 128088 118795 908919 376006 accompanying notes integral part financial statements nortek inc parent company schedule condensed financial information registrant condensed statement operations year ended december 31 1997 1996 1995 thousands except per share amounts revenues charges allocations subsidiaries 34498 33829 30134 interest dividend income 9073 4956 5635 net gain investment securities 200 750 2000 income 518 664 2992 total revenues 44289 40199 40761 expenses selling administrative net 13605 11503 9220 interest expense 43921 20912 20776 expense 784 731 535 total expenses 58310 33146 30531 loss earnings continuing operations equity subsidiaries earnings 14021 7053 10230 equity subsidiaries earnings income taxes 56721 31547 17870 earnings continuing operations provision income taxes 42700 38600 28100 provision income taxes 16300 14900 10600 earnings continuing operations 26400 23700 17500 loss discontinued operations 5200 1700 2500 net earnings 21200 22000 15000 earnings loss per share continuing operations basic 275 226 141 diluted 268 223 139 loss discontinued operations basic 054 016 020 diluted 053 016 020 net earnings basic 221 210 121 diluted 215 207 119 weighted average number shares basic 9605 10485 12445 diluted 9855 10641 12569 accompanying notes integral part financial statements nortek inc parent company schedule condensed financial information registrant condensed statement cash flows years ended december 31 1997 1996 1995 amounts thousands cash flows operating activities earnings continuing operations 26400 23700 17500 net loss discontinued operations 5200 1700 2500 net earnings 21200 22000 15000 adjustments reconcile net earnings cash depreciation amortization 139 320 275 noncash interest expense 1421 802 1018 equity subsidiaries earning 56721 31547 17870 charges allocations subsidiaries 34498 33829 30134 net transfers subsidiaries principally cash 57038 71889 55253 gain sale investments marketable securities 200 750 2000 deferred federal income tax provision benefit 4000 3000 1200 deferred federal income taxbenefit provision discontinued operations 1000 1200 100 changes certain assets liabilities net effects acquisitions dispositions prepaids current assets 1687 4003 1393 assets 5562 570 356 net assets discontinued operations 4934 817 1666 accrued expenses taxes 6991 2704 294 longterm liabilities 4832 903 34 net 277 482 1087 total adjustments net earnings 16662 10 9842 net cash provided operating activities 4538 22010 24842 cash flows investing activities capital expenditures 70 123 379 purchase investments marketable securities 283918 66901 104762 proceeds sale investments marketable securities 297133 82242 112173 proceeds either received directly subsidiaries relating businesses sold discontinued 1129 cash transferred subsidiaries paid directly acquired businesses 407419 27543 net 5016 1758 600 net cash used provided investing activities 399290 13460 19982 nortek inc parent company schedule condensed financial information registrant condensed statement cash flows continued years ended december 31 1997 1996 1995 amounts thousands cash flows financing activities sale notes net 466213 purchase nortek common special common stock 10177 34822 4665 net 386 356 105 net cash provided used financing activities 456422 34466 4560 net increase unrestricted cash investments 61670 1004 300 unrestricted cash investments beginning year 29974 28970 28670 unrestricted cash investments end year 91644 29974 28970 interest paid indebtedness 29581 21662 21577 net income taxes paid 7977 18611 3739 accompanying notes integral part financial statements nortek inc parent company condensed financial information registrant notes condensed financial statements 1 accompanying condensed financial statements nortek inc registrant prepared accordance reduced disclosure requirements permitted form 10k part iv item 14 schedule condensed financial information registrant consolidated financial statements related notes nortek inc subsidiaries included elsewhere herein form 10k part ii item 8and incorporated herein reference 2 descriptions material contingencies significant provisions longterm debt obligations commitments registrant included notes 5 8 notes consolidated financial statements incorporated herein reference following summary longterm debt registrants debt obligations excluding unamortized discount december 31 1997 amounts thousands 1998 1999 2000 2001 2002 thereafter 720006 3 registrants net investment subsidiaries net cumulative amount intercompany cash transfers transactions 4 included registrants condensed statement cash flows three years ended december 31 1997 net transfers subsidiaries principally cash dividends declared subsidiaries board directors subsidiaries 70000000 1997 2456900 1995 subsidiaries board directors declare dividends 1996 5 certain registrants subsidiaries entered financing agreements contain various restrictive covenants place limitations amount distributions advances registrant december 311997 approximately 381540000 approximately 307045000 goodwill subsidiary net assets principally ply gem restricted approximately 117427000 principal amount subsidiary indebtedness outstanding financing agreements nortek inc subsidiaries schedule ii valuation qualifying accounts balance charged costs charged deductions balance beginning acqui end classification year sitions expenses accounts reserves year amounts thousands year ended december 31 1995 allowances doubtful accounts sales allowances 3225 719 666 368 1539a 3439 year ended december 31 1996 allowances doubtful accounts sales allowances 3439 1951 119 1853a 3656 year ended december 31 1997 allowances doubtful accounts sales allowances 3656 7434 2303 171 2517a 11047 amounts written net recoveries nortek inc subsidiaries exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangement 31 restated certificate incorporation nortek inc exhibit 2 form 8k filed april 23 1987 file 16112 32 amendment restated certificate incorporation nortek inc effective may 10 1989 exhibit 32 form 10k filed march 30 1990 file 16112 33 bylaws nortek inc amended september 19 1996 exhibit 33 form 10q filed november 5 1996 file 16112 41 second amended restated rights agreement dated april 1 1996 company state street bank trust company rights agent exhibit 1 form 8k filed april 2 1996 file 16112 42 indenture dated february 14 1994 company state street bank trust company trustee relating 9 78 senior subordinated notes due 2004 exhibit 45 form 10k filed march 25 1994 file 16112 43 indenture dated march 17 1997 company state street bank trust company trustee relating 925 series b senior notes due march 15 2007 exhibit 42 registration statement 33325505 filed april 18 1997 44 indenture dated august 26 1997 company state street bank trust company trustee relating 9 18 series b senior notes due september 1 2007 exhibit 41 registration statement 33336711 filed september 30 1997 101 employment agreement richard l bready company dated january 1 1984 exhibit 102 form 10k filed march 31 1986 file 16112 102 amendment dated march 3 1988 employment agreement richard l bready company dated january 1 1984 exhibit 192 form 10q filed may 17 1988 file 16112 103 second amendment dated november 1 1990 employment agreement richard l bready company dated january 1 1984 exhibit 103 form 10k filed april 1 1991 file 16112 104 employment agreement richard l bready company dated february 26 1997 exhibit 103 form 10q filed may 12 1997 file 16112 105 amendment 1 dated june 13 1997 employment agreement richard l bready company dated february 26 1997 exhibit 102 form 10q filed august 8 1997 file 1 6112 106 deferred compensation agreement dated march 7 1983 richard l bready company exhibit 104 registration statement 3369778 filed february 9 1994 107 deferred compensation agreement dated march 7 1983 almon c hall company exhibit 105 registration statement 3369778 filed february 9 1994 108 deferred compensation agreement dated march 7 1983 richard j harris company exhibit 106 registration statement 3369778 filed february 9 1994 109 1984 stock option plan amended may 27 1987 exhibit 282 registration statement 3322527 filed june 15 1988 1010 change control severance benefit plan key employees adopted february 10 1986 form agreement employees exhibit 1019 form 10k filed march 31 1986 file 16112 1011 change control severance benefit plan key employees amended restated june 12 1997 form agreement employees exhibit 101 form 10q filed august 8 1997 file 1 6112 1012 1987 stock option plan exhibit 283 registration statement 3322527 filed june 15 1988 1013 1997 equity cash incentive plan exhibit 101 form 10q filed may 12 1997 file 16112 1014 1997 stock option plan directors exhibit 102 form 10q filed may 12 1997 file 16112 1015 nortek inc supplemental executive retirement plan dated july 1 1997 exhibit 103 form 10q filed august 8 1997 file 1 6112 1016 first amendment dated july 1 1997 nortek inc supplemental executive retirement plan dated july 1 1997 exhibit 104 form 10 q filed august 8 1997 file 16112 1017 form indemnification agreement company directors certain officers appendix c proxy statement dated march 23 1987 annual meeting nortek stockholders file 1 6112 1018 stock purchase sale agreement dated march 9 1998 williams yandn holdings inc ntk sub inc exhibit z form 8 ka filed march 18 1998 file 16112 211 list subsidiaries 231 consent independent public accountants 271 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k financial statements schedules following documents filed part report 1 financial statements page consolidated statement operations three years ended december 31 1998 49 consolidated balance sheet december 31 1998 1997 50 consolidated statement cash flows three years ended december 31 1998 52 consolidated statement stockholders investment three years ended december 31 1998 54 notes consolidated financial statements 57 report independent public accountants 90 2 financial statement schedules schedule condensed financial information registrant 91 schedule ii valuation qualifying accounts 97 3 exhibits listed exhibit index incorporated herein reference b reports form 8k reports form 8k filed registrant last quarter period covered report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 29 1999 nortek inc srichard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 29 1999 srichard l bready sj peter lyons richard l bready chairman j peter lyons director board president principal executive officer srichard j harris swilliam kelly richard j harris vice president william kelly director treasurer principal financial officer director salmon c hall sphillip l cohen almon c hall vice president phillip l cohen director controller principal accounting officer nortek inc subsidiaries consolidated balance sheet nortek inc subsidiaries consolidated balance sheet nortek inc subsidiaries consolidated statement cash flows nortek inc subsidiaries consolidated statement cash flows continued nortek inc subsidiaries consolidated statement stockholders investment year ended december 31 1996 dollar amounts thousands nortek inc subsidiaries consolidated statement stockholders investment year ended december 31 1997 dollar amounts thousands nortek inc subsidiaries consolidated statement stockholders investment year ended december 31 1998 dollar amounts thousands nortek inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies company diversified manufacturer residential commercial building products operating within three principal segments residential building products segment air conditioning heating products segment windows doors siding segment principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets effective 1998 company adopted statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 accordingly presentation years reclassified conform presentation 1998 see note 10 principles consolidation consolidated financial statements include accounts nortek inc significant whollyowned subsidiaries company nortek elimination intercompany accounts transactions certain amounts prior years consolidated financial statements reclassified conform presentation december 31 1998 use estimates preparation financial statements conformity generally accepted accounting principles involves estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts income expense reporting periods actual results could vary amounts derived estimates assumptions cash investments marketable securities cash equivalents consist shortterm highly liquid investments original maturities three months less readily convertible cash company classified restricted current assets accompanying consolidated balance sheet certain investments marketable securities fully available use operations december 31 1998 approximately 13818000 cash investments marketable securities pledged collateral insurance requirements nortek inc subsidiaries notes consolidated financial statements continued disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents carrying amount approximates fair value short maturity instruments investments marketable securities fair value investments marketable securities based quoted market prices december 31 1998 fair value investments marketable securities approximated amount companys consolidated balance sheet longterm debt december 31 1998 fair value longterm indebtedness approximately 30000000 higher amount companys consolidated balance sheet original issue discount based market quotations see note 5 inventories accompanying consolidated balance sheet valued lower cost market december 31 1998 1997 approximately 91304000 53817000 total inventories respectively valued lastin firstout method lifo firstin firstout method fifo accounting inventories would approximately 3407000 5041000 greater december 31 1998 1997 respectively inventories valued fifo method sales recognition company recognizes sales upon shipment products net applicable provisions discounts allowances company also provides estimate warranty bad debts time sale selling general administrative expense foreign currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency company translates assets nortek inc subsidiaries notes consolidated financial statements continued liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using average exchange rates effect year gains losses foreign currency translation credited charged accumulated comprehensive income included stockholders investment accompanying consolidated balance sheet transaction gains losses recorded selling general administrative expense material depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows buildings improvements 1035 years machinery equipment including leases 315 years leasehold improvements term lease expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost related accumulated depreciation eliminated resulting gain loss recognized intangible assets goodwill intangible assets consist principally patents trademarks copyrights amortized straightline method weighted average estimated useful life 21 years amortization intangible assets charged operations amounted approximately 2026000 648000 511000 1998 1997 1996 respectively company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions goodwill amortized straightline method 40 years amortization charged operations amounted approximately 12390000 5319000 2940000 1998 1997 1996 respectively balance sheet date accordance sfas 121 accounting long lived assets long lived assets disposed company evaluates realizability intangible assets goodwill based expectations nondiscounted future cash flows subsidiary material amount intangible assets goodwill sum expected nondiscounted future cash flows less carrying amount intangible assets goodwill company would recognize impairment loss based nortek inc subsidiaries notes consolidated financial statements continued recent analysis company believes material impairment intangible assets goodwill exists december 31 1998 earnings per share basic earnings per share amounts computed using weighted average number common equivalent shares outstanding year special common stock treated equivalent common stock determining earnings per share results diluted earnings per share amounts computed using weighted average number common equivalent shares dilutive potential common special common shares outstanding year reconciliation basic diluted earnings per share follows comprehensive income loss 1998 company adopted statement financial accounting standards 130 reporting comprehensive income sfas 130 requires display comprehensive income loss components financial statements comprehensive income loss includes net earnings unrealized gains losses currency translation available sale marketable securities minimum pension liability adjustments components companys comprehensive income loss effect earnings three years ended december 31 nortek inc subsidiaries notes consolidated financial statements continued 1998 detailed companys accompanying consolidated statement stockholders investment balances classification within accumulated comprehensive loss december 31 1998 1997 1996 follows derivative instruments hedging activities june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities sfas 133 statement establishes accounting reporting standards requiring every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas 133 requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivatives gains losses offset related results hedged item income statement requires company must formally document designate assess effectiveness transactions receive hedge accounting sfas 133 effective fiscal years beginning june 15 1999 company may also implement statement beginning fiscal quarter issuance fiscal quarters beginning june 16 1998 thereafter sfas 133 cannot applied retroactively sfas 133 must applied derivative instruments b certain derivative instruments embedded hybrid contracts issued acquired substantively modified december 31 1997 companys election january 1 1998 nortek inc subsidiaries notes consolidated financial statements continued company process quantifying impacts adopting sfas 133 financial statements determined timing method adoption sfas 133 2 acquisitions businesses sold acquisitions accounted purchases accordingly included companys consolidated results operations since acquisition date purchase price allocations subject refinement pertinent information regarding acquisitions obtained october 9 1998 company acquired napco inc affiliate napco approximately 80800000 cash approximately 4100000 paid 1999 approximately 400000 forgiveness napco employee loans assumption approximately 10200000 debt acquisition funded use unrestricted cash equivalents marketable securities july 31 1998 company whollyowned subsidiary purchased issued outstanding capital stock nutone inc nutone whollyowned subsidiary williams plc aggregate purchase price approximately 242500000 cash plus approximately 5500000 expenses fees connection acquisition company assumed nutones operating liabilities intercompany borrowings including certain liabilities nutone concerning post retirement benefit obligations purchase price funded use net proceeds sale 210000000 principal amount 8 78 notes due august 1 2008 8 78 notes slight discount occurred july 31 1998 together approximately 44800000 cash proceeds received common stock offering see notes 5 6 consummation acquisition nutone subject federal trade commission ftc order terms company required divest prior december 31 1998 assets properties business goodwill ms systems lp ms subsidiary december 30 1998 company sold ms mooreomatic inc mom obtaining required ftc approval august 26 1997 company acquired ply gem industries inc ply gem tender offer cash price 1950 per outstanding share common stock aggregate purchase price approximately 407400000 consisted 322700000 nortek inc subsidiaries notes consolidated financial statements continued cash paid purchase common stock settle stock options ply gem 50500000 cash paid refinance existing indebtedness ply gem including repurchase 45000000 accounts receivable ply gems securitization program 23500000 cash paid certain officers ply gem connection termination agreements 10700000 cash paid expenses acquisition prior accepting payment tendered shares ply gem august 26 1997 company sold 310000000 principal amount 9 18 senior notes due september 2007 9 18 notes slight discount see note 5 company used portion net proceeds together available cash purchase shares ply gem fund approximate 45000000 payment terminate ply gems existing accounts receivable securitization program pay certain fees expenses company accounted ply gems subsidiary studley products inc studley vacuum bag manufacturer operation held sale since date ply gem acquisition studleys net sales operating loss excluded companys consolidated results operations acquisition date december 31 1997 period january 1 1998 date sale may 8 1998 approximately 9400000 2900000 respectively 7300000 1600000 respectively studleys operating losses date acquisition date sale excluded consolidated continuing operations company include approximately 100000 allocated interest expense losses funded company accounted adjustment net realizable value studley ultimate disposition studley resulted decrease companys goodwill approximately 1000000 since acquisition date company realized expects continue realize cost savings result ply gem acquisition savings result several actions including elimination expenses associated ply gems new york headquarters ii consolidation nortek certain ply gems corporate functions accounting legal risk management iii identification rationalization underperforming product lines pro forma earnings see include estimated cost savings operating efficiencies management expects result acquisition unaudited estimated pretax cost savings total approximately 18000000 period january 1 1997 date acquisition year ended december 31 1997 actual cost savings achieved since acquisition ply nortek inc subsidiaries notes consolidated financial statements continued gem reflected companys historical consolidated operating results period acquisition date december 31 1997 year ended december 31 1998 date nutone acquisition company achieved cost reductions directly attributable acquisition elimination fees charges paid nutone williams related entities unaudited pro forma operating earnings increased years ended december 31 1998 1997 approximately 354000 1746000 respectively subsequent nutone acquisition company expects realize approximately 15000000 unaudited estimated annual cost reductions nutone cost reductions achieved result integrating nutone companys operations pro forma earnings increased nutone cost reductions either 1998 1997 except nutone cost reductions actually achieved since date acquisition see note 12 following presents approximate unaudited pro forma net sales operating earnings depreciation amortization expense amortization deferred debt expense debt discount earnings continuing operations diluted earnings per share company periods presented gives pro forma effect acquisitions nutone ply gem sale 8 78 notes common stock offering sale 9 18 notes extension credit ply gem credit facility refinance certain existing indebtedness termination ply gems accounts receivable securitization program sale 9 14 senior notes due 2007 9 14 notes refinancing certain subsidiary indebtedness reflects estimated cost reductions directly attributable nutone acquisition described transactions adjustments occurred january 1 1997 pro forma results include actual results ply gem nutone since august 26 1997 july 31 1998 respectively accordance purchase method accounting acquisition nortek inc subsidiaries notes consolidated financial statements continued following pro forma results give pro forma effect dispositions businesses occurred 1998 acquisition napco computing pro forma earnings reduced net interest income aggregate cash portion purchase price acquisitions historical rate earned company interest expense indebtedness incurred connection acquisitions refinancing repayment certain indebtedness ply gem earnings reduced amortization goodwill intangible assets reflect net adjustments depreciation expense result increase estimated fair market value property equipment changes depreciable lives interest expense subsidiary indebtedness refinanced funds 9 14 notes excluded average interest rate consistent indebtedness outstanding refinanced net tax effect interest expense included 9 14 notes 9 18 notes 8 78 notes applicable coupon rate plus amortization deferred debt expense debt discount net tax effect pro forma information presented purport indicative results would reported transactions occurred january 1 1997 may reported future december 30 1998 company sold ms mom approximately 27500000 cash recorded pretax gain approximately 4000000 years ended december 31 1998 1997 combined net sales operating earnings continuing operations provision income taxes ms mom approximately 42100000 3600000 37300000 3400000 respectively nortek inc subsidiaries notes consolidated financial statements continued 1998 company made several dispositions certain nonstrategic businesses acquired connection acquisition ply gem discussed may 8 1998 company sold studley may 22 1998 company sold sagebrush sales inc sagebrush approximately 9100000 cash sagebrush unaudited net sales operating earnings continuing operations provision income taxes approximately 47600000 400000 respectively full year ended december 31 1997 net sales operating earnings continuing operations provision income taxes approximately 19100000 200000 respectively five months ended may 22 1998 july 2 1998 company sold goldenberg group inc goldenberg approximately 11100000 including approximately 2000000 notes goldenberg unaudited net sales operating earnings continuing operations provision income taxes approximately 41300000 500000 respectively full year ended december 31 1997 net sales operating earnings continuing operations provision income taxes approximately 21500000 500000 respectively six months ended july 2 1998 july 31 1998 company sold another ply gem business ply gem manufacturing unaudited net sales operating earnings continuing operations provision income taxes approximately 48300000 2500000 respectively full year ended december 31 1997 net sales operating earnings continuing operations provision income taxes approximately 23300000 700000 respectively seven months ended july 31 1998 december 10 1998 company sold allied plywood corporation allied approximately 16500000 cash approximately 7000000 notes allied unaudited net sales operating earnings continuing operations provision income taxes approximately 84400000 400000 respectively full year ended december 31 1997 net sales operating earnings continuing operations provision income taxes approximately 80300000 800000 respectively eleven months ended november 1998 operating results sagebrush goldenberg ply gem manufacturing allied included companys 1997 1998 consolidated results date ply gem acquisition august 26 1997 date sale disposition four businesses result significant gains losses approximately 27700000 proceeds sale four businesses used pay debt remaining proceeds including proceeds nortek inc subsidiaries notes consolidated financial statements continued sale plumbing products business studley ms mom approximately 84000000 used general corporate purposes see note 9 3 cash flows interest paid 78988000 35921000 30568000 1998 1997 1996 respectively fair value assets acquired 436074000 672311000 1998 1997 respectively liabilities assumed created businesses acquired 111372000 264892000 1998 1997 respectively cash paid acquisitions 324702000 407419000 1998 1997 respectively significant noncash financing investing activities excluded accompanying consolidated statement cash flows include capitalized lease additions approximately 565000 1998 500000 1996 increase approximately 65000 increase approximately 781000 decline approximately 481000 fair market value marketable securities available sale 1998 1997 1996 respectively 4 income taxes following summary components earnings continuing operations provision income taxes nortek inc subsidiaries notes consolidated financial statements continued following summary provision benefit income taxes continuing operations included accompanying consolidated statement operations income tax payments net refunds approximately 4568000 7977000 18611000 1998 1997 1996 respectively current provision reflect tax benefits approximately 2000000 exercise nonqualified stock options benefits recorded increase additional paidin capital table follows reconciles federal statutory income tax rate continuing operations effective tax rate earnings approximately 445 382 386 1998 1997 1996 respectively nortek inc subsidiaries notes consolidated financial statements continued tax effect temporary differences give rise significant portions deferred income tax assets liabilities december 31 1998 december 31 1997 follows december 31 1998 company approximately 27300000 net us federal prepaid income tax assets expected realized future operating earnings december 31 1998 companys wholly owned subsidiary ply gem net operating loss carryforward approximately 61300000 expires 2011 subject certain limitations imposed internal revenue code losses may utilized future income ply gem group utilization losses limited approximately 17500000 per year company established valuation allowances related certain capital losses total valuation allowance approximately 2200000 reduce goodwill tax benefit ultimately realized nortek inc subsidiaries notes consolidated financial statements continued 5 notes mortgage notes obligations payable shortterm bank obligations december 31 1998 1997 consist following short term bank obligations secured approximately 29500000 accounts receivable inventory borrowings average weighted interest rate approximately 43 december 31 1998 notes mortgage notes obligations payable accompanying consolidated balance sheet december 31 1998 1997 consist following nortek inc subsidiaries notes consolidated financial statements continued july 31 1998 company sold 210000000 8 78 notes discount approximately 753900 amortized life issue net proceeds sale 8 78 notes deducting underwriting commissions expenses amounted approximately 203492000 company used portion net proceeds together approximately 44800000 cash proceeds received common stock offering purchase nutone see notes 2 6 indenture governing 8 78 notes companys restrictive indenture restricts among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indenture upon certain asset sales defined indenture company required offer purchase 100 principal amount plus accrued interest date purchase 8 78 notes principal amount equal net cash proceeds defined indenture invested properties assets used primarily related business owned operated company issue date 8 78 notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indenture 8 78 notes redeemable option company whole part time 104438 august 1 2003 declining 100 august 1 2006 thereafter march 5 1999 approximately 60800000 available payment cash dividends stock payments terms companys indenture governing 8 78 notes see note 6 companys ply gem subsidiary credit facility syndicate banks provides ply gem term loan letter credit facility interest borrowings varying rates based ply gems option london interbank offered rate libor plus spread b higher 5 federal funds rate ii banks prime rate ply gem pays facility fee quarterly fluctuates 20 30 aggregate principal amount available facility average weighted interest rate credit facility year ended december 31 1998 67 credit facility includes customary covenants including covenants limiting ply gems ability pledge assets incur liens assets maintain certain financial covenants borrowings credit facility collateralized common stock inventory accounts receivable ply gems principal subsidiaries nortek inc subsidiaries notes consolidated financial statements continued ply gem 35000000 interest rate swap agreements terminate december 3 1999 whereby ply gem pay counterparties interest fixed rate 5525 counterparties pay ply gem interest floating rate equal one month libor interest rate ply gem also 40000000 interest rate swaps terminate december 32003 whereby ply gem pay counterparties interest fixed rate 576 counterparties pay ply gem interest floating rate equal one month libor interest rate amounts paid received interest rate swap agreements accrued interest rates change recognized life swap agreements adjustment interest expense companys ply gem subsidiary also 75000000 interest rate cap agreements entitles ply gem receive counterparties monthly basis amount libor interest rate 75000000 floating rate debt exceeds 7 period december 5 1998 december 5 1999 cost interest rate cap agreements amortized interest expense life cap payments received result cap agreements reduce interest expense unamortized costs cap agreements included current assets companys accompanying consolidated balance sheet impact arrangements material companys consolidated operating results mortgage notes payable approximately 22184000 outstanding december 31 1998 include various mortgage notes related indebtedness payable installments 2014 notes bear interest rates ranging 20 93 collateralized property equipment aggregate net book value approximately 32100000 december 31 1998 obligations approximately 18391000 outstanding december 31 1998 include borrowings relating equipment purchases borrowings bearing interest rates primarily ranging 35 150 maturing various dates 2017 approximately 15338000 indebtedness collateralized property equipment aggregate net book value approximately 20400000 december 31 1998 nortek inc subsidiaries notes consolidated financial statements continued table follows summary maturities companys debt obligations excluding unamortized debt discount due december 31 1999 amounts thousands 2000 4887 2001 3652 2002 82108 2003 1616 thereafter 919798 6 common stock special common stock options deferred compensation first half 1998 company sold 2182500 shares common stock public offering approximately 64190000 net cash proceeds common stock offering deducting underwriting commission offering expense credited 2182500 common stock 62005000 additional paid capital portion net proceeds used acquire nutone see note 2 share special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting remaining 75 elected combined vote classes shares special common stock generally nontransferable freely convertible shareforshare basis shares common stock company shareholder rights plan expires march 31 2006 shareholder right entitles shareholders buy 1100 share new series preference stock nortek exercise price 72 per share subject adjustments stock dividends splits similar events rights currently exercisable attached share common stock may redeemed directors 01 per share time shareholder acquires beneficial ownership 17 companys common stock special common stock rights trade separately become exercisable entitling rights holder acquire additional shares companys common stock market value equal twice amount exercise price right addition person group acquiring company commences tender offer announces intention acquire 30 companys common stock special common stock rights trade separately certain circumstances permit rights nortek inc subsidiaries notes consolidated financial statements continued holder acquire common stock acquiring company market value equal twice amount exercise price right december 31 1998 total 1914857 shares common stock reserved follows stock option plans 1160913 conversion special common stock 753944 1914857 december 31 1998 1120516 shares special common stock reserved stock option plans company several stock option plans provide granting options certain officers employees nonemployee directors company options granted plans vest periods ranging five years expire ten years date grant december 31 1998 153767 additional options available grant plans december 31 1998 1997 1996 approximately 652702 709762 353800 respectively options acquire shares common special common stock exercisable nortek inc subsidiaries notes consolidated financial statements continued table follows summarizes common special common stock option transactions three years ended december 31 1998 13250 1007146 options outstanding december 31 1998 exercise price 2875 weighted average contractual life 2 years options exercisable 27147 options exercise price 875 weighted average remaining contractual life 5 years options exercisable 173849 options exercisable exercise price 14750 remaining contractual life 8 years 778600 options 433898 exercisable exercise prices 1950 2700 weighted average exercise price 2298 remaining contractual life 947 years remaining 14300 options 4558 exercisable exercise prices 30375 31875 weighted average exercise price 3070 remaining contractual life 10 years company accounts stock option plans apb opinion 25 compensation cost recognized since options granted exercise prices equal fair market value common stock date grant compensation cost plans determined consistent sfas 123 companys earnings continuing operations diluted earnings per share continuing operations would approximately 31700000 286 1998 approximately 24100000 245 nortek inc subsidiaries notes consolidated financial statements continued 1997 approximately 23300000 219 1996 respectively net earnings diluted net earnings per share would approximately 32700000 295 1998 approximately 19000000 192 1997 approximately 21600000 203 1996 respectively weighted average grant date fair value options granted 940 982 615 1998 1997 1996 respectively fair value option grant estimated date grant using blackscholes option pricing model following assumptions used 1998 1997 1996 riskfree interest rate 450 566 575 673 7 expected life 5 years 5 years 5 years expected volatility 37 33 expected dividend yield 0 companys board directors authorized program purchase 500000 shares companys common special common stock open market negotiated transactions subject market conditions cash availability provisions companys outstanding debt instruments march 5 1999 company purchased approximately 460000 shares common special common stock approximately 13000000 program accounted share purchases treasury stock 7 pension profit sharing post retirement benefits company subsidiaries various pension supplemental retirement plans certain officers profit sharing post retirement benefit plans requiring contributions qualified trusts union administered funds 1998 company assumed certain liabilities nutone concerning pension obligations post retirement obligations provide certain retirement medical life insurance benefits eligible retired employees certain active employees information presented tables follow presented accordance sfas 132 employers disclosures pension postretirement benefits revises companys disclosures change measurement recognition pension benefits nortek inc subsidiaries notes consolidated financial statements continued pension profit sharing expense charged operations aggregated approximately 9800000 1998 approximately 6624000 1997 approximately 4310000 1996 companys policy fund currently actuarially determined annual contribution table follows provides reconciliation benefit obligations plan assets funded status plans companys consolidated balance sheet december 31 1998 1997 nortek inc subsidiaries notes consolidated financial statements continued projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 109588000 102880000 66365000 respectively december 31 1998 19948000 16286000 8170000 respectively december 31 1997 plan assets include commingled funds marketable securities insurance contracts cash shortterm investments weighted average rate assumptions used determining pension costs projected benefit obligation follows nortek inc subsidiaries notes consolidated financial statements continued companys net periodic benefit cost defined benefit plans 1998 1997 1996 consists following components purposes calculating post retirement benefit cost medical inflation rate 675 assumed 1998 rate assumed decrease gradually ultimate rate 425 2003 net periodic post retirement benefit cost approximately 955000 year ended december 31 1998 consisted approximately 155000 service cost approximately 800000 interest cost assumed health care cost trend rates significant effect amounts reported health care plan onepercentagepoint change assumed health care cost trend rate would following effect 8 commitments contingencies company provides accruals direct costs associated estimated resolution contingencies earliest date deemed probable liability incurred amount liability reasonably estimated nortek inc subsidiaries notes consolidated financial statements continued december 31 1998 company subsidiaries obligated lease agreements rental certain real estate machinery equipment used operations minimum annual rental expense aggregates approximately 76675000 december 31 1998 obligations payable follows certain lease agreements provide increased payments based changes consumer price index rental expense charged operations accompanying consolidated statement operations approximately 15000000 8700000 6725000 years ended december 31 1998 1997 1996 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes company subject contingencies including legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated subsidiary company defendant number lawsuits alleging damage caused alleged defects certain pressure treated wood products many suits resolved dismissal settlement amounts paid insurance proceeds third party recoveries subsidiary continues vigorously defend remaining suits certain defense indemnity costs paid insurance proceeds settlement suppliers material used production treated wood products nortek inc subsidiaries notes consolidated financial statements continued subsidiary engaged coverage litigation certain insurers settled coverage claims several insurers company believes remaining coverage disputes resolved satisfactory basis additional coverage available reaching belief company analyzed insurance coverage status coverage litigation considered history settlements primary excess insurers consulted counsel company recorded liabilities approximately 10168000 december 31 1998 estimated costs resolve outstanding matters company also recorded receivables december 31 1998 approximately 8378000 estimated recoveries deemed probable collection related insurance litigation matters discussed impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided material adverse effect consolidated financial position results operations company 9 discontinued operations fourth quarter 1997 company adopted plan disposition plumbing products business sold july 10 1998 approximately 33700000 cash following summary results discontinued operations three years ended december 31 1998 nortek inc subsidiaries notes consolidated financial statements continued loss discontinued operations income taxes includes allocation corporate interest expense approximately 1000000 1900000 1700000 1998 1997 1996 respectively corporate interest allocated discontinued operations based ratio net assets discontinued operation sum total consolidated net assets company plus consolidated debt company debt discontinued operation assumed buyer debt directly attributed operations company income tax benefit 1998 includes approximately 800000 recorded result realization portion tax capital loss arising sale plumbing products business 10 operating segment information concentration credit risk effective 1998 company adopted sfas 131 disclosures segments enterprise related information statement introduced new model segment reporting called management approach management approach based way chief operating decisionmaker organizes segments within company making operating decisions assessing performance presentation 1997 1996 reclassified conform presentation 1998 company diversified manufacturer residential commercial building products organized within three principal operating segments residential building products segment air conditioning heating products segment windows doors siding segment individual subsidiary companies included companys three principal operating segments based similarity products production processes customers expected longterm financial performance subsidiary companies included particular operating segment three operating segments reportable segment provisions sfas 131 includes corporate related items results insignificant operations intersegment eliminations certain income expense items allocated reportable segments operating results labeled businesses sold consists entities sold 1998 previously included companys former specialty products distribution group well businesses sold 1998 residential building products segment manufactures distributes builtin products primarily residential new construction doityourself diy professional remodeling renovation markets including kitchen range hoods bath fans combination units fan heater light combinations air conditioning heating products segment manufactures sells heating ventilating air nortek inc subsidiaries notes consolidated financial statements continued conditioning hvac systems customdesigned commercial applications manufactured sitebuilt residential housing windows doors siding segment manufactures distributes vinyl wood windows doors vinyl siding aluminum trim coil soffit skirting shutters use residential construction diy professional renovation markets windows doors siding segment purchased connection acquisition ply gem august 26 1997 accordingly information presented excludes results operations segment periods prior acquisition date accounting policies segments described note 1 summary significant accounting policies company evaluates segment performance based operating earnings allocations corporate overhead costs intersegment net sales material periods presented intersegment eliminations material periods presented income statement impact purchase accounting adjustments including goodwill intangible assets amortization included operating earnings applicable operating segment however corresponding purchase accounting balance sheet adjustments related goodwill intangible assets allocated individual operating segments unallocated assets consist primarily cash equivalents marketable securities net assets discontinued operations 1997 1996 prepaid deferred income taxes goodwill intangible assets deferred debt expense tables follow exclude results operations plumbing products business sold 1998 accounted discontinued operation nortek inc subsidiaries notes consolidated financial statements continued summarized financial information companys reportable segments presented tables follow three years period ended december 31 1998 nortek inc subsidiaries notes consolidated financial statements continued nortek inc subsidiaries notes consolidated financial statements continued foreign net sales approximately 8 11 15 consolidated net sales years ended december 31 1998 1997 1996 respectively foreign longlived assets approximately 6 9 31 consolidated longlived assets years ended december 31 1998 1997 1996 respectively foreign net sales attributed based location companys subsidiary responsible sale required sfas 131 longlived assets exclude financial instruments deferred income taxes single customer accounts 10 consolidated net sales company operates internationally exposed market risks changes foreign exchange rates financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising companys customer base dispersion across many different geographical regions december 31 1998 company significant concentrations credit risk 11net gain loss marketable securities december 31 1998 1997 1996 reduction companys stockholders investment gross unrealized losses approximately 45000 110000 891000 respectively december 31 1998 gross unrealized gains companys marketable securities companys unrestricted marketable securities december 31 1998 consist certificates deposit bank issued money market instruments approximately 121757000 mature within one year nortek inc subsidiaries notes consolidated financial statements continued 12 accrued expenses taxes net accrued expenses taxes net consist following december 31 1998 1997 company recorded liabilities connection 1997 1998 acquisitions related employee terminations exit costs associated managements plans eliminate certain activities acquired entities managements plans eliminating certain ply gem activities completed 1998 relate principally elimination ply gems corporate headquarters consolidation certain duplicate ply gem corporate functions accounting legal risk management company finalization managements initial plans relative ply gem acquisition 1997 resulted decreases approximately 2700000 initial liabilities recorded 1997 decreases identified within one year acquisition date accordingly recorded adjustments purchase price allocation ply gem acquisition managements plans eliminating certain activities 1998 acquisitions finalized december 31 1998 accordingly company recorded liabilities approximately 1900000 portions 1998 acquisitions plans complete december 31 1998 principally related termination certain corporate employees 1998 acquired businesses company expects finalize plans respect 1998 acquisitions within one year respective acquisition dates accordingly additional liabilities recorded adjustments purchase price allocation acquired business managements estimates additional liabilities associated plans 1998 acquisitions range approximately 18000000 25000000 relate principally additional employee terminations exit costs related elimination consolidation certain functions operations acquired business nortek inc subsidiaries notes consolidated financial statements continued charges liabilities employee termination include payroll taxes insurance benefits related severance packages approximately 5300000 1700000 years ended december 31 1998 1997 respectively charges liabilities exit costs relate principally lease costs closing facilities legal consulting fees incurred due implementation companys exit strategies charges liabilities exit costs approximately 1400000 400000 years ended december 31 1998 1997 respectively 13 summarized quarterly financial data unaudited tables follow summarize unaudited quarterly financial data years ended december 31 1998 december 31 1997 nortek inc subsidiaries notes consolidated financial statements continued report independent public accountants annual report nortek inc audited accompanying consolidated balance sheets nortek inc delaware corporation subsidiaries listed item 14a1 form 10k december 31 1998 1997 related statements operations stockholders investment cash flows three years period ended december 31 1998 financial statements schedules referred responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position nortek inc subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles audit made purpose forming opinion basic financial statements taken whole schedules listed item 14a2 presented purposes complying securities exchange commissions rules part basic financial statements schedules subjected auditing procedures applied audit basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp sarthur andersen llp boston massachusetts march 22 1999 nortek incparent company schedule condensed financial information registrant nortek inc parent company schedule condensed financial information registrant nortek inc parent company schedule condensed financial information registrant nortek inc parent company schedule condensed financial information registrant nortek inc parent company schedule condensed financial information registrant nortek inc parent company schedule condensed financial information registrant notes condensed financial statements 1 accompanying condensed financial statements nortek inc registrant prepared accordance reduced disclosure requirements permitted form 10k part iv item 14 schedule condensed financial information registrant consolidated financial statements related notes nortek inc subsidiaries included elsewhere herein form 10k part ii item 8and incorporated herein reference certain 1997 1996 amounts reclassified conform 1998 presentation 2 descriptions material contingencies significant provisions longterm debt obligations commitments registrant included notes 5 8 notes nortek inc subsidiaries consolidated financial statements incorporated herein reference following summary maturities longterm debt registrants debt obligations excluding unamortized discount december 31 1998 amounts thousands 1999 2000 2001 2002 2003 thereafter 899822 3 registrants net investment subsidiaries net cumulative amount intercompany cash transfers transactions 4 1998 registrant made capital contributions 46040000 ply gem corporation ply gem provide funding certain business acquisitions made ply gem 1998 5 included registrants condensed statement cash flows year ended december 31 1997 net transfers subsidiaries principally cash dividends declared subsidiaries board directors subsidiaries 70000000 dividends declared 1998 1996 6 certain registrants subsidiaries entered financing agreements contain various restrictive covenants place limitations amount distributions advances registrant december 31 1998 approximately 380176000 approximately 327076000 goodwill subsidiary net assets principally ply gem subsidiaries restricted approximately 89756000 principal amount subsidiary indebtedness outstanding financing agreements nortek inc subsidiaries schedule ii valuation qualifying accounts nortek inc subsidiaries exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangement 31 restated certificate incorporation nortek inc exhibit 2 form 8k filed april 23 1987 file 16112 32 amendment restated certificate incorporation nortek inc effective may 10 1989 exhibit 32 form 10k filed march 30 1990 file 16112 33 bylaws nortek inc amended september 19 1996 exhibit 33 form 10q filed november 5 1996 file 16112 41 second amended restated rights agreement dated april 1 1996 company state street bank trust company rights agent exhibit 1 form 8k filed april 2 1996 file 16112 42 indenture dated february 14 1994 company state street bank trust company trustee relating 9 78 senior subordinated notes due 2004 exhibit 45 form 10k filed march 25 1994 file 16112 43 indenture dated march 17 1997 company state street bank trust company trustee relating 925 series b senior notes due march 15 2007 exhibit 42 registration statement 33325505 filed april 18 1997 44 indenture dated august 26 1997 company state street bank trust company trustee relating 9 18 series b senior notes due september 1 2007 exhibit 41 registration statement 33336711 filed september 30 1997 45 indenture dated july 31 1998 company state street bank trust company trustee relating 8 78 series b senior notes due august 1 2008 exhibit 41 registration statement 33364731 filed september 30 1998 101 employment agreement richard l bready company dated january 1 1984 exhibit 102 form 10k filed march 31 1986 file 16112 102 amendment dated march 3 1988 employment agreement richard l bready company dated january 1 1984 exhibit 192 form 10q filed may 17 1988 file 16112 103 second amendment dated november 1 1990 employment agreement richard l bready company dated january 1 1984 exhibit 103 form 10k filed april 1 1991 file 16112 104 employment agreement richard l bready company dated february 26 1997 exhibit 103 form 10q filed may 12 1997 file 16112 105 amendment 1 dated june 13 1997 employment agreement richard l bready company dated february 26 1997 exhibit 102 form 10q filed august 8 1997 file 16112 106 deferred compensation agreement dated march 7 1983 richard l bready company exhibit 104 registration statement 3369778 filed february 9 1994 107 deferred compensation agreement dated march 7 1983 almon c hall company exhibit 105 registration statement 3369778 filed february 9 1994 108 deferred compensation agreement dated march 7 1983 richard j harris company exhibit 106 registration statement 3369778 filed february 9 1994 109 1984 stock option plan amended may 27 1987 exhibit 282 registration statement 3322527 filed june 15 1988 1010 change control severance benefit plan key employees adopted february 10 1986 form agreement employees exhibit 1019 form 10k filed march 31 1986 file 16112 1011 change control severance benefit plan key employees amended restated june 12 1997 form agreement employees exhibit 101 form 10q filed august 8 1997 file 16112 1012 1987 stock option plan exhibit 283 registration statement 3322527 filed june 15 1988 1013 1997 equity cash incentive plan exhibit 101 form 10q filed may 12 1997 file 16112 1014 1997 stock option plan directors exhibit 102 form 10q filed may 12 1997 file 16112 1015 nortek inc supplemental executive retirement plan dated july 1 1997 exhibit 103 form 10q filed august 8 1997 file 16112 1016 first amendment dated july 1 1997 nortek inc supplemental executive retirement plan dated july 1 1997 exhibit 104 form 10q filed august 8 1997 file 16112 1017 form indemnification agreement company directors certain officers appendix c proxy statement dated march 23 1987 annual meeting nortek stockholders file 16112 1018 stock purchase sale agreement dated march 9 1998 williams yn holdings inc ntk sub inc exhibit 2 form 8ka filed march 18 1998 file 16112 1019 second amended restated credit agreement dated august 26 1997 restated december 30 1998 among ply gem industries inc fleet national bank agent banks signatory thereto 211 list subsidiaries 231 consent independent public accountants 271 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k financial statements schedules following documents filed part report 1 financial statements page consolidated statement operations three years ended december 31 1999 46 consolidated balance sheet december 31 1999 1998 47 consolidated statement cash flows three years ended december 31 1999 49 consolidated statement stockholders investment three years ended december 31 1999 51 notes consolidated financial statements 54 report independent public accountants 90 2 financial statement schedules schedule condensed financial information registrant 91 schedule ii valuation qualifying accounts 92 3 exhibits listed exhibit index incorporated herein reference b reports form 8k reports form 8k filed registrant last quarter period covered report nortek inc subsidiaries signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 9 2000 nortek inc richard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 9 2000 richard l bready j peter lyons richard l bready chairman j peter lyons board president director principal executive officer richard j harris william kelly richard j harris vice president william kelly treasurer principal financial director officer director almon c hall phillip l cohen almon c hall vice president phillip l cohen controller principal director accounting officer nortek inc subsidiaries consolidated statement operations accompanying notes integral part consolidated financial statements nortek inc subsidiaries consolidated balance sheet accompanying notes integral part consolidated financial statements nortek inc subsidiaries consolidation balance sheet accompanying notes integral part consolidated financial statements nortek inc subsidiaries consolidated statement cash flows nortek inc subsidiaries consolidated statement cash flows continued accompanying notes integral part consolidated financial statements nortek inc subsidiaries consolidated statement shockholders investment year ended december 31 1997 dollar amounts thousands accompanying notes integral part consolidated financial statements nortek inc subsidiaries consolidated statement shockholders investment year ended december 31 1998 dollar amounts thousands accompanying notes integral part consolidated financial statements nortek inc subsidiaries consolidated statement shockholders investment year ended december 31 1999 dollar amounts thousands accompanying notes integral part consolidated financial statements nortek inc subsidiaries notes consolidated financial statements 1summary significant accounting policies company diversified manufacturer residential commercial building products operating within three principal segments residential building products segment air conditioning heating products segment windows doors siding products segment principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets principles consolidation consolidated financial statements include accounts nortek inc significant whollyowned subsidiaries company nortek elimination intercompany accounts transactions certain amounts prior years consolidated financial statements reclassified conform presentation december 31 1999 use estimates preparation financial statements conformity generally accepted accounting principles involves estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts income expense reporting periods actual results could vary amounts derived estimates assumptions cash investments marketable securities cash equivalents consist shortterm highly liquid investments original maturities three months less readily convertible cash company classified restricted accompanying consolidated balance sheet certain investments marketable securities fully available use operations december 31 1999 approximately 26917000 11240000 included current assets cash investments marketable securities pledged collateral insurance employee benefits requirements nortek inc subsidiaries notes consolidated financial statements continued disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents carrying amount approximates fair value short maturity instruments investments marketable securities fair value investments marketable securities based quoted market prices december 31 1999 fair value investments marketable securities approximated amount companys consolidated balance sheet longterm debt december 31 1999 fair value longterm indebtedness approximately 19700000 lower amount companys consolidated balance sheet original issue discount based market quotations see note 5 inventories accompanying consolidated balance sheet valued lower cost market december 31 1999 1998 approximately 111349000 83286000 total inventories respectively valued lastin firstout method lifo firstin firstout method fifo accounting inventories would approximately 2252000 3640000 greater december 31 1999 1998 respectively inventories valued fifo method sales recognition company recognizes sales upon shipment products net applicable provisions discounts allowances company also provides estimate warranty bad debts time sale securities exchange commission released staff accounting bulletin 101 revenue recognition financial statements december 3 1999 sab provides additional guidance accounting revenue recognition including broad conceptual discussions well certain industryspecific guidance company process accumulating information necessary quantify potential impact new guidance nortek inc subsidiaries notes consolidated financial statements continued foreign currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency company translates assets liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using average exchange rates effect year gains losses foreign currency translation credited charged accumulated comprehensive loss included stockholders investment accompanying consolidated balance sheet transaction gains losses recorded selling general administrative expense material years ending december 31 1999 1998 1997 depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows buildings improvements 1035 years machinery equipment including leases 315 years leasehold improvements term lease expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost related accumulated depreciation eliminated resulting gain loss recognized intangible assets goodwill intangible assets consist principally patents trademarks copyrights noncompete agreements amortized straightline method weighted average estimated useful life 22 years amortization intangible assets charged operations amounted approximately 4906000 2026000 648000 1999 1998 1997 respectively company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions goodwill amortized straightline method 40 years amortization goodwill charged operations amounted approximately 15593000 12390000 5319000 1999 1998 1997 respectively balance sheet date accordance sfas 121 accounting long lived assets long nortek inc subsidiaries notes consolidated financial statements continued lived assets disposed company evaluates realizability long lived assets primarily consists property plant equipment intangible assets goodwill based expectations nondiscounted future cash flows subsidiary material amount long lived assets sum expected nondiscounted future cash flows less carrying amount assets including long lived assets company would recognize impairment loss based recent analysis company believes material impairment long lived assets exists december 31 1999 earnings per share basic earnings per share amounts computed using weighted average number common equivalent shares outstanding year special common stock treated equivalent common stock determining earnings per share results diluted earnings per share amounts computed using weighted average number common equivalent shares dilutive potential common special common shares outstanding year reconciliation basic diluted earnings per share follows years ended december 31 1999 1998 1997 thousands except per share amounts earnings continuing 49300 34000 26400 operations basic eps basic common shares 11763 10923 9605 basic eps 419 311 275 diluted eps basic common shares 11763 10923 9605 plus impact stock options note 6 219 190 250 diluted common shares 11982 11113 9855 diluted eps 411 306 268 nortek inc subsidiaries notes consolidated financial statements continued comprehensive income loss 1998 company adopted statement financial accounting standards 130 reporting comprehensive income requires display comprehensive income loss components financial statements comprehensive income loss includes net earnings unrealized gains losses currency translation marketable securities available sale minimum pension liability adjustments net tax benefit components companys comprehensive income loss effect earnings three years ended december 31 1999 detailed companys accompanying consolidated statement stockholders investment balances classification within accumulated comprehensive loss december 31 1999 1998 1997 follows derivative instruments hedging activities june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities amended sfas 137 accounting derivative instruments hedging activities deferral effective date fas 133 amendment fas 133 combined sfas 133 sfas 133 establishes accounting reporting standards requiring every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas 133 requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivatives gains losses offset related results hedged item income statement requires company must formally document designate assess effectiveness transactions receive hedge accounting nortek inc subsidiaries notes consolidated financial statements continued sfas 133 effective fiscal years beginning june 15 2000 company may also implement statement beginning fiscal quarter issuance fiscal quarters beginning june 16 1999 thereafter sfas 133 cannot applied retroactively sfas 133 must applied derivative instruments b certain derivative instruments embedded hybrid contracts issued acquired substantively modified december 31 1997 companys election january 1 1998 company process quantifying impacts adopting sfas 133 financial statements determined timing method adoption sfas 133 2 acquisitions businesses sold acquisitions accounted purchases accordingly included companys consolidated results operations since acquisition date purchase price allocations subject refinement pertinent information regarding acquisitions obtained march 8 1999 company acquired webco inc webco designer manufacturer custom air handling equipment industrial institutional commercial customers fiscal year ended october 31 1998 webco net sales approximately 13900000 april 23 1999 company completed acquisition three businesses caradon plc united kingdom peachtree doors windows thermalgard cwd windows doors caradon acquired companies peachtree doors windows national supplier residential windows entry doors patio doors target custom highend home markets thermalgard manufactures replacement windows patio doors sunrooms cwd windows doors provider complete window door systems new homes western canada year ended december 31 1998 caradon acquired companies combined net sales approximately 169700000 may 28 1999 company acquired multiplex technologies inc multiplex manufacturer designer highperformance multiroom video distribution equipment home automation home entertainment multiplex net sales approximately 10000000 year ended december 31 1998 nortek inc subsidiaries notes consolidated financial statements continued september 9 1999 company acquired kroy building products inc kroy manufacturer vinyl fencing railing profiles vinyl decking systems residential light commercial applications kroy net sales approximately 26000000 fiscal year ended june 30 1999 december 3 1999 company acquired xantech corporation xantech designer manufacturer residential infrared remote control systems extending control vcr cable satellite stereo systems multiple rooms throughout entire household xantech net sales approximately 13000000 fiscal year ended november 30 1999 acquisitions funded use unrestricted cash equivalents marketable securities issuance notes payable sellers issuance 235000 shares nortek common stock see note 6 october 9 1998 company acquired napco inc affiliate napco approximately 80800000 cash assumption approximately 10200000 debt july 31 1998 company whollyowned subsidiary purchased issued outstanding capital stock nutone inc nutone whollyowned subsidiary williams plc williams aggregate purchase price approximately 242500000 cash plus approximately 5500000 expenses fees connection acquisition company assumed nutones operating liabilities intercompany borrowings including certain liabilities nutone concerning post retirement benefit obligations purchase price funded use net proceeds sale 210000000 principal amount 8 78 senior notes due august 1 2008 8 78 notes slight discount occurred july 31 1998 together approximately 44800000 cash proceeds received common stock offering see notes 5 6 august 26 1997 company acquired ply gem industries inc ply gem tender offer cash price 1950 per outstanding share common stock aggregate purchase price approximately 407400000 consisted 322700000 cash paid purchase common stock settle stock options ply gem 50500000 cash paid refinance existing indebtedness ply gem including repurchase 45000000 accounts receivable ply gems securitization program 23500000 cash paid certain officers ply gem connection termination agreements 10700000 cash paid expenses acquisition prior accepting payment tendered shares ply gem august 26 1997 company sold 310000000 principal amount 9 18 senior notes due september 2007 9 18 notes nortek inc subsidiaries notes consolidated financial statements continued slight discount see note 5 company used portion net proceeds together available cash purchase shares ply gem fund approximate 45000000 payment terminate ply gems existing accounts receivable securitization program pay certain fees expenses company accounted ply gems subsidiary studley products inc studley vacuum bag manufacturer operation held sale since date ply gem acquisition studleys net sales operating losses excluded companys consolidated results operations acquisition date december 31 1997 period january 1 1998 date sale may 8 1998 approximately 9400000 2900000 respectively 7300000 1600000 respectively studleys operating losses date acquisition date sale excluded consolidated continuing operations company include approximately 100000 allocated interest expense losses funded company accounted adjustment net realizable value studley ultimate disposition studley resulted decrease companys goodwill approximately 1000000 since acquisition date company realized expects continue realize cost savings result ply gem acquisition savings result several actions including elimination expenses associated ply gems new york headquarters ii consolidation nortek certain ply gems corporate functions accounting legal risk management iii identification rationalization underperforming product lines pro forma earnings see include estimated cost savings operating efficiencies period january 1 1997 date acquisition actual cost savings achieved since acquisition ply gem reflected companys historical consolidated operating results period acquisition date december 31 1997 years ended december 31 1998 1999 date nutone acquisition company achieved cost reductions directly attributable acquisition elimination fees charges paid nutone williams related entities unaudited pro forma operating earnings increased years ended december 31 1998 1997 approximately 354000 1746000 respectively subsequent nutone acquisition company realized expects realize additional cost reductions nutone cost reductions result integrating nutone nortek inc subsidiaries notes consolidated financial statements continued companys operations pro forma earnings increased nutone cost reductions periods presented except nutone cost reductions actually achieved since date acquisition companys operating earnings year ended december 31 1999 reflect approximately 14000000 unaudited net cost savings related nutone cost reductions net approximately 3400000 unaudited related costs expenses company expects realize future incremental net nutone cost reductions excess 1999 levels approximately 6000000 9000000 unaudited annually future nutone cost reductions estimates actual savings achieved could differ materially see note 12 following presents approximate unaudited pro forma net sales operating earnings depreciation amortization expense amortization deferred debt expense debt discount earnings continuing operations diluted earnings per share company periods presented gives pro forma effect acquisitions nutone ply gem sale 8 78 notes common stock offering sale 9 18 notes extension credit ply gem credit facility refinance certain existing indebtedness termination ply gems accounts receivable securitization program sale 9 14 senior notes due 2007 9 14 notes refinancing certain subsidiary indebtedness reflects estimated cost reductions directly attributable nutone acquisition described transactions adjustments occurred january 1 1997 pro forma results include actual results ply gem nutone since august 26 1997 july 31 1998 respectively accordance purchase method accounting acquisition following pro forma results give pro forma effect dispositions businesses occurred 1998 acquisition napco occurred october 9 1998 acquisitions 1999 years ended december 31 1998 1997 thousands except per share amounts unaudited pro forma net sales 1849000 1849100 depreciation amortization expense 47400 47000 operating earnings 142500 104500 earnings continuing operations 31400 5000 diluted earnings per share continuing operations 263 42 nortek inc subsidiaries notes consolidated financial statements continued computing pro forma earnings reduced net interest income aggregate cash portion purchase price acquisitions historical rate earned company interest expense indebtedness incurred connection acquisitions refinancing repayment certain indebtedness ply gem earnings reduced amortization goodwill intangible assets reflect net adjustments depreciation expense result increase estimated fair market value property equipment changes depreciable lives interest expense subsidiary indebtedness refinanced funds 9 14 notes excluded average interest rate consistent indebtedness outstanding refinanced net tax effect interest expense included 9 14 notes 9 18 notes 8 78 notes applicable coupon rate plus amortization deferred debt expense debt discount net tax effect pro forma information presented purport indicative results would reported transactions occurred january 1 1997 may reported future december 30 1998 company sold ms systems lp ms subsidiary mooreomatic inc mom approximately 27500000 cash recorded pretax gain approximately 4000000 12 per share net tax years ended december 31 1998 1997 combined net sales operating earnings continuing operations provision income taxes ms mom approximately 42100000 3600000 37300000 3400000 respectively 1998 company made several dispositions certain nonstrategic assets acquired connection 1997 acquisition ply gem discussed may 8 1998 company sold studley may 22 1998 company sold sagebrush sales inc sagebrush approximately 9100000 cash july 2 1998 company sold goldenberg group inc approximately 11100000 including approximately 2000000 notes july 31 1998 company sold another ply gem business ply gem manufacturing december 10 1998 company sold allied plywood corporation allied approximately 16500000 cash approximately 7000000 notes operating results sagebrush goldenberg ply gem manufacturing allied included companys 1997 1998 consolidated results date ply gem acquisition august 26 1997 date sale full year ended december 31 1997 combined net sales operating earnings nortek inc subsidiaries notes consolidated financial statements continued earnings provision income taxes dispositions approximately 221600000 3800000 respectively combined net sales operating earnings provision income taxes dispositions approximately 144200000 2200000 respectively period january 1 1998 date sale disposition four businesses result significant gains losses approximately 27700000 proceeds sale four businesses used pay debt remaining proceeds including proceeds sale plumbing products business studley ms mom approximately 84000000 used general corporate purposes see notes 9 10 3 cash flows interest paid 92592000 78988000 35921000 1999 1998 1997 respectively fair value assets businesses acquired 192719000 436074000 1999 1998 respectively liabilities assumed created businesses acquired 60616000 111372000 1999 1998 respectively 1999 235000 shares nortek common stock issued partial consideration acquisition resulting 6315000 increase stockholders investment cash paid acquisitions 125788000 324702000 1999 1998 respectively significant noncash financing investing activities excluded accompanying consolidated statement cash flows include capitalized lease additions approximately 445000 1999 565000 1998 increases approximately 170000 65000 781000 fair market value marketable securities available sale 1999 1998 1997 respectively nortek inc subsidiaries notes consolidated financial statements continued 4 income taxes following summary components earnings continuing operations provision income taxes years ended december 31 1999 1998 1997 amounts thousands domestic 77000 54600 37000 foreign 13000 6700 5700 90000 61300 42700 following summary provision income taxes continuing operations included accompanying consolidated statement operations years ended december 31 1999 1998 1997 amounts thousands federal income taxes current 15000 6900 9000 deferred 17100 15100 4000 32100 22000 13000 foreign 5800 2000 1000 state 2800 3300 2300 40700 27300 16300 income tax payments net refunds approximately 25500000 4568000 7977000 1999 1998 1997 respectively current provision 1998 reflect tax benefits approximately 2000000 exercise nonqualified stock options benefits recorded increase additional paidin capital nortek inc subsidiaries notes consolidated financial statements continued table follows reconciles federal statutory income tax rate continuing operations effective tax rate earnings approximately 452 445 382 1999 1998 1997 respectively years ended december 31 1999 1998 1997 amounts thousands income tax provision continuing operations federal statutory rate 31500 21455 14945 net change statutory rate amortization deductible income tax purposes 5189 4200 1827 state income taxes net federal tax effect 1804 2145 1520 change tax reserves net 807 713 1540 product development income tax credit foreign operations 118 309 264 tax effect resulting foreign activities 917 807 25 effect change foreign tax law 766 net 601 285 603 40700 27300 16300 nortek inc subsidiaries notes consolidated financial statements continued tax effect temporary differences give rise significant portions deferred income tax assets liabilities december 31 1999 december 31 1998 follows december 31 1999 1998 amounts thousands prepaid income tax assets classified current arising accounts receivable 2270 135 inventory 3142 3884 insurance reserves 12384 11698 warranty accrual 12979 10511 net operating losses ply gem 6125 reserves assets net 29924 27935 66824 54163 deferred income tax assets liabilities classified noncurrent arising property equipment net 47062 40767 intangible assets net 29273 21997 capital loss carryforward 7781 6326 net operating losses ply gem 1325 21457 valuation allowances 7781 6326 reserves assets net 1511 15267 73499 26040 result changes us federal income tax regulations 1999 company utilize approximately 40000000 net operating losses 1999 federal tax return resulted approximately 14000000 lower expected federal income tax payments 1999 december 31 1999 companys wholly owned subsidiary ply gem net operating loss carryforward approximately 21300000 expires 2011 subject certain limitations imposed internal revenue code utilization losses limited approximately 17500000 per year company established valuation allowances related certain capital losses total valuation allowance approximately 2200000 reduce goodwill tax benefit ultimately realized nortek inc subsidiaries notes consolidated financial statements continued 5notes mortgage notes obligations payable shortterm bank obligations december 31 1999 1998 consist following december 31 1999 1998 amounts thousands secured lines credit bank advances companys european subsidiaries 6834 10589 secured line credit canadian subsidiary 1642 obligations 373 shortterm bank obligations 8476 10962 shortterm bank obligations secured approximately 32100000 accounts receivable inventory average weighted interest rate approximately 47 december 31 1999 nortek inc subsidiaries notes consolidated financial statements continued notes mortgage notes obligations payable included accompanying consolidated balance sheet december 31 1999 1998 consist following december 31 1999 1998 amounts thousands 8 78 senior notes due 2008 net unamortized original issue discount 683000 735000 209317 209265 9 14 senior notes due 2007 net unamortized original issue discount 816000 892000 174184 174108 9 18 senior notes due 2007 net unamortized original issue discount 2104000 2286000 307896 307714 9 78 senior subordinated notes due 2004 9 78 notes net unamortized original issue discount 876000 1035000 203946 203787 ply gem term loan 77965 78440 mortgage notes payable 28268 22184 27604 18391 1029180 1013889 less amounts included current liabilities 5564 6776 1023616 1007113 nortek inc subsidiaries notes consolidated financial statements continued july 31 1998 company sold 210000000 8 78 notes discount approximately 753900 amortized life issue net proceeds sale 8 78 notes deducting underwriting commissions expenses amounted approximately 203492000 company used portion net proceeds together approximately 44800000 cash proceeds received common stock offering purchase nutone see notes 2 6 indentures agreements governing company subsidiaries indebtedness including indentures 8 78 notes 9 18 notes 9 14 notes collectively senior notes 9 78 notes credit agreement covering ply gem credit facility contain restrictive financial operating covenants including covenants restrict among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indentures agreements upon certain asset sales defined indentures company required offer purchase 100 principal amount plus accrued interest date purchase senior notes principal amount equal net cash proceeds defined indentures invested properties assets used primarily related business owned operated company issue date senior notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indentures february 25 2000 approximately 87700000 available payment cash dividends stock payments restricted payments terms companys restrictive indenture governing senior subordinated notes see note 6 companys ply gem subsidiary credit facility syndicate banks provides ply gem term loan letter credit facility interest borrowings varying rates based ply gems option london interbank offered rate libor plus spread b higher 5 federal funds rate ii banks prime rate ply gem pays facility fee quarterly fluctuates 20 30 aggregate principal amount available facility average weighted interest rate credit facility year ended december 31 1999 58 year 1999 credit facility includes customary covenants including covenants limiting ply gems ability pledge assets incur liens assets maintain certain financial covenants borrowings credit facility collateralized common stock inventory accounts receivable ply gems principal subsidiaries nortek inc subsidiaries notes consolidated financial statements continued 1999 35000000 ply gem interest rate swap agreements expired another 40000000 interest rate swaps due expire december 3 2003 terminated replaced 45000000 interest rate collar terminate august 27 2002 termination date collar floor 576 cap 700 extent one month us dollar libor rate collar floor payment due ply gem difference extent one month us dollar libor rate collar cap ply gem entitled receive difference one month us dollar libor rate december 31 1999 58225 amounts received paid result collar agreements increase reduce interest expense fair market value asset related interest rate collar approximately 300000 december 31 1999 mortgage notes payable approximately 28268000 outstanding december 31 1999 include various mortgage notes related indebtedness payable installments 2014 notes bear interest rates ranging 2 925 approximately 26217000 indebtedness collateralized property equipment aggregate net book value approximately 61092000 december 31 1999 obligations approximately 27604000 outstanding december 31 1999 include borrowings relating equipment purchases notes payable issued acquisitions borrowings bearing interest rates primarily ranging 29 12 maturing various dates 2017 approximately 16784000 indebtedness collateralized property equipment aggregate net book value approximately 19033000 december 31 1999 nortek inc subsidiaries notes consolidated financial statements continued table follows summary maturities companys debt obligations excluding unamortized debt discount due december 31 2000 amounts thousands 2001 9815 2002 82396 2003 3676 2004 212248 thereafter 719960 6 common stock special common stock options deferred compensation first half 1998 company sold 2182500 shares common stock public offering approximately 64190000 net cash proceeds common stock offering deducting underwriting commission offering expense credited 2182500 common stock 62007500 additional paid capital portion net proceeds used acquire nutone see note 2 share special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting remaining 75 elected combined vote classes shares special common stock generally nontransferable freely convertible shareforshare basis shares common stock company shareholder rights plan expires march 31 2006 shareholder right entitles shareholders buy 1100 share new series preference stock nortek exercise price 72 per share subject adjustments stock dividends splits similar events rights currently exercisable attached share common stock may redeemed directors 01 per share time shareholder acquires beneficial ownership 17 companys common stock special common stock rights trade separately become exercisable entitling rights holder acquire additional shares companys common stock market value equal twice amount exercise price right addition person group acquiring company commences tender offer announces intention acquire 30 companys common stock special common stock rights trade separately certain circumstances nortek inc subsidiaries notes consolidated financial statements continued permit rights holder acquire common stock acquiring company market value equal twice amount exercise price right december 31 1999 total 2506516 shares common stock reserved follows stock option plans 1666080 conversion ofspecial common stock 840436 2506516 december 31 1999 1662333 shares special common stock reserved stock option plans company several equity cash incentive plans provide granting options awards certain officers employees nonemployee directors company cash incentive program certain key employees 1999 equity cash incentive plan based performance companys stock price amounts paid cash incentive program options granted equity cash incentive plans vest periods ranging five years expire ten years date grant december 31 1999 164467 additional options available grant plans december 31 1999 1998 1997 approximately 1073759 652702 709762 respectively options acquire shares common special common stock exercisable nortek inc subsidiaries notes consolidated financial statements continued table follows summarizes common special common stock option transactions three years ended december 31 1999 weighted average number option price exercise shares per share price options outstanding december 31 1996 628800 2875 1569 1093 granted 435600 1950 2700 2298 exercised 71953 2875 1569 666 canceled 6667 2269 options outstanding december 31 1997 985780 2875 2700 1648 granted 382300 22938 31875 2323 exercised 350934 2875 22690 1063 canceled 10000 22690 2269 options outstanding december 31 1998 1007146 2875 31875 2103 granted 584300 2475 33063 2822 exercised 69833 2875 22938 1363 canceled 20000 20750 30375 2505 options outstanding december 31 1999 1501613 875 33063 2411 3747 options exercise price 875 weighted average remaining contractual life 4 years options exercisable 173849 options exercisable exercise price 1475 remaining contractual life 6 years 919117 options 709847 exercisable exercise prices 1950 2700 weighted average exercise price 2343 remaining contractual life 8 years remaining 404900 options 186316 exercisable exercise prices 29563 33063 weighted average exercise price 29814 remaining contractual life 9 years company accounts stock option plans apb opinion 25 compensation cost recognized since options granted exercise prices equal fair market value common stock date grant compensation cost plans determined consistent sfas 123 companys earnings continuing operations diluted earnings per share continuing operations would approximately 44800000 374 1999 approximately 31700000 286 1998 approximately 24100000 245 1997 respectively net earnings nortek inc subsidiaries notes consolidated financial statements continued diluted net earnings per share would approximately 44800000 374 1999 approximately 32700000 295 1998 approximately 19000000 192 1997 respectively weighted average grant date fair value options granted 1160 940 982 1999 1998 1997 respectively fair value option grant estimated date grant using blackscholes option pricing model following assumptions used 1999 1998 1997 riskfree interest rate 491 631 450 566 575 673 expected life 5 years 5 years 5 years expected volatility 36 37 expected dividend yeild 0 companys board directors authorized program purchase 500000 shares companys common special common stock open market negotiated transactions subject market conditions cash availability provisions companys outstanding debt instruments february 25 2000 company purchased approximately 377300 shares common special common stock approximately 10800000 program accounted share purchases treasury stock 7pension profit sharing post retirement benefits company subsidiaries various pension supplemental retirement plans certain officers profit sharing post retirement benefit plans requiring contributions qualified trusts union administered funds 1998 company assumed certain liabilities nutone concerning pension obligations post retirement obligations provide certain retirement medical life insurance benefits eligible retired employees certain active employees pension profit sharing expense charged operations aggregated approximately 12400000 1999 approximately 9800000 1998 approximately 6624000 1997 companys policy fund currently actuarially determined annual contribution various qualified defined benefit plans nortek inc subsidiaries notes consolidated financial statements continued table follows provides reconciliation benefit obligations plan assets funded status plans companys consolidated balance sheet december 31 1999 1998 pension benefits 1999 1998 amounts thousands change benefit obligation benefit obligation october 1 154850 56884 service cost 2289 2329 interest cost 10377 5594 amendments 755 851 curtailment gains 8976 actuarial loss excluding assumption changes 13482 4828 actuarial gain loss due assumption changes 13254 7593 obligations acquisition 81822 benefits expenses paid 9848 5051 benefit obligation september 30 149675 154850 change plan assets fair value plan assets october 1 114336 56842 actual return plan assets 15643 2980 plan assets acquisition 63118 employer contribution 1761 2407 benefits expenses paid 9848 5051 fair value plan assets september 30 121892 114336 nortek inc subsidiaries notes consolidated financial statements continued pension benefits 1999 1998 amounts thousands funded status statement financial position fair value plan assets september 30 121892 114336 benefit obligation september 30 149675 154850 funded status 27783 40514 amount contributed fourth quarter 513 335 unrecognized actuarial loss 5467 15896 unrecognized prior service cost 7163 7224 accrued benefit cost 14640 17059 amount recognized statement financial position consists prepaid benefit cost 7296 6130 b accrued benefit liability 33503 38111 c intangible asset 6021 6907 accumulated comprehensive loss 5546 8015 accrued benefit cost 14640 17059 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 106127000 97972000 67220000 respectively december 31 1999 109588000 102880000 66365000 respectively december 31 1998 plan assets include commingled funds marketable securities insurance contracts cash shortterm investments also december 31 1999 company recorded longterm restricted investments marketable securities assets accompanying consolidated balance sheet approximately 15700000 contributed trust available fund obligations included table relating supplemental retirement plans weighted average rate assumptions used determining pension costs projected benefit obligation follows years ended december 31 1999 1998 1997 discount rate 750 675 750 expected return plan assets 850 rate compensation increase 500 450 500 nortek inc subsidiaries notes consolidated financial statements continued companys net periodic benefit cost defined benefit plans 1999 1998 1997 consist following components years ended december 31 1999 1998 1997 amounts thousands service cost 2289 2329 597 interest cost 10377 5594 2979 expected return plan assets 9713 5135 2819 amortization prior service cost 816 217 636 recognized actuarial loss 939 311 93 net periodic benefit cost 4708 3316 1486 table follows provides reconciliation benefit obligations plan assets funded status post retirement health benefit plan companys consolidated balance sheet december 31 1999 1998 nonpension post retirement health benefits 1999 1998 amounts thousands change benefit obligation benefit obligation october 1 29561 obligations acquisition 29022 service cost 226 155 interest cost 1189 800 curtailment gain 13344 actuarial loss gain excluding assumption changes 734 384 actuarial loss due assumption changes 199 benefits expenses paid 1753 32 benefit obligation september 30 16812 29561 change plan assets fair value plan assets october 1 employer contribution 1753 32 benefits expenses paid 1753 32 fair value plan assets september 30 funded status statement financial position fair value plan assets september 30 benefit obligation september 30 16812 29561 funded status 16812 29561 amount contributed fourth quarter 466 339 unrecognized actuarial loss gain 548 384 accrued benefit cost 15798 29606 nortek inc subsidiaries notes consolidated financial statements continued companys net periodic benefit cost post retirement health benefit plan 1999 1998 consists following components years ended december 31 1999 1998 amounts thousands service cost 226 155 interest cost 1189 800 net periodic post retirement health benefit cost 1415 955 purposes calculating post retirement health benefit cost medical inflation rate 8 assumed 1999 rate assumed decrease gradually ultimate rate 5 2005 assumed health care cost trend rates significant effect amounts reported post retirement health benefit plan onepercentagepoint change assumed health care cost trend rate would following effect decrease trend 1 increase trend 1 amounts thousands effect total service interest cost components 154 188 effect post retirement benefit obligation 1888 2256 8 commitments contingencies company provides accruals direct costs associated estimated resolution contingencies earliest date deemed probable liability incurred amount liability reasonably estimated nortek inc subsidiaries notes consolidated financial statements continued december 31 1999 company subsidiaries obligated lease agreements rental certain real estate machinery equipment used operations minimum annual rental expense aggregates approximately 90924000 december 31 1999 obligations payable follows 2000 13444000 2001 10648000 2002 8553000 2003 7264000 2004 6346000 thereafter 44669000 certain lease agreements provide increased payments based changes consumer price index rental expense charged operations accompanying consolidated statement operations approximately 14800000 15000000 8700000 years ended december 31 1999 1998 1997 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes company subject contingencies including legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated subsidiary company defendant number lawsuits alleging damage caused alleged defects certain pressure treated wood products many suits resolved dismissal settlement amounts paid insurance proceeds third party recoveries subsidiary continues vigorously defend remaining suits certain defense indemnity costs paid insurance proceeds settlement suppliers material used production treated wood products nortek inc subsidiaries notes consolidated financial statements continued subsidiary engaged coverage litigation certain insurers settled coverage claims several insurers company believes remaining coverage disputes resolved satisfactory basis additional coverage available reaching belief company analyzed insurance coverage status coverage litigation considered history settlements primary excess insurers consulted counsel company recorded liabilities approximately 11048000 december 31 1999 estimated costs resolve outstanding matters company also recorded receivables december 31 1999 approximately 9803000 estimated recoveries deemed probable collection related insurance litigation matters discussed impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided material adverse effect consolidated financial position results operations company 9 discontinued operations fourth quarter 1997 company adopted plan disposition plumbing products business sold july 10 1998 approximately 33700000 cash following summary results discontinued operations two years ended december 31 1998 years ended december 31 1998 1997 amounts thousands net sales 50110 104467 loss income taxes 3800 5700 income tax benefit 5000 2100 earnings loss discontinued operations 1200 3600 reserve future operating expenses net income tax benefit 900000 1600 earnings loss discontinued operations 1200 5200 nortek inc subsidiaries notes consolidated financial statements continued loss discontinued operations income taxes includes allocation corporate interest expense approximately 1000000 1900000 1998 1997 respectively corporate interest allocated discontinued operations based ratio net assets discontinued operation sum total consolidated net assets company plus consolidated debt company debt discontinued operation assumed buyer debt directly attributed operations company income tax benefit 1998 includes approximately 800000 recorded result realization portion tax capital loss arising sale plumbing products business 10operating segment information concentration credit risk company diversified manufacturer residential commercial building products organized within three principal operating segments residential building products segment air conditioning heating products segment windows doors siding products segment individual subsidiary companies included companys three principal operating segments based similarity products production processes customers expected longterm financial performance subsidiary companies included particular operating segment tables includes corporate related items results insignificant operations intersegment eliminations certain income expense items allocated reportable segments operating results labeled businesses sold consist entities sold 1998 residential building products segment manufactures distributes builtin products primarily residential new construction doityourself diy professional remodeling renovation markets principal products sold segment include kitchen range hoods exhaust fans bath fans fan heater light combination units indoor air quality products bath cabinets radio intercoms central vacuum systems air conditioning heating products segment principally manufactures sells heating ventilating air conditioning hvac systems customdesigned commercial applications manufactured sitebuilt residential housing windows doors siding products segment principally manufactures distributes vinyl wood composite windows vinyl wood steel composite patio entry doors vinyl siding soffit skirting accessories aluminum trim coil siding columns accessories soffit skirting shutters sun nortek inc subsidiaries notes consolidated financial statements continued rooms vinyl fencing railings decking use residential construction diy professional renovation markets windows doors siding products segment purchased connection acquisition ply gem august 26 1997 accordingly information presented excludes results operations segment periods prior acquisition date accounting policies segments described note 1 summary significant accounting policies company evaluates segment performance based operating earnings allocations corporate overhead costs intersegment net sales material periods presented intersegment eliminations material periods presented income statement impact purchase accounting adjustments including goodwill intangible assets amortization reflected operating earnings applicable operating segment however corresponding purchase accounting balance sheet adjustments related goodwill intangible assets allocated individual operating segments unallocated assets consist primarily cash equivalents marketable securities net assets discontinued operations 1997 prepaid deferred income taxes goodwill intangible assets deferred debt expense long term restricted investments marketable securities tables follow exclude results operations plumbing products business sold 1998 accounted discontinued operation nortek inc subsidiaries notes consolidated financial statements continued summarized financial information companys reportable segments presented tables follow three years period ended december 31 1999 years ended december 31 1999 1998 1997 amounts thousands net sales residential building products 637815 475029 381750 air conditioning heating products 540575 465164 419368 windows doors siding products 738398 536781 189027 76032 69322 21322 1992820 1546296 1011467 businesses sold 192047 122662 consolidated net sales 1992820 1738343 1134129 operating earnings loss residential building products 94704 53674 40287 air conditioning heating products 66958 55729 41267 windows doors siding products 37207 31492 8991 net 20351 14157 14428 178518 126738 76117 businesses sold 6390 6864 consolidated operating earnings 178518 133128 82981 unallocated gain businesses sold 4000 interest expense 96490 86298 50210 investment income 7972 10470 9929 earnings continuing operations provision income taxes 90000 61300 42700 nortek inc subsidiaries notes consolidated financial statements continued years ended december 31 1999 1998 1997 amounts thousands segment assets residential building products 273371 252533 172686 air conditioning heating products 198360 164710 132772 windows doors siding products 311668 242014 203902 31639 17029 27546 815038 676286 536906 businesses sold 86205 total segment assets 815038 676286 623111 unallocated cash equivalents marketable securities 126352 223451 168178 goodwill intangible assets 722572 672264 386984 prepaid deferred income taxes 66824 54163 56822 assets 78898 63829 69451 consolidated assets 1809684 1689993 1304546 years ended december 31 1999 1998 1997 amounts thousands depreciation amortization expense residential building products 20584 14641 10980 air conditioning heating products 10625 8920 8412 windows doors siding products 22677 15614 5414 1646 1222 525 55532 40397 25331 businesses sold 1687 1365 consolidated depreciation amortization expense 55532 42084 26696 capital expenditures residential building products 10840 8638 6361 air conditioning heating products 10814 20665 10724 windows doors siding products 18917 9809 3244 1442 536 314 42013 39648 20643 businesses sold 1215 1821 consolidated capital expenditures 42013 40863 22464 nortek inc subsidiaries notes consolidated financial statements continued foreign net sales approximately 9 8 11 consolidated net sales years ended december 31 1999 1998 1997 respectively foreign long lived assets approximately 7 6 9 consolidated long lived assets years ended december 31 1999 1998 1997 respectively foreign net sales attributed based location companys subsidiary responsible sale required long lived assets exclude financial instruments deferred income taxes single customer accounts 10 consolidated net sales company operates internationally exposed market risks changes foreign exchange rates financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising companys customer base dispersion across many different geographical regions december 31 1999 company significant concentrations credit risk 11net gain loss marketable securities december 31 1999 increase companys stockholders investment gross unrealized gains approximately 125000 december 31 1998 1997 reduction companys stockholders investment gross unrealized losses approximately 45000 110000 respectively company unrestricted marketable securities approximately 34219000 december 31 1999 consisting certificates deposit bank issued money market instruments mature within one year nortek inc subsidiaries notes consolidated financial statements continued 12 accrued expenses taxes net accrued expenses taxes net consist following december 31 1999 1998 december 31 1999 1998 amounts thousands insurance 31021 28658 employee compensation benefits 47004 48094 interest 29213 29231 product warranty 19423 13962 sales marketing 21617 19435 employee termination costs 2865 2666 net 38821 55039 189964 197085 company recorded liabilities connection acquisitions occurred 1997 1998 1999 related employee terminations exit costs associated managements plans eliminate certain activities acquired entities managements plans eliminating certain ply gem activities completed 1998 relate principally elimination ply gems corporate headquarters consolidation certain duplicate ply gem corporate functions accounting legal risk management company finalization managements initial plans relative ply gem acquisition resulted decreases approximately 2700000 initial liabilities recorded 1997 decreases identified within one year acquisition date accordingly recorded adjustments purchase price allocation ply gem acquisition company recorded liabilities approximately 5200000 1900000 years ended december 31 1999 1998 respectively 1998 1999 acquisitions principally related termination certain employees closing certain facilities acquired businesses december 31 1999 plans eliminating certain activities finalized significant acquisitions exception certain severence arrangements company estimates approximately 1000000 finalized first half 2000 nortek inc subsidiaries notes consolidated financial statements continued charges liabilities employee termination include payroll taxes insurance benefits related severance packages approximately 3600000 5300000 1700000 years ended december 31 1999 1998 1997 respectively charges liabilities exit costs relate principally lease costs closing facilities legal consulting fees incurred due implementation companys exit strategies charges liabilities exit costs approximately 1400000 400000 years ended december 31 1999 1998 1997 respectively addition 1999 company expensed accompanying consolidated statement operations approximately 3400000 costs related integration activities nutone companys operations nortek inc subsidiaries notes consolidated financial statements continued 13summarized quarterly financial data unaudited tables follow summarize unaudited quarterly financial data years ended december 31 1999 december 31 1998 quarters ended april 3 july 3 october 2 december 31 thousands except per share amounts net sales 406700 544088 553493 488539 gross profit 109784 159117 157479 133311 earnings continuing operations 3500 19800 20600 5400 earnings per share continuing operations basic 30 167 174 46 diluted 29 164 170 46 net earnings 3500 19800 20600 5400 net earnings per share basic 30 167 174 46 diluted 29 164 170 46 quarters ended april 4 july 4 october 3 december 31 thousands except per share amounts net sales 392468 449647 458193 438035 gross profit 98148 116141 127001 121703 earnings continuing operations 1300 8500 13300 10900 earnings per share continuing operations basic 14 79 113 93 diluted 13 78 111 92 net earnings 1300 8500 13800 11400 net earnings per share basic 14 79 117 97 diluted 13 78 115 96 report independent public accountants nortek inc audited accompanying consolidated balance sheets nortek inc delaware corporation subsidiaries listed item 14a1 form 10k december 31 1999 1998 related consolidated statements operations stockholders investment cash flows three years period ended december 31 1999 financial statements schedules referred responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position nortek inc subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states audit made purpose forming opinion basic financial statements taken whole schedules listed item 14a2 presented purposes complying securities exchange commissions rules part basic financial statements schedules subjected auditing procedures applied audit basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp sarthur andersen llp boston massachusetts march 8 2000 nortek inc parent company schedule condensed financial information registrant condensed balance sheet december 31 1999 1998 amounts thousands assets current assets unrestricted cash investments cost approximates market 21681 60238 marketable securities cost approximates market 29225 86736 restricted cash investments cost approximates market 8303 10801 marketable securities cost approximates market 1107 2796 notes accounts receivable net 2674 3435 prepaid expenses current assets 491 197 prepaid income taxes 5700 6200 total current assets 69181 170403 property equipment cost 1515 1708 lessaccumulated depreciation 1179 1350 total property equipment net 336 358 investments assets net intercompany balance investment subsidiaries 1083695 955987 deferred debt expense net 21184 23843 restricted investments marketable securities 15236 32801 25787 1152916 1005617 1222433 1176378 accompanying notes integral part financial statements nortek inc parent company schedule condensed financial information registrant condensed balance sheet continued december 31 1999 1998 amounts thousands liabilities stockholders investment current liabilities accounts payable 1041 1340 accrued expenses taxes 34830 45319 total current liabilities 35871 46659 liabilities deferred income taxes 5200 3500 17414 13735 22614 17235 senior notes 691397 691087 senior subordinated notes 203946 203787 longterm debt 8788 commitments contingencies note 2 stockholders investment preference stock 1 per value authorized 7000000 shares none issued common stock 1 par value authorized 40000000 shares 18738292 18427595 shares issued 18738 18428 special common stock 1 par value authorized 5000000 shares 840436 854935 shares issued 841 855 additional paidin capital 208755 201626 retained earnings 143266 93966 accumulated comprehensive loss 11822 11596 lesstreasury common stock cost 7793217 7290335 shares 97894 83711 treasury special common stock cost 290054 286009 shares 2067 1958 total stockholders investment 259817 217610 1222433 1176378 accompanying notes integral part financial statements nortek inc parent company schedule condensed financial information registrant condensed statement operations years ended december 31 1999 1998 1997 thousands except per share amounts revenues charges allocations subsidiaries 73307 75208 34498 gain sale businesses 4000 investment income 5441 8777 9273 income 508 556 518 total revenues 79256 88541 44289 expenses selling general administrative expense 21885 15030 13605 interest expense 87326 75922 43921 expense 1149 679 784 total expenses 110360 91631 58310 loss continuing operations equity subsidiaries earnings 31104 3090 14021 equity subsidiaries earnings provision income taxes 121104 64390 56721 earnings continuing operations provision income taxes 90000 61300 42700 provision income taxes 40700 27300 16300 earnings continuing operations extraordinary loss 49300 34000 26400 earnings loss discontinued operations 1200 5200 extraordinary loss debt retirements 200 net earnings 49300 35000 21200 earnings loss per share earnings per share continuing operations basic 419 311 275 diluted 411 306 268 earnings loss discontinued operations basic 11 054 diluted 11 053 extraordinary loss debt retirements basic 02 diluted 02 net earnings basic 419 320 221 diluted 411 315 215 weighted average number shares basic 11763 10923 9605 diluted 11982 11113 9855 accompanying notes integral part financial statements nortek inc parent company schedule condensed financial information registrant condensed statement cash flows years ended december 31 1999 1998 1997 amounts thousands cash flows operating activities earnings continuing operations 49300 34000 26400 net earnings loss discontinued operations 1200 5200 extraordinary loss debt retirements 200 net earnings 49300 35000 21200 adjustments reconcile net earnings cash depreciation amortization expense 446 117 139 noncash interest expense net 3253 2856 1421 gain sale businesses sold 4000 loss discontinued operations 3800 2500 loss debt retirement 300 equity subsidiaries earnings provision income taxes 121104 64390 56721 charges allocations subsidiaries 73307 75208 34498 net transfers subsidiaries principally cash 112916 97905 57034 net gain sale investments marketable securities 200 deferred federal income tax provision 17100 15100 4000 deferred federal income tax benefit discontinued operations 3200 1000 changes certain assets liabilities net effects acquisitions dispositions notes accounts receivable current assets 3080 2672 994 assets 1844 1034 2877 net assets discontinued operations 7426 4934 accrued expenses taxes 11787 13558 4491 longterm liabilities 691 1243 4832 net 317 948 277 total adjustments net earnings 76399 24589 16662 net cash used provided operating activities 27099 10411 4538 nortek inc parent company schedule condensed financial information registrant condensed statement cash flows continued years ended december 31 1999 1998 1997 cash flows investing activities capital expenditures 135 65 70 purchases investments marketable securities 84596 124986 283918 proceeds sale investments marketable securities 142794 75255 297133 proceeds either received directly subsidiaries relating businesses sold discontinued 61162 cash contributed subsidiaries businesses acquired 44737 294040 407419 change restricted cash investments marketable securities 8115 7234 828 net 2802 56 4188 net cash provided used investing activities 2409 289964 399290 cash flows financing activities sale notes net 203492 466214 purchase notes 13678 sale nortek common stock 64190 purchase nortek common special common stock 14524 7668 10177 net 657 1811 385 net cash used provided financing activities 13867 248147 456422 net decrease increase unrestricted cash investments 38557 31406 61670 unrestricted cash investments beginning year 60238 91644 29974 unrestricted cash investments end year 21681 60238 91644 interest paid indebtedness 83947 65599 29581 net income taxes paid including paid subsidiaries 25500 4568 7977 accompanying notes integral part financial statements nortek inc parent company schedule condensed financial information registrant notes condensed financial statements 1 accompanying condensed financial statements nortek inc registrant prepared accordance reduced disclosure requirements permitted form 10k part iv item 14 schedule condensed financial information registrant consolidated financial statements related notes nortek inc subsidiaries included elsewhere herein form 10k part ii item 8and incorporated herein reference certain 1998 1997 amounts reclassified conform 1999 presentation 2 descriptions material contingencies significant provisions longterm debt obligations commitments registrant included notes 5 8 notes nortek inc subsidiaries consolidated financial statements incorporated herein reference following summary maturities longterm debt registrants debt obligations excluding unamortized discount december 31 1999 amounts thousands 2000 2001 5000 2002 2003 2004 208610 thereafter 695000 3 registrants net investment subsidiaries net cumulative amount intercompany cash transfers transactions 4 included registrants condensed statement cash flows years ended december 31 1999 1997 net transfers subsidiaries principally cash dividends declared subsidiaries board directors subsidiaries 250000000 70000000 respectivelythere dividends declared 1998 5 certain registrants subsidiaries entered financing agreements contain various restrictive covenants place limitations amount distributions advances registrant december 31 1999 approximately 397693000 approximately 300555000 goodwill subsidiary net assets principally ply gem subsidiaries restricted approximately 94477000 principal amount subsidiary indebtedness outstanding financing agreements nortek inc subsidiarie schedule ii valuation qualifying accounts amounts written net recoveries b businesses sold c nortek inc subsidiaries exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangement 31 restated certificate incorporation nortek inc exhibit 2 form 8k filed april 23 1987 file 16112 32 amendment restated certificate incorporation nortek inc effective may 10 1989 exhibit 32 form 10k filed march 30 1990 file 16112 33 bylaws nortek inc amended september 19 1996 exhibit 33 form 10q filed november 5 1996 file 16112 34 amendment bylaws nortek inc exhibit 31 form 8k filed april 23 1999 file 16112 41 second amended restated rights agreement dated april 1 1996 company state street bank trust company rights agent exhibit 1 form 8k filed april 2 1996 file 16112 42 indenture dated february 14 1994 company state street bank trust company trustee relating 9 78 senior subordinated notes due 2004 exhibit 45 form 10k filed march 25 1994 file 16112 43 indenture dated march 17 1997 company state street bank trust company trustee relating 925 series b senior notes due march 15 2007 exhibit 42 registration statement 33325505 filed april 18 1997 44 indenture dated august 26 1997 company state street bank trust company trustee relating 9 18 series b senior notes due september 1 2007 exhibit 41 registration statement 33336711 filed september 30 1997 45 indenture dated july 31 1998 company state street bank trust company trustee relating 8 78 series b senior notes due august 1 2008 exhibit 41 registration statement 33364731 filed september 30 1998 101 employment agreement richard l bready company dated january 1 1984 exhibit 102 form 10k filed march 31 1986 file 16112 102 amendment dated march 3 1988 employment agreement richard l bready company dated january 1 1984 exhibit 192 form 10q filed may 17 1988 file 16112 103 second amendment dated november 1 1990 employment agreement richard l bready company dated january 1 1984 exhibit 103 form 10k filed april 1 1991 file 16112 104 employment agreement richard l bready company dated february 26 1997 exhibit 103 form 10q filed may 12 1997 file 16112 105 amendment 1 dated june 13 1997 employment agreement richard l bready company dated february 26 1997 exhibit 102 form 10q filed august 8 1997 file 16112 106 amendment 2 dated june 30 1998 employment agreement richard l bready company dated february 26 1997 exhibit 101 form 10qa filed december 1 1998 file 16112 107 deferred compensation agreement dated march 7 1983 richard l bready company exhibit 104 registration statement 3369778 filed february 9 1994 108 deferred compensation agreement dated march 7 1983 almon c hall company exhibit 105 registration statement 3369778 filed february 9 1994 109 deferred compensation agreement dated march 7 1983 richard j harris company exhibit 106 registration statement 3369778 filed february 9 1994 1010 1984 stock option plan amended may 27 1987 exhibit 282 registration statement 3322527 filed june 15 1988 1011 change control severance benefit plan key employees adopted february 10 1986 form agreement employees exhibit 1019 form 10k filed march 31 1986 file 16112 1012 change control severance benefit plan key employees amended restated june 12 1997 form agreement employees exhibit 101 form 10q filed august 8 1997 file 16112 1013 1987 stock option plan exhibit 283 registration statement 3322527 filed june 15 1988 1014 1997 equity cash incentive plan exhibit 101 form 10q filed may 12 1997 file 16112 1015 1997 stock option plan directors exhibit 102 form 10q filed may 12 1997 file 16112 1016 1998 equity cash incentive plan exhibit 101 form 10q filed august 18 1998 file 16112 1017 1999 equity cash incentive plan exhibit 41 registration statement 33376345 filed may 28 1999 1018 nortek inc supplemental executive retirement plan dated july 1 1997 exhibit 103 form 10q filed august 8 1997 file 16112 1019 first amendment dated july 1 1997 nortek inc supplemental executive retirement plan dated july 1 1997 exhibit 104 form 10q filed august 8 1997 file 16112 1020 form indemnification agreement company directors certain officers appendix c proxy statement dated march 23 1987 annual meeting nortek stockholders file 16112 1021 1999 equity performance plan approved july 1 1999 1022 second amended restated credit agreement dated august 26 1997 restated december 30 1998 among ply gem industries inc fleet national bank agent banks signatory thereto exhibit 1019 form 10k filed march 30 1999 file 16112 1023 first amendment dated april 22 1999 second amended restated credit agreement dated august 26 1997 restated december 30 1998 among ply gem industries inc fleet national bank agent banks signatory thereto 1024 second amendment dated september 9 1999 second amended restated credit agreement dated august 26 1997 restated december 30 1998 among ply gem industries inc fleet national bank agent banks signatory thereto 211 list subsidiaries 231 consent independent public accountants 271 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k financial statements schedules following documents filed part report b reports form 8k reports form 8k filed registrant last quarter period covered report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 16 2001 nortek inc richard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 16 2001 richard l bready j peter lyons richard l bready chairman j peter lyons board president director principal executive officer richard j harris william kelly richard j harris vice president william kelly treasurer principal financial director officer director almon c hall phillip l cohen almon c hall vice president phillip l cohen controller principal director accounting officer consolidated statement operations accompanying notes integral part consolidated financial statements consolidated balance sheet accompanying notes integral part consolidated financial statements consolidated statement cash flows accompanying notes integral part consolidated financial statements consolidated statement stockholders investment year ended december 31 1998 dollar amounts thousands accompanying notes integral part consolidated financial statements consolidated statement stockholders investment year ended december 31 1999 dollar amounts thousands accompanying notes integral part consolidated financial statements consolidated statement stockholders investment year ended december 31 2000 dollar amounts thousands accompanying notes integral part consolidated financial statements nortekinc subsidiaries notes consolidated financial statements december 312000 1 summary significant accounting policies company diversified manufacturer residential commercial building products operating within three principal segments residential building products segment air conditioning heating products segment windows doors siding products segment principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets principles consolidation consolidated financial statements include accounts nortek inc significant whollyowned subsidiaries company nortek elimination intercompany accounts transactions certain amounts prior years consolidated financial statements reclassified conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles involves estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts income expense reporting periods actual results could vary amounts derived estimates assumptions cash investments marketable securities cash equivalents consist shortterm highly liquid investments original maturities three months less readily convertible cash company unrestricted marketable securities approximately 8042000 34219000 december 31 2000 1999 respectively consisting certificates deposit bank issued money market instruments mature within one year company classified restricted accompanying consolidated balance sheet certain investments marketable securities fully available use operations december 31 2000 approximately 43305000 10869000 included current assets cash investments marketable securities pledged collateral held pension trusts insurance employee benefits requirements see note 7 disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents carrying amount approximates fair value short maturity instruments investments marketable securities fair value investments marketable securities based quoted market prices fair value investments marketable securities approximated amount companys consolidated balance sheet longterm debt december 31 2000 fair value longterm indebtedness approximately 84000000 lower amount companys consolidated balance sheet original issue discount based market quotations see note 5 inventories accompanying consolidated balance sheet valued lower cost market december 31 2000 1999 approximately 110157000 111349000 total inventories respectively valued lastin firstout method lifo firstin firstout method fifo accounting inventories would approximately 2593000 2252000 greater december 31 2000 1999 respectively inventories valued fifo method recognition sales related costs incentives allowances company primarily recognizes sales upon shipment products net applicable provisions discounts allowances company also provides estimate warranty bad debts time sale shipping costs included cost products sold securities exchange commission released staff accounting bulletin sab 101 revenue recognition financial statements december 3 1999 sab provides additional guidance accounting revenue recognition including broad conceptual discussions well certain industryspecific guidance application guidance material effect companys consolidated financial statements financial accounting standards boards emerging issues task force reached final consensus 2000 respect accounting shipping handling fees costs accounting certain sales incentives result company reclassified certain amounts among net sales cost products sold selling general administrative expenses accordance pronouncements periods presented accompanying consolidated financial statements reclassifications effect operating earnings net earnings net earnings per share period presented foreign currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency company translates assets liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using average exchange rates effect year gains losses foreign currency translation credited charged accumulated comprehensive loss included stockholders investment accompanying consolidated balance sheet transaction gains losses recorded selling general administrative expense material years ending december 31 2000 1999 1998 depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost related accumulated depreciation eliminated resulting gain loss recognized intangible assets goodwill intangible assets consist principally patents trademarks copyrights noncompete agreements amortized straightline method weighted average estimated useful life 20 years amortization intangible assets charged operations amounted approximately 6586000 4906000 2026000 2000 1999 1998 respectively company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions goodwill amortized straightline method 40 years amortization goodwill charged operations amounted approximately 16505000 15593000 12390000 2000 1999 1998 respectively balance sheet date accordance sfas 121 accounting long lived assets long lived assets disposed company evaluates realizability long lived assets primarily consists property plant equipment intangible assets goodwill based expectations nondiscounted future cash flows subsidiary material amount long lived assets sum expected nondiscounted future cash flows less carrying amount assets including long lived assets company would recognize impairment loss based recent analysis company believes material impairment long lived assets exists december 31 2000 earnings per share basic earnings per share amounts computed using weighted average number common equivalent shares outstanding year special common stock treated equivalent common stock determining earnings per share results diluted earnings per share amounts computed using weighted average number common equivalent shares dilutive potential common special common shares outstanding year reconciliation basic diluted earnings per share follows comprehensive income loss comprehensive income loss includes net earnings unrealized gains losses currency translation marketable securities available sale minimum pension liability adjustments net tax attributes components companys comprehensive income loss effect earnings three years ended december 31 2000 detailed companys accompanying consolidated statement stockholders investment balances classification net tax attributes within accumulated comprehensive loss december 31 2000 1999 1998 follows derivative instruments hedging activities june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities amended 1999 sfas 137 accounting derivative instruments hedging activities deferral effective date sfas 133 amendment sfas 133 amended june 2000 sfas 138 accounting certain derivative instruments certain hedging activities amendment sfas 133 combined sfas no133 sfas no133 establishes accounting reporting standards requiring every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas no133 requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivatives gains losses offset related results hedged item income statement requires company must formally document designate assess effectiveness transactions receive hedge accounting sfas 133 effective fiscal years beginning june 15 2000 sfas 133 must applied derivative instruments b certain derivative instruments embedded hybrid contracts issued acquired substantively modified december 31 1997 companys election january 1 1998 effective january 1 2001 company adopt sfas 133 adoption statement material companys consolidated financial statements 2 acquisitions businesses sold acquisitions accounted purchases accordingly included companys consolidated results operations since acquisition date purchase price allocations subject refinement pertinent information regarding acquisitions obtained july 3 2000 company acquired eatonwilliams holdings limited eatonwilliams edenbridge england eatonwilliams designs manufactures installs services custommade standard air conditioning humidification equipment fiscal year ended april 2 2000 eatonwilliams reported sales approximately 41000000 unaudited march 8 1999 company acquired webco inc webco designer manufacturer custom air handling equipment industrial institutional commercial customers fiscal year ended october 31 1998 webco net sales approximately 13900000 unaudited april 23 1999 company completed acquisition three businesses caradon plc united kingdom peachtree doors windows thermalgard cwd windows doors caradon acquired companies peachtree doors windows national supplier residential windows entry doors patio doors targets custom highend home markets thermalgard manufactures replacement windows patio doors sunrooms cwd windows doors provider complete window door systems new homes western canada year ended december 31 1998 caradon acquired companies combined net sales approximately 169700000 unaudited may 28 1999 company acquired multiplex technologies inc multiplex manufacturer designer highperformance multiroom video distribution equipment home automation home entertainment multiplex net sales approximately 10000000 unaudited year ended december 31 1998 september 9 1999 company acquired kroy building products inc kroy manufacturer vinyl fencing railing profiles vinyl decking systems residential light commercial applications kroy net sales approximately 26000000 unaudited fiscal year ended june 30 1999 december 3 1999 company acquired xantech corporation xantech designer manufacturer residential infrared remote control systems extending control vcr cable satellite stereo systems multiple rooms throughout entire household xantech net sales approximately 13000000 unaudited fiscal year ended november 30 1999 acquisitions funded use unrestricted cash equivalents marketable securities issuance notes payable sellers issuance 235000 shares nortek common stock october 9 1998 company acquired napco inc affiliate napco approximately 80800000 cash assumption approximately 10200000 debt july 31 1998 company whollyowned subsidiary purchased issued outstanding capital stock nutone inc nutone whollyowned subsidiary williams plc williams aggregate purchase price approximately 242500000 cash plus approximately 5500000 expenses fees connection acquisition company assumed nutones operating liabilities intercompany borrowings including certain liabilities nutone concerning post retirement benefit obligations purchase price funded use net proceeds sale 210000000 principal amount 8 78 senior notes due august 1 2008 8 78 notes slight discount occurred july 31 1998 together approximately 44800000 cash proceeds received common stock offering see notes 5 6 date nutone acquisition company achieved cost reductions directly attributable acquisition elimination fees charges paid nutone williams related entities unaudited pro forma operating earnings increased year ended december 31 1998 approximately 354000 fees charges approximate unaudited pro forma net sales operating earnings depreciation amortization expense amortization deferred debt expense debt discount earnings continuing operations diluted earnings per share company year ended december 31 1998 approximately 1849000000 142500000 47400000 31400000 263 respectively gives pro forma effect acquisition nutone sale 8 78 notes common stock offering reflects estimated cost reductions directly attributable nutone acquisition described transactions adjustments occurred january 1 1998 pro forma results include actual results nutone since july 31 1998 accordance purchase method accounting acquisition pro forma results give pro forma effect dispositions businesses occurred 1998 acquisition napco occurred october 9 1998 acquisitions 1999 2000 computing pro forma earnings reduced net interest income aggregate cash portion purchase price acquisition nutone historical rate earned company interest expense indebtedness incurred connection acquisition earnings reduced amortization goodwill intangible assets reflect net adjustments depreciation expense result increase estimated fair market value property equipment changes depreciable lives interest expense included 8 78 notes applicable coupon rate plus amortization deferred debt expense debt discount net tax effect pro forma information presented purport indicative results would reported transactions occurred january 1 1998 may reported future 1998 company made several dispositions certain nonstrategic assets december 30 1998 company sold ms systems lp ms subsidiary mooreomatic inc mom approximately 27500000 cash recorded pretax gain approximately 4000000 12 per share net tax year ended december 31 1998 combined net sales operating earnings continuing operations provision income taxes ms mom approximately 41900000 3600000 respectively may 8 1998 company sold studley products inc studley may 22 1998 company sold sagebrush sales inc sagebrush approximately 9100000 cash july 2 1998 company sold goldenberg group inc approximately 11100000 including approximately 2000000 notes july 31 1998 company sold ply gem manufacturing december 10 1998 company sold allied plywood corporation allied approximately 16500000 cash approximately 7000000 notes operating results sagebrush goldenberg ply gem manufacturing allied included companys 1998 consolidated results january 1 1998 date sale combined net sales operating earnings provision income taxes dispositions approximately 143700000 2200000 respectively period january 1 1998 date sale disposition four businesses result significant gains losses approximately 27700000 proceeds sale four businesses used pay debt remaining proceeds including proceeds sale discontinued plumbing products business studley ms mom approximately 84000000 used general corporate purposes see notes 9 10 3 cash flows interest paid 93562000 92592000 78988000 2000 1999 1998 respectively fair value assets businesses acquired 27010000 192719000 436074000 2000 1999 1998 respectively liabilities assumed created businesses acquired 16961000 60616000 111372000 2000 1999 1998 respectively 1999 235000 shares nortek common stock issued partial consideration acquisition net cash paid acquisitions 10049000 125788000 324702000 2000 1999 1998 respectively significant noncash financing investing activities excluded accompanying consolidated statement cash flows include capitalized lease additions approximately 5701000 2000 445000 1999 565000 1998 decline approximately 106000 increases approximately 170000 65000 fair market value marketable securities available sale 2000 1999 1998 respectively 4 income taxes following summary components earnings continuing operations provision income taxes following summary provision income taxes continuing operations included accompanying consolidated statement operations income tax payments net refunds approximately 19279000 25500000 4568000 2000 1999 1998 respectively provision income taxes 1998 reflect tax benefits approximately 2000000 exercise nonqualified stock options benefits recorded increase additional paidin capital table follows reconciles federal statutory income tax rate continuing operations effective tax rate earnings approximately 450 452 445 2000 1999 1998 respectively tax effect temporary differences give rise significant portions deferred income tax assets liabilities december 31 2000 december 31 1999 follows december 31 2000 companys wholly owned subsidiary ply gem net operating loss carryforward approximately 3800000 expires 2011 subject certain limitations imposed internal revenue code company established valuation allowances related certain capital losses total valuation allowance approximately 1900000 reduce goodwill tax benefit ultimately realized december 31 2000 cumulative unremitted foreign earnings approximately 8000000 invested indefinitely accordingly us income taxes provided earnings 5 notes mortgage notes obligations payable shortterm bank obligations december 31 2000 1999 consist following shortterm bank obligations secured approximately 54869000 accounts receivable inventory assets average weighted interest rate approximately 73 december 31 2000 notes mortgage notes obligations payable included accompanying consolidated balance sheet december 31 2000 1999 consist following july 31 1998 company sold 210000000 8 78 notes discount approximately 754000 amortized life issue net proceeds sale 8 78 notes deducting underwriting commissions expenses amounted approximately 203492000 company used portion net proceeds together approximately 44800000 cash proceeds received common stock offering purchase nutone see notes 2 6 indentures agreements governing company subsidiaries indebtedness including indentures 8 78 notes 9 18 notes 9 14 notes collectively senior notes 9 78 notes credit agreement covering ply gem credit facility contain restrictive financial operating covenants including covenants restrict among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indentures agreements upon certain asset sales defined indentures company required offer purchase 100 principal amount plus accrued interest date purchase senior notes principal amount equal net cash proceeds defined indentures invested properties assets used primarily related business owned operated company issue date senior notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indentures february 28 2001 approximately 100900000 available payment cash dividends stock payments restricted payments terms companys restrictive indenture governing senior subordinated notes see note 6 companys ply gem subsidiary credit facility syndicate banks provides ply gem term loan letter credit facility matures august 26 2002 interest borrowings varying rates based ply gems option london interbank offered rate libor plus spread b higher 5 federal funds rate ii banks prime rate ply gem pays facility fee quarterly fluctuates 20 30 aggregate principal amount available facility average weighted interest rate credit facility year ended december 31 2000 69 credit facility includes customary covenants including covenants limiting ply gems ability pledge assets incur liens assets maintain certain financial covenants borrowings credit facility collateralized common stock inventory accounts receivable ply gems principal subsidiaries 1999 company ply gem subsidiary entered 45000000 interest rate collar transaction lock interest rate floor 576 cap 7 collar terminate august 27 2002 termination date extent one month us dollar libor rate collar floor payment due ply gem difference extent one month us dollar libor rate collar cap ply gem entitled receive difference one month us dollar libor rate december 31 2000 6565 amounts received paid result collar agreement increase reduce interest expense fair market value liability related interest rate collar approximately 300000 december 31 2000 mortgage notes payable approximately 24098000 outstanding december 31 2000 include various mortgage notes related indebtedness payable installments 2014 notes bear interest rates ranging 2 925 collateralized property equipment aggregate net book value approximately 63190000 december 31 2000 obligations approximately 36332000 outstanding december 31 2000 include borrowings relating equipment purchases notes payable issued acquisitions borrowings bearing interest rates primarily ranging 29 12 maturing various dates 2017 approximately 23467000 indebtedness collateralized property equipment aggregate net book value approximately 24791000 december 31 2000 table follows summary maturities companys debt obligations excluding unamortized debt discount due december 31 2001 6 common stock special common stock options deferred compensation first half 1998 company sold 2182500 shares common stock public offering approximately 64190000 net cash proceeds common stock offering deducting underwriting commissions offering expenses portion net proceeds used acquire nutone see note 2 share special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting remaining 75 elected combined vote classes shares special common stock generally nontransferable freely convertible shareforshare basis shares common stock company shareholder rights plan expires march 31 2006 shareholder right entitles shareholders buy 1100 share new series preference stock nortek exercise price 72 per share subject adjustments stock dividends splits similar events rights currently exercisable attached share common stock may redeemed directors 01 per share time shareholder acquires beneficial ownership 17 companys common stock special common stock rights trade separately become exercisable entitling rights holder acquire additional shares companys common stock market value equal twice amount exercise price right addition person group acquiring company commences tender offer announces intention acquire 30 companys common stock special common stock rights trade separately certain circumstances permit rights holder acquire common stock acquiring company market value equal twice amount exercise price right december 31 2000 total 3061834 shares common stock reserved follows stock option plans 2234330 conversion special common stock 827504 december 31 2000 2192083 shares special common stock reserved stock option plans company several equity cash incentive plans provide granting options awards certain officers employees nonemployee directors company cash incentive program certain key employees 2000 equity cash incentive plan based performance companys stock price amounts paid cash incentive program options granted equity cash incentive plans vest periods ranging five years expire ten years date grant december 31 2000 193667 additional options available grant plans december 31 2000 1999 1998 1789257 1073759 652702 respectively options acquire shares common special common stock exercisable table follows summarizes common special common stock option transactions three years ended december 31 2000 2247 options exercisable exercise price 875 weighted average remaining contractual life 3 years 173849 options exercisable exercise price 1475 remaining contractual life 5 years 1471367 options 1236928 exercisable exercise prices ranging 1950 2700 weighted average exercise price 2271 remaining contractual life ranging 6 9 years remaining 393200 options 376233 exercisable exercise prices ranging 2956 3306 weighted average exercise price 2982 remaining contractual life ranging 7 9 years company accounts stock options granted employees pursuant provisions apb opinion 25 compensation cost recognized since options granted exercise prices equal fair market value common stock date grant compensation cost options granted plans determined consistent sfas 123 companys earnings continuing operations diluted earnings per share continuing operations would approximately 37300000 331 2000 approximately 44800000 374 1999 approximately 31700000 286 1998 respectively net earnings diluted net earnings per share would approximately 37300000 331 2000 approximately 44800000 374 1999 approximately 32700000 295 1998 respectively weighted average fair value options grant date 978 1160 940 2000 1999 1998 respectively fair value option grant estimated date grant using blackscholes option pricing model following assumptions used companys board directors authorized number programs purchase shares companys common special common stock recent programs announced may 4 2000 purchase 1000000 shares companys common special common stock open market negotiated transactions subject market conditions cash availability provisions companys outstanding debt instruments february 28 2001 company purchased approximately 460700 shares common special common stock approximately 9200000 program accounted share purchases treasury stock 7 pension profit sharing post retirement benefits company subsidiaries various pension supplemental retirement plans certain officers profit sharing post retirement benefit plans requiring contributions qualified trusts union administered funds 1998 company assumed certain liabilities nutone concerning pension obligations post retirement obligations provide certain retirement medical life insurance benefits eligible retired employees certain active employees pension profit sharing expense charged operations aggregated approximately 15600000 2000 approximately 12400000 1999 approximately 9800000 1998 companys policy fund currently actuarially determined annual contribution various qualified defined benefit plans table follows provides reconciliation benefit obligations plan assets funded status plans companys accompanying consolidated balance sheet december 31 2000 1999 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 133413000 130448000 87379000 respectively december 31 2000 106127000 97972000 67220000 respectively december 31 1999 plan assets include commingled funds marketable securities insurance contracts cash shortterm investments december 31 2000 1999 company recorded longterm restricted investments marketable securities held pension trusts accompanying consolidated balance sheet approximately 32400000 15700000 respectively contributed trusts available fund obligations included table relating supplemental retirement plans 2000 one trusts related companys supplemental retirement plans loaned funds certain officers company fully vested retirement benefits plans december 31 2000 approximately 13400000 notes receivable officers bearing interest 675 maturing 2015 included restricted investments marketable securities held pension trusts accompanying consolidated balance sheet weighted average rate assumptions used determining pension costs projected benefit obligation follows companys net periodic benefit cost defined benefit plans 2000 1999 1998 consist following components table follows provides reconciliation benefit obligations plan assets funded status post retirement health benefit plan companys accompanying consolidated balance sheet december 31 2000 1999 companys net periodic benefit cost post retirement health benefit plan 2000 1999 1998 consists following components purposes calculating post retirement health benefit cost medical inflation rate 85 assumed 2000 rate assumed decrease gradually ultimate rate 55 2005 assumed health care cost trend rates significant effect amounts reported post retirement health benefit plan onepercentagepoint change assumed health care cost trend rate would following effect 8 commitments contingencies company provides accruals direct costs associated estimated resolution contingencies earliest date deemed probable liability incurred amount liability reasonably estimated december 31 2000 company subsidiaries obligated lease agreements rental certain real estate machinery equipment used operations minimum annual rental obligation aggregates approximately 102599000 december 31 2000 obligations payable follows certain lease agreements provide increased payments based changes consumer price index rental expense charged operations accompanying consolidated statement operations approximately 17800000 14800000 15000000 years ended december 31 2000 1999 1998 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes company subject contingencies including legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls product liability environmental legal proceedings also include matters respect businesses previously owned including litigation concerning commercial airline fatal accident company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated subsidiary company defendant number lawsuits alleging damage caused alleged defects certain pressure treated wood products many suits resolved dismissal settlement amounts paid insurance proceeds third party recoveries subsidiary continues vigorously defend remaining suits certain defense indemnity costs paid insurance proceeds settlement suppliers material used production treated wood products subsidiary engaged coverage litigation certain insurers settled coverage claims several insurers company believes remaining coverage disputes resolved satisfactory basis additional coverage available reaching belief company analyzed insurance coverage status coverage litigation considered history settlements primary excess insurers consulted counsel company recorded liabilities approximately 10600000 december 31 2000 estimated costs resolve outstanding matters company also recorded receivables december 31 2000 approximately 7800000 estimated recoveries deemed probable collection related insurance litigation matters discussed impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided covered insurance material adverse effect consolidated financial position results operations company 9 discontinued operations fourth quarter 1997 company adopted plan disposition plumbing products business sold july 10 1998 approximately 33700000 cash net sales loss incomes taxes income tax benefit net earnings discontinued operations year ended december 31 1998 approximately 50110000 3800000 5000000 1200000 respectively loss discontinued operations income taxes includes allocation corporate interest expense approximately 1000000 1998 corporate interest allocated discontinued operations based ratio net assets discontinued operation sum total consolidated net assets company plus consolidated debt company debt discontinued operation assumed buyer debt directly attributed operations company income tax benefit 1998 includes approximately 800000 recorded result realization portion tax capital loss arising sale plumbing products business 10 operating segment information concentration credit risk company diversified manufacturer residential commercial building products organized within three principal operating segments residential building products segment air conditioning heating products segment windows doors siding products segment individual subsidiary companies included companys three principal operating segments based way chief operating decision maker manages business similarity products production processes customers expected longterm financial performance tables includes corporate related items results insignificant operations intersegment eliminations certain income expense items allocated reportable segments operating results labeled businesses sold consist entities sold 1998 residential building products segment manufactures distributes builtin products primarily residential new construction doityourself diy professional remodeling renovation markets principal products sold segment include kitchen range hoods exhaust fans bath fans fan heater light combination units indoor air quality products bath cabinets radio intercoms central vacuum systems air conditioning heating products segment principally manufactures sells heating ventilating air conditioning hvac systems customdesigned commercial applications manufactured sitebuilt residential housing windows doors siding products segment principally manufactures distributes vinyl wood composite windows vinyl wood steel composite patio entry doors vinyl siding soffit skirting accessories aluminum trim coil siding columns accessories soffit skirting shutters sun rooms vinyl fencing railings decking use residential construction diy professional renovation markets accounting policies segments described note 1 summary significant accounting policies company evaluates segment performance based operating earnings allocations corporate overhead costs intersegment net sales material periods presented intersegment eliminations material periods presented income statement impact purchase accounting adjustments including goodwill intangible assets amortization reflected operating earnings applicable operating segment however corresponding purchase accounting balance sheet adjustments related goodwill intangible assets allocated individual operating segments unallocated assets consist primarily cash equivalents marketable securities prepaid deferred income taxes goodwill intangible assets deferred debt expense long term restricted investments marketable securities tables follow exclude results operations plumbing products business sold 1998 accounted discontinued operation summarized financial information companys reportable segments presented tables follow three years period ended december 31 2000 foreign net sales approximately 10 9 8 consolidated net sales years ended december 31 2000 1999 1998 respectively foreign long lived assets approximately 8 7 6 consolidated long lived assets years ended december 31 2000 1999 1998 respectively foreign net sales attributed based location companys subsidiary responsible sale required long lived assets exclude financial instruments deferred income taxes single customer accounts 10 consolidated net sales accounts receivable company operates internationally exposed market risks changes foreign exchange rates financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising companys customer base dispersion across many different geographical regions december 31 2000 company significant concentrations credit risk 11 accrued expenses taxes net accrued expenses taxes net consist following december 31 2000 1999 company recorded liabilities connection acquisitions established 1997 2000 related employee terminations exit costs associated managements plans eliminate certain activities acquired entities company recorded liabilities approximately 1400000 5200000 1900000 years ended december 31 2000 1999 1998 respectively principally related termination certain employees closing certain facilities acquired businesses december 31 2000 plans eliminating certain activities finalized significant acquisitions charges liabilities employee termination include payroll taxes insurance benefits related severance packages approximately 1800000 3600000 5300000 years ended december 31 2000 1999 1998 respectively charges liabilities exit costs relate principally lease costs closing facilities legal consulting fees incurred due implementation companys exit strategies charges liabilities exit costs approximately 800000 1400000 years ended december 31 2000 1999 1998 respectively 12 income second quarter 2000 company sold parcel land resulting pretax gain approximately 1700000 10 net tax per share included operating earnings 13 summarized quarterly financial data unaudited tables follow summarize unaudited quarterly financial data years ended december 31 2000 december 31 1999 see notes 1 2 12 managements discussion analysis financial condition results operations item 7 part ii report regarding certain quarterly transactions impact operating results table including acquisitions sales volume material costs delays rationalization relocation manufacturing operations weakness manufactured housing industry report independent public accountants nortek inc audited accompanying consolidated balance sheet nortek inc delaware corporation subsidiaries listed item 14a1 form 10k december 31 2000 1999 related consolidated statements operations stockholders investment cash flows three years period ended december 31 2000 financial statements schedules referred responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position nortek inc subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states audit made purpose forming opinion basic financial statements taken whole schedules listed item 14a2 presented purposes complying securities exchange commissions rules part basic financial statements schedules subjected auditing procedures applied audit basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp boston massachusetts march 7 2001 nortek inc parent company schedule condensed financial information registrant condensed balance sheet accompanying notes integral part condensed financial statements condensed statement operations accompanying notes integral part condensed financial statements condensed statement cash flows accompanying notes integral part condensed financial statements notes condensed financial statements december 31 2000 1 accompanying condensed financial statements nortek inc registrant prepared accordance reduced disclosure requirements permitted form 10k part iv item 14 schedule condensed financial information registrant consolidated financial statements related notes nortek inc subsidiaries included elsewhere herein form 10k part ii item 8 incorporated herein reference certain amounts reclassified conform 2000 presentation 2 descriptions material contingencies significant provisions longterm debt obligations commitments registrant included notes 5 8 notes nortek inc subsidiaries consolidated financial statements incorporated herein reference following summary maturities longterm debt registrants debt obligations excluding unamortized discount december 31 2000 3 registrants net investment subsidiaries net cumulative amount intercompany cash transfers transactions 4 included registrants condensed statement cash flows years ended december 31 2000 1999 net transfers subsidiaries principally cash dividends declared subsidiaries board directors subsidiaries approximately 215000000 250000000 respectively dividends declared 1998 5 certain registrants subsidiaries entered financing agreements contain various restrictive covenants place limitations amount distributions advances registrant december 31 2000 approximately 398300000 approximately 293200000 goodwill subsidiary net assets principally ply gem subsidiaries restricted approximately 93300000 principal amount subsidiary indebtedness outstanding financing agreements 6 combined liabilities excluding deferred income taxes companys subsidiaries december 31 2000 approximately 520100000 consisting 137300000 short longterm debt 153100000 accounts payable 229700000 short longterm accruals taxes obligations approximately 125400000 classified shortterm nortek inc subsidiaries schedule ii valuation qualifying accounts nortek inc subsidiaries exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangementitem 14 exhibits financial statement schedules reports form 8k financial statements schedules following documents filed part report 1 financial statements consolidated statement operations three years period ended december 31 2001 consolidated balance sheet december 31 2001 2000 consolidated statement cash flows three years period ended december 31 2001 consolidated statement stockholders’ investment three years period ended december 31 2001 notes consolidated financial statements report independent public accountants 2 financial statement schedules schedule condensed financial information registrant schedule ii valuation qualifying accounts 3 exhibits listed exhibit index incorporated herein reference b reports form 8k reports form 8k filed registrant last quarter period covered report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 15 2002 nortek inc richard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 15 2002 richard l bready j peter lyons richard l bready chairman j peter lyons board president director principal executive financial officer almon c hall william kelly almon c hall vice president william kelly controller principal director accounting officer phillip l cohen phillip l cohen director richard j harris richard j harris director consolidated statement operations accompanying notes integral part consolidated financial statements consolidated balance sheet accompanying notes integral part consolidated financial statements consolidated statement cash flows accompanying notes integral part consolidated financial statements consolidated statement stockholders’ investment yearended december 31 1999 dollar amounts thousands accompanying notes integral part consolidated financial statements consolidated statement stockholders’ investment yearended december 31 2000 dollar amounts thousands accompanying notes integral part consolidated financial statements consolidated statement stockholders’ investment yearended december 31 2001 dollar amounts thousands accompanying notes integral part consolidated financial statements nortek inc subsidiaries notes consolidated financial statements december 31 2001 1 summary significant accounting policies company diversified manufacturer residential commercial building products operating within three principal segments residential building products segment air conditioning heating products segment windows doors siding products segment principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself “diy” professional remodeling renovation markets 2001 company sold certain subsidiaries whollyowned subsidiary ply gem industries inc “ply gem” sale subsidiaries related operating results excluded earnings continuing operations classified discontinued operations periods presented see note 9 principles consolidation consolidated financial statements include accounts nortek inc whollyowned subsidiaries “company“ “nortek” elimination intercompany accounts transactions certain amounts prior years’ consolidated financial statements reclassified conform current year presentation accounting policies use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states involves estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts income expense reporting periods certain company’s accounting policies require application judgment selecting appropriate assumptions calculating financial estimates nature judgments subject inherent degree uncertainty company periodically evaluates judgments estimates used critical accounting policies ensure judgments estimates reasonable interim yearend reporting requirements judgments based company’s historical experience current trends information available sources appropriate different conditions result assumptions used company’s judgments results could materially different company’s estimates recognition sales related cost incentive allowances company primarily recognizes sales upon shipment products net applicable provisions discounts allowances cash discounts volume rebates cooperative advertising programs gross customer returns among others recorded reduction sales time sale based upon estimated future outcome cash discounts volume rebates advertising programs based upon certain percentages agreed company’s various customers typically earned customer annual period company records periodic estimates amounts based upon historical results date estimated future results end contract period contractual provisions customer agreements calendar year customer agreements company able adjust periodic estimates actual amounts december 31 year based upon contractual provisions customer agreements customers agreements calendar year cycle company records estimates december 31 consistent described methodology customer returns recorded actual basis throughout year also include estimate end reporting period future customer returns related sales recorded prior end period company generally estimates customer returns based upon time lag historically occurs date sale date return also factoring new business conditions might impact historical analysis new product introduction company also provides estimate warranty bad debts shipping costs time sale shipping warranty costs included cost products sold bad debt provisions included selling general administrative expense amounts recorded generally based upon historically derived percentages also factoring new business conditions might impact historical analysis new product introduction warranty bankruptcies particular customers bad debts cash investments marketable securities cash equivalents consist shortterm highly liquid investments original maturities three months less readily convertible cash company unrestricted marketable securities approximately 96238000 8042000 december 31 2001 2000 respectively consisting commercial paper bank issued money market instruments mature within one year company classified restricted accompanying consolidated balance sheet certain investments marketable securities fully available use operations december 31 2001 2000 approximately 77955000 4360000 included current assets 43210000 10774000 included current assets respectively cash investments marketable securities pledged collateral held pension trusts insurance employee benefits requirements see note 7 disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents carrying amount approximates fair value short maturity instruments investments marketable securities fair value investments marketable securities based quoted market prices fair value investments marketable securities approximated amount company’s consolidated balance sheet longterm debt december 31 2001 fair value longterm indebtedness approximately 10800000 higher amount company’s consolidated balance sheet original issue discount based market quotations see note 5 inventories accompanying consolidated balance sheet valued lower cost market december 31 2001 2000 approximately 96734000 98068000 total inventories respectively valued lastin firstout method lifo firstin firstout method fifo accounting inventories would approximately 1792000 2209000 greater december 31 2001 2000 respectively inventories valued fifo method connection lifo fifo inventories company record provisions appropriate writedown obsolete excess inventory estimated net realizable value process evaluating obsolete excess inventory often requires company make subjective judgments estimates concerning future sales levels quantities prices inventory able sold normal course business accelerating disposal process incorrect estimates future sales potential may cause actual results differ estimates time inventory disposed sold depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost related accumulated depreciation eliminated resulting gain loss recognized intangible assets goodwill june 30 2001 company accounted goodwill intangible assets accordance apb 16 “business combinations”“apb 16” subsequent june 30 2001 company accounted goodwill intangible assets accordance statement financial accounting standards “sfas” 141 “business combinations”“sfas 141” acquisitions purchase accounting required apb 16 sfas 141 involves judgment respect valuation acquired assets liabilities order determine final amount goodwill significant acquisitions company uses third party appraisers value items property plant equipment acquired intangibles third party actuarial consultants determine value assets liabilities associated pension post retirement benefit plans company believes estimates used record prior acquisitions reasonable accordance apb 16 sfas 141 intangible assets consist principally patents trademarks copyrights noncompete agreements amortized straightline basis weighted average estimated useful life approximately 20 years amortization intangible assets charged operations amounted approximately 6330000 6024000 4568000 2001 2000 1999 respectively company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions goodwill amortized straightline basis 40 years december 31 2001 goodwill amortization approximately 16394000 16505000 15593000 2001 2000 1999 respectively determined applicable accounting principles generally accepted united states balance sheet date december 31 2001 accordance sfas 121 “accounting impairment longlived assets longlived assets disposed of”“sfas 121” sfas 144 “accounting impairment disposal longlived assets”“sfas 144” company evaluates realizability “longlived assets“which primarily consists property plant equipment intangible assets goodwill based expectations nondiscounted future cash flows subsidiary material amount longlived assets sum expected nondiscounted future cash flows less carrying amount assets including longlived assets company would recognize impairment loss company’s cash flow estimates based upon historical cash flows well future projected cash flows received subsidiary management connection annual company wide planning process include terminal valuation applicable subsidiary based upon multiple earnings interest expense net depreciation amortization expense income taxes “ebitda” company estimates ebitda multiple reviewing comparable company information industry data applicable consultation investment bankers company believes procedures estimating gross future cash flows including terminal valuation reasonable consistent current market conditions based recent analysis company believes material impairment longlived assets exists december 31 2001 beginning january 1 2002 company adopt sfas 142 “ goodwill intangible assets”“sfas 142” result goodwill intangible assets determined indefinite useful life longer amortized instead evaluated impairment annual basis whenever events business conditions warrant intangible assets continue amortized remaining estimated useful lives evaluated impairment accordance provisions sfas 144 addition sfas 142 requires additional disclosures respect major intangible asset class relative gross net carrying amounts accumulated amortization expense weightedaverage amortization periods residual value assumptions sfas 142 also requires estimated aggregate amortization expense five succeeding years disclosed company december 31 2002 complete initial evaluation carrying value goodwill sfas 142 determine whether impairment exists impairment charges associated initial adoption retroactively recorded cumulative effect change accounting principle first quarter 2002 thereafter additional goodwill impairment charges included income continuing operations unless relate discontinued operation sfas 142 also requires additional disclosures respect goodwill reportable segment changes goodwill balances impairment losses including methodology determination amount goodwill included gain loss disposal reporting unit company currently evaluating impact sfas 142 may respect carrying value goodwill yet determined whether impairment loss required recorded company’s consolidated financial statements 2002 pensions post retirement health benefits company accounts pension post retirement health benefit liabilities sfas 87 “employers’ accounting pensions” “sfas 87” sfas 106 “employers’ accounting post retirement benefits pensions” “sfas 106” sfas 87 sfas 106 require estimating items longterm average return plan assets discount rate compensation increase assumed medical cost inflation rate estimates require significant amount judgment result company utilizes expertise third party actuarial consultants perform calculations amounts pension post retirement health benefit assets liabilities expense comprehensive income loss required recorded company’s consolidated financial statements december 31 accordance generally accepted accounting principles currently effect united states see note 7 insurance liabilities company records insurance liabilities related expenses health workers compensation product general liability losses insurance reserves expenses accordance either contractual terms policies selfinsured total liabilities estimable probable reporting date insurance liabilities recorded current liabilities extent expected paid succeeding year remaining requirements classified longterm liabilities accounting selfinsured plans requires significant judgments estimates made respect future liabilities paid known claims incurred reported claims reporting date company relies heavily historical trends certain cases advice calculations thirdparty actuarial consultants determining appropriate insurance reserves record balance sheet substantial portion workers compensation general product liability losses certain cases partial insurance coverage exists company must estimate portion liability covered existing insurance policies arrive net expected liability company income taxes company accounts income taxes using liability method accordance sfas 109 “accounting income taxes”“sfas 109” requires deferred tax consequences temporary differences amounts recorded company’s consolidated financial statements amounts included company’s federal state income tax returns recognized balance sheet company generally file income tax returns well closing process december 31 financial statements complete amounts recorded december 31 reflect estimates final amounts actual income tax returns filed fiscal year addition estimates often required respect among things appropriate state income tax rates use various states company subsidiaries required file potential utilization operating capital loss carryforwards federal state income tax purposes valuation allowances required tax assets may realizable future sfas 109 requires balance sheet classification current longterm deferred income tax assets liabilities based upon classification underlying asset liability gives rise temporary difference see note 4 commitments contingencies company provides accruals direct costs associated estimated resolution contingencies earliest date deemed probable liability incurred amount liability reasonably estimated costs accrued estimated based consultation legal counsel experts based upon analysis potential results assuming combination litigation settlement strategies outcomes see note 8 comprehensive income loss comprehensive income loss includes net earnings unrealized gains losses currency translation marketable securities available sale minimum pension liability adjustments net tax attributes components company’s comprehensive income loss effect earnings three years ended december 31 2001 detailed company’s accompanying consolidated statement stockholders’ investment balances classification net tax attributes within accumulated comprehensive loss december 31 2001 2000 1999 follows foreign currency translation financial statements subsidiaries outside united states generally measured using foreign subsidiaries’ local currency functional currency company translates assets liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using average exchange rates effect year gains losses foreign currency translation credited charged accumulated comprehensive loss included stockholders’ investment accompanying consolidated balance sheet transaction gains losses recorded selling general administrative expense material years ending december 31 2001 2000 1999 derivative instruments hedging activities june 1998 financial accounting standards board “fasb” issued sfas 133 “accounting derivative instruments hedging activities” amended 1999 sfas 137 “accounting derivative instruments hedging activities deferral effective date sfas 133 amendment sfas 133“and amended june 2000 sfas 138 “accounting certain derivative instruments certain hedging activities “an amendment sfas 133”combined “sfas 133” sfas 133 establishes accounting reporting standards requiring every derivative instrument including certain derivative instruments embedded contracts issued acquired substantially modified december 31 1997 recorded balance sheet either asset liability measured fair value sfas 133 requires changes derivative’s fair value recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivative’s gains losses offset related results hedged item income statement requires company formally document designate assess effectiveness transactions receive hedge accounting first quarter 2001 company adopted sfas 133 recording liability approximately 800000 balance sheet march 31 2001 representing fair value company’s interest rate collar agreement march 31 2001 cumulative effect adopting accounting method january 1 2001 material interest expense company’s consolidated statement operations year ended december 31 2001 includes noncash charge approximately 1200000 07 per share net tax related company’s interest rate collar agreement earnings per share basic earnings per share amounts computed using weighted average number common equivalent shares outstanding year special common stock treated equivalent common stock determining earnings per share results diluted earnings per share amounts computed using weighted average number common equivalent shares dilutive potential common special common shares outstanding year reconciliation basic diluted earnings per share continuing operations follows new accounting pronouncements july 2001 fasb issued sfas 141 requires business combinations initiated june 30 2001 accounted using purchase method july 2001 fasb issued sfas 142 applies goodwill intangible assets acquired june 30 2001 well previously acquired goodwill intangible assets sfas 142 became effective july 1 2001 goodwill intangible assets acquired june 30 2001 effective goodwill intangible assets beginning january 1 2002 early adoption permitted calendar yearend companies sfas 142 goodwill well certain intangible assets determined indefinite life longer amortized instead assets reviewed impairment periodic basis see intangible assets goodwill within note discussion july 2001 fasb issued sfas 143 “accounting asset retirement obligations”“sfas 143” sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs sfas 143 requires fair value liability asset retirement obligation recognized period incurred reasonable estimate fair value made associated asset retirement costs capitalized part carrying amount longlived asset sfas 143 effective financial statements issued fiscal years beginning june 15 2002 early adoption permitted company currently assessing impact adopting sfas 143 consolidated financial statements october 2001 fasb issued sfas 144 addresses financial accounting reporting impairment disposal longlived assets apply goodwill intangible assets amortized certain longlived assets statement supersedes sfas 121 accounting reporting provisions apb opinion 30 “reporting results operations “reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions” disposal segment business previously defined opinion statement also amends arb 51 “consolidated financial statements” eliminate exception consolidation subsidiary control likely temporary sfas 144 effective financial statements issued fiscal years beginning december 15 2001 early adoption encouraged company adopted sfas 144 third quarter 2001 applied accounting standard beginning year adoption accounting standard result material changes net earnings accounting standards previously applied adoption standard result accounting loss sale certain businesses related operating results 2001 discontinued operations accordingly presentation periods presented reclassified conform new standard see note 9 2 acquisitions businesses sold acquisitions accounted purchases accordingly included company’s consolidated results operations since acquisition date purchase price allocations subject refinement pertinent information regarding acquisitions obtained june 15 2001 company acquired senior air systems “sas” whollyowned subsidiary senior plc acquired company located stokeontrent england manufactures sells air conditioning equipment july 3 2000 company acquired eatonwilliams holdings limited “eatonwilliams” edenbridge england eatonwilliams designs manufactures installs services custommade standard air conditioning humidification equipment fiscal yearended april 2 2000 eatonwilliams reported sales approximately 41000000 unaudited march 8 1999 company acquired webco inc “webco” designer manufacturer custom air handling equipment industrial institutional commercial customers fiscal yearended october 31 1998 webco net sales approximately 13900000 unaudited april 23 1999 company completed acquisition three businesses caradon plc united kingdom peachtree doors windows inc “peachtree” thermalgard cwd windows doors “caradon acquired companies” thermalgard manufactures replacement windows patio doors sunrooms cwd windows doors provider complete window door systems new homes western canada yearended december 31 1998 caradon acquired companies combined net sales approximately 169700000 unaudited approximately 116800000 unaudited net sales related peachtree sold 2001 see note 9 may 28 1999 company acquired multiplex technologies inc “multiplex” manufacturer designer highperformance multiroom video distribution equipment home automation home entertainment multiplex net sales approximately 10000000 unaudited yearended december 31 1998 september 9 1999 company acquired kroy building products inc “kroy” manufacturer vinyl fencing railing profiles vinyl decking systems residential light commercial applications kroy net sales approximately 26000000 unaudited fiscal yearended june 30 1999 december 3 1999 company acquired xantech corporation “xantech” designer manufacturer residential infrared remote control systems extending control vcr cable satellite stereo systems multiple rooms throughout entire household xantech net sales approximately 13000000 unaudited fiscal yearended november 30 1999 acquisitions funded use unrestricted cash equivalents marketable securities issuance notes payable sellers issuance 235000 shares nortek common stock 3 cash flows interest paid 102406000 93562000 92592000 2001 2000 1999 respectively fair value assets businesses acquired approximately 1950000 27010000 192719000 2001 2000 1999 respectively liabilities assumed created businesses acquired approximately 50000 16961000 60616000 2001 2000 1999 respectively 1999 235000 shares nortek common stock issued partial consideration acquisition net cash paid acquisitions approximately 1900000 10049000 125788000 2001 2000 1999 respectively significant noncash financing investing activities excluded accompanying consolidated statement cash flows include capitalized lease additions approximately 5701000 2000 445000 1999 decline approximately 91000 106000 increase approximately 170000 fair market value marketable securities available sale 2001 2000 1999 respectively 4 income taxes following summary components earnings continuing operations provision income taxes following summary provision income taxes continuing operations included accompanying consolidated statement operations income tax payments net refunds approximately 4500000 19279000 25500000 2001 2000 1999 respectively table follows reconciles federal statutory income tax rate continuing operations effective tax rate earnings approximately 477 450 446 2001 2000 1999 respectively tax effect temporary differences give rise significant portions deferred income tax assets liabilities december 31 2001 december 31 2000 follows company established valuation allowances related certain capital loss carryforwards total valuation allowance approximately 1700000 reduce goodwill tax benefit ultimately realized december 31 2001 cumulative unremitted foreign earnings approximately 8000000 invested indefinitely accordingly us income taxes provided earnings december 31 2001 company approximately 25600000 capital loss carryforwards utilized offset capital gains future periods 5 notes mortgage notes obligations payable shortterm bank obligations december 31 2001 2000 consist following shortterm bank obligations secured approximately 47076000 accounts receivable inventory assets average weighted interest rate approximately 41 december 31 2001 notes mortgage notes obligations payable included accompanying consolidated balance sheet december 31 2001 2000 consist following june 2001 company sold 250000000 principal amount 9 78 senior subordinated notes due 2011 “9 78 notes” discount approximately 2727500 amortized life issue net proceeds sale 9 78 notes deducting underwriting commissions expenses amounted approximately 241800000 portion proceeds used redeem july 11 2001 approximately 204800000 principal amount company’s 9 78 senior subordinated notes due 2004 notes called redemption june 13 2001 plus approximate 2900000 redemption premium thereon approximately 7400000 accrued interest thereon result redemption company recorded extraordinary loss approximately 5500000 32 per share net tax third quarter 2001 yearended december 31 2001 company incurred approximately 1250000 07 per share net tax duplicative interest expense net interest income since redemption 9 78 senior subordinated notes due 2004 occur day financing indentures agreements governing company subsidiaries’indebtedness including indentures 8 78 notes 9 18 notes 9 14 notes collectively “senior notes” 9 78 notes credit agreement covering ply gem credit facility contain restrictive financial operating covenants including covenants restrict among things payment cash dividends repurchase company’s capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indentures agreements upon certain asset sales defined indentures company required offer purchase 100 principal amount plus accrued interest date purchase senior notes principal amount equal net cash proceeds defined indentures invested properties assets used primarily related business owned operated company issue date senior notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indentures february 22 2002 approximately 121300000 available payment cash dividends stock payments restricted payments terms company’s restrictive indenture governing senior subordinated notes see note 6 company’s ply gem subsidiary credit facility syndicate banks provides ply gem term loan letter credit facility matures august 26 2002 interest borrowings varying rates based ply gem’s option london interbank offered rate libor plus spread b higher 5 federal funds rate ii bank’s prime rate ply gem pays facility fee quarterly fluctuates 20 30 aggregate principal amount available facility average weighted interest rate credit facility yearended december 31 2001 48 credit facility includes customary covenants including covenants limiting ply gem’s ability pledge assets incur liens assets maintain certain financial covenants borrowings credit facility collateralized common stock inventory accounts receivable ply gem’s principal subsidiaries 1999 company ply gem subsidiary entered 45000000 interest rate collar transaction lock interest rate ply gem credit facility floor 576 cap 7 collar agreement terminate august 27 2002 extent one month us dollar libor rate collar floor payment due ply gem difference extent one month us dollar libor rate collar cap ply gem entitled receive difference one month us dollar libor rate december 31 2001 187 amounts received paid result collar agreement increase reduce interest expense fair value liability related interest rate collar approximately 1200000 december 31 2001 mortgage notes payable approximately 27304000 outstanding december 31 2001 include various mortgage notes related indebtedness payable installments 2025 notes bear interest rates ranging 15 995 collateralized property equipment aggregate net book value approximately 74308000 december 31 2001 obligations approximately 28780000 outstanding december 31 2001 include borrowings relating equipment purchases notes payable issued acquisitions borrowings bearing interest rates primarily ranging 29 12 maturing various dates 2017 approximately 20794000 indebtedness collateralized property equipment aggregate net book value approximately 32030000 december 31 2001 table follows summary maturities company’s debt obligations excluding unamortized debt discount due december 31 2002 approximately 30400000 letters credit issued ply gem credit facility additional security approximately 29000000 industrial revenue bonds capital leases outstanding included mortgage notes payable table notes mortgage notes obligations payable december 31 2001 relating several company’s manufacturing facilities 6 common stock special common stock options deferred compensation share special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting remaining 75 elected combined vote classes shares special common stock generally nontransferable freely convertible shareforshare basis shares common stock company shareholder rights plan expires march 31 2006 shareholder right entitles shareholders buy 1100 share new series preference stock nortek exercise price 72 per share subject adjustments stock dividends splits similar events rights currently exercisable attached share common stock may redeemed directors 01 per share time shareholder acquires beneficial ownership 17 company’s common stock special common stock rights trade separately become exercisable entitling rights holder acquire additional shares company’s common stock market value equal twice amount exercise price right addition person group “acquiring company” commences tender offer announces intention acquire 30 company’s common stock special common stock rights trade separately certain circumstances permit rights holder acquire common stock acquiring company market value equal twice amount exercise price right december 31 2001 total 3527159 shares common stock reserved follows december 31 2001 2672329 shares special common stock reserved stock option plans company several equity cash incentive plans provide granting options awards certain officers employees nonemployee directors company cash incentive program certain key employees 2000 equity cash incentive plan based performance company’s stock price amounts paid cash incentive program options granted equity cash incentive plans vest periods ranging five years expire ten years date grant december 31 2001 729567 additional options available grant plans december 31 2001 2000 1999 1854411 1789257 1073759 respectively options acquire shares common special common stock exercisable table follows summarizes common special common stock option transactions three years ended december 31 2001 1047 options exercisable exercise price 875 weighted average remaining contractual life 2 years 173849 options exercisable exercise price 1475 remaining contractual life 4 years 1415713 options 1294649 exercisable exercise prices ranging 1950 2765 weighted average exercise price 2279 remaining contractual life ranging 2 10 years remaining 393200 options 384866 exercisable exercise prices ranging 2956 3306 weighted average exercise price 2982 remaining contractual life ranging 6 8 years company accounts stock options granted employees pursuant provisions apb opinion 25 compensation cost recognized since options granted exercise prices equal fair market value common stock date grant compensation cost options granted plans determined consistent sfas 123 company’s earnings continuing operations diluted earnings per share continuing operations would approximately 33500000 299 2001 approximately 37400000 333 2000 approximately 48800000 407 1999 respectively net earnings diluted net earnings per share would approximately 7000000 63 2001 approximately 37300000 332 2000 approximately 44800000 374 1999 respectively weighted average fair value options grant date 898 978 1160 2001 2000 1999 respectively fair value option grant estimated date grant using blackscholes option pricing model following assumptions used company’s board directors authorized number programs purchase shares company’s common special common stock recent programs announced may 4 2000 purchase 1000000 shares company’s common special common stock open market negotiated transactions subject market conditions cash availability provisions company’s outstanding debt instruments february 22 2002 company purchased approximately 461000 shares common special common stock approximately 9200000 program accounted share purchases treasury stock 7 pension profit sharing post retirement benefits company subsidiaries various pension supplemental retirement plans certain officers profit sharing post retirement benefit plans requiring contributions qualified trusts union administered funds pension profit sharing expense charged operations aggregated approximately 16300000 2001 approximately 13800000 2000 approximately 10900000 1999 company’s policy fund currently actuarially determined annual contribution various qualified defined benefit plans table follows provides reconciliation benefit obligations plan assets funded status plans company’s accompanying consolidated balance sheet december 31 2001 2000 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 199968000 194146000 115251000 respectively december 31 2001 125947000 122982000 83049000 respectively december 31 2000 plan assets primarily consist cash equivalents common stock including approximately 6100000 company’s common stock special common stock september 30 2001 us government securities corporate debt mutual funds well investments include certain commingled funds december 31 2001 2000 company recorded longterm restricted investments marketable securities held pension trusts accompanying consolidated balance sheet approximately 73600000 32400000 respectively contributed trusts available fund obligations included table relating supplemental retirement plans 2001 2000 one trusts related company’s supplemental retirement plans loaned funds certain officers company fully vested retirement benefits plans december 31 2001 approximately 35190000 notes receivable officers consisting 11675000 notes receivable bearing interest 675 maturing 2015 17100000 notes receivable bearing interest 543 maturing 2016 6415000 notes receivable bearing interest 557 maturing 2016 included restricted investments marketable securities held pension trusts company’s accompanying consolidated balance sheet weighted average rate assumptions used determining pension costs projected benefit obligation follows company’s net periodic benefit cost defined benefit plans 2001 2000 1999 consist following components table follows provides reconciliation benefit obligations plan assets funded status post retirement health benefit plan one company’s subsidiaries included accompanying consolidated balance sheet december 31 2001 2000 company’s net periodic benefit cost subsidiary’s post retirement health benefit plan 2001 2000 1999 consists following components purposes calculating post retirement health benefit cost medical inflation rate 110 assumed 2001 rate assumed decrease gradually ultimate rate 50 2005 assumed health care cost trend rates significant effect amounts reported post retirement health benefit plan onepercentagepoint change assumed health care cost trend rate would following effect 8 commitments contingencies company provides accruals direct costs associated estimated resolution contingencies earliest date deemed probable liability incurred amount liability reasonably estimated december 31 2001 company subsidiaries obligated lease agreements rental certain real estate machinery equipment used operations minimum annual rental obligations aggregate approximately 76679000 december 31 2001 obligations payable follows certain lease agreements provide increased payments based changes consumer price index rental expense charged operations accompanying consolidated statement operations approximately 21100000 19900000 14300000 years ended december 31 2001 2000 1999 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes company subsidiaries guaranteed certain obligations various third parties aggregate approximately 30800000 december 31 2001 approximately 28100000 relates ply gem’s guarantee base rental payments june 30 2016 facility leased sne enterprises inc “sne” sold september 21 2001 buyer sne provided certain indemnifications rights ply gem payments might required make pursuant guarantee company believes obligation make payments ply gem exists guarantee accordingly recorded liabilities december 31 2001 company’s accompanying consolidated balance sheet accordance generally accepted accounting principles currently effect united states company subject contingencies including legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls product liability environmental legal proceedings also include matters respect businesses previously owned including litigation concerning commercial airline fatal accident company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers’compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated subsidiary company defendant number lawsuits alleging damage caused alleged defects certain pressure treated wood products many suits resolved dismissal settlement amounts paid insurance proceeds third party recoveries subsidiary continues vigorously defend remaining suits certain defense indemnity costs paid insurance proceeds settlement suppliers material used production treated wood products subsidiary engaged coverage litigation certain insurers settled coverage claims several insurers company believes remaining coverage disputes resolved satisfactory basis additional coverage available reaching belief company analyzed insurance coverage status coverage litigation considered history settlements primary excess insurers consulted counsel company recorded liabilities approximately 10266000 december 31 2001 estimated costs resolve outstanding matters company also recorded receivables december 31 2001 approximately 8121000 estimated recoveries deemed probable collection related insurance litigation matters discussed impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided covered insurance material adverse effect consolidated financial position results operations company possible however future results operations particular future period could materially affected changes assumptions strategies related contingencies changes company’s control 9 discontinued operations september 21 2001 company sold capital stock peachtree sne subsidiaries ply gem subsidiary approximately 45000000 recorded pretax loss sale approximately 34000000 179 per share net tax including write approximately 11700000 unamortized intangible assets peachtree sne previously part windows doors siding products segment portion cash proceeds used pay approximately 20500000 outstanding debt company’s ply gem credit facility table follows presents summary results discontinued operations years ended december 31 2001 2000 1999 table follows presents breakdown major components assets liabilities discontinued operations december 31 2000 10 operating segment information concentration credit risk company diversified manufacturer residential commercial building products organized within three principal operating segments residential building products segment air conditioning heating products segment windows doors siding products segment individual subsidiary companies included company’s three principal operating segments based way chief operating decision maker manages business similarity products production processes customers expected longterm financial performance tables includes corporate related items results insignificant operations intersegment eliminations certain income expense items allocated reportable segments residential building products segment manufactures distributes builtin products primarily residential new construction diy professional remodeling renovation markets principal products sold segment include kitchen range hoods exhaust fans bath fans fan heater light combination units indoor air quality products bath cabinets radio intercoms central vacuum systems air conditioning heating products segment principally manufactures sells heating ventilating air conditioning “hvac” systems customdesigned commercial applications manufactured sitebuilt residential housing windows doors siding products segment principally manufactures distributes use residential construction diy professional renovation markets vinyl siding skirting soffit accessories ii vinyl composite windows iii vinyl patio entry doors iv vinyl blocks vents shutters sunrooms fencing railing decking v aluminum trim coil soffit accessories september 21 2001 company sold capital stock peachtree sne subsidiaries ply gem accordingly results peachtree sne previously part windows doors siding products segment excluded earnings continuing operations classified separately discontinued operations periods presented see notes 1 9 accordingly windows doors siding products segment information presented excludes peachtree sne periods accounting policies segments described note 1 summary significant accounting policies company evaluates segment performance based operating earnings allocations corporate overhead costs intersegment net sales intersegment eliminations material periods presented income statement impact purchase accounting adjustments including goodwill intangible assets amortization reflected operating earnings applicable operating segment however corresponding purchase accounting balance sheet adjustments related goodwill intangible assets allocated individual operating segments unallocated assets consist primarily cash equivalents marketable securities prepaid deferred income taxes goodwill intangible assets deferred debt expense longterm restricted investments marketable securities summarized financial information company’s reportable segments presented tables follow three years period ended december 31 2001 foreign net sales approximately 14 12 11 consolidated net sales years ended december 31 2001 2000 1999 respectively foreign longlived assets approximately 8 consolidated longlived assets years ended december 31 2001 2000 1999 respectively foreign net sales attributed based location company’s subsidiary responsible sale required longlived assets exclude financial instruments deferred income taxes single customer accounts 10 consolidated net sales accounts receivable company operates internationally exposed market risks changes foreign exchange rates financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising company’s customer base dispersion across many different geographical regions december 31 2001 company significant concentrations credit risk 11 accrued expenses taxes net accrued expenses taxes net included current liabilities accompanying consolidated balance sheet consist following december 31 2001 2000 longterm accrued expenses included liabilities accompanying consolidated balance sheet consist following december 31 2001 2000 company recorded liabilities connection acquisitions established 1997 2000 related employee terminations exit costs associated management’s plans eliminate certain activities acquired entities 2001 company provide additional liabilities provided approximately 300000 4700000 years ended december 31 2000 1999 respectively principally related termination certain employees closing certain facilities acquired businesses december 31 2001 plans eliminating certain activities finalized significant acquisitions charges liabilities employee termination include payroll taxes insurance benefits related severance packages approximately 100000 1200000 3200000 years ended december 31 2001 2000 1999 respectively charges liabilities exit costs relate principally lease costs closing facilities legal consulting fees incurred due implementation company’s exit strategies 2001 charges liabilities exit costs charges approximately 800000 1400000 years ended december 31 2000 1999 respectively 12 income expense 2001 company expensed approximately 3000000 manufacturing costs incurred connection start residential air conditioning facility vinyl fence decking facility also year 2001 company expensed charge continuing operations approximately 6300000 fees expenses associated company’s material procurement strategy estimates realized approximately 4000000 unaudited 6000000 unaudited benefits date addition company also realized reductions cost certain purchased materials particularly pvc resin steel part due declining prices approximately 2700000 fees expenses associated material procurement strategy charged residential building products segment 2800000 air conditioning heating products segment 600000 windows doors siding products segment 200000 segment 2001 first half 2001 company recorded operating earnings nontaxable gain approximately 3200000 29 per share net death benefit insurance proceeds relating life insurance maintained former managers year 2001 company also incurred certain duplicative net interest expense see note 5 third quarter 2001 company recorded approximately 1700000 included investment income interest income resulting favorable abatement state income taxes abatement state income taxes significant effect overall annual effective income tax rate second quarter 2000 company sold parcel land resulting pretax gain approximately 1700000 10 per share net tax included operating earnings 13 summarized quarterly financial data unaudited tables follow summarize unaudited quarterly financial data years ended december 31 2001 december 31 2000 see notes 1 2 12 management’s discussion analysis financial condition results operations item 7 part ii report regarding certain quarterly transactions impact operating results table including dispositions financing activities new accounting pronouncements acquisitions sales volume material costs rationalization relocation manufacturing operations material procurement strategies weakness manufactured housing industry extraordinary loss debt retirement third quarter 2001 report independent public accountants nortek inc audited accompanying consolidated balance sheet nortek inc delaware corporation subsidiaries december 31 2001 2000 related consolidated statements operations stockholders’ investment cash flows three years period ended december 31 2001 financial statements schedules referred responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position nortek inc subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states explained note 1 notes consolidated financial statements third quarter 2001 company adopted statement financial accounting standard 144 “accounting impairment disposal longlived assets” adoption standard result material changes net earnings accounting standards previously applied adoption standard result accounting loss sale certain businesses related operating results 2001 discontinued operations accordingly presentation periods presented reclassified conform new standard audit made purpose forming opinion basic financial statements taken whole schedules listed item 14a2 presented purposes complying securities exchange commissions rules part basic financial statements schedules subjected auditing procedures applied audit basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp boston massachusetts february 28 2002 nortek inc parent company schedule condensed financial information registrant condensed balance sheet accompanying notes integral part condensed financial statements condensed statement operations accompanying notes integral part condensed financial statements condensed statement cash flows accompanying notes integral part condensed financial statements nortek inc parent company schedule condensed financial information registrant notes condensed financial statements december 31 2001 1 accompanying condensed financial statements nortek inc “the registrant” prepared accordance reduced disclosure requirements permitted form 10k part iv item 14 schedule condensed financial information registrant consolidated financial statements related notes nortek inc subsidiaries included elsewhere herein form 10k part ii item 8 incorporated herein reference certain amounts reclassified conform 2001 presentation 2 descriptions material contingencies significant provisions longterm debt obligations commitments registrant included notes 1 5 8 notes nortek inc subsidiaries consolidated financial statements incorporated herein reference following summary maturities longterm debt registrant’s debt obligations excluding unamortized discount december 31 2001 3 registrant’s net investment subsidiaries net cumulative amount intercompany cash transfers transactions includes approximately 93400000 notes payable subsidiary nortek bear interest rates ranging 8 10 interest expense approximately 3900000 900000 respectively related notes included interest expense accompanying condensed statement operations years ended december 31 2001 2000 interest expense charged 1999 4 october 2001 fasb issued statement financial accounting standards 144 “accounting impairment disposal longlived assets”“sfas 144” sfas 144 addresses financial accounting reporting impairment disposal longlived assets apply goodwill intangible assets amortized certain longlived assets statement supersedes statement financial accounting standards 121 “accounting impairment longlived assets longlived assets disposed of” accounting reporting provisions apb opinion 30 ”reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions” disposal segment business previously defined opinion statement also amends arb 51 “consolidated financial statements” eliminate exception consolidation subsidiary control likely temporary sfas 144 effective financial statements issued fiscal years beginning december 15 2001 early adoption encouraged company adopted sfas 144 third quarter 2001 applied accounting standard beginning year adoption accounting standard result material changes net earnings accounting standards previously applied adoption standard result accounting loss sale certain businesses related operating results 2001 discontinued operations accordingly presentation periods presented reclassified conform new standard september 21 2001 company’s ply gem industries inc “ply gem” subsidiary sold capital stock peachtree doors windows inc “peachtree” sne enterprises inc “sne” approximately 45000000 recorded loss sale approximately 20000000 included loss discontinued operations accompanying condensed statement operations ply gem used proceeds pay approximately 20500000 outstanding debt ply gem’s credit facility general corporate purposes result included net intercompany balance investment subsidiaries december 31 2000 net investment discontinued operations 72732000 consisting assets 126523000 liabilities 53791000 related company’s indirect net investment peachtree sne 5 included registrant’s condensed statement cash flows years ended december 31 2001 2000 1999 net transfers subsidiaries principally cash noncash dividends declared subsidiaries’ board directors subsidiaries approximately 280000000 215000000 250000000 respectively december 31 2001 2000 company’s subsidiaries principally ply gem unrestricted cash investments marketable securities approximately 123705000 73711000 respectively 6 certain registrant’s subsidiaries entered financing agreements contain various restrictive covenants place limitations amount distributions advances registrant december 31 2001 approximately 394600000 approximately 282500000 goodwill subsidiary net assets principally ply gem subsidiaries restricted approximately 70500000 principal amount subsidiary indebtedness outstanding financing agreements 7 combined liabilities excluding deferred income taxes company’s subsidiaries december 31 2001 approximately 467400000 consisting 111900000 short longterm debt 123000000 accounts payable 232500000 short longterm accruals taxes obligations approximately 130000000 classified shortterm nortek inc subsidiaries schedule ii valuation qualifying accounts nortek inc subsidiaries exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangementitem 14 principal accountant fees services audit fees company billed 2872000 3720000 audit services years ended december 31 2003 2002 respectively audit fees year ended december 31 2003 include fees audit company’s annual financial statements years ended december 31 2003 audit combined financial statements company’s subsidiary ply gem industries inc december 31 2002 2001 three years ended december 31 2002 december 31 2003 year ended review financial statements included nortek’s quarterly reports form 10q filed 2003 professional services rendered connection company’s private placement senior discount notes statutory audits audit fees year ended december 31 2002 include fees audit nortek’s annual financial statements years ended december 31 2002 reaudit nortek’s financial statements december 31 2001 2000 three years ended december 31 2001 review financial statements included nortek’s quarterly reports form 10q filed 2002 statutory audits auditrelated fees company billed 270000 400000 nonaudit services company’s principal accountant year ended december 31 2003 2002 auditrelated fees billed 2003 include fees audits company’s employee benefit plans accounting consultations audit procedures related acquisitions consultations related company’s sarbanesoxley act section 404 project auditrelated fees billed 2002 include fees audits nortek’s employee benefit plans accounting consultations related acquisitions tax fees company billed 1059000 525000 professional services rendered company’s accountants tax compliance tax advice related acquisitions tax advice tax planning years ended december 31 2003 2002 respectively fees company billed 16000 services 2003 services billed 2003 relate company’s subscription ernst young’s accounting information database services company billed services 2002 part iv item 15item 14 exhibits financial statement schedules reports form 8k financial statements schedules following documents filed part report 1 financial statements page consolidated statement operations three years ended december 31 1994 29 consolidated balance sheet december 31 1994 1993 30 consolidated statement cash flows three years ended december 31 1994 32 consolidated statement stockholders investment three years ended december 31 1994 33 notes consolidated financial statements 34 report independent public accountants 53 2 financial statement schedules schedule ii valuation qualifying accounts 54 schedules iii iv v omitted applicable required rules regulation sx 3 exhibits listed exhibit index incorporated herein reference b reports form 8k reports form 8k filed registrant last quarter period covered report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 6 1995 nortek inc srichard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 6 1995 srichard l bready sd stevens mcvoy richard l bready chairman stevens mcvoy director board president principal executive officer srichard j harris sj peter lyons richard j harris vice president j peter lyons director treasurer principal financial officer director salmon c hall sdennis j mcgillicuddy almon c hall vice president dennis j mcgillicuddy director controller principal accounting officer sphilip b brooks sbarry silverstein philip b brooks director barry silverstein director nortek inc subsidiaries consolidated statement operations three years ended december 31 1994 1993 1992 thousands except per share amounts net sales 737160 744113 799979 costs expenses cost products sold 520328 532488 595177 selling general administrative expense 166815 181279 184366 687143 713767 779543 operating earnings 50017 30346 20436 interest expense 26162 26519 29232 interest income 5295 3223 4446 net gain investment marketable securities 1650 850 loss businesses sold 1750 20300 14500 earnings loss continuing operations provision income taxes 27400 11600 18000 provision income taxes 10200 1000 3000 earnings loss continuing operations 17200 12600 21000 loss discontinued operations 3300 earnings loss extraordinary gain loss 17200 12600 24300 extraordinary gain loss debt retirements 200 6100 100 earnings loss cumulative effect accounting changes 17400 18700 24200 cumulative effect accounting changes 400 2100 net earnings loss 17800 20800 24200 net earnings loss per share continuing operations primary 135 100 167 fully diluted 134 100 167 discontinued operations primary 26 fully diluted 26 earnings loss extraordinary gain loss primary 135 100 193 fully diluted 134 100 193 extraordinary gain loss primary 02 49 01 fully diluted 02 49 01 cumulative effect accounting changes primary 03 17 fully diluted 03 17 net earnings loss primary 140 166 192 fully diluted 139 166 192 weighted average number shares primary 12707 12622 12645 fully diluted 13144 13362 13411 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet december 31 1994 1993 assets 1994 1993 amounts thousands current assets unrestricted cash investments cost approximates market 77106 56606 marketable securities available sale 27974 25892 restricted cash investments marketable securities cost approximates market 9337 6687 accounts receivable less allowances 4030000 4198000 91687 84843 inventories raw materials 32660 27603 work process 9497 9227 finished goods 53191 45183 95348 82013 current assets business sold 23736 insurance claims receivable 14500 prepaid expenses current assets 7542 7541 u federal prepaid income taxes 19800 17000 total current assets 328794 318818 property equipment cost land 6069 5833 buildings improvements 55639 52309 machinery equipment 123848 108983 185556 167125 less accumulated depreciation 87475 76546 total property equipment net 98081 90579 assets goodwill less accumulated amortization 21459000 19180000 72682 75599 noncurrent assets business sold 11987 deferred debt expense 8502 563 11158 11663 92342 99812 519217 509209 accompanying notes integral part financial statements nortek inc subsidiaries consolidated balance sheet december 31 1994 1993 1994 1993 amounts thousands liabilities stockholders investment current liabilities notes payable current maturities longterm debt shortterm obligations 4629 14957 11 12 senior subordinated debentures net 22582 accounts payable 52697 46923 accrued expenses taxes net 98009 91422 current liabilities business sold 11769 insurance claims advances 13239 total current liabilities 155335 200892 liabilities deferred income taxes 18232 18000 7909 8100 26141 26100 notes mortgage notes debentures payable less current maturities 219951 169664 mortgage notes payable business sold 8546 commitments contingencies note 7 stockholders investment preference stock 1 par value authorized 7000000 shares none issued common stock 1 par value authorized 40000000 shares 15814246 15758974 shares issued 15814 15759 special common stock 1 par value authorized 5000000 shares 802097 849575 shares issued 802 849 additional paidin capital 134627 retained earnings accumulated deficit 766 17034 cumulative translation pension adjustments 6168 2143 less treasury common stock cost 3795028 shares 26371 treasury special common stock cost 271574 shares 1680 total stockholders investment 117790 104007 519217 509209 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement cash flows three years ended december 31 1994 1993 1992 amounts thousands cash flows operating activities net earnings loss 17800 20800 24200 adjustments reconcile net earnings loss cash depreciation amortization 17960 20726 23644 gain marketable securities 1650 850 extraordinary gain loss debt retirements 250 9275 150 loss businesses sold 1750 20300 19500 cumulative effect accounting changes 400 3100 deferred federal income tax provision credit continuing operations 300 6300 1700 deferred federal income tax provision discontinued operations 2200 deferred federal income tax provision credit extraordinary items 1350 3175 changes certain assets liabilities net effects acquisitions dispositions accounts receivable net 5501 11033 7323 prepaids current assets 4361 937 2443 u federal income tax refund 1803 inventories 12593 2854 2807 accounts payable 6364 4360 1638 accrued expenses taxes 4242 3913 3398 longterm assets liabilities net 2682 5326 21 total adjustments net earnings loss 8379 33225 36299 net cash provided operating activities 26179 12425 12099 cash flows investing activities capital expenditures 19424 10436 8804 proceeds sale property equipment 114 5242 1045 purchase investments marketable securities 5032 87922 94671 proceeds sale investments marketable securities 113961 72280 net cash proceeds payments relating businesses sold discontinued 12465 2420 38813 change restricted cash investments 2475 2552 13030 net 51 777 1080 net cash provided used investing activities 14301 20200 22773 cash flows financing activities sale notes net 209195 purchase debentures notes payable 191582 1383 21693 increase borrowings 7348 4197 payment borrowings 8962 4124 5692 purchase nortek common special common stock 2006 net 29 1327 2720 net cash provided used financing activities 8622 514 27914 net increase unrestricted cash investments 20500 33139 6958 unrestricted cash investments beginning year 56606 23467 16509 unrestricted cash investments end year 77106 56606 23467 accompanying notes integral part financial statements nortek inc subsidiaries consolidated statement stockholders investment three years ended december 31 1994 cumulative translation addi retained pension special tional earnings common paidin accumulat adjusttreasury stock capital ed deficit ments stock amounts thousands balance december 31 1991 15438 1077 134493 27966 26045 86345 shares special common stock converted 86345 shares common stock 87 631701 shares common treasury stock acquired net 2006 77837 shares common stock issued upon exercise stock options 77 106 net loss 24200 balance december 31 1992 15602 990 134599 3766 28051 140432 shares special common stock converted 140432 shares common stock 141 16400 shares common stock issued upon exercise stock options 16 28 translation adjustment 1337 pension adjustment 806 net loss 20800 balance december 31 1993 15759 849 134627 17034 2143 28051 47478 shares special common stock converted 47478 shares common stock 47 7794 shares common stock issued upon exercise stock options 8 translation adjustment 780 pension adjustment 134 cumulative effect accounting change 400 unrealized decline marketable securities 2979 net earnings 17800 balance december 31 1994 15814 802 134627 766 6168 28051 accompanying notes integral part financial statements nortek inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts nortek inc significant whollyowned subsidiaries company nortek elimination intercompany accounts transactions certain amounts prior years financial statements reclassified conform presentation december 31 1994 october 2 1993 company began account dixieline lumber company inc subsidiary dixieline business held sale result dixielines assets liabilities separately reflected companys accompanying consolidated balance sheet dixielines operating results october 2 1993 included companys consolidated statement operations year ended december 31 1993 dixielines operating results longer included companys consolidated operating results subsequent october 2 1993 company sold business march 31 1994see note 9 cash investments marketable securities investments consist shortterm highly liquid investments readily convertible cash investments marketable securities carried approximate market price company classified restricted certain cash investments marketable securities fully available use operations december 31 1994 approximately 9337000 cash investments marketable securities pledged collateral insurance requirements classified restricted current assets accompanying consolidated balance sheet disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash investments carrying amount approximates fair value short maturity instruments marketable securities fair value marketable securities based quoted market prices december 31 1994 fair value marketable securities approximated amount companys consolidated balance sheet longterm debt december 31 1994 fair value longterm indebtedness approximately 26765000 lower amount companys consolidated balance sheet based quoted market prices see note 4 nortek inc subsidiaries notes consolidated financial statements continued inventories accompanying consolidated balance sheet valued lower cost market december 31 1994 1993 approximately 64589000 53154000 total inventories respectively valued lastin firstout method lifo firstin firstout method fifo accounting inventories would approximately 6710000 4982000 greater december 31 1994 1993 respectively inventories valued fifo method sales recognition company recognizes sales upon shipment products net applicable provisions discounts allowances company also provides estimate warranty bad debts time shipment selling general administrative expense foreign currency translation company translates assets liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using exchange rates effect year gains losses foreign currency translation credited charged cumulative translation adjustment included stockholders investment accompanying consolidated balance sheet gains losses foreign currency translation material 1992 depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows buildings improvements 1035 years machinery equipment including leases 315 years leasehold improvements term lease expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost accumulated depreciation eliminated resulting gain loss recognized goodwill company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions goodwill amortized straightline method 40 years amortization charged continuing operations amounted 2407000 2418000 2548000 1994 1993 1992 respectively balance sheet date company evaluates realizability goodwill based expectations nondiscounted cash flows operating income subsidiary material goodwill balance based recent nortek inc subsidiaries notes consolidated financial statements continued analysis company believes material impairment goodwill exists december 31 1994 net earnings loss per share net earnings loss per share amounts computed using weighted average number common equivalent shares outstanding year earnings loss per share calculations 1993 1992 include effect common stock equivalents convertible debentures reduction related interest expense assumed exercise stock options conversion debentures antidilutive net loss per share amounts special common stock treated equivalent common stock determining earnings per share results 2 cash flows interest paid 22119000 26981000 27436000 1994 1993 1992 respectively following table summarizes activity businesses sold discontinued included accompanying consolidated statement cash flows year ended december 31 1994 1993 1992 amounts thousands fair value assets sold 39439 52793 liabilities assumed purchaser 16143 13329 notes receivable noncash proceeds received part proceeds 6000 316 cash payments relating businesses sold discontinued net 4831 2420 335 net cash proceeds payments relating businesses sold discontinued 12465 2420 38813 noncash financing investing activities excluded accompanying consolidated statement cash flows consisted approximately 2979000 unrealized loss investment marketable securities 1994 see note 11 noncash financing investing activities significant year ended december 31 1993 following summarizes noncash financing investing activities 1992 amounts thousands use restricted cash investments settlement certain litigation see note 7 11800 exchange debentures see note 7 4050 settlement 11 subordinated notes receivable see note 7 2576 1556 nortek inc subsidiaries notes consolidated financial statements continued 3 income taxes first quarter 1993 company adopted sfas 109 change accounting method effect change accounting method material prior year financial statements restated reflect new accounting method effect adopting new accounting method first quarter 1993 significant provision income taxes compared prior accounting method year ended december 31 1992 provision credit income taxes computed accordance comprehensive income tax allocation method recognizes tax effects income expense transactions included years consolidated statement operations regardless year transactions reported tax purposes tax effect temporary differences gave rise significant portions deferred income tax assets liabilities december 31 1994 december 31 1993 follows dec 31 dec 31 1994 1993 amounts thousands u federal prepaid deferred income tax assets arising accounts receivable 1399 1387 inventory 468 666 insurance reserves 7688 4576 reserves liabilities assets net 11181 11703 19800 17000 deferred prepaid income tax liabilities arising property equipment net 12406 11709 prepaid pension assets 1230 1666 unamortized debt discount 102 insurance reserves 643 1025 reserves liabilities assets net 2476 2504 capital loss carryforward 6217 unrealized loss business sold 604 3405 tax assets 3642 1660 valuation allowances 13226 14326 18232 18000 nortek inc subsidiaries notes consolidated financial statements continued december 31 1994 company capital loss carryforward approximately 17700000 expires year 1997 company provided valuation allowance equal tax effect capital loss carryforwards certain tax assets since realization tax assets cannot reasonably assured december 31 1994 company approximately 3000000 net us federal prepaid income tax assets expected realized future operating earnings following summary components earnings loss continuing operations income tax credit year ended december 31 1994 1993 1992 amounts thousands domestic 23100 17000 24400 foreign 4300 5400 6400 27400 11600 18000 following summary provision credit income taxes continuing operations included accompanying consolidated statement operations year ended december 31 1994 1993 1992 amounts thousands federal income taxes current 7125 2800 600 deferred 300 6300 1700 7425 3500 1100 foreign 1500 2600 3200 state 1275 1900 900 10200 1000 3000 nortek inc subsidiaries notes consolidated financial statements continued income tax payments net refunds approximately 10895000 11950000 1600000 1994 1993 1992 respectively table reconciles federal statutory income tax rate effective tax rate continuing operations approximately 372 86 167 1994 1993 1992 respectively year ended december 31 1994 1993 1992 amounts thousands income tax provision credit continuing operations federal statutory rate 9590 4060 6120 net change statutory rate change valuation reserve net 1625 2618 effect unrecognized capital losses 3990 state taxes net federal tax effect 829 1235 594 amortization deductible tax purposes 737 746 552 businesses sold 613 172 2827 foreign source deemed income 700 648 tax effect foreign income 164 196 479 net 108 263 30 10200 1000 3000 company recorded 1000000 income tax credit principally deferred first quarter 1993 relating cumulative effect accounting change certain postretirement benefits fourth quarter 1993 company recorded 3175000 deferred income tax credit relating extraordinary loss arising indebtedness called redemption see note 4 nortek inc subsidiaries notes consolidated financial statements continued 4 notes mortgage notes debentures payable notes mortgage notes debentures payable accompanying consolidated balance sheet december 31 1994 1993 consist following december 31 1994 1993 amounts thousands notes payable banks 51 7348 mortgage notes payable 6774 8188 887 1141 9 78 senior subordinated notes due 2004 9 78 notes net unamortized original issue discount 1632000 216868 9 34 senior notes due 1997 9 34 senior notes net unamortized original issue discount 293000 51152 13 12 senior subordinated debentures due 1997 13 12 debentures net unamortized original issue discount 53000 79305 11 12 senior subordinated debentures due 1994 11 12 debentures net unamortized original issue discount 18000 22582 11 subordinated sinking fund debentures due 2004 11 debentures net unamortized debt discount 18000 19406 10 subordinated sinking fund debentures due 1999 10 debentures net unamortized debt discount 8000 2587 7 12 convertible sinking fund debentures due 2006 7 12 convertible debentures 15494 224580 207203 less amounts included current liabilities 4629 37539 219951 169664 january 14 1994 company redeemed 22600000 principal amount 11 12 debentures called redemption december 1993 classified current liability accompanying consolidated balance sheet february 1994 company sold public offering 218500000 nortek inc subsidiaries notes consolidated financial statements continued 9 78 senior subordinated notes due 2004 9 78 notes discount approximately 1717000 amortized life issue net proceeds sale 9 78 notes deducting underwriting commissions expenses amounted approximately 207695000 portion proceeds used redeem march 24 1994 companys outstanding principal amount indebtedness pay accrued interest 51445000 9 34 senior notes 79358000 13 12 debentures 2595000 10 debentures 19424000 11 debentures called redemption february 22 1994 13 12 debentures redeemed 1015 outstanding principal amount thereof issues redeemed par interest expense net interest income first quarter 1994 approximately 1300000 greater would debt redemption occurred day financing call debt redemptions resulted extraordinary loss approximately 6100000 49 per share net income tax credit approximately 3175000 recorded fourth quarter 1993 see note 9 respect pro forma effect debt redemptions indenture governing 9 78 notes restricts among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indenture upon certain asset sales defined indenture company required offer purchase 100 principal amount plus accrued interest date purchase 9 78 notes principal amount equal net cash proceeds defined indenture invested properties assets used primarily related business owned operated company issue date 9 78 notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indenture 9 78 notes redeemable option company whole part time 104214 march 1 1999 declining 100 march 1 2002 thereafter first half 1994 company purchased 9121000 principal amount 7 12 convertible debentures resulted extraordinary gain approximately 300000 net income taxes approximately 150000 october 24 1994 company redeemed remaining outstanding 6373000 principal amount 7 12 convertible debentures plus paid accrued interest slight redemption premium redemption resulted extraordinary loss approximately 100000 net income taxes 100000 third quarter 1994 purchases redemptions resulted net extraordinary gain 200000 02 per share year ended december 31 1994 discount deferred costs relating various notes debentures 1993 principally amortized original life issues amortization discount deferred costs approximately 1400000 2100000 2000000 1994 1993 1992 respectively fourth quarter 1993 result call redemption certain companys indebtedness described company wrote approximately 8100000 unamortized deferred debt expense debt discount provided redemption premium approximately 1175000 recorded nortek inc subsidiaries notes consolidated financial statements continued extraordinary loss december 31 1994 approximately 28800000 available payment cash dividends stock payments terms companys indenture governing 9 78 notes companys canadian subsidiary 14300000 secured line credit approximately 10550000 aggregate available company december 31 1994 approximately 51000 outstanding secured line credit bearing interest rates approximate prime rate interest line credit facility subject review april year canadian subsidiary pays commitment fee 25 per annum unutilized portion line credit payable monthly pro rata basis mortgage notes payable include various mortgage notes related indebtedness payable installments 2009 bearing interest rates ranging 84 115 approximately 6774000 indebtedness collateralized property equipment aggregate net book value approximately 5254000 december 31 1994 obligations include borrowings relating equipment purchases borrowings bearing interest 2 1245 maturing various dates 2001 approximately 887000 indebtedness collateralized property equipment aggregate net book value approximately 700000 december 31 1994 material shortterm borrowings 1994 following summary maturities companys debt obligations excluding unamortized debt discount due december 31 1995 amounts thousands 1996 527 1997 547 1998 549 1999 205 thereafter 219755 221583 nortek inc subsidiaries notes consolidated financial statements continued 5 common stock special common stock options deferred compensation share special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting remaining 75 elected combined vote classes shares special common stock generally nontransferable freely convertible shareforshare basis shares common stock company rights plan provides right purchase 75 one onehundredth share 100 par value series participating preference stock right held rights currently exercisable attached share common stock may redeemed directors 01 per share time shareholder acquires beneficial ownership 17 companys common stock special common stock rights trade separately become exercisable entitling rights holder acquire additional shares companys common stock market value equal twice amount exercise price right addition person group acquiring company commences tender offer announces intention acquire 30 companys common stock special common stock rights trade separately certain circumstances permit rights holder acquire common stock acquiring company market value equal twice amount exercise price right december 31 1994 total 1584597 shares common stock reserved follows stock option plans 782500 conversion special common stock 802097 1584597 december 31 1994 total 43500 shares special common stock reserved stock option plans company several stock option plans provide granting options certain officers employees nonemployee directors company options granted plans vest periods ranging five years expire eight ten years date grant december 31 1994 total options granted available grant plans 782500 options outstanding covering 494100 shares common special common stock 261500 options currently exercisable options 50100 65100 shares common special common stock became exercisable 1994 1993 respectively proceeds options exercised credited common stock additional paidin capital nortek inc subsidiaries notes consolidated financial statements continued following table summarizes common special common stock option transactions three years ended december 31 1994 number option price shares per share total options outstanding december 31 1991 376500 2251569 1593459 exercised 85700 225288 240613 canceled 50500 225869 288008 options outstanding december 31 1992 240300 2251569 1064838 granted 280000 875 2450000 exercised 16400 2252875 44000 options outstanding december 31 1993 503900 2251569 3470838 exercised 9800 2875 28175 options outstanding december 31 1994 494100 2251569 3442663 january 31 1992 company acquired 625000 shares common stock negotiated transaction approximately 1975000 including expenses see note 4 respect limitations payment cash dividends stock payments 6 pension retirement profit sharing plans postretirement benefits company subsidiaries various pension retirement profit sharing plans requiring contributions qualified trusts union administered funds pension profit sharing expense charged operations aggregated approximately 2883000 1994 1683000 1993 2130000 1992 companys policy fund currently actuarially determined annual contribution companys net pension expense defined benefit plans 1994 1993 1992 consists following components year ended december 31 1994 1993 1992 amounts thousands service costs 1647 1685 1584 interest cost 2261 1989 1967 actual net income plan assets 2155 3295 3173 net amortization deferred items 10 822 1070 1763 1201 1448 nortek inc subsidiaries notes consolidated financial statements continued following tables set forth funded status companys defined benefit plans amounts recognized companys consolidated balance sheet december 31 1994 1993 plan assets exceeding benefit obligation 1994 1993 amounts thousands actuarial present value benefit obligations september 30 vested benefits 18149 17799 nonvested benefits 630 434 accumulated benefit obligation 18779 18233 effect projected future compensation levels 5373 5936 projected benefit obligation 24152 24169 plan assets fair value september 30 24486 24055 plan assets excess less projected benefit obligation 334 114 unrecognized net loss 5401 7294 unrecognized net assets 2412 2971 unrecognized prior service costs 129 312 3194 4521 accumulated benefit obligation exceeding plan assets 1994 1993 amounts thousands actuarial present value benefit obligations september 30 vested benefits 4199 4221 nonvested benefits 232 305 accumulated benefit obligation 4431 4526 effect projected future compensation levels projected benefit obligation 4431 4526 plan assets fair value september 30 3691 3678 plan assets less projected benefit obligation 740 848 unrecognized net loss 807 806 unrecognized prior service costs 602 652 additional minimum liability 1409 1458 740 848 plan assets include commingled funds marketable securities insurance contracts cash shortterm investments weighted average discount rate increase future compensation levels used determining actuarial present value projected benefit obligation 8 percent 5 12 percent respectively 1994 7 18 percent 5 12 percent respectively 1993 8 percent 6 percent respectively 1992 expected longterm rate return assets 8 12 percent 1994 1993 9 12 percent 1992 nortek inc subsidiaries notes consolidated financial statements continued 1994 1993 minimum pension liability intangible asset certain plans recognized resulting reduction companys stockholders investment approximately 672000 806000 respectively january 1 1993 company adopted accounting requirements statement financial accounting standards sfas 106 employers accounting postretirement benefits pensions recorded charge operations accumulated postretirement benefit obligation apbo approximately 3100000 income tax credit approximately 1000000 17 per share net tax cumulative effect accounting change previously health care related benefits qualified active retired beneficiaries charged operating results period benefits paid remaining liability approximately 1200000 december 31 1994 related benefits significant companys financial position 7 commitments contingencies company provides accruals direct indirect costs associated estimated resolution contingencies earliest date incurrence liability deemed probable amount liability reasonably estimated december 31 1994 company subsidiaries obligated lease agreements rental certain real estate machinery equipment used operations minimum annual rental expense aggregates approximately 26598000 december 31 1994 obligations payable follows 1995 4130000 1996 3393000 1997 2907000 1998 2596000 1999 1880000 thereafter 11692000 nortek inc subsidiaries notes consolidated financial statements continued certain lease agreements provide increased payments based changes consumer price index rental expense continuing operations accompanying consolidated statement operations excluding dixieline years ended december 31 1994 1993 1992 approximately 7000000 6600000 8700000 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes 1992 former subsidiary company sold 1984 defaulted certain principal interest payments relating obligations company contingently liable march 1994 company paid approximately 1594000 interest payments date obligations third fourth quarter 1994 company purchased slight discount approximately 6640000 principal amount obligations consisting obligations several holders company record losses 1994 connection settlement contingent obligations july 1992 derivative litigation company directors challenging transactions involving retirement 1990 companys former chairman settled connection settlement company recorded net aftertax gain discontinued operations third quarter approximately 900000 07 per share company subject contingencies including additional legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided material adverse effect consolidated financial position results operations company nortek inc subsidiaries notes consolidated financial statements continued 8 operating segment information concentration credit risk company operates one industry segment residential commercial building products single customer accounts 10 consolidated net sales 90 net sales identifiable segment assets related companys domestic operations financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising companys customer base dispersion across many different geographical regions december 31 1994 company significant concentrations credit risk 9 businesses sold march 31 1994 company sold capital stock dixieline approximately 18800000 cash 6000000 preferred stock purchaser third quarter 1993 company provided valuation reserve approximately 20300000 119 per share net tax reduce companys net investment dixieline estimated net realizable value additional loss 1994 incurred connection sale january 1995 company paid approximately 1750000 14 per share net tax final purchase price adjustment related one businesses sold recorded charge earnings fourth quarter 1994 following table presents approximate unaudited pro forma operating results company year ended december 31 1994 december 31 1993 adjusted debt financing debt redemptions see note 4 pro forma effect businesses sold including sale dixieline year ended december 31 1994 1993 amounts thousands except per share amounts net sales 737160 660908 earnings continuing operations 19900 3500 fully diluted earnings per share 155 28 computing pro forma earnings continuing operations interest expense indebtedness redeemed period indebtedness outstanding excluded operating results average interest rate approximately 135 including amortization debt discount deferred debt expense periods presented net tax effect interest expense included notes rate approximately 9 78 plus amortization deferred debt expense debt discount periods presented net tax effect net aftertax loss recorded third quarter 1993 valuation reserve recorded reduce companys net investment dixieline nortek inc subsidiaries notes consolidated financial statements continued net realizable value 1750000 1994 noted also excluded investment income assumed earned remaining cash proceeds debt financing rate 35 investment income assumed earned proceeds sale dixieline january 2 1992 companys dixieline products inc subsidiary sold assets subject certain liabilities subsidiary l j smith inc l j smith approximately 24000000 company recorded pretax gain sale l j smith approximately 8000000 34 per share net tax first quarter 1992 october 2 1992 company sold capital stock whollyowned subsidiary bend millwork systems inc bend approximately 17200000 cash recorded pretax loss sale third quarter 1992 approximately 20500000 143 per share net tax fourth quarter 1992 company provided additional reserves approximately 2000000 17 per share net tax connection sale bend related purchase price negotiations settlements combined unaudited net sales pretax loss businesses sold 1993 1992 included consolidated statement operations company approximately 83205000 600000 respectively year ended december 31 1993 approximately 187700000 2250000 respectively year ended december 31 1992 10 discontinued operations results discontinued operations include income expense items relating businesses discontinued prior years including increase reserves approximately 1400000 third quarter 5000000 fourth quarter 1992 11 net gain loss investment marketable securities january 1 1994 company adopted accounting requirements sfas 115 accounting certain investments debt equity securities recorded income accumulated unrealized marketable security reserve recorded december 31 1993 approximately 400000 03 per share cumulative effect accounting change new accounting method company record unrealized gains losses investment securities adjustments stockholders investment previously gains losses recorded companys statement operations december 31 1994 reduction companys stockholders investment new accounting method gross unrealized losses approximately 3379000 december 31 1994 gross unrealized gains companys marketable securities prior periods restated nortek inc subsidiaries notes consolidated financial statements continued companys marketable securities december 31 1994 consist u government treasury notes due follows fair principal market due amount cost value amounts thousands 15 years 16000 16004 14712 510 years 15000 15349 13262 31000 31353 27974 1994 realized gains losses marketable securities 1993 company recorded pretax gain investment marketable securities 1000000 05 per share net tax first quarter pretax gain 450000 02 per share net tax second quarter 900000 pretax gain 05 per share net tax third quarter pretax loss 700000 04 per share net tax fourth quarter 1992 company recorded pretax loss investment marketable securities 500000 03 per share net tax first quarter pre tax gain 850000 04 per share net tax second quarter 1050000 pretax gain 06 per share net tax third quarter pretax loss 550000 04 per share net tax fourth quarter 12 selling general administrative expense 1994 company incurred net aftertax charges approximately 6600000 principally relating expenses certain cost reduction activities manufacturing process improvements companys operating groups marketing expenses result competitive conditions expenses certain litigation matters dispute effect costs expenses partially offset second quarter 1994 approximately 1900000 aftertax income resulting settlement certain insurance claims disputes net aftertax charges approximately 1500000 1993 incurred connection cost reduction activities manufacturing process improvements fourth quarter 1993 companys plumbing products group recorded pretax loss approximately 2800000 15 per share net tax connection restructure certain product lines third quarter 1993 company recorded pretax loss approximately 1600000 08 per share net tax result sale october 1993 certain real property provided pretax reserve approximately 700000 04 per share net tax connection consolidation certain manufacturing facilities nortek inc subsidiaries notes consolidated financial statements continued 13 accrued expenses taxes net accrued expenses taxes net consist following december 31 1994 1993 december 31 1994 1993 amounts thousands interest 7446 4759 insurance 23483 17677 payroll management incentive accrued employee benefits 14609 11647 businesses sold discontinued 1750 8650 net 50721 48689 98009 91422 14 summarized quarterly financial data unaudited following summarizes unaudited quarterly financial data years ended december 31 1994 december 31 1993 quarters ended april 2 july 2 oct 1 dec 31 thousands except per share amounts net sales 169020 193722 197012 177406 gross profit 49718 57678 58075 51361 earnings continuing operations 700 5500 6400 4600 net earnings 1500 5400 6300 4600 earnings per share continuing operations primary 06 44 50 36 fully diluted 06 43 50 36 net earnings per share primary 12 43 49 36 fully diluted 12 42 49 36 nortek inc subsidiaries notes consolidated financial statements continued quarters ended april 3 july 3 oct 2 dec 31 thousands except per share amounts net sales 178707 195058 202030 168318 gross profit 49545 54665 56985 50430 earnings loss continuing operations 1400 1500 12900 200 net earnings loss 3500 1500 12900 5900 earnings loss per share continuing operations primary 11 12 103 02 fully diluted 11 12 103 02 net earnings loss per share primary 28 12 103 47 fully diluted 28 12 103 47 companys earnings loss continuing operations 1993 includes approximate 14900000 net aftertax loss 119 per share third quarter relating valuation reserve reduce companys investment dixieline estimated net realizable value see notes 1 9 net earnings loss 1993 also includes approximate 2100000 net aftertax loss 17 per share related cumulative effect accounting change first quarter see note 6 approximate 6100000 aftertax extraordinary loss 49 per share fourth quarter related call debt redemption first quarter 1994 see note 4 see notes 4 6 9 11 12 regarding certain quarterly transactions included operating results table lower net sales 1994 1993 compared prior year principally reflect effect businesses sold partially offset increased net sales ongoing operations part resulting overall improvement residential housing market see managements discussion analysis financial condition results operations report independent public accountants nortek inc audited accompanying consolidated financial statements nortek inc delaware corporation subsidiaries listed item 14a1 form 10k financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position nortek inc subsidiaries december 31 1994 1993 results operations cash flows three years period ended december 31 1994 conformity generally accepted accounting principles explained note 6 consolidated financial statements effective january 1 1993 company changed method accounting post retirement benefits pensions explained note 11 consolidated financial statements effective january 1 1994 company changed method accounting marketable securities audit made purpose forming opinion basic financial statements taken whole schedule listed item 14a2 presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp boston massachusetts february 28 1995 schedule ii nortek inc subsidiaries valuation qualifying accounts balance charged costs charged deductions balance beginning end classification year expenses accounts reserves year amounts thousands year ended december 31 1992 allowances doubtful accounts sales allowances 4633 2362 573b2354a 4068 year ended december 31 1993 allowances doubtful accounts sales allowances 4068 1832 125c1577a 4198 year ended december 31 1994 allowances doubtful accounts sales allowances 4198 762 147 d1077a 4030 amounts written net recoveries b sale businesses c transfer allowances doubtful accounts dixieline current assets business held sale exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangement 31 restated certificate incorporation nortek inc exhibit 2 form 8k filed april 23 1987 file 16112 32 amendment restated certificate incorporation nortek inc effective may 10 1989 exhibit 32 form 10k filed march 30 1990 file 16112 33 bylaws nortek inc amended november 30 1993 exhibit 33 form 10k filed march 25 1994 file 16112 41 rights agreement dated march 31 1986 amended restated march 18 1991 company state street bank trust company rights agent exhibit 1 form 8k filed march 26 1991 file 16112 42 amendment 1 dated october 6 1993 amended restated rights agreement dated march 18 1991 exhibit 1 form 8k filed october 12 1993 file 16112 43 indenture dated february 14 1994 company state street bank trust company trustee relating 9 78 senior subordinated notes due 2004 exhibit 45 form 10k filed march 25 1994 file 16112 101 employment agreement richard l bready company dated january 1 1984 exhibit 102 form 10k filed march 31 1986 file 16112 102 amendment dated march 3 1988 employment agreement richard l bready company dated january 1 1984 exhibit 192 form 10q filed may 17 1988 file 16112 103 second amendment dated november 1 1990 employment agreement richard l bready company dated january 1 1984 exhibit 103 form 10k filed april 1 1991 file 16112 104 deferred compensation agreement dated march 7 1983 richard l bready company exhibit 104 registration statement 3369778 filed february 9 1994 105 deferred compensation agreement dated march 7 1983 almon c hall company exhibit 105 registration statement 3369778 filed february 9 1994 106 deferred compensation agreement dated march 7 1983 richard j harris company exhibit 106 registration statement 3369778 filed february 9 1994 107 1984 stock option plan amended may 27 1987 exhibit 282 registration statement 3322527 filed june 15 1988 108 change control severance benefit plan key employees adopted february 10 1986 form agreement employees exhibit 1019 form 10k filed march 31 1986 file 16112 109 1987 stock option plan exhibit 283 registration statement 3322527 filed june 15 1988 1010 form indemnification agreement company directors certain officers appendix c proxy statement dated march 23 1987 annual meeting nortek stockholders file 16112 1011 1988 general stock option plan appendix proxy statement dated april 1 1988 annual meeting nortek stockholders file 16112 1012 1988 general stock option plan iii appendix c proxy statement dated april 12 1989 annual meeting nortek stockholders file 16112 1013 registration rights agreement dated october 31 1990 company bready associates exhibit 4 schedule 13d filed november 13 1990 bready associates relating common stock par value 100 per share company 1014 1990 general stock option plan appendix proxy statement dated april 17 1991 annual meeting nortek stockholders file 16112 111 calculation shares used determining earnings per share 211 list subsidiaries 231 consent independent public accountants 271 financial data schedule item 7 managements discussion analysis financial condition results operations company diversified manufacturer residential commercial building products operating within three principal product groups residential building products group air conditioning heating products group plumbing products group product groups company manufactures sells primarily united states canada wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets october 1993 company made strategic decision sell retail home center operations dixieline increase companys focus building products businesses although company currently intends operate business sale consummated purposes managements discussion analysis financial condition results operations results operations attributable dixieline excluded data reported ongoing operations including net sales cost products sold selling general administrative expense segment earnings total consolidated operating results company however include operating results dixieline october 2 1993 date business accounted business held sale see notes 1 9 notes consolidated financial statements results operations following tables set forth three years ended december 31 1993 certain consolidated operating results b percentage change certain results compared prior year c percentage certain results bears net sales change certain percentages net sales compared prior year percentage change year ended december 31 1992 1991 1993 1992 1991 1993 1992 amounts millions net sales 7441 8000 9170 70 128 cost products sold 5325 5952 6931 105 141 selling general admini strative expense 1813 1844 2129 17 134 operating earnings 303 204 110 485 855 interest expense 265 292 392 93 255 interest dividend income 32 44 88 273 500 net gain investment marketable securities 17 09 04 889 1250 settlement litigation 115 1000 loss businesses sold held sale 203 145 152 400 46 loss continuing operations provision credit income taxes 116 180 457 356 606 provision credit income taxes 10 30 110 667 1273 loss continuing operations 126 210 347 400 395 loss discontinued operations 33 1000 extraordinary gain loss debt retirements 61 01 76 987 cumulative effect account ing change 21 net loss 208 242 271 141 107 change percentage net sales 1992 1991 year ended december 31 1993 1992 1991 1993 1992 net sales 1000 cost products sold 715 744 756 29 12 selling general admini strative expense 244 230 232 14 02 operating earnings 41 26 12 15 14 interest expense 36 37 43 1 06 interest dividend income 4 6 10 2 04 net gain investment marketable securities 2 settlement litigation 13 loss businesses sold 27 18 16 9 02 loss continuing opera tions provision credit income taxes 16 23 50 7 27 provision credit income taxes 1 03 12 2 15 loss continuing opera tions 17 26 38 9 12 loss discontinued operations 04 4 04 extraordinary gain loss debt retirements 8 08 8 08 cumulative effect accounting change 3 net loss 28 30 2 following table presents net sales companys principal product groups three years ended december 31 1993 percentage change results compared prior year percentage change 1992 1991 year ended december 31 1993 1992 1991 1993 1992 net sales residential building products 2572 2492 2415 32 air conditioning heating products 2756 2370 2211 163 72 plumbing products 1281 1261 1127 16 119 net sales ongoing operations 6609 6123 5753 79 64 businesses sold held sale 832 1877 3417 557 451 total 7441 8000 9170 70 128 year ended december 31 1993 compared year ended december 31 1992 net sales ongoing operations increased approximately 48598000 approximately 79 1993 compared 1992 total net sales decreased approximately 55866000 approximately 70 1993 compared 1992 result businesses sold 1992 effect dixieline partially offset following factors net sales ongoing operations increased principally result increased sales volume residential air conditioning heating products part result addition certain distributors increased shipments new replacement air conditioning heating products manufactured housing customers air conditioning heating products group lesser extent increased sales levels residential building products group increased sales levels bathroom fixtures principally vitreous china products plumbing products group also factor cost products sold ongoing operations percentage net sales ongoing operations decreased approximately 725 1992 approximately 711 1993 total cost products sold percentage total net sales decreased approximately 744 1992 approximately 715 1993 result effect businesses sold 1992 partially offset effect increases cost products sold percentage net sales dixieline following factors decrease cost products sold ongoing operations percentage net sales ongoing operations primarily attributable increased sales levels reduction cost plumbing products group lesser extent increased sales residential building products group air conditioning heating products group cases without proportionate increase costs improvement cost levels due part companys ongoing cost control efforts selling general administrative expense ongoing operations percentage net sales ongoing operations increased approximately 233 1992 approximately 243 1993 total selling general administrative expense percentage total net sales increased approximately 230 1992 approximately 244 1993 result factors described effect businesses sold 1992 sold businesses operated lower expense levels companys product groups partially offset lower expense levels dixieline increase percentage net sales ongoing operations 1993 principally due effect pretax loss fourth quarter 1993 approximately 2800000 connection curtailment certain product lines companys plumbing products group effect pretax losses third quarter 1993 approximately 1600000 result sale october 1993 certain real property approximately 700000 connection consolidation certain manufacturing facilities companys residential building products group increase percentage net sales ongoing operations partially offset effect increased sales volume residential manufactured housing air conditioning heating products air conditioning heating products group without proportionate increases expense segment earnings ongoing operations approximately 47200000 1993 compared approximately 38100000 1992 total segment earnings approximately 46900000 1993 compared approximately 32700000 1992 result effect changes operating year ended december 31 1993 compared year ended december 31 1992 continued results dixieline business sold 1992 following factors total segment earnings operating earnings loss plus corporate expenses directly attributable companys operating activities increase segment earnings ongoing operations principally due increased sales level reduced costs plumbing products group part due companys ongoing cost control efforts increased sales volume residential manufactured housing air conditioning heating products air conditioning heating products group increased sales level residential building products group without proportionate increase cost expense increase segment earnings ongoing operations partially offset effect pretax loss fourth quarter 1993 approximately 2800000 effect pretax losses third quarter 1993 approximately 1600000 700000 described foreign segment earnings consisting primarily results operations companys canadian subsidiary manufactures builtin ventilating products declined approximately 11 segment earnings ongoing operations 1993 approximately 16 earnings 1992 decline primarily due approximately 30 increase domestic segment earnings ongoing operations 1993 well approximate 11 decrease foreign segment earnings 1993 decrease foreign segment earnings primarily result continued weakness residential construction market canada dixielines operating loss decreased approximately 700000 loss approximately 300000 1993 net sales dixieline approximately 83200000 1993 approximately 94800000 1992 total consolidated operating results company include operating results dixieline october 2 1993 weakness san diego area residential construction market increased competition continued affect dixielines results adversely operating earnings 1993 increased approximately 9900000 approximately 485 compared 1992 primarily result factors discussed include effect results dixieline business sold 1992 interest expense 1993 decreased approximately 2700000 approximately 93 compared 1992 primarily result purchases discount open market negotiated transactions companys debentures notes 1992 payment current maturities longterm debt interest income 1993 decreased approximately 1200000 approximately 273 compared 1992 principally due lower average invested balances shortterm investments marketable securities investments part due reduction indebtedness lower yields earned investment marketable securities net gain investment marketable securities approximately 1650000 1993 compared approximately 850000 1992 year ended december 31 1993 compared year ended december 31 1992 continued pretax loss businesses sold held sale approximately 20300000 1993 approximately 14500000 1992 resulted approximately 11600000 loss provision income taxes 1993 primary reason approximately 18000000 loss provision income taxes 1992 pretax loss businesses sold held sale 1993 resulted companys decision sell dixieline therefore reduce companys net investment business estimated net realizable value see notes 1 9 notes consolidated financial statements provision income taxes approximately 1000000 1993 compared approximately 3000000 1992 provision income taxes percentage pretax loss continuing operations approximately 86 1993 compared approximately 167 1992 income tax rates differed united states federal statutory rate 35 1993 34 1992 result effect increase income tax valuation reserves 1993 higher foreign income tax foreign source income limited amount state income tax benefits recorded nondeductible amortization expense tax purposes years 1992 result certain nondeductible costs associated business sold unrecorded income tax credits relating capital loss carryforwards since income tax benefits attributable thereto may realized see note 3 notes consolidated financial statements extraordinary loss approximately 6100000 1993 compared approximate 100000 gain 1992 loss 1993 resulted primarily call redemption february 22 1994 certain companys various notes debentures connection financing described note 4 notes consolidated financial statements charge operations 1993 cumulative effect accounting change approximately 2100000 resulted adoption statement financial accounting standards sfas 106 see note 6 notes consolidated financial statements year ended december 31 1992 compared year ended december 31 1991 net sales ongoing operations increased approximately 36982000 approximately 64 1992 compared 1991 total net sales decreased approximately 117070000 approximately 128 1992 compared 1991 due effect businesses sold 1991 1992 partially offset following factors net sales ongoing operations increased principally result increased sales volume residential air conditioning heating products air conditioning heating products group increased sales prices sales volume bathroom fixtures plumbing products group lesser extent increased sales levels residential building products group also factor cost products sold ongoing operations percentage net sales ongoing operations decreased slightly approximately 727 1991 approximately 725 1992 total cost products sold percentage total net sales decreased approximately 756 1991 approximately 744 1992 differential attributable fact year ended december 31 1992 compared year ended december 31 1991 continued businesses sold company period operated higher cost levels companys product groups decrease cost products sold ongoing operations percentage net sales ongoing operations 1992 primarily attributable increased sales levels residential air conditioning heating products air conditioning heating products group increased sales levels plumbing products residential building products groups case without proportionate increase cost decrease percentage partially offset increased costs slightly lower sales commercial industrial air conditioning heating products air conditioning heating products group selling general administrative expense ongoing operations percentage net sales ongoing operations decreased approximately 247 1991 approximately 233 1992 total selling general administrative expense percentage total net sales decreased approximately 232 1991 approximately 230 1992 differential attributable fact businesses sold company period operated lower expense levels companys product groups decrease selling general administrative expense ongoing operations percentage net sales ongoing operations 1992 principally due increased sales bathroom fixtures plumbing products group without proportionate increase expense reduction level expense residential building products group also contributed decrease percentage net settlements litigation related expenses approximately 700000 1992 compared approximately 2300000 1991 also factors segment earnings ongoing operations approximately 38100000 1992 approximately 27800000 1991 total segment earnings approximately 32700000 1992 compared approximately 23800000 1991 increase total segment earnings primarily result factors follow partially offset effect businesses sold increase segment earnings ongoing operations due principally reduced expense levels residential building products group increased sales levels residential air conditioning heating products air conditioning heating products group lesser extent increased sales levels plumbing products plumbing products group contributed increase segment earnings ongoing operations decline 1992 amount net settlements litigation related expenses also factor increase segment earnings ongoing operations 1992 increases segment earnings ongoing operations partially offset slightly lower earnings attributable commercial industrial air conditioning heating products air conditioning heating products group resulting slight decrease net sales products without proportionate decrease costs foreign segment earnings declined approximately 16 total segment earnings ongoing operations 1992 approximately 30 earnings 1991 decline primarily due approximate 64 increase domestic segment earnings ongoing operations 1992 well approximate 27 decrease foreign segment earnings 1992 decrease foreign segment earnings due primarily sales decrease year ended december 31 1992 compared year ended december 31 1991 continued companys canadian operations resulting weakness residential construction market canada operating loss dixieline increased approximately 500000 loss 1100000 1992 increased loss resulted primarily decline net sales approximately 9700000 approximately 93 approximately 94800000 1992 approximately 104500000 1991 weakness san diego area residential construction market increased competition primarily responsible lower sales increased loss operating earnings 1992 increased approximately 9400000 approximately 855 compared 1991 primarily result factors discussed segment earnings ongoing operations partially offset increase operating loss businesses sold date sale lower unallocated corporate expenses also factor interest expense 1992 decreased approximately 10000000 approximately 255 compared 1991 principally result purchases discount open market negotiated transactions companys debentures notes 1992 1991 payment current maturities longterm debt reduction net shortterm borrowings interest income 1992 decreased approximately 4400000 approximately 500 compared 1991 principally due lower average invested balances shortterm investments marketable securities investments part due reduction indebtedness significantly lower yields earned investments marketable securities net gain investment marketable securities approximately 850000 1992 compared approximately 400000 1991 gain investment marketable securities 1991 net loss approximately 1600000 sale companys investment stanley interiors corporation preferred stock pretax loss businesses sold approximately 14500000 1992 primary factor approximately 18000000 loss continuing operations provision income taxes 1992 approximately 15200000 pretax loss businesses sold approximately 11500000 loss settlement litigation 1991 significant factors approximately 45700000 loss continuing operations income tax credit 1991 provision income taxes continuing operations approximately 3000000 1992 compared approximately 11000000 income tax credit 1991 provision income taxes percentage pretax loss continuing operations approximately 167 1992 compared income tax credit approximately 241 1991 income tax rate differed u federal statutory rate 34 years result effect certain nondeductible costs associated businesses sold approximately 2827000 1992 approximately 968000 1991 higher foreign income tax foreign source income approximately 1127000 1992 approximately 2728000 1991 limited amount state income tax benefits recorded since income tax benefits attributable operating year ended december 31 1992 compared year ended december 31 1991 continued losses state income tax purposes may realized nondeductible amortization expense tax purposes 1992 approximately 3990000 unrecorded income tax credits relating capital loss carryforwards results discontinued operations 1992 included pretax gain 1474000 approximately 900000 aftertax attributable exchange securities resulting settlement derivative litigation see note 7 notes consolidated financial statements 1992 results discontinued operations also included pretax valuation reserves approximately 1400000 recorded third quarter approximately 5000000 recorded fourth quarter company remains contingently liable approximately 7100000 obligations industrial revenue bond irbs agreements plus unpaid interest relating facilities previously discontinued business discontinued business defaulted certain principal interest payments related irbs 1992 february 1993 filed protection federal bankruptcy laws company continues vigorously pursue available remedies minimize liability may ultimately result outcome matter company believes resolution matter giving consideration amounts previously provided material adverse effect financial position results operations company see notes 7 10 notes consolidated financial statements results discontinued operations 1991 included income expense items relating businesses discontinued prior years including pretax gain approximately 700000 result proceeds settlement certain litigation extraordinary gain debt retirements decreased approximately 7500000 1992 compared 1991 liquidity capital resources companys primary sources liquidity 1993 1992 funds provided subsidiary operations unrestricted investments marketable securities net proceeds businesses sold discontinued companys canadian subsidiary broan limited 20100000 canadian approximately 15200000 u exchange rates prevailing december 31 1993 secured line credit approximately 14800000 canadian approximately 11200000 u exchange rates prevailing december 31 1993 aggregate available company line credit line credit prohibits dividends distributions company broan limited excess 14800000 canadian approximately 11200000 u exchange rates prevailing december 31 1993 borrowings line credit available working capital general corporate purposes line credit contains covenants requiring broan limited maintain ratio earnings interest taxes interest least 2 1 ii working capital ratio least 15 1 iii debt equity ratio higher 3 1 line credit also limits annual amount capital expenditures broan limited may make 500000 canadian approximately 378000 u exchange rates prevailing december 31 1993 broan limited pays commitment fee 25 per annum unutilized portion line credit payable monthly pro rata basis line credit subject review lender april 1994 liquidity capital resources continued march 15 1994 2346000 u outstanding borrowings line credit proceeds borrowings advanced company 3850000 u additional available borrowings could advanced company unrestricted cash investments 56606000 december 31 1993 january 14 1994 company redeemed 22600000 principal amount 11 12 senior subordinated debentures due may 1994 called redemption december 1993 february 1994 company sold public offering 218500000 978 senior subordinated notes due 2004 978 notes slight discount portion net proceeds sale 978 notes used redeem march 24 1994 approximately 153000000 certain companys outstanding principal amount indebtedness pay accrued interest call redemption february 22 1994 indebtedness resulted aftertax extraordinary loss approximately 6100000 recorded fourth quarter 1993 see note 4 notes consolidated financial statements company believes cash flow subsidiary operations unrestricted cash marketable securities borrowings line credit new credit facilities arrangements may entered provide sufficient liquidity meet companys working capital expenditure debt service ongoing business needs least 1994 capital expenditures approximately 10400000 1993 expected approximately 14000000 1994 indenture governing 978 notes restricts among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness see note 4 notes consolidated financial statements companys investment marketable securities december 31 1993 consisted primarily investments united states treasury securities december 31 1993 approximately 6687000 companys cash investments pledged collateral insurance company classified restricted current assets companys accompanying consolidated balance sheet 1993 approximately 5507000 cash utilized company subsidiaries pay indebtedness including purchases slight discount open market transactions approximately 1202000 principal amount companys debentures december 31 1993 company remains contingently liable approximately 7100000 obligations industrial revenue bond irbs agreements plus unpaid interest relating facilities previously owned subsidiary former subsidiary defaulted certain principal interest payments related irbs 1992 february 1993 filed protection federal bankruptcy laws march 1994 company paid approximately 1594000 trustee irbs interest payments date company continues vigorously pursue available remedies minimize liability may ultimately result outcome matter company believes resolution matter giving consideration amounts previously provided material liquidity capital resources continued adverse effect financial position results operations company see note 7 notes consolidated financial statements 1993 company adopted accounting requirements sfas 106 postretirement health care related benefits recorded accumulated postretirement benefit obligation approximately 2100000 income tax credit approximately 1000000 17 per share net tax cumulative effect accounting change previously health care related benefits qualified retired beneficiaries charged operating results period benefits paid approximately 950000 accumulated postretirement benefit obligation paid 1993 result certain plan modifications see note 6 notes consolidated financial statements 1993 company decided sell dixieline recorded pretax valuation reserve approximately 20300000 approximately 14900000 aftertax third quarter 1993 reduce companys net investment business estimated net realizable value company preliminary discussions potential purchaser operations however agreement yet reached assurance transaction consummated company reflected dixielines current assets noncurrent assets current liabilities longterm mortgage notes payable separately consolidated balance sheet see notes 1 9 notes consolidated financial statements companys working capital current ratio decreased approximately 132587000 approximately 191 respectively december 31 1992 approximately 117926000 approximately 161 respectively december 31 1993 decreases include effect change method accounting income taxes pursuant sfas 109 adopted first quarter 1993 see note 3 notes consolidated financial statements disregarding effect sfas 109 working capital decreased approximately 18263000 approximately 138 december 31 1992 december 31 1993 accounts receivable excluding dixieline increased approximately 6480000 approximately 83 december 31 1992 december 31 1993 net sales ongoing operations increased approximately 56 fourth quarter 1993 compared fourth quarter 1992 increase principally result increased net sales new replacement products residential manufactured housing customers air conditioning heating products group rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales significant net sales near end period generally result significant amounts accounts receivable date balance sheet end period recent periods company experienced significant changes credit terms collection efforts credit utilization delinquency inventories excluding dixieline increased approximately 5870000 approximately 77 december 31 1992 december 31 1993 liquidity capital resources continued disregarding effect sfas 109 inventories increased approximately 523000 approximately 7 unrestricted cash investments increased approximately 33139000 22600000 used retire certain indebtedness january 14 1994 see note 4 notes consolidated financial statements december 31 1992 december 31 1993 principally result cash provided used following condensed consolidated cash flows operating activities cash flow operations net 21476000 increase accounts receivable net 11033000 increase inventories 2854000 increase accounts payable 4360000 change accrued expenses taxes prepaids assets liabilities net 476000 investing activities net cash payments relating businesses sold discontinued 2420000 proceeds sale investment marketable securities net purchases 26039000 proceeds sale property equipment 5242000 capital expenditures 10436000 financing activities increases borrowings net payments including purchase debentures 1841000 net 448000 33139000 companys debttoequity ratio increased approximately 161 december 31 1992 approximately 211 december 31 1993 primarily result net loss 20800000 1993 net increase borrowings approximately 7100000 december 31 1993 subsequently thereafter payment cash dividends stock payments prohibited restrictive companys indentures loan agreements see note 4 notes consolidated financial statements companys st louis missouri plant part companys air conditioning heating products group manufactures products residential sitebuilt manufactured housing markets experienced damage result flooding mississippi river july 1993 plant closed several weeks returned full operation late august 1993 december 31 1993 company accrued estimated losses approximately 14500000 related flooding recorded receivable approximately 14500000 casualty property damage business interruption insurance claims due insurance carrier recorded liability approximately 13200000 cash advances received relating claims company believes adequate insurance coverage expect event liquidity capital resources continued material adverse effect companys financial condition results operations see note 7 notes consolidated financial statements december 31 1993 company approximately 8000000 net u federal prepaid income tax assets expected realized future operating earnings see note 3 notes consolidated financial statements company believes growth generated largely internal growth product groups augmented strategic acquisitions company regularly reviews potential acquisitions would increase expand market penetration otherwise complement current product lines although pending agreements negotiations material acquisitions company made material acquisitions since early 1988 inflation trends general considerations companys performance dependent significant extent upon levels new residential construction residential replacement remodeling non residential construction affected factors interest rates inflation unemployment recent periods companys product groups operated environment flat declining levels construction remodeling activity particularly new housing starts decreased 438 1986 1991 new residential construction made modest recovery since 1991 although housing starts remain significantly levels experienced mid1980s companys operations significantly affected difficult economic conditions particularly northeastern united states california however actions taken reduce production costs overhead levels improve efficiency profitability companys operations enabled company significantly increase operating earnings slow economy well position company growth recovery companys markets near term company expects operate environment relatively stable levels construction remodeling activity without significant declines improvements levels recent periods inflation expected foreseeable future material effect companys results operations financial condition item 8item 7 managements discussion analysis financial condition results operations company diversified manufacturer residential commercial building products operating within three principal product groups residential building products group air conditioning heating products group plumbing products group product groups company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets march 1994 company sold retail home center operations dixieline purposes managements discussion analysis financial condition results operations results operations attributable dixieline excluded data reported ongoing operations including net sales cost products sold selling general administrative expense segment earnings total consolidated operating results company however include operating results dixieline october 2 1993 date business accounted business held sale fourth quarter 1995 company acquired three businesses included residential building products group accounted acquisitions purchase method accounting accordingly results acquisitions included companys consolidated results since date acquisition see liquidity capital resources notes 1 2 notes consolidated financial statements included elsewhere herein results operations following tables set forth three years ended december 31 1995 certain consolidated operating results b percentage change results compared prior year c percentage results bears net sales change percentages compared prior year percentage change year ended december 31 1994 1993 1995 1994 1993 1995 1994 amounts millions net sales 7762 7372 7441 53 9 cost products sold 5749 5204 5325 105 23 selling general admini strative expense 1602 1668 1813 40 80 operating earnings 411 500 303 178 650 interest expense 249 262 265 50 11 interest income 61 53 32 151 656 net gain investment marketable securities 20 17 1000 loss businesses sold 17 203 1000 916 earnings loss provision income taxes 243 274 116 113 provision income taxes 93 102 10 88 9200 earnings lossbefore extra ordinary gain loss 150 172 126 128 extraordinary gain loss debt retirements 2 611000 cumulative effect accounting changes 4 211000 net earnings loss 150 178 208 157 percentage net sales change year ended december 31 1994 1993 1995 1994 1993 1995 1994 net sales 1000 cost products sold 741 706 715 35 9 selling general admini strative expense 206 226 244 20 18 operating earnings 53 68 41 15 27 interest expense 32 36 4 interest income 8 7 4 1 3 net gain investment marketable securities 2 loss businesses sold 2 27 2 25 earnings lossbefore provision income taxes 31 37 16 6 53 provision income taxes 12 14 1 2 13 earnings lossbefore extra ordinary gain loss 19 23 17 4 40 extraordinary gain loss debt retirements 8 cumulative effect accounting changes 1 3 1 4 net earnings loss 19 24 28 5 52 following table presents net sales companys principal product groups three years ended december 31 1995 percentage change results compared prior year percentage change 1994 1993 year ended december 31 1995 1994 1993 1995 1994 amounts millions net sales residential building products 2812 2652 2572 60 31 air conditioning heating products 3634 3380 2756 75 226 plumbing products 1316 1340 1281 18 46 net sales ongoing operations 7762 7372 6609 53 115 businesses sold 832 1000 7762 7372 7441 53 9 year ended december 31 1995 compared year ended december 31 1994 net sales ongoing operations increased approximately 39000000 approximately 53 compared 1994 net sales ongoing operations increased principally result increased shipments new replacement air conditioning heating hvac products manufactured housing customers increased sales levels commercial industrial hvac products air conditioning heating products group acquisitions contributed approximately 24600000 net sales 1995 increases partially offset lower sales volume prices vitreous china products plumbing products group cost products sold ongoing operations percentage net sales ongoing operations increased approximately 706 1994 approximately 741 1995 primarily result higher material costs companys operating groups year end inventory values ongoing operations stated fifo basis year end inventory would approximately 10550000 higher 1995 approximately 6710000 higher 1994 approximately 4982000 higher 1993 increased direct labor overhead costs air conditioning heating products group also contributed increased percentage lesser extent decreased sales levels without proportionate decrease overhead costs plumbing products also factor increase percentage partially offset lower direct labor overhead costs residential building products group selling general administrative expense ongoing operations percentage net sales ongoing operations decreased approximately 226 1994 approximately 206 1995 principally due lower expense increased hvac product net sales primarily residential manufactured housing customers lower nonsegment expense result companys cost containment measures lesser extent decreased expenses plumbing products group also factor decrease percentage partially offset effect approximately 3200000 income 1994 settlement insurance claims disputes segment earnings ongoing operations approximately 48700000 1995 compared approximately 61300000 1994 result effect factors discussed segment earnings operating earnings corporate expenses directly attributable companys product groups acquisitions 1995 included residential building products group contributed approximately 1050000 segment earnings 1995 segment earnings ongoing operations reduced depreciation amortization expense approximately 17600000 15700000 1995 1994 respectively acquisitions contributed approximately 750000 increase depreciation amortization expense 1995 overall decline segment earnings ongoing operations due principally increased material costs companys operating groups partially offset higher earnings increased sales volume hvac products without proportionate increase expense lower selling general administrative expense percentage net sales air conditioning heating products plumbing products groups approximately 1600000 decline segment earnings resulted effect income second quarter 1994 settlement insurance claims disputes foreign segment earnings 1995 consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilating products decreased approximately 61 segment earnings ongoing operations 1995 approximately 62 earnings 1994 decrease primarily due decline earnings canada due continued weakness residential construction partially offset acquisitions effect approximate 21 decline domestic segment earnings ongoing operations 1995 operating earnings 1995 decreased approximately 8900000 approximately 178 compared 1994 primarily result factors discussed including effect lower nonsegment expense net approximately 3200000 including 1600000 relating companys operating segments income second quarter 1994 settlement insurance claims disputes interest expense decreased approximately 1300000 approximately 50 1995 compared 1994 february 1994 company sold public offering 218500000 9 78 notes used portion proceeds redeem march 24 1994 approximately 153000000 certain companys outstanding indebtedness interest expense net interest income 1994 approximately 1300000 greater would debt redemption occurred day financing effect redemption certain outstanding indebtedness 1994 also factor see note 2 notes consolidated financial statement included elsewhere herein decrease interest expense partially offset increased interest expense result acquisitions interest income increased approximately 800000 approximately 151 1995 compared 1994 principally due higher yields earned short term investments marketable securities partially offset lower average invested balances shortterm investments marketable securities third quarter 1995 company sold investment preferred stock dixieline resulted pretax gain 2200000 see notes 1 2 notes consolidated financial statements included elsewhere herein provision income taxes approximately 9300000 1995 compared approximately 10200000 1994 provision income taxes percentage pretax earnings approximately 383 1995 372 1994 provision income taxes 1995 reduced approximately 1100000 reflecting reversal tax valuation reserves longer required 670000 result sale certain investment marketable securities provision income taxes 1994 reduced approximately 1600000 principally reflecting reversal tax valuation reserves result realization certain tax assets income tax rates also differ united states federal statutory rate 35 result state income tax provisions nondeductible amortization expense tax purposes effect foreign income tax foreign source income see note 4 notes consolidated financial statements included elsewhere herein year ended december 31 1994 compared year ended december 31 1993 net sales ongoing operations increased approximately 76300000 115 compared 1993 total net sales decreased approximately 6900000 approximately 9 1994 compared 1993 result sale dixieline partially offset following factors net sales ongoing operations increased principally result increased sales volume residential air conditioning heating hvac products increased shipments new replacement hvac products manufactured housing customers increased sales levels commercial industrial hvac products increased sales plumbing products group principally due increased shipments water efficient toilets partially offset decreased sales levels approximately 7100000 bathroom fixtures result restructure certain product lines fourth quarter 1993 cost products sold ongoing operations percentage net sales ongoing operations decreased approximately 711 1993 approximately 706 1994 total cost products sold percentage total net sales decreased approximately 715 1993 approximately 706 1994 result factors described effect dixieline operated higher cost levels companys product groups year end inventory values ongoing operations stated fifo basis year end inventory would approximately 6710000 higher 1994 approximately 4982000 higher 1993 approximately 6388000 higher 1992 decrease cost products sold percentage net sales ongoing operations primarily attributable increase plumbing products group net sales increased sales residential commercial hvac products air conditioning heating products group without proportionate increase costs lesser extent decreases percentage partially offset slightly higher cost levels residential building products group part due effect increased competition impact consolidating certain manufacturing facilities overall improvement cost levels due part companys ongoing cost control efforts selling general administrative expense ongoing operations percentage net sales ongoing operations decreased approximately 243 1993 approximately 226 1994 total selling general administrative expense percentage total net sales decreased approximately 244 1993 approximately 226 1994 result factors described effect dixieline operated higher expense levels companys product groups decrease selling general administrative expense ongoing operations percentage net sales ongoing operations 1994 principally due lower nonsegment expense effect 1993 pretax losses approximately 2800000 restructure certain product lines plumbing products group approximately 1600000 result sale october 1993 certain real property 700000 connection consolidation certain manufacturing facilities companys building products group approximately 3200000 income settlement insurance claims disputes 1994 combined effect increased net sales ongoing operations 1994 effect percentage increase net sales air conditioning heating products group excess percentage increases net sales companys product groups also factor overall decrease percentage ongoing net sales since group operates lower expense levels total expense level ongoing operations improvements percentage partially offset effect approximately 11300000 expenses relating implementation certain cost reduction activities manufacturing process improvements companys operating groups cost installing new systems marketing expenses result competitive conditions expenses certain litigation matters dispute approximately 2600000 expenses relating certain cost reduction activities manufacturing process improvements incurred 1993 segment earnings ongoing operations approximately 61300000 1994 compared approximately 47200000 1993 total segment earnings approximately 61300000 1994 compared approximately 46900000 1993 result effect dixieline following factors segment earnings ongoing operations reduced depreciation amortization expense approximately 15700000 16200000 1994 1993 respectively increase segment earnings ongoing operations principally due increased sales levels air conditioning heating products plumbing products groups without proportionate increase cost effect 1993 pretax losses approximately 2800000 1600000 700000 described approximately 1500000 increase segment earnings 1994 related income settlement insurance claims increase segment earnings partially offset effect approximately 10000000 1994 expenses incurred connection implementation certain cost reduction activities manufacturing process improvements companys operating groups cost installing new systems marketing expenses result competitive conditions residential building products group expenses incurred connection cost reduction activities manufacturing process improvements 1993 approximately 2600000 foreign segment earnings 1994 1993 consisting primarily results operations companys canadian subsidiary manufactures builtin ventilating products declined approximately 62 segment earnings ongoing operations 1994 approximately 105 earnings 1993 decline primarily due approximate 36 increase domestic segment earnings ongoing operations 1994 well approximate 20 decrease foreign segment earnings 1994 decrease foreign segment earnings primarily result continued weakness residential construction market canada operating earnings 1994 increased approximately 19700000 approximately 65 compared 1993 primarily result factors discussed effect dixielines operating results operating earnings also include approximately 1700000 nonsegment income settlement 1994 insurance claims disputes partially offset approximately 1300000 nonsegment expense certain litigation matters dispute 1994 dixielines loss included companys consolidated operating results approximately 300000 1993 dixielines operating results longer included companys consolidated operating results 1994 see notes 1 2 notes consolidated financial statements included elsewhere herein interest expense decreased approximately 300000 approximately 11 1994 compared 1993 february 1994 company sold public offering 218500000 9 78 senior subordinated notes due 2004 9 78 notes used proceeds redeem approximately 153000000 certain companys outstanding indebtedness interest expense net interest income approximately 1300000 greater 1994 would debt redemption occurred day financing increase partially offset effect redemption certain outstanding indebtedness january 1994 decrease interest expense primarily due redemption financing discussed see note 5 notes consolidated financial statements included elsewhere herein interest income 1994 increased approximately 2100000 approximately 656 compared 1993 increases principally due higher average invested balances shortterm investments marketable securities investments effect slightly higher yields earned investment marketable securities net gain investment marketable securities approximately 1650000 1993 portion unrealized gains recorded companys statement operations 1993 due adoption 1994 statement financial accounting standards sfas 115 unrealized gains losses recorded adjustments stockholders investment see note 10 notes consolidated financial statements included elsewhere herein pretax loss businesses sold approximately 1750000 1994 significantly lower approximate 20300000 loss 1993 related dixieline see note 2 notes consolidated financial statements included elsewhere herein provision income taxes approximately 10200000 1994 compared approximately 1000000 1993 provision income taxes percentage pretax earnings continuing operations approximately 372 1994 approximately 86 pretax loss continuing operations 1993 provision income taxes 1994 reduced approximately 1600000 principally reflecting reversal tax valuation reserves result realization certain tax assets effect nondeductible losses businesses sold years increase income tax valuation reserves 1993 significant factors percentages income tax rates also differ united states federal statutory rate 35 result effect foreign income tax foreign source income state income taxes nondeductible amortization expense tax purposes see note 4 notes consolidated financial statements included elsewhere herein company recorded extraordinary gain approximately 200000 1994 resulting call redemption purchases open market companys 7 12 convertible debentures compared approximate 6100000 loss 1993 loss 1993 resulted primarily call redemption february 22 1994 certain companys various notes debentures connection refinancing described note 5 notes consolidated financial statements cumulative effect accounting changes resulted earnings approximately 400000 1994 loss approximately 2100000 1993 adoption sfas 115 106 respectively see note 10 notes consolidated financial statements included elsewhere herein liquidity capital resources companys primary sources liquidity 1995 1994 funds provided subsidiary operations unrestricted shortterm investments marketable securities 1994 included funds sale 9 78 notes see note 5 notes consolidated financial statements included elsewhere herein proceeds business sold unrestricted cash investments marketable securities approximately 103313000 december 31 1995 compared 105080000 december 31 1994 october 6 1995 company completed purchase assets subject certain liabilities rangaire company cleburne texas rangaire manufactures sells kitchen range hoods lighting fixtures appliance original equipment manufacturing customers electrical distributors rangaire also manufactures lighting fixtures distribution primarily southeastern united states october 31 1995 certain wholly owned subsidiaries company completed acquisition capital stock best spa related entities best manufacturer eurostyle kitchen range hoods headquartered fabriano italy best manufactures range hoods distributed eastern western europe north south america middle east australia new zealand orient november 1 1995 broan ltd wholly owned subsidiary company acquired capital stock venmar ventilation inc canada along related entities venmar leader indoor air quality market canada manufactures continuous ventilation systems energy recovery ventilators distribution primarily canadian united states markets venmar headquartered drummondville quebec canada aggregate purchase price acquisitions approximately 36500000 consisting cash approximately 33400000 future payments approximately 3100000 selling shareholders certain acquisitions entitled additional purchase price payments approximately 7800000 depending subsequent operating results acquisitions approximately 9600000 cash borrowed terms line credit one companys subsidiaries see note 2 notes consolidated financial statements included elsewhere herein companys investment marketable securities december 31 1995 consisted primarily investments united states treasury securities see note 10 notes consolidated financial statements included elsewhere herein december 31 1995 approximately 9411000 companys cash investments pledged collateral insurance requirements classified restricted current assets companys accompanying consolidated balance sheet indenture governing 9 78 notes restricts among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indenture upon certain asset sales defined indenture company required offer purchase 100 principal amount plus accrued interest date purchase 9 78 notes principal amount equal net cash proceeds defined indenture invested properties assets used primarily related business owned operated company issue date 9 78 notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indenture november 16 1995 companys board directors authorized program purchase 1000000 shares companys common stock subject market conditions cash availability company purchased approximately 615500 shares common stock february 13 1996 program see note 6 notes consolidated financial statements included elsewhere herein december 31 1995 approximately 30200000 available payment cash dividends stock payments terms companys indenture governing 9 78 notes companys working capital current ratio changed approximately 173459000 approximately 211 respectively december 31 1994 approximately 160753000 approximately 171 respectively december 31 1995 principally result factors described working capital included approximately 103313000 1995 approximately 105080000 1994 unrestricted cash investments marketable securities increase current assets 1995 includes approximately 65400000 increase current liabilities includes approximately 71400000 acquisitions accounted approximately 35900000 increase shortterm indebtedness current maturities longterm debt accounts receivable increased approximately 26330000 approximately 287 december 31 1994 december 31 1995 net sales increased approximately 148 fourth quarter 1995 compared fourth quarter 1994 increase accounts receivable principally due approximately 29745000 acquisitions occurred fourth quarter 1995 result increased net sales new replacement products residential manufactured housing customers air conditioning heating products group rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales significant increases decreases net sales near end period generally result significant changes amount accounts receivable date balance sheet end period situation december 31 1995 compared december 31 1994 company experienced significant changes credit terms collection efforts credit utilization delinquency accounts receivable 1995 liquidity capital resources continued inventories increased approximately 14704000 approximately 154 december 31 1994 december 31 1995 including approximately 22034000 acquisitions accounts payable increased approximately 20350000 approximately 386 december 31 1994 december 31 1995 including approximately 22975000 acquisitions unrestricted cash investments increased approximately 5650000 december 31 1994 december 31 1995 principally result following condensed consolidated cash flows operating activities cash flow operations net 33277000 decrease accounts receivable net 4496000 decrease inventories 5820000 decrease trade accounts payable 5614000 change accrued expenses taxes prepaids assets liabilities net 4132000 investing activities net cash paid businesses acquired 27543000 net cash proceeds relating businesses sold 1129000 proceeds sale property equipment 1831000 purchase marketable securities 10086000 proceeds sale marketable securities 20772000 capital expenditures 16091000 financing activities increase borrowings net payments 9107000 purchase nortek common special common stock 4664000 net 2652000 5650000 companys debttoequity ratio increased approximately 191 december 31 1994 221 december 31 1995 primarily result effect increased indebtedness result acquisitions purchase companys common special common stock partially offset increased stockholders investment result net earnings changes cumulative translation marketable securities adjustments see note 2 notes consolidated financial statements companys consolidated statement stockholders investment included elsewhere herein december 31 1995 company approximately 1800000 net u federal prepaid income tax assets expected realized future operating earnings see note 4 notes consolidated financial statements company believes growth generated largely internal growth product groups augmented strategic acquisitions company regularly evaluates potential acquisitions would increase expand market penetration otherwise complement current product lines inflation trends general considerations companys performance dependent significant extent upon levels new residential construction residential replacement remodeling non residential construction affected factors interest rates inflation unemployment recent periods companys product groups operated environment increasing levels construction remodeling activity including new housing starts increased approximately 20 1990 1994 declined approximately 85 1995 new residential construction housing starts however remain levels experienced mid1980s companys operations affected difficult economic conditions northeastern united states california canada however actions taken reduce production costs overhead levels improve efficiency profitability companys operations enabled significantly increase operating earnings well position company growth near term company expects operate environment relatively stable levels construction remodeling activity however increases interest rates could negative impact level housing construction remodeling activity inflation material effect companys results operations financial condition mid1994 company experienced increases certain costs expenses including raw material costs 1995 material costs percentage net sales increased approximately 30 compared 1994 company able assurance company able sufficiently increase sales prices future item 8item 7 managements discussion analysis financial condition results operations company diversified manufacturer residential commercial building products operating within three principal product groups residential building products group air conditioning heating products group plumbing products group product groups company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets fourth quarter 1995 company acquired three businesses included residential building products group accounted acquisitions purchase method accounting accordingly results acquisitions included companys consolidated results since date acquisition see liquidity capital resources notes 1 2 notes consolidated financial statements included elsewhere herein results operations following tables set forth three years ended december 31 1996 certain consolidated operating results b percentage change results compared prior year c percentage results bears net sales change percentages compared prior year percentage change year ended december 31 1995 1994 1996 1995 1994 1996 1995 amounts millions net sales 9698 7762 7372 249 53 cost products sold 7099 5749 5204 235 105 selling general admini strative expense 1998 1602 1668 247 40 operating earnings 601 411 500 462 178 interest expense 301 249 262 209 50 interest income 53 61 53 131 151 net gain investment marketable securities 7 20 650 loss business sold 17 1000 earnings provision income taxes 360 243 274 481 113 provision income taxes 140 93 102 505 88 earnings extra ordinary gain 220 150 172 467 128 extraordinary gain debt retirements 2 1000 cumulative effect accounting change 4 1000 net earnings 220 150 178 467 157 percentage net sales change year ended december 31 1995 1994 1996 1995 1994 1996 1995 net sales 1000 cost products sold 732 741 706 9 35 selling general admini strative expense 206 226 20 operating earnings 62 53 68 9 15 interest expense 31 32 36 1 4 interest income 6 8 7 2 1 net gain investment marketable securities 2 loss business sold 2 earnings provision income taxes 37 31 37 6 provision income taxes 14 12 14 2 earnings extra ordinary gain 23 19 23 4 extraordinary gain debt retirements cumulative effect accounting change 1 net earnings 23 19 24 4 5 following table presents net sales companys principal product groups three years ended december 31 1996 percentage change results compared prior year percentage change year ended december 31 1995 1994 1996 1995 1994 1996 1995 net sales amounts millions residential building products 4186 2812 2652 489 60 air conditioning heating products 4119 3634 3380 134 75 plumbing products 1393 1316 1340 59 18 total 9698 7762 7372 249 53 year ended december 31 1996 compared year ended december 31 1995 net sales increased approximately 193600000 approximately 249 compared 1995 residential building products group net sales increased principally result fourth quarter 1995 acquisitions contributed approximately 140400000 1996 compared approximately 24600000 1995 shipments new replacement air conditioning heating hvac products manufactured housing customers increased sales levels commercial industrial hvac products primary reasons increased sales air conditioning heating products group modest sales price increases certain product lines residential building products group also factor partially offset lower sales prices certain products plumbing products group certain residential hvac products air conditioning heating products group cost products sold percentage net sales decreased approximately 741 1995 approximately 732 1996 decrease percentage principally resulted reduction cost 1996 certain raw materials components compared 1995 decreased overhead costs percentage sales residential building products air conditioning heating products groups due increased volume improved efficiency decreases partially offset 1995 acquisitions higher level cost sales net sales overall group businesses owned prior acquisitions effect development introduction new products effect extended shutdown period third quarter europe increased direct labor costs plumbing products group yearend inventory values stated fifo basis yearend inventory would approximately 8482000 higher 1996 approximately 10550000 higher 1995 approximately 6710000 higher 1994 overall changes cost products sold percentage net sales one period compared another period may reflect effect number factors including among others changes relative mix products sold effect changes sales prices unit cost products sold changes productivity levels selling general administrative expense percentage net sales approximately 206 1995 1996 fourth quarter 1995 acquisitions lower level selling general administrative expense net sales overall group businesses owned prior acquisitions increased sales levels without proportionate increase expense companys plumbing products group 1996 contributed decrease percentage offset effect limited sales activity extended shutdown period third quarter companys european subsidiaries without proportionate reduction expense higher net unallocated expense segment earnings approximately 73900000 1996 compared approximately 48700000 1995 segment earnings operating earnings corporate expenses directly attributable companys product groups fourth quarter 1995 acquisitions included residential building products group contributed approximately 8400000 segment earnings 1996 compared 1050000 1995 year ended december 31 1996 compared year ended december 31 1995 continued segment earnings reduced depreciation amortization expense approximately 22200000 approximately 17600000 1996 1995 respectively acquisitions accounted approximately 5100000 depreciation amortization expense 1996 compared 750000 1995 overall increase segment earnings due principally increased sales volume companys operating groups particularly increased sales volume residential commercial hvac products residential building products effect increased sales fourth quarter 1995 acquisitions reduction price paid certain materials companys operating groups affected factors noted foreign segment earnings consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilating products increased approximately 114 segment earnings 1996 approximately 61 earnings 1995 increase 1996 primarily attributable approximate 1842 increase foreign segment earnings 1996 compared 432 increase domestic earnings increase 1996 primarily attributable earnings companys 1995 canadian european acquisitions sales earnings derived international market subject risks currency fluctuations operating earnings 1996 increased approximately 19000000 approximately 462 compared 1995 primarily due factors previously discussed interest expense 1996 increased approximately 5200000 approximately 209 compared 1995 primarily result higher borrowings resulting 1995 acquisitions including existing shortterm working capital borrowings acquired subsidiaries interest income 1996 decreased approximately 800000 approximately 131 compared 1995 principally due lower average invested balances shortterm investments marketable securities principally resulting 1995 acquisitions purchases companys capital stock partially offset increased cash operating results provision income taxes approximately 14000000 1996 compared approximately 9300000 1995 provision income taxes reduced approximately 481000 1996 approximately 1100000 1995 respectively reflecting reversal tax valuation reserves longer required approximately 263000 1996 670000 1995 result gain sale certain investments marketable securities income tax rates principally differed united states federal statutory rate 35 result state income tax provisions nondeductible amortization expense tax purposes changes tax valuation reserves effect foreign income tax foreign source income 1996 effect product development tax credits foreign operations see note 4 notes consolidated financial statements included elsewhere herein year ended december 31 1995 compared year ended december 31 1994 net sales increased approximately 39000000 approximately 53 compared 1994 principally result increased shipments new replacement hvac products manufactured housing customers increased sales levels commercial industrial hvac products air conditioning heating products group acquisitions contributed approximately 24600000 net sales 1995 increases partially offset lower sales volume prices vitreous china products plumbing products group cost products sold percentage net sales increased approximately 706 1994 approximately 741 1995 primarily result higher material costs companys operating groups year end inventory values stated fifo basis year end inventory would approximately 10550000 higher 1995 approximately 6710000 higher 1994 approximately 4982000 higher 1993 increased direct labor overhead costs air conditioning heating products group also contributed increased percentage lesser extent decreased sales levels without proportionate decrease overhead costs plumbing products also factor increase percentage partially offset lower direct labor overhead costs residential building products group selling general administrative expense percentage net sales decreased approximately 226 1994 approximately 206 1995 principally due lower expense increased hvac product net sales primarily residential manufactured housing customers lower nonsegment expense result companys cost containment measures lesser extent decreased expenses plumbing products group also factor decrease percentage partially offset effect approximately 3200000 income 1994 settlement insurance claims disputes segment earnings approximately 48700000 1995 compared approximately 61300000 1994 result effect factors discussed acquisitions 1995 included residential building products group contributed approximately 1050000 segment earnings 1995 segment earnings reduced depreciation amortization expense approximately 17600000 15700000 1995 1994 respectively acquisitions contributed approximately 750000 increase depreciation amortization expense 1995 overall decline segment earnings due principally increased material costs companys operating groups partially offset higher earnings increased sales volume hvac products without proportionate increase expense lower selling general administrative expense percentage net sales air conditioning heating products plumbing products groups approximately 1600000 decline segment earnings resulted effect income second quarter 1994 settlement insurance claims disputes year ended december 31 1995 compared year ended december 31 1994 continued foreign segment earnings 1995 consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilating products decreased approximately 61 segment earnings 1995 approximately 62 earnings 1994 decrease primarily due decline earnings canada due continued weakness residential construction partially offset acquisitions effect approximate 21 decline domestic segment earnings 1995 operating earnings 1995 decreased approximately 8900000 approximately 178 compared 1994 primarily result factors discussed including effect lower nonsegment expense net approximately 3200000 including 1600000 relating companys operating segments income second quarter 1994 settlement insurance claims disputes interest expense decreased approximately 1300000 approximately 50 1995 compared 1994 february 1994 company sold public offering 218500000 9 78 notes used portion proceeds redeem march 24 1994 approximately 153000000 certain companys outstanding indebtedness interest expense net interest income 1994 approximately 1300000 greater would debt redemption occurred day financing effect redemption certain outstanding indebtedness 1994 also factor decrease interest expense partially offset increased interest expense result acquisitions interest income increased approximately 800000 approximately 151 1995 compared 1994 principally due higher yields earned short term investments marketable securities partially offset lower average invested balances shortterm investments marketable securities third quarter 1995 company sold investment preferred stock business previously sold resulted pretax gain 2200000 see note 2 notes consolidated financial statements included elsewhere herein provision income taxes approximately 9300000 1995 compared approximately 10200000 1994 provision income taxes percentage pretax earnings approximately 383 1995 372 1994 provision income taxes 1995 reduced approximately 1100000 reflecting reversal tax valuation reserves longer required 670000 result sale certain investments marketable securities provision income taxes 1994 reduced approximately 1600000 principally reflecting reversal tax valuation reserves result realization certain tax assets income tax rates also differ united states federal statutory rate 35 result state income tax provisions nondeductible amortization expense tax purposes effect foreign income tax foreign source income see note 4 notes consolidated financial statements included elsewhere herein liquidity capital resources companys primary sources liquidity 1996 1995 funds provided subsidiary operations unrestricted shortterm investments marketable securities unrestricted cash investments marketable securities approximately 92093000 december 31 1996 compared 103313000 december 31 1995 companys investment marketable securities december 31 1996 consisted primarily investments united states treasury notes bank issued money market instruments december 31 1996 approximately 5681000 companys investments marketable securities pledged collateral insurance requirements classified restricted current assets companys accompanying consolidated balance sheet 1995 1996 companys board directors authorized number programs purchase shares companys common special common stock subject market conditions cash availability programs included purchase 1189809 shares common stock approximately 106 outstanding shares april 26 1996 approximately 20200000 three directors also resigned companys board directors recent program announced october 28 1996 purchase 500000 shares companys common special common stock open market negotiated transactions subject market conditions cash availability november 16 1995 february 7 1997 company purchased approximately 2757000 shares common special common stock approximately 42849000 accounted share purchases treasury stock see note 6 notes consolidated financial statements included elsewhere herein february 7 1997 approximately 683607 available payment cash dividends stock payments terms companys indenture governing 9 78 notes companys working capital decreased approximately 160753000 approximately 143474000 december 31 1995 december 31 1996 current ratio 171 dates principally result purchases companys common stock described factors described working capital included approximately 103313000 december 31 1995 approximately 92093000 december 31 1996 unrestricted cash investments marketable securities liquidity capital resources continued accounts receivable increased approximately 4159000 approximately 35 december 31 1995 december 31 1996 net sales increased approximately 180 fourth quarter 1996 compared fourth quarter 1995 rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales significant increases decreases net sales near end period generally result changes amount accounts receivable date balance sheet end period situation december 31 1996 compared december 31 1995 company experienced significant changes credit terms collection efforts credit utilization delinquency accounts receivable 1995 1996 inventories decreased approximately 12394000 approximately 113 december 31 1995 december 31 1996 reflect part positive effect changes inventory control systems initiatives implemented past several years reduce inventories certain companys businesses accounts payable increased approximately 1898000 approximately 26 december 31 1995 december 31 1996 unrestricted cash equivalents increased approximately 3831000 december 31 1995 december 31 1996 principally result following condensed consolidated cash flows operating activities cash flow operations net 43176000 increase accounts receivable net 3626000 decrease inventories 12196000 decrease prepaids current assets 4620000 increase trade accounts payable 2090000 decrease accrued expenses taxes 8840000 investing activities purchase marketable securities 66901000 proceeds sale marketable securities 82435000 capital expenditures 21683000 financing activities increase borrowings 9609000 payment borrowings 13701000 purchase nortek common special common stock 34822000 net 722000 3831000 companys debttoequity ratio increased approximately 221 december 31 1995 241 december 31 1996 primarily result effect purchase companys common special common stock see note 6 notes consolidated financial statements partially offset slight net decrease borrowings net earnings 1996 see companys consolidated statement stockholders investment included elsewhere herein april 1 1996 company extended amended shareholder rights plan march 31 2006 amended plan right previously issued plan effect date subsequently issued amended restated plan entitles shareholders buy 1100 share new series preferred stock nortek exercise price 72 per share subject adjustments stock dividends splits similar events see note 6 notes consolidated financial statements included elsewhere herein company believes growth generated largely internal growth product groups augmented strategic acquisitions company regularly evaluates potential acquisitions would increase expand market penetration otherwise complement current product lines inflation trends general considerations companys performance dependent significant extent upon levels new residential construction residential replacement remodeling non residential construction affected factors interest rates inflation unemployment recent periods companys product groups operated environment increasing levels construction remodeling activity including new housing starts increased approximately 20 1990 1994 declined approximately 85 1995 increased approximately 88 1996 new residential construction housing starts however remain levels experienced midl980s companys operations affected past difficult economic conditions northeastern united states california canada however actions taken reduce production costs overhead levels improve efficiency profitability companys operations enabled significantly increase operating earnings well position company growth near term company expects operate environment relatively stable levels construction remodeling activity however increases interest rates could negative impact level housing construction remodeling activity inflation material effect companys results operations financial condition mid1994 company experienced increases certain costs expenses including raw material costs 1995 material costs percentage net sales increased approximately 30 compared 1994 1996 cost increases subsided company experienced decreases certain costs expenses including raw materials compared prices effect 1995 forward looking statements used discussion words believes anticipates expects similar expressions intended identify forwardlooking statements subject certain risks uncertainties company control could cause actual results differ materially projected risks uncertainties include increases raw material costs including among others steel copper packaging material plastics resins aluminum purchased component costs level domestic foreign construction remodeling activity affecting residential commercial markets interest rates inflation consumer spending levels operating international economies rate sales growth price product competition new product introduction material shortages product liability claims readers cautioned place undue reliance forwardlooking statements speak date hereof company undertakes obligation republish revised forward looking statements reflect events circumstances date thereof reflect occurrence unanticipated events readers also urged carefully review consider various disclosures made company report well companys periodic reports forms 10q 8k filed securities exchange commission item 8item 7managements discussion analysis financial condition results operations company diversified manufacturer residential commercial building products operating within four principal product groups residential building products group air conditioning heating hvac products group windows doors siding group specialty products distribution group product groups company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets fourth quarter 1995 several companys wholly owned subsidiaries completed acquisition assets subject certain liabilities rangaire company rangaire capital stock best spa related entities best capital stock venmar ventilation inc venmar august 26 1997 company acquired ply gem accounted purchase method accounting accordingly results ply gem included companys consolidated results since date see liquidity capital resources notes 1 2 notes consolidated financial statements included elsewhere herein fourth quarter 1997 company adopted plan discontinue plumbing products group accordingly results plumbing products group excluded earnings continuing operations classified separately discontinued operations periods presented see note 9 notes consolidated financial statements included elsewhere herein results operations following tables set forth three years ended december 31 1997 certain consolidated operating results b percentage change results compared prior year c percentage results bears net sales change percentages compared prior year percentage change year ended december 31 1996 1995 1997 1996 1995 1997 1996 amounts millions net sales 11341 8416 6568 348 281 cost products sold 8317 6003 4723 385 271 selling general admini strative expense 2194 1803 1415 217 274 operating earnings 830 610 430 361 419 interest expense 502 284 230 768 235 investment income 99 60 81 650 259 earnings continuing operations provision income taxes 427 386 281 106 374 provision income taxes 163 149 106 94 406 earnings continuing operations 264 237 175 114 354 loss discontinued operations 52 17 25 2059 320 net earnings 212 220 150 36 467 percentage net sales change year ended december 31 1996 1995 1997 1996 1995 1997 1996 net sales 1000 cost products sold 734 713 719 21 06 selling general admini strative expense 193 214 215 21 01 operating earnings 73 66 07 interest expense 44 34 35 10 01 investment income 09 07 12 02 05 earnings continuing operations provision income taxes 38 46 43 08 03 provision income taxes 14 18 16 04 02 earnings continuing operations 24 28 27 04 01 loss discontinued operations 05 02 04 03 02 net earnings 19 26 23 07 03 following table presents net sales companys principal product groups three years ended december 31 1997 percentage change results compared prior year certain amounts table prior periods reclassified conform presentation 1997 percentage change 1996 1995 year ended december 31 1997 1996 1995 1997 1996 net sales amounts millions residential building products 4305 4185 2934 29 426 air conditioning heating products 4194 4231 3634 09 164 windows doors siding 1890 specialty products distribution 952 11341 8416 6568 348 281 year ended december 31 1997 compared year ended december 31 1996 net sales increased approximately 292500000 approximately 348 compared 1996 increased approximately 300500000 approximately 357 excluding effect foreign exchange net sales increased principally result acquisition ply gem august 26 1997 contributed approximately 284200000 net sales excluding sales acquisition net sales increased approximately 8300000 10 compared 1996 increased approximately 16400000 approximately 20 excluding effect foreign exchange increase principally result slightly higher sales volume residential building products group partially offset effects foreign exchange residential products air conditioning heating products group partially offset lower sales levels commercial hvac products approximately 3600000 lower sales sale residential hvac product line 1997 cost products sold percentage net sales increased approximately 713 1996 approximately 734 1997 excluding ply gem businesses higher level cost sales overall group businesses owned prior acquisition cost products sold percentage net sales decreased approximately 713 approximately 704 1997 compared 1996 decrease percentage principally resulted reduction cost certain raw materials components compared 1996 decreased labor percentage net sales residential building products air conditioning heating products groups due increased volume higher margin products improved efficiency yearend inventory values stated fifo basis yearend inventory would approximately 5041000 higher 1997 approximately 6015000 higher 1996 approximately 7873000 higher 1995 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material cost products sold changes productivity levels year ended december 31 1997 compared year ended december 31 1996 continued selling general administrative expense percentage net sales decreased approximately 214 1996 approximately 193 1997 excluding ply gem businesses lower level selling general administrative expense net sales overall group businesses owned prior acquisition selling general administrative expense percentage net sales decreased approximately 214 1996 approximately 212 1997 decrease percentage due principally higher sales levels residential building products group without proportionate increase expense effect sale residential hvac product line noted partially offset lower sales levels commercial products air conditioning heating products group without proportionate decrease expense segment earnings approximately 97000000 1997 compared approximately 74900000 1996 segment earnings operating earnings continuing operations corporate expenses directly attributable companys product groups ply gem acquisition late august 1997 contributed approximately 11300000 segment earnings segment earnings reduced depreciation amortization expense approximately 26600000 approximately 19500000 1997 1996 respectively acquisition ply gem contributed approximately 6300000 increase depreciation amortization expense 1997 overall increase segment earnings due principally addition effect acquisition ply gem increased sales volume without proportionate increase expense particularly residential building products group lesser extent residential sector air conditioning heating products group affected factors previously noted earnings foreign operations consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilating products decreased approximately 108 segment earnings 1997 approximately 112 earnings 1996 decrease percentage due increase domestic earnings 1997 part result 11300000 contributed ply gem primarily domestic operations sales earnings derived international market subject risks currency fluctuations operating earnings 1997 increased approximately 22000000 approximately 361 compared 1996 primarily due factors previously discussed interest expense 1997 increased approximately 21800000 approximately 768 compared 1996 primarily result sale 175000000 principal amount 9 14 senior notes due 2007 9 14 notes march 1997 sale 310000000 principal amount 9 18 senior notes due 2007 9 18 notesin august 1997 existing indebtedness ply gem increase partially offset refinancing certain outstanding indebtedness companys subsidiaries primarily second quarter 1997 see notes 2 5 notes consolidated financial statements included elsewhere herein investment income 1997 increased approximately 3900000 approximately 650 compared 1996 principally due higher average invested balances shortterm investments marketable securities provision income taxes approximately 16300000 1997 compared approximately 14900000 1996 provision income taxes reduced approximately 1540000 1997 481000 1996 reflecting reversal tax reserves longer required income tax rates differed united states federal statutory rate 35 principally result state income tax provisions nondeductible amortization expense tax purposes changes tax reserves effect foreign income tax foreign source income effect product development tax credits foreign operations see note 4 notes consolidated financial statements included elsewhere herein fourth quarter 1997 company adopted plan disposition plumbing products group loss discontinued operations related plumbing products group increased approximately 3500000 loss 1700000 1996 loss 5200000 1997 loss discontinued operations 1997 includes net tax loss 1600000 operating losses expected occur disposal period net income tax benefit 900000 loss discontinued operations includes net tax operating losses 3600000 1997 1700000 1996 net income tax benefits 2100000 900000 1997 1996 respectively operating results discontinued operations reflect allocation corporate interest expense approximately 1900000 1700000 1997 1996 respectively net income tax benefits 670000 600000 1997 1996 respectively see note 9 notes consolidated financial statements included elsewhere herein year ended december 31 1996 compared year ended december 31 1995 net sales increased approximately 184800000 approximately 281 compared 1995 residential building products group net sales increased principally result fourth quarter 1995 acquisitions contributed approximately 140400000 1996 compared approximately 24600000 1995 shipments new replacement hvac products manufactured housing customers increased sales levels commercial industrial hvac products primary reasons increased sales air conditioning heating products group modest sales price increases certain product lines residential building products group also factor partially offset lower sales prices certain residential hvac products air conditioning heating products group cost products sold percentage net sales decreased approximately 719 1995 approximately 713 1996 decrease percentage principally resulted reduction cost 1996 certain raw materials components compared 1995 decreased overhead costs percentage sales residential building products air conditioning heating products groups due increased volume improved efficiency decreases partially offset 1995 acquisitions higher level cost sales net sales overall group businesses owned prior acquisitions effect development introduction new products effect extended shutdown period third quarter europe yearend inventory values stated fifo basis yearend inventory would approximately 6015000 higher 1996 approximately 7873000 higher 1995 approximately 4254000 higher 1994 selling general administrative expenses percentage net sales consistent years approximately 215 1995 214 1996 fourth quarter 1995 acquisitions lower level selling general year ended december 31 1996 compared year ended december 31 1995 continued administrative expense net sales overall group businesses owned prior acquisitions resulted decrease percentage primarily offset effect limited sales activity extended shutdown period third quarter 1996 companys european subsidiaries without proportionate reduction expense higher net unallocated expense segment earnings approximately 74900000 1996 compared approximately 50600000 1995 fourth quarter 1995 acquisitions included residential building products group contributed approximately 8400000 segment earnings 1996 compared 1050000 1995 segment earnings reduced depreciation amortization expense approximately 19500000 approximately 14800000 1996 1995 respectively acquisitions accounted approximately 5100000 depreciation amortization expense 1996 compared 750000 1995 overall increase segment earnings due principally increased sales volume companys operating groups particularly increased sales volume residential commercial hvac products residential building products effect increased sales fourth quarter 1995 acquisitions reduction price paid certain materials companys operating groups affected factors previously noted foreign segment earnings consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilating products increased approximately 112 segment earnings 1996 approximately 58 earnings 1995 increase 1996 primarily attributable approximate 1842 increase foreign segment earnings 1996 compared 391 increase domestic earnings increase 1996 primarily attributable earnings companys 1995 canadian european acquisitions operating earnings 1996 increased approximately 18000000 approximately 419 compared 1995 primarily due factors previously discussed interest expense 1996 increased approximately 5400000 approximately 235 compared 1995 primarily result higher borrowings resulting 1995 acquisitions including existing shortterm working capital borrowings acquired subsidiaries investment income 1996 decreased approximately 2100000 approximately 259 compared 1995 principally due lower average invested balances shortterm investments marketable securities principally resulting 1995 acquisitions purchases companys capital stock partially offset increased cash operating results provision income taxes approximately 14900000 1996 compared approximately 10600000 1995 provision income taxes reduced approximately 481000 1996 approximately 1100000 1995 respectively reflecting reversal tax valuation reserves longer required approximately 263000 1996 670000 1995 result gain sale certain investments marketable year ended december 31 1996 compared year ended december 31 1995 continued securities income tax rates differed united states federal statutory rate 35 principally result state income tax provisions nondeductible amortization expense tax purposes changes tax reserves effect foreign income tax foreign source income 1996 effect product development tax credits foreign operations see note 4 notes consolidated financial statements included elsewhere herein loss discontinued operations related plumbing products group decreased approximately 800000 loss 2500000 1995 loss 1700000 1996 loss discontinued operations includes net tax operating loss 1700000 1996 2500000 1995 net tax benefits 900000 1300000 1996 1995 respectively operating results discontinued operations reflect allocation corporate interest expense approximately 1700000 1900000 1996 1995 respectively net tax benefit 600000 670000 1996 1995 respectively see note 9 notes consolidated financial statements included elsewhere herein liquidity capital resources march 9 1998 company whollyowned subsidiary entered agreement purchase nutone inc whollyowned subsidiary williams plc approximately 242500000 cash subject adjustment acquisition subject requirements hartscottrodino antitrust improvements act connection review transaction act federal trade commission ftc issued second request certain additional information ftc taken position respect transaction assurance transaction proposed consummated acquisition consummated company expects would incur approximately 3000000 031 per diluted share net tax charge earnings result fees expenses acquisition related costs order consummate acquisition company need raise additional funds debt equity financings see discussion item 1 recent developments note 13 notes consolidated financial statements following acquisition company anticipates need enter bank facility order meet working capital needs august 26 1997 whollyowned subsidiary company completed acquisition ply gem industries inc ply gem tender offer cash price 1950 per outstanding share common stock net cash paid acquisition ply gem including expenses settlement stock options payment terminate ply gems existing accounts receivable securitization program approximately 407419000 december 31 1997 august 26 1997 prior acquisition ply gem refinanced approximately 108900000 existing indebtedness august 26 1997 company sold 310000000 principal amount 9 18 notes due 2007 approximately 297269000 net discount approximately 2505000 approximately 10226000 expenses incurred connection sale company used portion net proceeds together available cash purchase shares ply gem fund approximate 45000000 payment terminate ply gems existing accounts receivable securitization program pay certain fees expenses march 17 1997 company sold 175000000 principal amount 9 14 notes due 2007 approximately 168945000 net discount approximately 1011000 approximately 5044000 expenses incurred connection sale unrestricted cash equivalents increased approximately 84800000 december 31 1996 december 31 1997 primarily result cash generated operations net proceeds sale 9 14 9 18 notes net cash paid connection acquisition ply gem described reduction certain indebtedness companys subsidiaries companys investment marketable securities december 31 1997 consisted primarily investments bank issued money market instruments commercial paper united states treasury securities december 31 1997 approximately 6348000 companys cash investments pledged collateral insurance requirements classified restricted current assets companys accompanying consolidated balance sheet companys board directors authorized program purchase 500000 shares companys common special common stock openmarket negotiated transactions subject market conditions cash availability provisions companys outstanding debt instruments february 28 1998 company purchased approximately 316500 shares common special common stock program approximately 9314000 accounted share purchases treasury stock march 1 1998 approximately 6872000 available payment cash dividends stock payments terms companys restrictive indenture companys working capital current ratio increased approximately 163133000 191 respectively approximately 341821000 231 respectively december 31 1996 december 31 1997 increase principally result acquisition ply gem contributed approximately 212971000 current assets approximately 88385000 current liabilities december 31 1997 increase unrestricted cash investments marketable securities approximately 84800000 accounts receivable increased approximately 72212000 approximately 667 december 31 1996 december 31 1997 net sales increased approximately 206282000 approximately 985 fourth quarter 1997 compared fourth quarter 1996 approximately 69000000 increase accounts receivable approximately 201000000 increase net sales principally due acquisition ply gem rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales increases decreases net sales near end period generally result significant changes amount accounts receivable date balance sheet end period situation december 31 1997 compared december 31 1996 company experienced significant changes credit terms collection efforts credit utilization delinquency accounts receivable 1997 inventories increased approximately 86264000 approximately 959 december 31 1996 december 31 1997 increase due inclusion approximately 88000000 inventory related ply gem december 31 1997 accounts payable increased approximately 24660000 approximately 369 december 31 1996 december 31 1997 including approximately 28355000 accounts payable december 31 1997 acquisition ply gem unrestricted cash equivalents increased approximately 84800000 december 31 1996 december 31 1997 principally result following condensed consolidated cash flows operating activities cash flow operations net 52407000 decrease accounts receivable net 10259000 decrease inventories 6524000 decrease prepaids current assets 5699000 decrease net assets discontinued operations 4934000 decrease trade accounts payable 16359000 increase accrued expenses taxes 25968000 investing activities net cash paid business acquired 407419000 purchase marketable securities 283918000 proceeds sale marketable securities 298158000 capital expenditures 22464000 financing activities sale notes 466214000 payment borrowings net 33354000 purchase nortek common special common stock 10177000 net 11672000 84800000 impact changes foreign currency exchange rates cash material included net companys debttoequity ratio increased approximately 241 december 31 1996 671 december 31 1997 primarily result sale 9 14 notes 9 18 notes indebtedness ply gem approximately 128529000 existing date acquisition effect purchase companys common special common stock see notes 2 5 6 consolidated financial statements partially offset payment certain subsidiary indebtedness net earnings yearended december 31 1997 see consolidated statement stockholders investment included elsewhere herein december 31 1997 company approximately 60800000 net us federal prepaid income tax assets expected realized future operating earnings see note 4 notes consolidated financial statements company believes growth generated largely internal growth augmented strategic acquisitions company regularly evaluates potential acquisitions would increase expand market penetration otherwise complement current product lines absent acquisition nutone company believes cash flow subsidiary operations unrestricted cash marketable securities borrowings new credit facilities arrangements may entered provide sufficient liquidity meet companys working capital expenditure debt service ongoing business needs next 12 months capital expenditures approximately 22500000 1997 expected approximately 40000000 1998 inflation trends general considerations companys performance dependent significant extent upon levels new residential construction residential replacement remodeling non residential construction affected factors interest rates inflation unemployment near term company expects operate environment relatively stable levels construction remodeling activity however increases interest rates could negative impact level housing construction remodeling activity demand companys products seasonal particularly northeast midwest regions united states inclement weather winter months usually reduces level building remodeling activity home improvement new construction markets companys lower sales levels usually occur first fourth quarters since high percentage companys manufacturing overhead operating expenses relatively fixed throughout year operating income net earnings tend lower quarters lower sales levels addition demand cash fund working capital companys subsidiaries greater late first quarter early fourth quarter company process updating computer systems ensure systems year 2000 compliant improve systems company continue make investments computer systems applications ensure company year 2000 compliant financial impact company year 2000 compliance programs anticipated material financial position results operations given year company believe suffer major effect year 2000 issue possible effects could materially impact future financial results forwardlooking statements used discussion throughout document words believes anticipates expects similar expressions intended identify forwardlooking statements subject certain risks uncertainties company control could cause actual results differ materially presented risks uncertainties include increases raw material costs including among others steel copper packaging material plastics resins glass wood aluminum purchased component costs level domestic foreign construction remodeling activity affecting residential commercial markets interest rates employment inflation consumer spending levels operating international economies rate sales growth price product liability claims readers cautioned place undue reliance forwardlooking statements speak date hereof company undertakes obligation republish revised forwardlooking statements reflect events circumstances date thereof reflect occurrence unanticipated events readers also urged carefully review consider various disclosures made company report well companys periodic reports forms 10k 10q 8k filed securities exchange commission item 7aitem 7 managements discussion analysis financial condition results operations effective 1998 company adopted statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 accordingly information years presented reclassified conform presentation 1998 see note 10 notes consolidated financial statements included elsewhere herein company diversified manufacturer residential commercial building products operating within three principal segments residential building products segment air conditioning heating hvac products segment windows doors siding segment includes corporate related items results insignificant operations certain income expense allocable reportable segments results operations data relating businesses sold presented separately principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets nortek inc subsidiaries residential building products segment manufactures distributes builtin products primarily residential new construction doityourself diy professional remodeling renovation markets including kitchen range hoods bath fans combination units fan heater light combinations air conditioning heating products segment manufactures sells heating ventilating air conditioning hvac systems customdesigned commercial applications manufactured sitebuilt residential housing windows doors siding segment manufactures distributes vinyl wood windows doors vinyl siding aluminum trim coil soffit skirting shutters use residential construction diy professional renovation markets windows doors siding segment purchased connection acquisition ply gem august 26 1997 accordingly information presented excludes results operations segment periods prior acquisition date company acquired nutone inc nutone july 31 1998 napco inc affiliate napco october 9 1998 ply gem industries inc subsidiaries ply gem august 26 1997 acquisitions accounted purchase method accounting accordingly results nutone napco ply gem included companys consolidated results since date acquisition see liquidity capital resources note 2 notes consolidated financial statements included elsewhere herein full year ended december 31 1997 napco net sales operating earnings continuing operations provision income taxes approximately 91100000 8600000 8000000 respectively period january 1 1998 date acquisition october 9 1998 napco net sales operating earnings continuing operations provision income taxes approximately 77900000 9200000 8900000 respectively fourth quarter 1997 company adopted plan discontinue plumbing products business accordingly results plumbing products business excluded earnings continuing operations classified separately discontinued operations three years ended december 31 1998 july 10 1998 company sold plumbing products business approximately 33700000 cash see note 9 notes consolidated financial statements included elsewhere herein nortek inc subsidiaries 1998 company made several dispositions nonstrategic assets may 8 1998 company sold studley products inc studley net sales operating loss approximately 22000000 6100000 full year ended december 31 1997 respectively net sales operating loss approximately 7300000 1600000 respectively period january 1 1998 may 8 1998 treated operation held sale since acquisition ply gem accordingly company recognize gain loss sale studley studleys operating results included companys consolidated financial results may 22 1998 company sold sagebrush sales inc sagebrush approximately 9100000 cash sagebrush net sales operating earnings continuing operations provision income taxes approximately 47600000 400000 respectively full year ended december 31 1997 net sales operating earnings continuing operations provision income taxes approximately 19100000 200000 respectively five months ended may 22 1998 july 2 1998 company sold goldenberg group inc goldenberg approximately 11100000 including approximately 2000000 notes goldenberg net sales operating earnings continuing operations provision income taxes approximately 41300000 500000 respectively full year ended december 31 1997 net sales operating earnings continuing operations provision income taxes approximately 21500000 500000 respectively six months ended july 2 1998 july 31 1998 company sold another ply gem business ply gem manufacturing net sales operating earnings continuing operations provision income taxes approximately 48300000 2500000 respectively full year ended december 31 1997 net sales operating earnings continuing operations provision income taxes approximately 23300000 700000 respectively seven months ended july 31 1998 december 10 1998 company sold allied plywood corporation allied approximately 16500000 cash approximately 7000000 notes allied net sales operating earnings continuing operations provision income taxes approximately 84400000 400000 respectively full year ended december 31 1997 net sales operating earnings continuing operations provision income taxes approximately 80300000 800000 respectively eleven months ended november 1998 december 30 1998 company sold ms nortek inc subsidiaries systems lp ms subsidiary mooreomatic inc mom approximately 27500000 cash recorded pretax gain approximately 4000000 year ended december 31 1997 combined net sales operating earnings continuing operations provision income taxes ms mom approximately 37300000 3400000 respectively year ended december 31 1998 combined net sales operating earnings continuing operations provision income taxes ms mom approximately 42100000 3600000 respectively operating results sagebrush goldenberg ply gem manufacturing allied included companys 1997 1998 consolidated results date ply gem acquisition august 26 1997 date sale disposition four businesses result significant gains losses approximately 27700000 proceeds sale four businesses used pay debt remaining proceeds including proceeds sale plumbing products business studley ms mom approximately 84000000 used general corporate purposes see notes 2 9 10 notes consolidated financial statements included elsewhere herein company expect effect businesses sold 1998 significant companys future operations nortek inc subsidiaries results operations tables follow present net sales operating earnings companys principal segments three years ended december 31 1998 dollar amount percentage change results compared prior year amounts tables prior years reclassified conform presentation 1998 nortek inc subsidiaries tables follow set forth three years ended december 31 1998 certain consolidated operating results b percentage change results compared prior year c percentage results bear net sales change percentages compared prior year nortek inc subsidiaries nortek inc subsidiaries year ended december 31 1998 compared year ended december 31 1997 net sales increased approximately 604200000 approximately 533 compared 1997 increased approximately 610400000 approximately 538 excluding effect changes foreign exchange rates net sales increased 1998 principally result acquisitions acquisition nutone july 31 1998 contributed approximately 82200000 93200000 increase 99400000 increase excluding effect changes foreign exchange rates net sales residential building products segment 1998 balance increase net sales segment result higher sales levels higher margin builtin ventilation products north america partially offset lower sales levels certain lower margin products increase net sales air conditioning heating products segment approximately 45800000 109 principally result higher sales volume related products sold residential manufactured housing markets partially offset slightly lower sales commercial hvac products part result seven week strike 1998 one segments manufacturing facilities increase net sales windows doors siding segment principally arose connection august 26 1997 acquisition ply gem full twelve months operating results 1998 compared four months 1997 acquisition napco october 9 1998 contributed approximately 21000000 segments increase net sales 1998 net sales businesses sold increased approximately 69400000 principally result certain nonstrategic businesses acquired connection august 26 1997 acquisition ply gem sold 1998 cost products sold percentage net sales increased approximately 728 1997 approximately 734 1998 changes percentages large part affected acquisitions affected future effect businesses sold 1998 ply gem businesses higher level cost sales percentage net sales overall group businesses owned prior ply gem acquisition nutones level cost sales percentage net sales lower excluding effect businesses sold cost products sold percentage net sales increased approximately 724 1997 approximately 729 1998 increase percentage principally resulted acquisitions ply gem lesser extent napco windows doors siding segment partially offset acquisition nutone effect nortek inc subsidiaries higher sales levels residential building products air conditioning heating product segments without proportionate increase costs yearend inventory values stated fifo basis yearend inventory would approximately 3407000 higher 1998 approximately 5041000 higher 1997 approximately 6015000 higher 1996 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material cost products sold changes productivity levels selling general administrative expense percentage net sales decreased approximately 194 1997 approximately 181 1998 decrease percentage principally affected result acquisitions affected future effect businesses sold 1998 ply gem napco lower level selling general administrative expense percentage net sales overall group businesses owned prior acquisitions nutone higher level expense percentage net sales excluding effect businesses sold selling general administrative expense percentage net sales decreased approximately 195 1997 approximately 180 1998 air conditioning heating products segment lesser extent residential building products segment contributed decrease percentage result increases sales noted without proportionate increase expense partially offset increased corporate overhead principally result acquisition ply gem amortization goodwill intangible assets percentage net sales increased approximately 5 net sales 1997 approximately 8 net sales 1998 principally result acquisitions ply gem nutone consolidated operating earnings increased approximately 50100000 approximately 83000000 1997 compared approximately 133100000 1998 businesses acquired 1998 contributed approximately 12600000 increase approximately 2300000 windows doors siding segment 10300000 residential building products segment operating earnings increased substantially 1998 windows doors siding segment principally due effect august 26 1997 acquisition ply gem full twelve months operating results 1998 compared four months 1997 consolidated operating earnings reduced depreciation amortization expense nortek inc subsidiaries approximately 42100000 approximately 26700000 1998 1997 respectively businesses acquired 1998 contributed approximately 4300000 increase depreciation amortization expense 1998 approximately 500000 windows doors siding segment 3800000 residential building products segment depreciation amortization expense year ended december 31 1998 related operating results businesses sold 1998 approximately 1700000 see note 10 notes consolidated financial statements included elsewhere herein increase operating earnings also due increased sales volume without proportionate increase cost expense air conditioning heating products segment approximately 14400000 349 lesser extent residential building products segment approximately 3100000 excluding contribution nutone noted partially offset increased expense principally result increased corporate overhead result acquisition ply gem operating earnings foreign operations consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilating products approximately 65 90 operating earnings corporate overhead 1998 1997 respectively decline foreign operating earnings percentage net sales principally result increased domestic sales operating earnings ply gem acquisition sales earnings derived international market subject risks currency fluctuations gain businesses sold provision income taxes 1998 approximately 4000000 arose connection sale ms mom interest expense 1998 increased approximately 36100000 approximately 719 compared 1997 primarily result sale 9 14 notes march 17 1997 sale 9 18 notes august 26 1997 indebtedness ply gem existing date acquisition sale 8 78 notes july 31 1998 increase partially offset refinancing certain outstanding indebtedness companys subsidiaries 1997 see notes 2 5 notes consolidated financial statements included elsewhere herein investment income 1998 increased approximately 600000 approximately 61 compared 1997 principally due higher average invested balances partially offset slightly lower yields earned shortterm investments marketable securities nortek inc subsidiaries provision income taxes approximately 27300000 1998 compared approximately 16300000 1997 income tax rates differed united states federal statutory rate 35 principally result state income tax provisions nondeductible amortization expense tax purposes changes tax reserves effect foreign income tax foreign source income effect product development tax credits foreign operations see note 4 notes consolidated financial statements included elsewhere herein earnings discontinued operations approximately 1200000 1998 compared loss approximately 5200000 1997 fourth quarter 1997 company adopted plan disposition plumbing products business july 10 1998 business sold following comparison operating results discontinued operations two years ended december 31 1998 see note 9 notes consolidated financial statements included elsewhere herein income tax benefit 1998 includes approximately 800000 recorded result realization portion tax capital loss arising sale plumbing products business year ended december 31 1997 compared year ended december 31 1996 net sales increased approximately 292500000 approximately 348 compared 1996 increased approximately nortek inc subsidiaries 300500000 approximately 357 excluding effect changes foreign exchange rates net sales increased principally result acquisition ply gem august 26 1997 contributed approximately 284200000 net sales approximately 189000000 related windows doors siding segment approximately 73900000 related certain nonstrategic assets subsequently sold 1998 net sales residential building products segment increased approximately 13100000 36 result higher sales levels higher margin builtin ventilation products north america partially offset lower sales levels lower margin european ventilation including effects changes foreign exchange rates domestic products net sales air conditioning heating products segment decreased approximately 3700000 9 principally result approximately 3600000 lower sales resulting sale residential hvac product line 1997 lower sales levels commercial hvac products partially offset increased sales levels hvac products residential markets cost products sold percentage net sales increased approximately 709 1996 approximately 728 1997 excluding ply gem businesses higher level cost sales overall group businesses owned prior acquisition cost products sold percentage net sales decreased approximately 713 approximately 704 1997 compared 1996 decrease percentage principally resulted reduction cost certain raw materials components compared 1996 decreased labor percentage net sales residential building products air conditioning heating products segments due increased volume higher margin products improved efficiency yearend inventory values stated fifo basis yearend inventory would approximately 5041000 higher 1997 approximately 6015000 higher 1996 approximately 7873000 higher 1995 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material cost products sold changes productivity levels selling general administrative expense percentage net sales decreased approximately 214 1996 approximately 194 1997 excluding ply gem businesses lower level selling general administrative expense net sales overall group businesses owned prior acquisition selling general administrative nortek inc subsidiaries expense percentage net sales decreased approximately 214 1996 approximately 212 1997 decrease percentage due principally higher sales levels residential building products segment without proportionate increase expense effect sale residential hvac product line noted partially offset lower sales levels commercial products air conditioning heating products segment without proportionate decrease expense amortization goodwill intangible assets percentage net sales increased approximately 4 net sales 1996 approximately 5 net sales 1997 principally result acquisition ply gem operating earnings increased approximately 22000000 approximately 61000000 1996 approximately 83000000 1997 primarily due factors previously discussed ply gem acquisition late august 1997 contributed approximately 11300000 operating earnings approximately 9000000 windows doors siding segment 2000000 related businesses subsequently sold 1998 operating earnings reduced depreciation amortization expense approximately 26700000 approximately 19800000 1997 1996 respectively acquisition ply gem contributed approximately 6300000 increase depreciation amortization expense 1997 operating earnings also increased approximately 9100000 292 residential building products segment 2800000 73 air conditioning heating products segment result increased sales volume without proportionate increase expense earnings foreign operations consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilating products decreased approximately 90 operating earnings corporate overhead 1997 approximately 91 earnings 1996 decrease percentage due increase domestic earnings 1997 part result 11300000 contributed ply gem primarily domestic operations sales earnings derived international market subject risks currency fluctuations interest expense 1997 increased approximately 21800000 approximately 768 compared 1996 primarily result sale 175000000 principal amount 9 14 senior notes due 2007 9 14 notes march 1997 sale 310000000 principal amount 9 18 senior notes due nortek inc subsidiaries 9 18 notesin august 1997 existing indebtedness ply gem increase partially offset refinancing certain outstanding indebtedness companys subsidiaries primarily second quarter 1997 see notes 2 5 notes consolidated financial statements included elsewhere herein investment income 1997 increased approximately 3900000 approximately 650 compared 1996 principally due higher average invested balances shortterm investments marketable securities provision income taxes approximately 16300000 1997 compared approximately 14900000 1996 provision income taxes reduced approximately 1540000 1997 481000 1996 reflecting reversal tax reserves longer required income tax rates differed united states federal statutory rate 35 principally result state income tax provisions nondeductible amortization expense tax purposes changes tax reserves effect foreign income tax foreign source income effect product development tax credits foreign operations see note 4 notes consolidated financial statements included elsewhere herein fourth quarter 1997 company adopted plan disposition plumbing products business loss discontinued operations related plumbing products business increased approximately 3500000 loss 1700000 1996 loss 5200000 1997 loss discontinued operations 1997 includes net tax loss 1600000 operating losses expected occur disposal period net income tax benefit 900000 loss discontinued operations includes net tax operating losses 3600000 1997 1700000 1996 net income tax benefits 2100000 900000 1997 1996 respectively operating results discontinued operations reflect allocation corporate interest expense approximately 1900000 1700000 1997 1996 respectively net income tax benefits 670000 600000 1997 1996 respectively see note 9 notes consolidated financial statements included elsewhere herein liquidity capital resources company highly leveraged expects continue highly leveraged foreseeable future december 31 1998 company consolidated debt approximately nortek inc subsidiaries 1024900000 consisting 17700000 shortterm borrowings current maturities longterm debt ii 112300000 notes mortgage notes indebtedness iii 209300000 8 78 notes iv 174100000 9 14 notes v 203800000 9 78 notes vi 307700000 9 18 notes december 31 1998 company consolidated unrestricted cash equivalents marketable securities approximately 209600000 compared approximately 161800000 december 31 1997 companys debt equity ratio approximately 471 december 31 1998 compared 671 december 31 1997 companys ability pay interest refinance indebtedness depends successful integration operations recent acquisitions companys future performance part subject general economic financial competitive legislative regulatory factors beyond control assurance company generate sufficient cash flow operation subsidiaries future financings available acceptable terms amounts sufficient enable company service refinance indebtedness make necessary capital expenditures company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions indentures agreements governing company subsidiaries indebtedness including indentures 8 78 notes 9 78 notes 9 14 notes 9 18 notes credit agreement ply gem credit facility contain restrictive financial operating covenants including covenants restrict ability company subsidiaries complete acquisitions pay dividends incur indebtedness make investments sell assets take certain corporate actions company expects meet cash flow requirements fiscal 1999 cash generated operations existing cash equivalents marketable securities possible financings may include securitization accounts receivables mortgage capital lease financings 1998 company improved liquidity reduced leverage result sale 2182500 shares common stock net cash proceeds approximately 64190000 nortek inc subsidiaries common stock offering net cash proceeds approximately 111700000 sale certain businesses approximately 44800000 proceeds received common stock offering used acquisition nutone approximately 27700000 net proceeds received sale businesses used reduce debt balance used general corporate purposes see notes 2 5 6 9 notes consolidated financial statements included elsewhere herein october 9 1998 company acquired napco manufacturer exterior building products approximately 80800000 cash approximately 4100000 paid 1999 approximately 400000 forgiveness napco employee loans assumption approximately 10200000 debt acquisition funded use unrestricted cash equivalents marketable securities july 31 1998 company acquired nutone manufacturer exhaust fans range hoods ventilation products accessories aggregate purchase price 242500000 cash plus fees expenses connection acquisition company assumed nutones operating liabilities intercompany borrowings including certain liabilities nutone concerning post retirement benefit obligations purchase price funded net proceeds sale 8 78 notes occurred july 31 1998 together portion cash proceeds common stock offering see notes 2 5 6 notes consolidated financial statements included elsewhere herein company begins process integrating 1998 acquisitions businesses expects achieve significant synergies cost savings reductions 1999 partially offset certain costs expenses total expenditures associated effort estimated range approximately 18000000 25000000 expected funded companys 1999 operating cash flow company expects finalize integration plans determine estimated cost complete integration second quarter 1999 significant difficulty encountered integration process synergies cost savings realized results operations cash flow financial condition company likely adversely affected assurance company able successfully manage integrate 1998 acquisitions see note 12 notes consolidated financial statements included elsewhere herein nortek inc subsidiaries unrestricted cash equivalents decreased approximately 125842000 december 31 1997 approximately 87876000 december 31 1998 marketable securities available sale increased approximately 35988000 december 31 1997 approximately 121757000 december 31 1998 companys investment marketable securities december 31 1998 consisted primarily certificates deposit bank issued money market instruments december 31 1998 approximately 13818000 companys cash investments pledged collateral insurance requirements classified restricted current assets companys accompanying consolidated balance sheet capital expenditures approximately 41400000 1998 expected approximately 40000000 1999 companys board directors authorized program purchase 500000 shares companys common special common stock openmarket negotiated transactions subject market conditions cash availability provisions companys outstanding debt instruments march 5 1999 company purchased approximately 460000 shares common special common stock program approximately 13000000 accounted share purchases treasury stock march 5 1999 approximately 60800000 available payment cash dividends stock payments restricted payments defined terms companys restrictive indenture see note 5 notes consolidated financial statements included elsewhere herein nortek inc subsidiaries companys working capital current ratio decreased approximately 341821000 231 respectively approximately 337207000 201 respectively december 31 1997 december 31 1998 principally result following accounts receivable increased approximately 24945000 approximately 138 december 31 1997 december 31 1998 net sales increased approximately 22319000 approximately 54 fourth quarter 1998 compared fourth quarter 1997 increase accounts receivable primarily attributable acquisitions nutone napco contributed approximately 52000000 increase partially offset decrease approximately 29800000 attributable businesses sold rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales increases decreases net sales near end period generally result significant changes amount accounts receivable date balance sheet end period situation december 31 1998 compared december 31 1997 company experienced significant overall changes credit terms collection efforts credit utilization delinquency accounts receivable 1998 inventories decreased approximately 13546000 approximately 77 december 31 1997 december 31 1998 decrease primarily attributable businesses sold accounted approximately 47100000 decrease partially offset increase approximately 35200000 attributable acquisitions nutone napco accounts payable increased approximately 28613000 approximately 313 december 31 1997 december 31 nortek inc subsidiaries 1998 increase primarily attributable acquisitions nutone napco contributed approximately 21900000 increase partially offset decrease approximately 7100000 attributable businesses sold unrestricted cash equivalents decreased approximately 37966000 december 31 1997 december 31 1998 principally result following companys debttoequity ratio decreased approximately 671 december 31 1997 471 december 31 1998 primarily result increase equity due common stock offering net earnings 1998 payment borrowings partially offset effect sale 8 78 notes see consolidated statement stockholders investment year ended december 31 1998 notes 5 6 notes consolidated financial statements included elsewhere herein nortek inc subsidiaries december 31 1998 company approximately 27300000 net us federal prepaid income tax assets expected realized future operating earnings inflation trends general considerations company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions companys performance dependent significant extent upon levels new residential construction residential replacement remodeling nonresidential construction affected factors interest rates inflation unemployment near term company expects operate environment relatively stable levels construction remodeling activity however increases interest rates could negative impact level housing construction remodeling activity demand companys products seasonal particularly northeast midwest regions united states inclement weather winter months usually reduces level building remodeling activity home improvement new construction markets companys lower sales levels usually occur first fourth quarters since high percentage companys manufacturing overhead operating expenses relatively fixed throughout year operating income net earnings tend lower quarters lower sales levels ply gem businesses acquired august 1997 napco acquired october 1998 past seasonal nature companys businesses owned prior acquisitions addition demand cash fund working capital companys subsidiaries greater late first quarter early fourth quarter market risk discussed specifically company exposed market risks related changes interest rates foreign currencies commodity pricing company uses derivative financial instruments limited basis hedge economic exposures company enter derivative financial instruments financial instruments trading purposes nortek inc subsidiaries interest rate risk company exposed market risk changes interest rates primarily investing borrowing activities addition companys ability finance future acquisition transactions may impacted company unable obtain appropriate financing acceptable interest rates companys investing strategy manage interest rate exposure invest shortterm highly liquid investments marketable securities shortterm investments primarily consist money market accounts corporate commercial paper original maturities 90 days less december 31 1998 fair value companys shortterm investments approximated market value marketable securities primarily consist certificates deposit bank issued money market instruments original maturities 91 183 days restricted investments marketable securities primarily consist money market accounts commercial paper original maturities 90 days less december 31 1998 fair value companys unrestricted restricted investments marketable securities approximated market value company manages borrowing exposure changes interest rates optimizing use fixed rate debt extended maturities addition december 31 1998 company hedged exposure substantial portion variable rate debt entering interest rate swap agreements lock fixed rate december 31 1998 approximately 98 carrying values companys longterm debt either fixed interest rates covered interest rate swap agreements fixed interest rates see table longterm debt notes 1 5 notes consolidated financial statements included elsewhere herein disclosure terms companys debt interest rate swap agreements b foreign currency risk companys results operations affected fluctuations value us dollar compared value currencies foreign markets primarily related changes italian lira canadian dollar 1998 net impact foreign currency changes material companys financial condition results operations company manages exposure foreign currency exchange risk principally trying minimize companys net investment nortek inc subsidiaries foreign assets use strategic short longterm borrowings foreign subsidiary level consistent strategy notes payable shortterm obligations december 31 1998 consist entirely shortterm borrowings certain companys foreign subsidiaries december 31 1998 companys net investment foreign assets approximately 60000000 overall unfavorable change foreign exchange rates 10 would result approximate 6000000 reduction equity result impact cumulative translation adjustment company generally enter derivative financial instruments manage foreign currency exposure december 31 1998 notional amounts outstanding foreign currency hedging contracts expire 1999 material company expect settlement contracts material impact financial condition results operations fiscal 1999 companys operations europe significant therefore company expect materially impacted introduction european single currency euro c commodity pricing risk company subject significant market risk respect pricing principal raw materials include among others steel copper packaging material plastics resins glass wood aluminum prices raw materials increase dramatically company may able pass increases customers result gross margins could decline significantly company manages exposure commodity pricing risk continuing diversify product mix strategic buying programs vendor partnering company generally enter derivative financial instruments manage commoditypricing exposure december 31 1998 company outstanding commodity forward contracts longterm debt table follows sets forth december 31 1998 companys longterm debt obligations principal cash flows scheduled maturity weighted average interest rates estimated fair market values approximately 12 companys total indebtedness denominated foreign currencies weighted average interest rates variable rate debt based december 31 1998 interest rates addition table follows sets forth outstanding notional amounts year weighted average interest rates nortek inc subsidiaries companys interest rate swap agreements longterm debt interest rate swaps nortek inc subsidiaries year 2000 disclosure year 2000 y2k issue refers arises deficient computer programs related products embedded chips properly distinguish year begins 20 instead 19 beginning january 1 2000 corrected many businesses processes could fail create erroneous results extent potential impact y2k problem yet known timely corrected could affect global economy required recent guidance sec applicable public companies following disclosure provides detail regarding companys y2k compliance previous reports filed company companys readiness manage y2k program company established corporatewide initiative divided efforts five areas awareness communication employees vendors suppliers y2k issue assessment complete inventory aspects business might affected remediationvalidation develop plans correct issues identified assessment stage implementation corrective measures taken solve y2k issues identified contingency alternative actions developed event corrective measures implemented y2k company identified three key areas concentration information technology systems nonit systems third parties suppliers customers companys subsidiaries various stages completion readiness including assessment remediation implementation stages y2k issue certain companys subsidiaries simultaneously working assessment remediation implementation stages initiative second third fiscal quarters 1999 companys subsidiaries expect make significant progress remediation implementation stages overall company believes remediation stage addressing y2k issue expects end second fiscal quarter 1999 provide definitive assessment status stage although company believes modifications information technology nonit systems material companys business y2k compliant december 31 1999 cannot predict outcome success y2k program third party systems y2k compliant costs required address y2k initiative impact failure achieve substantial y2k compliance material adverse effect companys business financial condition results operations nortek inc subsidiaries 1 information technology systems company conducting comprehensive review computer systems identify could affected y2k issue companys operating systems database systems y2k compliant company presently believes minor modifications conversion testing progress existing software replacement others y2k problem pose significant operational problems companys computer systems modified 2 nonit systems nonit systems typically include embedded technology microcontrollers chips company process evaluating effect y2k problem nonit systems including telecommunications equipment shopfloor controls alarm systems equipment potentially use microcontrollers chips systems affected y2k problem 3 third parties due pervasive use computers company dealings suppliers customers financial institutions third parties y2k problem could material impact company timely addressed third parties assess third party readiness company surveying principal suppliers financial institutions receiving responses indicate parties process adequately addressing problem cases key suppliers responded adequately addressing issue company determine contingency plans necessary protect companys interests company surveyed customers received surveys many principal customers indicate also addressing problem company operates decentralized environment major computer systems therefore various states readiness company nineteen businesses various systems support 100 companys net sales 1998 excluding net sales businesses sold 1998 company estimates remediation effort systems y2k issues eight business units representing approximately 36 net sales 1998 approximately 8095 complete company estimates nortek inc subsidiaries remediation effort systems y2k issues seven business units representing approximately 43 net sales 1998 approximately 6075 complete company estimates remediation effort systems y2k issues four business units representing approximately 21 net sales 1998 approximately 3050 complete substantially nonit systems including telephone systems office equipment tested found y2k compliant process replaced repaired machinery equipment testing remediation process company estimates phase approximately 30 complete overall b cost companys estimate remediation directly related fixing y2k issues approximately 6500000 total estimated expenditures approximately 6500000 consist approximately 2000000 computer hardware equipment costs approximately 3500000 software nonit computer hardware expenditures approximately 1000000 nonit expenditures company spent approximately 2200000 december 31 1998 companys y2k compliance expenditures expected funded companys operating cash flow companys y2k compliance budget include significant amounts hardware replacement company historically employed strategy continually upgrade computer systems consequently companys y2k compliance budget required diversion funds postponement implementation planned projects actual costs incurred company depend number factors cannot accurately predicted may therefore deviate estimates including among others extent difficulty remaining remediation work done availability cost consultants extent testing required demonstrate y2k compliance c risks based current information company believes y2k problem material adverse effect company business financial condition however assurances y2k remediation company third parties properly timely completed failure nortek inc subsidiaries could material adverse effect company business financial condition company believes greatest risk presented y2k problem third parties suppliers financial institutions utility providers customers among others may adequately addressed problem failure third partys computer applicable systems sufficient magnitude could materially adversely affect company presently able quantify risk company unable assess reasonable worst case y2k scenario given number factors outside companys direct indirect control including among others companys current remediation status uncertainty readiness vendors customers company recognizes risks ability conduct business key suppliers utilities communications transportation banking government domestic local state federal foreign y2k ready company process surveying vendors customers readiness upon completion survey company complete internal review information verify accuracy responses company monitoring news progress reports pertaining critical services determine effect companys ability conduct business result y2k issues economy key suppliers utilities communications transportation banking government domestic local state federal foreign cease function company completed remediation phase y2k issue company develop appropriate worstcase scenarios plans deal contingencies develops contingency plans expected completed mid 1999 contingency plans company process preparing appropriate contingency plans event significant internal external exposure identified company presently aware significant exposure guarantee systems third parties company relies converted timely manner failure properly convert another company would material adverse effect company companys contingency plans systems completely developed expected complete mid 1999 company expects complete preparation contingency plans evaluates status nortek inc subsidiaries completed remediation phase y2k project systems planning issues resolved contemplated systems company plans allocate internal resources may retain dedicated consultants vendor representatives available take corrective action necessary however company adjust adopt additional plans situations arise requiring modifications existing contingency plans new contingency plans required companys contingency plans nonit systems also completed companys subsidiaries however various business interruption contingency plans place plans process evaluated y2k scenarios adjusted appropriate company develop necessary appropriate contingency plans mid 1999 upon completion remediation efforts area forwardlooking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 used discussion throughout document words intends plans estimates believes anticipates expects similar expressions intended identify forwardlooking statements based companys current plans expectations involve risks uncertainties company control could cause actual future activities results operations materially different set forth forwardlooking statements important factors could cause actual future activities operating results differ include availability cost certain raw materials costs including among others steel copper packaging materials plastics resins glass wood aluminum purchased components level domestic foreign construction remodeling activity affecting residential commercial markets interest rates employment inflation y2k readiness currency translation consumer spending levels operating international economies rate sales growth price product warranty liability claims readers cautioned place undue reliance forwardlooking statements speak date hereof company undertakes obligation update publicly forwardlooking statements whether result new information future events otherwise subsequent written oral forwardlooking statements attributable company persons acting behalf expressly qualified entirety cautionary statements readers also urged carefully review consider various disclosures made company nortek inc subsidiaries document well companys periodic reports forms 10k 10q 8k filed securities exchange commission sec item 7aitem 7 managements discussion analysis financial condition results operations company diversified manufacturer residential commercial building products operating within three principal segments residential building products segment air conditioning heating products segment windows doors siding products segment results operations presented includes corporate related items results insignificant operations certain income expense allocable reportable segments results operations data relating businesses sold presented separately see notes 2 10 notes consolidated financial statements included elsewhere herein principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself diy professional remodeling renovation markets residential building products segment manufactures distributes builtin products primarily residential new construction diy professional remodeling renovation markets principal products sold segment include kitchen range hoods bath fans combination units fan heater light combinations air conditioning heating products segment manufactures sells heating ventilating air conditioning systems hvac customdesigned commercial applications manufactured sitebuilt residential housing windows doors siding products segment principally manufactures distributes vinyl wood composite windows vinyl wood steel composite patio entry doors vinyl siding skirting soffit accessories aluminum trim coil siding soffit accessories blocks vents shutters sunrooms fencing railing decking use residential construction diy professional renovation markets nortek inc subsidiaries company acquired webco inc webco march 8 1999 april 23 1999 company acquired three businesses caradon plc united kingdom peachtree windows doors thermalgard cwd windows doors caradon acquired companies 1999 acquisitions included multiplex technologies inc multiplex may 28 1999 kroy building products inc kroy september 9 1999 xantech corporation xantech december 3 1999 1998 company acquired nutone inc nutone july 31 1998 napco inc affiliate napco october 9 1998 company acquired ply gem industries inc ply gem subsidiaries august 26 1997 acquisitions accounted purchase method accounting accordingly results webco caradon acquired companies multiplex kroy xantech nutone napco ply gem included companys consolidated results since date acquisition see liquidity capital resources note 2 notes consolidated financial statements included elsewhere herein fourth quarter 1997 company adopted plan discontinue plumbing products business accordingly results plumbing products business excluded earnings continuing operations classified separately discontinued operations three years ended december 31 1999 july 10 1998 company sold plumbing products business approximately 33700000 cash see note 9 notes consolidated financial statements included elsewhere herein nortek inc subsidiaries 1998 company made several dispositions nonstrategic assets acquired 1997 acquisition ply gem may 8 1998 company sold studley products inc studley treated operation held sale since acquisition ply gem accordingly studleys operating results included companys consolidated financial results four additional ply gem subsidiaries sold 1998 may 22 1998 company sold sagebrush sales inc july 2 1998 company sold goldenberg group inc july 31 1998 company sold ply gem manufacturing division ply gem december 10 1998 company sold allied plywood corporation additionally december 30 1998 company sold ms systems lp mooreomatic inc subsidiaries operating results 1998 dispositions included companys 1998 consolidated results date sale combined net sales operating earnings provision income taxes dispositions period january 1 1998 date sale approximately 192000000 6400000 respectively see notes 2 9 10 notes consolidated financial statements included elsewhere herein nortek inc subsidiaries results operations tables follow present net sales operating earnings companys principal segments three years ended december 31 1999 dollar amount percentage change results compared prior year net change year ended december 31 1999 1998 1997 1999 1998 1997 dollar amounts millions net sales residential building products 6378 4750 3818 1628 343 932 244 air conditioning heating products 5406 4652 4194 754 162 458 109 windows doors siding products 7384 5368 1890 2016 376 3478 1840 760 693 213 67 97 480 2254 19928 15463 10115 4465 289 5348 529 businesses sold 1920 1226 1920 1000 694 566 19928 17383 11341 2545 146 6042 533 operating earnings residential building products 947 537 403 410 764 134 333 air conditioning heating products 670 557 413 113 203 144 349 windows doors siding products 372 315 90 57 181 225 2500 204 142 145 62 437 03 21 1785 1267 761 518 409 506 665 businesses sold 64 69 64 1000 05 72 1785 1331 830 454 341 501 604 nortek inc subsidiaries tables follow set forth three years ended december 31 1999 certain consolidated operating results b percentage change results compared prior year c percentage results bear net sales change percentages compared prior year percentage change 1999 1998 year ended december 31 1999 1998 1997 1998 1997 dollar amounts millions net sales 19928 17383 11341 146 533 cost products sold 14331 12753 8258 124 544 selling general administrative expense 3607 3155 2194 143 438 amortization goodwill intangible assets 205 144 59 424 1441 operating earnings 1785 1331 830 341 604 gain businesses sold 40 1000 interest expense 965 863 502 118 719 investment income 80 105 99 238 61 earnings continuing operations provision income taxes 900 613 427 468 436 provision income taxes 407 273 163 491 675 earnings continuing operations extraordinary loss 493 340 264 450 288 earnings loss discontinued operations 12 521000 1231 extraordinary loss debt retirements 02 1000 net earnings 493 350 212 409 651 nortek inc subsidiaries percentage change percentage net sales 1999 1998 year ended december 31 1999 1998 1997 1998 1997 net sales 1000 cost products sold 719 734 728 15 06 selling general administrative expense 181 194 13 amortization goodwill intangible assets 10 08 05 02 03 operating earnings 90 77 73 13 04 gain businesses sold 02 interest expense 49 50 44 01 06 investment income 04 06 09 02 03 earnings continuing operations provision income taxes 45 35 38 10 03 provision income taxes 20 16 14 04 02 earnings continuing operations extraordinary loss 25 19 24 06 05 earnings loss discontinued operations 01 05 01 06 extraordinary loss debt retirements net earnings 25 20 19 05 01 nortek inc subsidiaries year ended december 31 1999 compared year ended december 31 1998 net sales increased approximately 254500000 approximately 146or increased approximately 257400000 approximately 148 excluding effect changes foreign exchange rates compared 1998 net sales increased 1999 principally result acquisitions higher sales volume partially offset effect businesses sold acquisitions contributed approximately 127400000 total increase net sales approximately 162800000 165700000 increase excluding effect changes foreign exchange rates residential building products segment 1999 increased domestic sales volume partially offset effects changes foreign exchange rates accounted balance increase segment net sales air conditioning heating products segment increased approximately 75400000 162 1999 increase net sales segment principally result higher sales volume products sold customers serving residential site built commercial markets partially offset lower sales products customers serving manufactured housing market segment second half 1999 segment began feel impact slowdown manufactured housing industry anticipated weakness manufactured housing industry continue year 2000 adverse effect segments sales next several quarters segments sales air conditioning heating products sold manufactured housing customers improve manufactured housing industry takes steps reduce retail inventories manufactured homes approximately 12100000 increase net sales segment 1999 acquisition net sales windows doors siding products segment increased approximately 201600000 1999 increase arose primarily net sales acquired companies contributed approximately 215900000 1999 increase net sales segment partially offset effect lower sales volume certain lower margin vinyl window products relocated lower cost manufacturing facility operation closely controlled sales continues implement cost control measures improve operating systems overall net increases net sales companys three principal segments partially offset effect approximately 192000000 net sales attributable businesses sold 1998 result acquisitions second third quarters 1999 windows doors siding products segment performance segment seasonal prior years due effect winter weather conditions normally experienced fourth first quarters us canada securities exchange commission released staff accounting bulletin 101 revenue recognition financial statements sab 101 december 3 1999 sab provides additional guidance accounting revenue recognition including broad conceptual discussions well certain industryspecific guidance company process accumulating information necessary quantify potential impact new guidance nortek inc subsidiaries cost products sold percentage net sales decreased approximately 734 1998 approximately 719 1999 changes percentages large part result acquisitions businesses sold 1998 excluding effect businesses sold cost products sold percentage net sales decreased approximately 729 1998 approximately 719 1999 decrease percentage principally resulted acquisitions residential building products segment partially offset acquisitions windows doors siding products segment combined basis net lower level cost sales overall group businesses owned prior acquisitions lesser extent effect higher sales levels residential building products segment without proportionate increase costs also contributed decrease percentage decreases percentages partially offset effect higher vinyl resin cost due higher oil prices without proportionate increase sales prices windows doors siding products segment year 2000 rising cost vinyl resin also expected adversely impact cost sales percentages situation mitigated price increases segments vinyl products implemented next several quarters yearend inventory values stated fifo basis yearend inventory would approximately 2252000 higher 1999 3640000 higher 1998 5041000 higher 1997 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material costs changes productivity levels selling general administrative expense percentage net sales remained unchanged approximately 181 1998 1999 excluding effect businesses sold selling general administrative expense percentage net sales increased slightly approximately 180 1998 approximately 181 1999 increase percentage principally result acquisitions residential building products segment higher level expense percentage net sales overall group businesses owned prior acquisitions partially offset increase net sales air conditioning heating products segment without proportionate increase expense reduction level expense windows doors siding products segment including effect acquisitions part lower level expense percentage net sales overall group businesses owned prior acquisitions amortization goodwill intangible assets percentage net sales increased approximately 8 net sales 1998 approximately 10 net sales 1999 principally result acquisitions nortek inc subsidiaries consolidated operating earnings increased approximately 45400000 approximately 133100000 1998 approximately 178500000 1999 businesses acquired 1999 contributed approximately 30900000 increase approximately 18500000 residential building products segment 900000 air conditioning heating products segment 11500000 windows doors siding products segment increase operating earnings 1999 includes approximately 14000000 estimated synergies cost reductions realized integration nutone companys residential building products segment net approximately 3400000 costs expenses consolidated operating earnings reduced depreciation amortization expense amortization deferred debt expense debt discount approximately 55500000 42100000 1999 1998 respectively businesses acquired contributed approximately 10500000 increase depreciation amortization expense 1999 approximately 5300000 residential building products segment 300000 air conditioning heating products segment 4900000 windows doors siding products segment depreciation amortization expense relating operating results businesses sold 1998 approximately 1700000 1998 see note 10 notes consolidated financial statements included elsewhere herein increase operating earnings also due part increased sales volume without proportionate increase costs expenses residential building products segment approximately 22600000 excluding contribution acquisitions increased sales volume without proportionate increase costs expenses air conditioning heating products segment approximately 10300000 excluding contribution acquisitions increase operating earnings air conditioning heating products segment arose higher sales levels commercial sitebuilt residential products partially offset second half 1999 lower operating earnings air conditioning heating products sold manufactured housing market compared prior year due slowdown manufactured housing industry noted slowdown manufactured housing industry expected adversely effect segments operating earnings next several quarters anticipated segments operating earnings begin improve increased sales air conditioning heating products manufactured housing industry takes steps reduce retail inventories manufactured homes also expected next several quarters effect slowdown continue somewhat offset increased earnings higher sales levels sitebuilt residential air conditioning products operating earnings 1999 windows doors siding products segment decreased approximately 5800000 excluding contribution acquisitions principally result higher vinyl resin costs lower sales volume certain vinyl windows noted overall increase companys operating earnings partially offset effect approximately 6400000 operating earnings businesses sold 1998 integration nortek inc subsidiaries recently acquired caradon acquired companies taking longer expected resulted lower contribution earnings 1999 anticipated company anticipates lower earnings levels next several quarters windows doors siding products segment due seasonality segments 1999 acquisitions effects integration caradon acquired companies lower sales levels certain vinyl windows noted continue felt company also expects future operating earnings segment adversely affected higher vinyl resin costs increases sales prices customers implemented operating earnings foreign operations consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilation products windows doors approximately 74 65 operating earnings corporate overhead 1999 1998 respectively increase foreign operating earnings percentage operating earnings 1999 compared 1998 principally result increased operating earnings foreign acquisitions sales earnings derived international market subject risks among factors currency fluctuations interest expense 1999 increased approximately 10200000 approximately 118 compared 1998 primarily result sale 8 78 senior notes due 2008 8 78 notes july 31 1998 increase partially offset paydown approximately 27700000 debt portion proceeds sale businesses 1998 investment income decreased approximately 2500000 approximately 238 1999 compared 1998 decrease 1999 principally due lower average invested balances result funds used acquisitions lower yields earned shortterm investments marketable securities provision income taxes approximately 40700000 1999 compared 27300000 1998 income tax rates differed united states federal statutory rate 35 principally result state income tax provisions nondeductible amortization expense tax purposes effect foreign income tax foreign source income changes tax reserves effect product development tax credits foreign operations see note 4 notes consolidated financial statements included elsewhere herein nortek inc subsidiaries year ended december 31 1998 compared year ended december 31 1997 net sales increased approximately 604200000 approximately 533 compared 1997 increased approximately 610400000 approximately 538 excluding effect changes foreign exchange rates net sales increased 1998 principally result acquisitions acquisition nutone july 31 1998 contributed approximately 82200000 93200000 increase 99400000 increase excluding effect changes foreign exchange rates net sales residential building products segment 1998 balance increase net sales segment result higher sales levels higher margin builtin ventilation products north america partially offset lower sales levels certain lower margin products increase net sales air conditioning heating products segment approximately 45800000 109 principally result higher sales volume related products sold residential manufactured housing markets partially offset slightly lower sales commercial hvac products part result seven week strike 1998 one segments manufacturing facilities increase net sales windows doors siding products segment principally arose connection august 26 1997 acquisition ply gem full twelve months operating results 1998 compared four months 1997 acquisition napco october 9 1998 contributed approximately 21000000 segments increase net sales 1998 net sales businesses sold increased approximately 69400000 principally result certain nonstrategic businesses acquired connection august 26 1997 acquisition ply gem sold 1998 cost products sold percentage net sales increased approximately 728 1997 approximately 734 1998 changes percentages large part affected acquisitions affected future effect businesses sold 1998 ply gem businesses higher level cost sales percentage net sales overall group businesses owned prior ply gem acquisition nutones level cost sales percentage net sales lower excluding effect businesses sold cost products sold percentage net sales increased approximately 724 1997 approximately 729 1998 increase percentage principally resulted acquisitions ply gem lesser extent napco windows doors siding products segment partially offset acquisition nutone effect higher sales levels residential building products air conditioning heating product segments without proportionate increase costs yearend inventory values stated fifo basis yearend inventory would approximately 3640000 higher 1998 approximately 5041000 higher 1997 approximately 6015000 higher 1996 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material cost products sold changes productivity levels nortek inc subsidiaries selling general administrative expense percentage net sales decreased approximately 194 1997 approximately 181 1998 decrease percentage principally affected result acquisitions affected future effect businesses sold 1998 ply gem napco lower level selling general administrative expense percentage net sales overall group businesses owned prior acquisitions nutone higher level expense percentage net sales excluding effect businesses sold selling general administrative expense percentage net sales decreased approximately 195 1997 approximately 180 1998 air conditioning heating products segment lesser extent residential building products segment contributed decrease percentage result increases sales noted without proportionate increase expense partially offset increased corporate overhead principally result acquisition ply gem amortization goodwill intangible assets percentage net sales increased approximately 5 net sales 1997 approximately 8 net sales 1998 principally result acquisitions ply gem nutone consolidated operating earnings increased approximately 50100000 approximately 83000000 1997 compared approximately 133100000 1998 businesses acquired 1998 contributed approximately 12600000 increase approximately 2300000 windows doors siding products segment 10300000 residential building products segment operating earnings increased substantially 1998 windows doors siding products segment principally due effect august 26 1997 acquisition ply gem full twelve months operating results 1998 compared four months 1997 consolidated operating earnings reduced depreciation amortization expense approximately 42100000 approximately 26700000 1998 1997 respectively businesses acquired 1998 contributed approximately 4300000 increase depreciation amortization expense 1998 approximately 500000 windows doors siding products segment 3800000 residential building products segment depreciation amortization expense year ended december 31 1998 related operating results businesses sold 1998 approximately 1700000 see note 10 notes consolidated financial statements included elsewhere herein increase operating earnings also due increased sales volume without proportionate increase cost expense air conditioning heating products segment approximately 14400000 349 lesser extent residential building products segment approximately 3100000 excluding contribution nutone noted partially offset increased expense principally result increased corporate overhead result acquisition ply gem nortek inc subsidiaries operating earnings foreign operations consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilating products approximately 65 90 operating earnings corporate overhead 1998 1997 respectively decline foreign operating earnings percentage net sales principally result increased domestic sales operating earnings ply gem acquisition sales earnings derived international market subject risks currency fluctuations gain businesses sold provision income taxes 1998 approximately 4000000 arose connection sale ms mom interest expense 1998 increased approximately 36100000 approximately 719 compared 1997 primarily result sale 9 14 notes march 17 1997 sale 9 18 notes august 26 1997 indebtedness ply gem existing date acquisition sale 8 78 notes july 31 1998 increase partially offset refinancing certain outstanding indebtedness companys subsidiaries 1997 see notes 2 5 notes consolidated financial statements included elsewhere herein investment income 1998 increased approximately 600000 approximately 61 compared 1997 principally due higher average invested balances partially offset slightly lower yields earned shortterm investments marketable securities provision income taxes approximately 27300000 1998 compared approximately 16300000 1997 income tax rates differed united states federal statutory rate 35 principally result state income tax provisions nondeductible amortization expense tax purposes changes tax reserves effect foreign income tax foreign source income effect product development tax credits foreign operations see note 4 notes consolidated financial statements included elsewhere herein earnings discontinued operations approximately 1200000 1998 compared loss approximately 5200000 1997 fourth quarter 1997 company adopted plan disposition plumbing products business july 10 1998 business sold following comparison operating results discontinued operations two years ended december 31 1998 see note 9 notes consolidated financial statements included elsewhere herein nortek inc subsidiaries years ended december 31 1998 1997 amounts thousands loss income taxes 2800 3800 allocated corporate interest expense 1000 1900 3800 5700 income tax benefit 5000 2100 1200 3600 reserve future operating expenses net tax benefit 900000 1600 earnings loss discontinued operations 1200 5200 income tax benefit 1998 includes approximately 800000 recorded result realization portion tax capital loss arising sale plumbing products business liquidity capital resources company highly leveraged expects continue highly leveraged foreseeable future december 31 1999 company consolidated debt approximately 1037600000 consisting 14000000 shortterm borrowings current maturities longterm debt ii 128300000 notes mortgage notes indebtedness iii 209300000 8 78 notes iv 307900000 9 18 senior notes due 2007 9 18 notes v 174200000 9 14 senior notes due 2007 9 14 notes vi 203900000 9 78 senior subordinated notes due 2004 9 78 notes december 31 1999 company consolidated unrestricted cash equivalents marketable securities approximately 115100000 compared approximately 209600000 december 31 1998 companys debt equity ratio approximately 401 december 31 1999 compared 471 december 31 1998 companys ability pay interest refinance indebtedness depends successful integration operations recent acquisitions companys future performance subject general economic financial competitive legislative regulatory factors beyond control assurance company generate sufficient cash flow operation subsidiaries future financings available acceptable terms amounts sufficient enable company service refinance indebtedness make necessary capital expenditures nortek inc subsidiaries company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions indentures agreements governing company subsidiaries indebtedness including indentures 8 78 notes 9 78 notes 9 14 notes 9 18 notes credit agreement ply gem credit facility contain restrictive financial operating covenants including covenants restrict ability company subsidiaries complete acquisitions pay dividends incur indebtedness make investments sell assets take certain corporate actions company expects meet cash flow requirements fiscal 2000 cash generated operations existing cash equivalents marketable securities financings may include securitization accounts receivable mortgage capital lease financings march 8 1999 company acquired webco designer manufacturer custom air handling equipment year ended october 31 1998 webco net sales approximately 13900000 april 23 1999 company acquired caradon acquired companies caradon america inc caradon limited wholly owned subsidiaries caradon plc united kingdom company caradon acquired companies manufacture sell residential windows entry doors patio doors new construction replacement markets year ended december 31 1998 caradon acquired companies combined net sales approximately 169700000 may 28 1999 company acquired multiplex manufacturer designer highperformance multiroom video distribution equipment home automation home entertainment multiplex net sales approximately 10000000 year ended december 31 1998 september 9 1999 company acquired kroy manufacturer vinyl fencing railing profiles vinyl decking systems residential light commercial applications kroy net sales approximately 26000000 twelve months ended june 30 1999 december 3 1999 company acquired xantech designer manufacturer residential infrared remote control systems extending control vcr cable satellite stereo systems multiple rooms throughout entire household xantech net sales approximately 13000000 twelve months ended november 30 1999 nortek inc subsidiaries acquisitions 1999 principally funded use unrestricted cash investments issuance notes payable sellers issuance common stock company integrates recent acquisitions businesses expects achieve incremental synergies cost savings reductions 2000 partially offset certain costs expenses december 31 1999 plans eliminating certain activities finalized significant acquisitions exception certain severence arrangements company estimates approximately 1000000 finalized first half 2000 acquisition integration liabilities adjustments relate principally additional employee terminations exit costs certain products consolidation certain functions operations acquired businesses total future expenditures associated exit costs related integration effort december 31 1999 expected funded companys operating cash flow integration acquisitions within windows doors siding products segment taking longer originally planned significant difficulty encountered integration acquisitions within windows doors siding products segment acquisitions within segments synergies cost savings realized results operations cash flow financial condition company likely adversely affected assurance company able successfully manage integrate recent acquisitions see note 2 12 notes consolidated financial statements included elsewhere herein unrestricted cash equivalents decreased approximately 87876000 december 31 1998 approximately 80893000 december 31 1999 marketable securities available sale decreased approximately 121757000 december 31 1998 approximately 34219000 december 31 1999 companys investment marketable securities december 31 1999 consisted primarily certificates deposit commercial paper bank issued money market instruments december 31 1999 approximately 26917000 approximately 11240000 included current assets companys cash investments marketable securities pledged collateral insurance employee benefits requirements classified restricted companys accompanying consolidated balance sheet capital expenditures approximately 42000000 1999 expected range 50000000 55000000 2000 companys board directors authorized number programs purchase shares companys common special common stock recent programs announced may 20 1999 allows company purchase 500000 shares companys common special common stock open market negotiated transactions subject market conditions cash availability provisions companys outstanding debt instruments february 25 2000 company purchased approximately 377300 shares common special common stock program approximately 10800000 accounted share purchases treasury stock nortek inc subsidiaries february 25 2000 approximately 87700000 available payment cash dividends stock purchases restricted payments defined terms companys restrictive indenture see note 5 notes consolidated financial statements included elsewhere herein companys working capital current ratio decreased slightly approximately 337207000 201 respectively december 31 1998 approximately 324492000 191 respectively december 31 1999 principally result payments related acquisitions partially offset working capital acquired acquisitions net factors described accounts receivable increased approximately 38404000 approximately 187 december 31 1998 december 31 1999 net sales increased approximately 50504000 approximately 115 fourth quarter 1999 compared fourth quarter 1998 increases result 1999 acquisitions contributed approximately 54941000 net sales fourth quarter 1999 approximately 29124000 accounts receivable 1999 rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales increases decreases net sales near end period generally result significant changes amount accounts receivable date balance sheet end period situation december 31 1999 compared december 31 1998 company experience significant overall changes credit terms collection efforts credit utilization delinquency accounts receivable 1999 inventories increased approximately 49971000 approximately 307 december 31 1998 december 31 1999 acquisitions contributed approximately 28693000 increase inventory 1999 substantial portion balance increase inventories result expanded distribution hvac residential sitebuilt products companys air conditioning heating products segment accounts payable increased approximately 29671000 approximately 247 december 31 1998 december 31 1999 acquisitions contributed approximately 16322000 increase accounts payable substantial portion balance increase accounts payable occurred companys air conditioning heating products segment result increased distribution residential sitebuilt products company expects increases working capital levels year 2000 distribution hvac residential sitebuilt products companys air conditioning heating products segment continues expand nortek inc subsidiaries unrestricted cash equivalents decreased approximately 6983000 december 31 1998 december 31 1999 principallyas result following condensed consolidated cash flows operating activities cash flow operations net 125617000 increase accounts receivable net 7899000 increase inventories 21434000 increase prepaids current assets 2072000 increase accounts payable 20760000 decrease accrued expenses taxes 12399000 investing activities net cash paid businesses acquired 125788000 proceeds sale marketable securities net 88349000 capital expenditures 42013000 increase restricted cash investments 7952000 financing activities payment borrowings net 1713000 purchase nortek common special common stock 14524000 net 5915000 6983000 prepared companys consolidated statement cash flows year ended december 31 1999 see nortek inc subsidiaries consolidated financial statements 1999 included elsewhere herein impact changes foreign currency exchange rates cash material included net companys debttoequity ratio decreased approximately 471 december 31 1998 401 december 31 1999 primarily result increase equity due net earnings 1999 issuance common stock partial consideration acquisition partially offset effect purchase nortek common special common stock changes currency translation net increase borrowings see consolidated statement stockholders investment included elsewhere herein nortek inc subsidiaries result changes us federal income tax regulations 1999 company utilize approximately 40000000 net operating losses 1999 federal tax return resulted approximately 14000000 lower expected federal income tax payments 1999 december 31 1999 companys wholly owned subsidiary ply gem net operating loss carry forward approximately 21300000 expires 2011 subject certain limitations imposed internal revenue code extent company consolidated federal taxable income beginning year 2000 company able utilize remaining net operating loss utilization net operating loss limited approximately 17500000 annually inflation trends general considerations company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions companys performance dependent significant extent upon levels new residential construction residential replacement remodeling nonresidential construction affected factors interest rates inflation unemployment near term company expects operate environment relatively stable levels construction remodeling activity however increases interest rates could negative impact level housing construction remodeling activity demand companys products seasonal particularly northeast midwest regions united states inclement weather winter months usually reduces level building remodeling activity home improvement new construction markets companys lower sales levels usually occur first fourth quarters since high percentage companys manufacturing overhead operating expenses relatively fixed throughout year operating income net earnings tend lower quarters lower sales levels result recent acquisitions windows doors siding products segment performance segment seasonal prior years due number businesses affected winter weather conditions addition demand cash fund working capital companys subsidiaries greater late first quarter early fourth quarter market risk discussed specifically company exposed market risks related changes interest rates foreign currencies commodity pricing company uses derivative financial instruments limited basis hedge economic exposures company enter derivative financial instruments financial instruments trading purposes nortek inc subsidiaries interest rate risk company exposed market risk changes interest rates primarily investing borrowing activities addition companys ability finance future acquisition transactions may impacted company unable obtain appropriate financing acceptable interest rates companys investing strategy manage interest rate exposure invest shortterm highly liquid investments marketable securities shortterm investments primarily consist money market accounts corporate commercial paper original maturities 90 days less december 31 1999 fair value companys shortterm investments approximated market value marketable securities primarily consist certificates deposit bank issued money market instruments original maturities 91 180 days restricted investments marketable securities primarily consist money market accounts certificates deposit commercial paper original maturities 90 days less december 31 1999 fair value companys unrestricted restricted investments marketable securities approximated market value company manages borrowing exposure changes interest rates optimizing use fixed rate debt extended maturities addition december 31 1999 company ply gem subsidiary hedged exposure substantial portion variable rate debt entering interest rate collar transaction lock interest rate floor 576 cap 7 december 31 1999 approximately 95 carrying values companys longterm debt either fixed interest rates covered interest rate collar agreement see table set forth item longterm debt notes 1 5 notes consolidated financial statements included elsewhere herein disclosure terms companys debt interest rate collar agreement b foreign currency risk companys results operations affected fluctuations value us dollar compared value currencies foreign markets primarily related changes italian lira canadian dollar 1999 net impact foreign currency changes material companys financial condition results operations company manages exposure foreign currency exchange risk principally trying minimize companys net investment foreign assets use strategic short longterm borrowings foreign subsidiary level consistent strategy notes payable shortterm obligations december 31 1999 consist primarily shortterm borrowings certain companys foreign subsidiaries december 31 1999 companys net investment foreign assets approximately 83300000 overall unfavorable change foreign exchange rates 10 would result approximate 7600000 reduction nortek inc subsidiaries equity result impact cumulative translation adjustment company generally enter derivative financial instruments manage foreign currency exposure december 31 1999 company outstanding foreign currency hedging contracts c commodity pricing risk company subject significant market risk respect pricing principal raw materials include among others steel copper packaging material plastics resins glass wood aluminum prices raw materials increase dramatically company may able pass increases customers result gross margins could decline significantly company manages exposure commodity pricing risk continuing diversify product mix strategic buying programs vendor partnering company generally enter derivative financial instruments manage commoditypricing exposure december 31 1999 company outstanding commodity forward contracts see discussion elsewhere herein managements discussion analysis financial condition results operations respect increase cost resin material second half 1999 longterm debt table follows sets forth december 31 1999 companys longterm debt obligations principal cash flows scheduled maturity weighted average interest rates estimated fair market values approximately 15 companys total indebtedness denominated foreign currencies weighted average interest rates variable rate debt based december 31 1999 interest rates addition table follows sets forth outstanding notional amounts year floor cap interest rates companys interest rate collar agreement nortek inc subsidiaries longterm debt scheduled maturity average interest rate fixed variable fixed variable year ending rate total rate total dollar amounts millions december 31 2000 30 26 56 651 590 623 2001 69 29 98 807 625 753 2002 17 807 824 590 644 643 2003 15 22 37 578 784 698 2004 2100 22 2122 983 812 981 thereafter 1 7094 106 7200 900 591 895 total principal 9325 1012 10337 916 643 889 unamortized debt discount 45 total longterm debt december 31 1999 9280 1012 10292 fair market value longterm debt december 31 1999 9083 1012 10095 1 senior notes total principal 695000000 weighted average interest rate 908 mature various times 2007 2008 see note 5 notes consolidated financial statements included elsewhere herein interest rate collar notional floor cap outstanding amount rate dollar amounts millions december 31 2000 450 576 2 7 3 2001 450 576 2 7 3 fair market value asset related interest rate collar december 31 1999 3 2 interest rate 576 company pay difference 3 interest rate 7 company entitled receive difference nortek inc subsidiaries year 2000 disclosure following year 2000 statements constitute year 2000 readiness disclosure within meaning year 2000 information readiness disclosure act 1998 march 3 2000 none companys subsidiaries experienced significant year 2000 related problems instances missioncritical nonmissioncritical systems failed perform correctly however year 2000 issue still poses several potential risks company subsidiaries number companys customers suppliers third parties utilize computers computer software varying degrees conjunction operation businesses customers suppliers businesses may utilize computers well companys customers suppliers businesses depend experience year 2000 related computer problems third parties cash flow could disrupted adversely affecting ability pay company customer supplier ability pay suppliers goods needed supply company disruptions could adverse affects company subsidiaries company assessed year 2000 third party exposure use questionnaires personal interviews 1999 march 3 2000 company aware supply credit problems related year 2000 issue year 2000 related problems occur cause systems certain third parties upon company subsidiaries depends become inoperative increased personnel costs could incurred additional staff required perform functions inoperative systems would otherwise performed march 3 2000 company experienced disruptions third party services related year 2000 issue companys expenditures remediation directly related correcting year 2000 issues approximately 6000000 including businesses acquired 1999 total expenditures approximately 6000000 consisted approximately 2000000 computer hardware equipment costs approximately 3000000 software nonit computer hardware expenditures approximately 1000000 nonit expenditures companys year 2000 compliance expenditures funded companys operating cash flow nortek inc subsidiaries companys year 2000 compliance budget include significant amounts hardware replacement company historically employed strategy continually upgrade computer systems consequently companys year 2000 compliance budget required diversion funds postponement implementation planned projects company believes possible estimate potential lost revenue due remaining potential year 2000 problems discussed occurrence extent longevity potential problems cannot predicted march 3 2000 company believes experienced lost revenue related year 2000 issue forwardlooking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 used discussion throughout document words intends plans estimates believes anticipates expects similar expressions intended identify forwardlooking statements based companys current plans expectations involve risks uncertainties company control could cause actual future activities results operations materially different set forth forwardlooking statements important factors could cause actual future activities operating results differ include availability cost certain raw materials including among others steel copper packaging materials plastics resins glass wood aluminum purchased components level domestic foreign construction remodeling activity affecting residential commercial markets interest rates employment inflation foreign currency fluctuations consumer spending levels exposure foreign economies rate sales growth price product warranty liability claims readers cautioned place undue reliance forwardlooking statements speak date hereof company undertakes obligation update publicly forwardlooking statements whether result new information future events otherwise subsequent written oral forwardlooking statements attributable company persons acting behalf expressly qualified entirety cautionary statements readers also urged carefully review consider various disclosures made company document well companys periodic reports forms 10k 10q 10qa 8k filed securities exchange commission sec nortek inc subsidiaries item 7aitem 7 managements discussion analysis financial condition results operations company diversified manufacturer residential commercial building products operating within three principal segments residential building products segment air conditioning heating products segment windows doors siding products segment results operations presented includes corporate related items results insignificant operations certain income expense allocable reportable segments results operations data relating businesses sold presented separately see notes 2 10 notes consolidated financial statements included elsewhere herein principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself diy professional remodeling renovation markets residential building products segment manufactures distributes builtin products primarily residential new construction diy professional remodeling renovation markets principal products sold segment include kitchen range hoods bath fans combination units fan heater light combinations air conditioning heating products segment manufactures sells heating ventilating air conditioning systems hvac customdesigned commercial applications residential light commercial manufactured structures windows doors siding products segment principally manufactures distributes vinyl wood composite windows vinyl wood steel composite patio entry doors vinyl siding skirting soffit accessories aluminum trim coil siding soffit accessories blocks vents shutters sunrooms fencing railing decking use residential construction diy professional renovation markets company acquired eatonwilliams holdings limited eatonwilliams july 3 2000 webco inc webco march 8 1999 april 23 1999 company acquired three businesses caradon plc united kingdom peachtree windows doors thermalgard cwd windows doors caradon acquired companies 1999 acquisitions included multiplex technologies inc multiplex may 28 1999 kroy building products inc kroy september 9 1999 xantech corporation xantech december 3 1999 1998 company acquired nutone inc nutone july 31 1998 napco inc affiliate napco october 9 1998 acquisitions accounted purchase method accounting accordingly results eatonwilliams webco caradon acquired companies multiplex kroy xantech nutone napco included companys consolidated results since date acquisition see liquidity capital resources note 2 notes consolidated financial statements included elsewhere herein 1998 company made several dispositions nonstrategic assets acquired 1997 acquisition ply gem industries inc ply gem may 8 1998 company sold studley products inc studley treated operation held sale since acquisition ply gem accordingly studleys operating results included companys consolidated financial results four additional ply gem subsidiaries sold 1998 may 22 1998 company sold sagebrush sales inc july 2 1998 company sold goldenberg group inc july 31 1998 company sold ply gem manufacturing division ply gem december 10 1998 company sold allied plywood corporation additionally december 30 1998 company sold ms systems lp mooreomatic inc subsidiaries operating results 1998 dispositions included companys 1998 consolidated results date sale combined net sales operating earnings provision income taxes dispositions period january 1 1998 date sale approximately 191400000 6400000 respectively see notes 2 10 notes consolidated financial statements included elsewhere herein financial accounting standards boards emerging issues task force reached final consensus 2000 respect accounting shipping handling fees costs accounting certain sales incentives result company reclassified certain amounts among net sales cost products sold selling general administrative expenses accordance pronouncements periods presented managements discussion analysis financial condition results operations contained herein companys consolidated financial statements included elsewhere herein see note 1 notes consolidated financial statements reclassifications effect operating earnings net earnings per share period presented results operations tables follow present net sales operating earnings companys principal segments three years period ended december 31 2000 dollar amount percentage change results compared prior year tables follow set forth three years period ended december 31 2000 certain consolidated operating results b percentage change results compared prior year c percentage results bear net sales change percentages compared prior year ended december 31 2000 compared year ended december 31 1999 consolidated net sales increased approximately 206900000 approximately 104 2000 increased approximately 216900000 approximately 109 excluding effect changes foreign exchange rates compared 1999 consolidated net sales increased 2000 principally result acquisitions price increases higher net sales volume acquisitions contributed approximately 134200000 increase consolidated net sales residential building products segment net sales increased approximately 27500000 approximately 43 2000 approximately 37500000 excluding effect changes foreign exchange rates compared 1999 principally result approximately 20900000 sales acquisitions higher sales volume kitchen range hoods bath fans air conditioning heating products segment net sales increased approximately 89700000 166 compared 1999 increase net sales segment principally result higher sales volume products sold customers serving residential sitebuilt commercial markets including sales contributed acquisitions approximately 30800000 partially offset lower sales products customers serving manufactured housing market line overall softness experienced manufactured housing industry anticipated weakness manufactured housing industry continue throughout 2001 expected continue adverse effect segments sales compared 2000 windows doors siding segment net sales increased approximately 94700000 129 2000 principally result 1999 acquisitions contributed approximately 82500000 increase net sales 2000 balance increase net sales segment approximately 12200000 2000 principally resulted increased sales prices sales volume vinyl siding related products accessories partially offset lower sales volume window door products cost products sold percentage net sales increased approximately 753 1999 approximately 765 2000 increase percentage principally resulted effect higher material costs principally vinyl resin costs without proportionate increase sales prices customers windows doors siding products segment certain product mix changes integration costs incurred 2000 principally residential building products segment although overall cost vinyl resin 2000 windows doors siding products segment higher 1999 cost resin began decrease slightly latter part 2000 slightly lower vinyl resin costs 2001 compared 2000 expected continue however costs expected remain higher 2001 overall levels experienced segment 1999 situation however may mitigated sales price increases cost reduction measures price stabilization vinyl products occur windows doors siding products segment lesser extent higher anticipated costs result delays rationalization relocation nutones manufacturing operations residential building products segment also factor increase 2000 percentage cost products sold percentage net sales acquisitions air conditioning heating products segment higher cost products sold percentage net sales effect increase percentage offset effect acquisitions residential building products segment lower cost products sold percentage net sales overall group businesses owned prior acquisitions yearend inventory values stated fifo basis yearend inventory would approximately 2593000 higher 2000 2252000 higher 1999 3640000 higher 1998 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material costs changes productivity levels selling general administrative expense percentage net sales increased slightly approximately 147 1999 approximately 149 2000 selling general administrative expense 2000 reduced approximately 1700000 gain sale land second quarter 2000 selling general administrative expense percentage net sales excluding effect gain sale land second quarter 2000 increased approximately 147 1999 approximately 150 2000 increase percentage 2000 principally result 1999 acquisitions residential building products windows doors siding products segments higher expense level percentage net sales overall group businesses owned prior acquisitions partially offset lower expense levels window door product lines windows doors siding products segment amortization goodwill intangible assets percentage net sales increased slightly 10 net sales 1999 11 2000 principally result increased amortization related acquisitions partially offset increased sales volume consolidated operating earnings decreased approximately 13100000 approximately 178500000 1999 approximately 165400000 2000 result factors discussed consolidated operating earnings 2000 include gain second quarter sale land approximately 1700000 acquisitions contributed approximately 5500000 operating earnings 2000 consisted increase approximately 2200000 residential building products segment increase approximately 900000 air conditioning heating products segment increase approximately 2400000 windows doors siding products segment consolidated operating earnings reduced depreciation amortization expense amortization deferred debt expense debt discount approximately 59800000 2000 businesses acquired contributed approximately 3800000 increase depreciation amortization expense 2000 approximately 900000 residential building products segment approximately 500000 air conditioning heating products segment approximately 2400000 windows doors siding products segment consolidated operating earnings excluding earnings acquisitions 1700000 gain sale land decreased approximately 20300000 178500000 1999 approximately 158200000 2000 due part decrease approximately 6000000 operating earnings residential building products segment decrease within residential building products segment due primarily increased manufacturing costs result delays rationalization relocation certain nutones manufacturing operations partially offset increased sales volume without proportionate increase cost expenses operating earnings increased approximately 6900000 2000 excluding effect acquisitions air conditioning heating products segment increase operating earnings air conditioning heating products segment arose higher sales levels commercial sitebuilt residential products partially offset decline operating earnings lower sales volume air conditioning heating products sold manufactured housing market compared 1999 due slowdown manufactured housing industry softness manufactured housing industry expected continue adversely effect segments operating earnings 2001 compared 2000 expected effect softness continue somewhat offset increased earnings higher sales levels sitebuilt residential air conditioning products 2001 operating earnings decreased approximately 15900000 2000 excluding acquisitions windows doors siding products segment decrease operating earnings primarily result higher material costs principally vinyl resin cost substantially raised manufacturing costs vinyl products segment decrease earnings partially offset increased sales prices siding related products door window products b increased sales volume siding related products c reduction level costs expenses certain window door products company expects operating earnings segment 2001 adversely affected sales price increases cost reduction measures lower vinyl resin costs price stabilization segments vinyl products occur operating earnings foreign operations consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilation products windows doors certain air conditioning humidification equipment approximately 70 74 operating earnings corporate overhead 2000 1999 respectively decrease foreign operating earnings percentage total operating earnings principally result decline foreign exchange rates sales earnings derived international market subject risks currency fluctuations interest expense 2000 increased approximately 900000 approximately 09 compared 1999 increase primarily result debt acquired issued connection acquisitions net payments investment income decreased approximately 400000 approximately 5 2000 compared 1999 primarily due lower average invested balances result funds used acquisitions 1999 2000 partially offset slightly higher yields provision income taxes approximately 34000000 2000 compared 40700000 1999 income tax rates differed united states federal statutory income tax rate 35 principally result state income tax provisions nondeductible amortization expense tax purposes tax effect resulting foreign activities see note 4 notes consolidated financial statements included elsewhere herein year ended december 31 1999 compared year ended december 31 1998 consolidated net sales increased approximately 262200000 approximately 152 1999 increased approximately 265100000 approximately 154 excluding effect changes foreign exchange rates compared 1998 consolidated net sales increased 1999 principally result acquisitions higher sales volume partially offset effect businesses sold acquisitions contributed approximately 355400000 increase consolidated net sales acquisitions contributed approximately 127400000 total increase net sales approximately 163800000 166700000 increase excluding effect changes foreign exchange rates residential building products segment 1999 increased domestic sales volume partially offset effects changes foreign exchange rates accounted balance increase segment net sales air conditioning heating products segment increased approximately 79800000 173 1999 increase net sales segment principally result higher sales volume products sold customers serving residential site built commercial markets partially offset lower sales products customers serving manufactured housing market segment second half 1999 segment began feel impact slowdown manufactured housing industry approximately 12100000 increase net sales segment 1999 acquisition net sales windows doors siding products segment increased approximately 203300000 1999 increase arose primarily net sales acquired companies contributed approximately 215900000 1999 increase net sales segment partially offset effect lower sales volume certain lower margin vinyl window products relocated lower cost manufacturing facility operation closely controlled sales implemented cost control measures improved operating systems overall net increases net sales companys three principal segments partially offset effect approximately 191400000 net sales attributable businesses sold 1998 result acquisitions second third quarters 1999 windows doors siding products segment performance segment seasonal prior years due effect winter weather conditions normally experienced fourth first quarters us canada cost products sold percentage net sales decreased approximately 767 1998 approximately 753 1999 changes percentages large part result acquisitions businesses sold 1998 excluding effect businesses sold cost products sold percentage net sales decreased approximately 764 1998 approximately 753 1999 decrease percentage principally resulted acquisitions residential building products segment partially offset acquisitions windows doors siding products segment combined basis net lower level cost sales overall group businesses owned prior acquisitions lesser extent effect higher sales levels residential building products segment without proportionate increase costs also contributed decrease percentage decreases percentages partially offset effect higher vinyl resin cost due higher oil prices without proportionate increase sales prices windows doors siding products segment yearend inventory values stated fifo basis yearend inventory would approximately 2252000 higher 1999 3640000 higher 1998 5041000 higher 1997 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material costs changes productivity levels selling general administrative expense percentage net sales decreased slightly approximately 148 1998 approximately 147 1999 excluding effect businesses sold selling general administrative expense percentage net sales increased slightly approximately 145 1998 approximately 147 1999 increase percentage principally result acquisitions residential building products segment higher level expense percentage net sales overall group businesses owned prior acquisitions partially offset increase net sales air conditioning heating products segment without proportionate increase expense reduction level expense windows doors siding products segment including effect acquisitions part lower level expense percentage net sales overall group businesses owned prior acquisitions amortization goodwill intangible assets percentage net sales increased approximately 08 net sales 1998 approximately 10 net sales 1999 principally result acquisitions consolidated operating earnings increased approximately 45400000 approximately 133100000 1998 approximately 178500000 1999 businesses acquired 1999 contributed approximately 30900000 increase approximately 18500000 residential building products segment 900000 air conditioning heating products segment 11500000 windows doors siding products segment increase operating earnings 1999 includes approximately 14000000 estimated synergies cost reductions realized integration nutone companys residential building products segment net approximately 3400000 costs expenses consolidated operating earnings reduced depreciation amortization expense amortization deferred debt expense debt discount approximately 55500000 42100000 1999 1998 respectively businesses acquired contributed approximately 10500000 increase depreciation amortization expense 1999 approximately 5300000 residential building products segment 300000 air conditioning heating products segment 4900000 windows doors siding products segment depreciation amortization expense relating operating results businesses sold 1998 approximately 1700000 1998 see note 10 notes consolidated financial statements included elsewhere herein increase operating earnings also due part increased sales volume without proportionate increase costs expenses residential building products segment approximately 22500000 excluding contribution acquisitions increased sales volume without proportionate increase costs expenses air conditioning heating products segment approximately 10400000 excluding contribution acquisitions increase operating earnings air conditioning heating products segment arose higher sales levels commercial sitebuilt residential products partially offset second half 1999 lower operating earnings air conditioning heating products sold manufactured housing market compared prior year due slowdown manufactured housing industry noted operating earnings 1999 windows doors siding products segment decreased approximately 5800000 excluding contribution acquisitions principally result higher vinyl resin costs lower sales volume certain vinyl windows noted overall increase companys operating earnings partially offset effect approximately 6400000 operating earnings businesses sold 1998 operating earnings foreign operations consisting primarily results operations companys canadian european subsidiaries manufacture builtin ventilation products windows doors approximately 74 65 operating earnings corporate overhead 1999 1998 respectively increase foreign operating earnings percentage operating earnings 1999 compared 1998 principally result increased operating earnings foreign acquisitions sales earnings derived international market subject risks among factors currency fluctuations interest expense 1999 increased approximately 10200000 approximately 118 compared 1998 primarily result sale 8 78 senior notes due 2008 8 78 notes july 31 1998 increase partially offset paydown approximately 27700000 debt portion proceeds sale businesses 1998 investment income decreased approximately 2500000 approximately 238 1999 compared 1998 decrease 1999 principally due lower average invested balances result funds used acquisitions lower yields earned shortterm investments marketable securities provision income taxes approximately 40700000 1999 compared 27300000 1998 income tax rates differed united states federal statutory rate 35 principally result state income tax provisions nondeductible amortization expense tax purposes effect foreign income tax foreign source income changes tax reserves effect product development tax credits foreign operations see note 4 notes consolidated financial statements included elsewhere herein liquidity capital resources company highly leveraged expects continue highly leveraged foreseeable future december 31 2000 company consolidated debt approximately 1041990000 consisting 21497000 shortterm borrowings current maturities longterm debt ii 124640000 notes mortgage notes longterm indebtedness iii 209372000 8 78 senior notes due august 1 2008 8 78 notes iv 308095000 9 18 senior notes due 2007 9 18 notes v 174267000 9 14 senior notes due 2007 9 14 notes vi 204119000 9 78 senior subordinated notes due 2004 9 78 notes december 31 2000 company consolidated unrestricted cash equivalents marketable securities approximately 140600000 compared approximately 115100000 december 31 1999 companys debt equity ratio approximately 371 december 31 2000 compared 401 december 31 1999 companys ability pay interest refinance indebtedness depends successful integration operations recent acquisitions companys future performance subject general economic financial competitive legislative regulatory factors beyond control assurance company generate sufficient cash flow operation subsidiaries future financings available acceptable terms amounts sufficient enable company service refinance indebtedness make necessary capital expenditures company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions indentures agreements governing company subsidiaries indebtedness including indentures 8 78 notes 9 78 notes 9 14 notes 9 18 notes credit agreement ply gem credit facility contain restrictive financial operating covenants including covenants restrict ability company subsidiaries complete acquisitions pay dividends incur indebtedness make investments sell assets take certain corporate actions company expects meet cash flow requirements fiscal 2001 cash generated operations existing cash equivalents marketable securities financings may include securitization accounts receivable mortgage capital lease financings july 3 2000 company acquired eatonwilliams holdings limited eatonwilliams edenbridge england acquisition 2000 funded use unrestricted cash investments eatonwilliams designs manufactures installs services custommade standard air conditioning humidification equipment fiscal year ended april 2 2000 eatonwilliams reported sales approximately 41000000 see note 2 notes consolidated financial statements included elsewhere herein december 31 2000 plans eliminating certain activities related businesses acquired past several years finalized significant acquisitions acquisition integration liabilities adjustments relate principally additional employee terminations exit costs certain products consolidation certain functions operations acquired businesses total future expenditures associated exit costs related integration effort december 31 2000 expected funded companys operating cash flow integration acquisitions within residential building products windows doors siding products segments taking longer originally planned significant difficulty encountered continued integration acquisitions synergies cost savings realized results operations cash flow financial condition company likely adversely affected assurance company able successfully manage integrate recent acquisitions see note 2 11 notes consolidated financial statements included elsewhere herein unrestricted cash equivalents increased approximately 80893000 december 31 1999 approximately 132508000 december 31 2000 marketable securities available sale decreased approximately 34219000 december 31 1999 approximately 8042000 december 31 2000 companys investment marketable securities december 31 2000 consisted primarily certificates deposit commercial paper bank issued money market instruments company classified restricted accompanying consolidated balance sheet certain investments marketable securities fully available use operations december 31 2000 approximately 43305000 10869000 included current assets cash investments marketable securities pledged collateral held pension trusts insurance employee benefits requirements see notes 1 7 notes consolidated financial statements included elsewhere herein capital expenditures approximately 41334000 including capital leases approximately 5701000 2000 expected range 45000000 50000000 2001 companys board directors authorized number programs purchase shares companys common special common stock recent programs announced may 4 2000 allows company purchase 10000000 shares companys common special common stock open market negotiated transactions subject market conditions cash availability provisions companys outstanding debt instruments february 28 2001 company purchased approximately 460700 shares common special common stock program approximately 9200000 accounted share purchases treasury stock february 28 2001 approximately 100900000 available payment cash dividends stock purchases restricted payments defined terms companys restrictive indenture see note 5 notes consolidated financial statements included elsewhere herein companys working capital current ratio increased approximately 327035000 201 respectively december 31 1999 approximately 362497000 211 respectively december 31 2000 principally result factors described accounts receivable increased approximately 12305000 approximately 52 december 31 1999 december 31 2000 net sales increased approximately 24700000 approximately 51 fourth quarter 2000 compared fourth quarter 1999 increases result 2000 acquisition contributed approximately 12518000 net sales fourth quarter 2000 approximately 8362000 accounts receivable 2000 rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales increases decreases net sales near end period generally result significant changes amount accounts receivable date balance sheet end period situation december 31 2000 compared december 31 1999 company experience significant overall changes credit terms collection efforts credit utilization delinquency accounts receivable 2000 inventories increased approximately 11523000 approximately 54 december 31 1999 december 31 2000 acquisition 2000 contributed approximately 5419000 increase inventory 2000 accounts payable increased approximately 5609000 approximately 37 december 31 1999 december 31 2000 acquisition 2000 contributed approximately 8728000 increase accounts payable unrestricted cash equivalents increased approximately 51615000 december 31 1999 december 31 2000 principally result following prepared companys consolidated statement cash flows year ended december 31 2000 see nortek inc subsidiaries consolidated financial statements 2000 included elsewhere herein impact changes foreign currency exchange rates cash material included net companys debttoequity ratio decreased approximately 401 december 31 1999 371 december 31 2000 primarily result increase equity due net earnings 2000 partially offset effect purchase nortek common special common stock slight increase debt increase accumulated comprehensive loss see consolidated statement stockholders investment included elsewhere herein inflation trends general considerations company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions companys performance dependent significant extent upon levels new residential construction residential replacement remodeling nonresidential construction affected factors interest rates inflation consumer confidence unemployment first part 2001 company expects operate environment lower levels construction remodeling activity 2000 demand companys products across markets except commercial air conditioning products expected remain weak first part 2001 improvement later part year however overall demand companys products sold manufactured housing industry expected remain levels experienced 2000 declines consumer confidence unfavorable changes interest rates lack additional reductions interest rates federal reserve higher unemployment rates would negative impact general economic conditions resulting lower levels housing construction remodeling activity would adverse effect companys operating results demand companys products seasonal particularly northeast midwest regions united states inclement weather winter months usually reduces level building remodeling activity home improvement new construction markets companys lower sales levels usually occur first fourth quarters since high percentage companys manufacturing overhead operating expenses relatively fixed throughout year operating income net earnings tend lower quarters lower sales levels result 1998 1999 acquisitions windows doors siding products segment performance segment seasonal previous years due number businesses affected winter weather conditions addition demand cash fund working capital companys subsidiaries greater late first quarter early fourth quarter market risk company exposed market risks related changes interest rates foreign currencies commodity pricing company use derivative financial instruments except limited basis periodically hedge certain economic exposures company enter derivative financial instruments financial instruments trading purposes june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities sfas 133 subsequently amended establishes accounting reporting standards requiring every derivative instrument recorded balance sheet either asset liability measured fair value requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met company completed review effect sfas 133 results operations financial position effective january 1 2001 company adopt sfas 133 material companys consolidated financial statements see note 1 notes consolidated financial statements included elsewhere herein interest rate risk company exposed market risk changes interest rates primarily investing borrowing activities addition companys ability finance future acquisition transactions may impacted company unable obtain appropriate financing acceptable interest rates companys investing strategy manage interest rate exposure invest shortterm highly liquid investments marketable securities shortterm investments primarily consist money market accounts corporate commercial paper original maturities 90 days less marketable securities primarily consist certificates deposit bank issued money market instruments original maturities 91 180 days restricted investments marketable securities primarily consist money market accounts certificates deposit commercial paper original maturities 90 days less december 31 2000 fair value companys unrestricted restricted investments marketable securities approximated market value company manages borrowing exposure changes interest rates optimizing use fixed rate debt extended maturities addition december 31 2000 company ply gem subsidiary hedged exposure substantial portion variable rate debt entering interest rate collar transaction lock interest rate floor 576 cap 7 december 31 2000 approximately 95 carrying values companys longterm debt either fixed interest rates covered interest rate collar agreement see table set forth item longterm debt notes 1 5 notes consolidated financial statements included elsewhere herein disclosure terms companys debt interest rate collar agreement b foreign currency risk companys results operations affected fluctuations value us dollar compared value currencies foreign markets primarily related changes italian lira canadian dollar british pound 2000 net impact foreign currency changes material companys financial condition results operations company manages exposure foreign currency exchange risk principally trying minimize companys net investment foreign assets use strategic short longterm borrowings foreign subsidiary level consistent strategy notes payable shortterm obligations december 31 2000 consist primarily shortterm borrowings certain companys foreign subsidiaries december 31 2000 companys net investment foreign assets approximately 97926000 overall unfavorable change foreign exchange rates 10 would result approximate 8902000 reduction equity result impact cumulative translation adjustment company generally enter derivative financial instruments manage foreign currency exposure december 31 2000 company outstanding foreign currency hedging contracts c commodity pricing risk company subject significant market risk respect pricing principal raw materials include among others steel copper packaging material plastics resins glass wood aluminum prices raw materials increase dramatically company may able pass increases customers result gross margins could decline significantly company manages exposure commodity pricing risk continuing diversify product mix strategic buying programs vendor partnering company generally enter derivative financial instruments manage commoditypricing exposure december 31 2000 company outstanding commodity forward contracts see discussion elsewhere herein managements discussion analysis financial condition results operations respect increase cost vinyl resin material 2000 longterm debt table follows sets forth december 31 2000 companys longterm debt obligations principal cash flows scheduled maturity weighted average interest rates estimated fair market values approximately 132 companys total longterm indebtedness denominated foreign currencies weighted average interest rates variable rate debt based december 31 2000 interest rates addition table follows sets forth outstanding notional amounts year floor cap interest rates companys interest rate collar agreement longterm debt 1 senior notes total principal 695000000 weighted average interest rate 908 mature various times 2007 2008 see note 5 notes consolidated financial statements included elsewhere herein interest rate collar 2 interest rate 576 company pay difference 3 interest rate 7 company entitled receive difference year 2000 disclosure company subsidiaries experienced significant year 2000 related problems forwardlooking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 used discussion throughout document words intends plans estimates believes anticipates expects similar expressions intended identify forwardlooking statements based companys current plans expectations involve risks uncertainties company control could cause actual future activities results operations materially different set forth forwardlooking statements important factors could cause actual future activities operating results differ include availability cost certain raw materials including among others steel copper packaging materials plastics resins glass wood aluminum purchased components level domestic foreign construction remodeling activity affecting residential commercial markets interest rates employment inflation foreign currency fluctuations consumer spending levels exposure foreign economies rate sales growth price product warranty liability claims readers cautioned place undue reliance forwardlooking statements speak date hereof company undertakes obligation update publicly forwardlooking statements whether result new information future events otherwise subsequent written oral forwardlooking statements attributable company persons acting behalf expressly qualified entirety cautionary statements readers also urged carefully review consider various disclosures made company document well companys periodic reports forms 10k 10q 10qa 8k filed securities exchange commission sec item 7aitem 7 management’s discussion analysis financial condition results operations company diversified manufacturer residential commercial building products operating within three principal segments residential building products segment air conditioning heating products segment windows doors siding products segment results operations presented includes corporate related items results insignificant operations certain income expense allocable reportable segments principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing diy professional remodeling renovation markets october 2001 financial accounting standards board “fasb” issued statement financial accounting standards 144 “accounting impairment disposal longlived assets”“sfas 144” sfas 144 addresses financial accounting reporting impairment disposal longlived assets apply goodwill intangible assets amortized certain longlived assets company adopted sfas 144 third quarter 2001 applied accounting standard beginning year adoption standard resulted accounting loss sale peachtree windows doors inc “peachtree” sne enterprises inc “sne” subsidiaries company’s ply gem industries inc subsidiary “ply gem” related operating results discontinued operations accordingly results peachtree sne excluded earnings continuing operations classified separately discontinued operations periods presented see notes 1 9 notes consolidated financial statements included elsewhere herein residential building products segment manufactures distributes builtin products primarily residential new construction diy professional remodeling renovation markets principal products sold segment include kitchen range hoods builtin exhaust fans bath fans fan heater light combination units indoor air quality products air conditioning heating products segment manufactures sells heating ventilating air conditioning systems “hvac” customdesigned commercial applications residential light commercial manufactured structures windows doors siding products segment principally manufactures distributes vinyl siding skirting soffit accessories ii vinyl composite windows iii vinyl patio entry doors iv vinyl blocks vents shutters sunrooms fencing railing decking v aluminum trim coil soffit accessories use residential construction diy professional renovation markets june 15 2001 company acquired senior air systems “sas” whollyowned subsidiary senior plc acquired company located stokeontrent england manufactures sells air conditioning equipment process integrated operations eatonwilliams holdings limited “eatonwilliams” company acquired eatonwilliams july 3 2000 webco inc “webco” march 8 1999 april 23 1999 company acquired three businesses caradon plc united kingdom peachtree windows doors thermalgard cwd windows doors “caradon acquired companies” 1999 acquisitions included multiplex technologies inc “multiplex” may 28 1999 kroy building products inc “kroy” september 9 1999 xantech corporation “xantech” december 3 1999 acquisitions accounted purchase method accounting accordingly results sas eatonwilliams webco caradon acquired companies multiplex kroy xantech included company’s consolidated results since date acquisition see “liquidity capital resources” note 2 notes consolidated financial statements included elsewhere herein critical accounting policies company’s discussion analysis financial condition results operations based upon company’s consolidated financial statements prepared accordance accounting principles generally accepted united states see notes consolidated financial statements included elsewhere herein certain company’s accounting policies require application judgment selecting appropriate assumptions calculating financial estimates nature judgments subject inherent degree uncertainty company periodically evaluates judgments estimates used critical accounting policies ensure judgments estimates reasonable interim yearend reporting requirements judgments estimates based company’s historical experience current trends information available sources appropriate different conditions result assumptions used company’s judgments results could materially different company’s estimates company’s critical accounting policies include revenue recognition related expenses company primarily recognizes sales based upon shipment products customers procedures place subsidiaries ensure accurate cutoff obtained reporting period allowances cash discounts volume rebates cooperative advertising programs gross customer returns among others recorded reduction sales time sale based upon estimated future outcome cash discounts volume rebates advertising programs based upon certain percentages agreed company’s various customers typically earned customer annual period company records periodic estimates amounts based upon historical results date estimated future results end contract period contractual provisions customer agreements calendar year customer agreements company able adjust periodic estimates actual amounts december 31 year based upon contractual provisions customer agreements customers agreements calendar year cycle company records estimates december 31 consistent described methodology result end given reporting period amounts recorded allowances based upon estimates likely outcome future sales applicable customers may require adjustment future actual outcome differs company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimates adjusted actual amounts customer returns recorded actual basis throughout year also include estimate end reporting period future customer returns related sales recorded prior end period company generally estimates customer returns based upon time lag historically occurs date sale date return also factoring new business conditions might impact historical analysis new product introduction company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimates adjusted actual amounts provisions estimated costs future product warranty claims bad debts recorded cost sales selling general administrative expense respectively time sale recorded amounts recorded generally based upon historically derived percentages also factoring new business conditions might impact historical analysis new product introduction warranty bankruptcies particular customers bad debts company also periodically evaluates adequacy reserves warranty bad debts recorded consolidated balance sheet test ensure adequacy recorded provisions warranty claims extend far future bad debt analysis often involves subjective analysis particular customer’s ability pay result significant judgment required company determining appropriate amounts record judgments may prove incorrect future company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimates adjusted actual amounts inventory valuation company values inventories lower cost market approximately 51 valued using lastin firstout lifo method remainder valued using firstin firstout fifo method connection lifo fifo inventories company record provisions appropriate writedown obsolete excess inventory estimated net realizable value process evaluating obsolete excess inventory often requires company make subjective judgments estimates concerning future sales levels quantities prices inventory able sold normal course business accelerating disposal process incorrect estimates future sales potential may cause actual results differ estimates time inventory disposed sold company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimates adjusted actual amounts prepaid income tax assets deferred tax liabilities company accounts income taxes using liability method accordance sfas 109 “accounting income taxes” “sfas 109” requires deferred tax consequences temporary differences amounts recorded company’s consolidated financial statements amounts included company’s federal state income tax returns recognized balance sheet company generally file income tax returns well closing process december 31 financial statements complete amounts recorded december 31 reflect estimates final amounts actual income tax returns filed fiscal year addition estimates often required respect among things appropriate state income tax rates use various states company subsidiaries required file potential utilization operating capital loss carryforwards federal state income tax purposes valuation allowances required tax assets may realizable future company requires subsidiaries submit yearend tax information packages part yearend financial statement closing process information used estimate deferred tax accounts december 31 reasonably consistent amounts expected included filed tax returns sfas 109 requires balance sheet classification current longterm deferred income tax assets liabilities based upon classification underlying asset liability gives rise temporary difference nortek historically prepaid income tax assets due principally unfavorable tax consequences recording expenses required book reserves things among others bad debts inventory valuation insurance product liability warranty cannot deducted income tax purposes expenses actually paid company believes amounts recorded prepaid income tax assets recoverable either future taxable income generated company fact company deferred tax liabilities exceed amount prepaid income tax assets although absolute assurance recognized prepaid income tax assets fully recovered company believes procedures estimates used accounting income taxes reasonable accordance established tax law income tax estimates used historically resulted material adjustments income tax expense subsequent periods estimates adjusted actual filed tax return amounts although may reclassifications current longterm portion deferred tax accounts goodwill december 31 2001 company accounted goodwill accordance apb 16 “business combinations”“apb 16” acquisitions sfas 121 “accounting impairment longlived assets longlived assets disposed of”“sfas 121” periodic evaluation goodwill impairment purchase accounting required apb 16 involved judgment respect valuation acquired assets liabilities order determine final amount goodwill significant acquisitions company would use third party appraisers value items property plant equipment acquired intangibles third party actuarial consultants determine value assets liabilities associated pension post retirement benefit plans company believes estimates used record prior acquisitions reasonable accordance apb 16 company performs annual evaluation impairment longlived assets including goodwill based expectations nondiscounted future cash flows compared carrying value subsidiary company’s cash flow estimates based upon historical cash flows well future projected cash flows received subsidiary management connection annual company wide planning process include terminal valuation applicable subsidiary based upon multiple earnings interest expense net depreciation amortization expense income taxes “ebitda” company estimates ebitda multiple reviewing comparable company information industry data applicable consultation investment bankers company believes procedures estimating gross future cash flows including terminal valuation reasonable consistent current market conditions company historically material impairment adjustments subsequent december 31 2001 company account acquired goodwill impairment accordance new standards outlined later section note 1 notes consolidated financial statements new pronouncements also require considerable judgment may require company use third parties provide pertinent information assist company’s evaluation future goodwill impairment pensions post retirement health benefits company’s accounting pension post retirement health benefit liabilities requires estimating items longterm average return plan assets discount rate compensation increase assumed medical cost inflation rate estimates require significant amount judgment result company utilizes expertise third party actuarial consultants perform calculations amounts pension post retirement health benefit assets liabilities expense comprehensive income loss required recorded company’s consolidated financial statements december 31 accordance generally accepted accounting principles currently effect united states evidenced 2001 items stock market declines changes interest rates plan amendments significant impact assumptions used therefore ultimate final actuarial determinations particular year result company carefully reviews current market conditions consultation actuarial consultants determine appropriate assumptions use fiscal year company believes procedures estimates used accounting pensions post retirement health benefits reasonable consistent acceptable actuarial practices certain years 2001 revisions actuarial assumptions caused adverse financial market conditions resulted significant increases pension postretirement liabilities comprehensive loss amounts recognized prior years insurance liabilities company records insurance liabilities related expenses health workers compensation product general liability losses insurance reserves expenses accordance either contractual terms policies selfinsured total liabilities estimable probable reporting date insurance liabilities recorded current liabilities extent expected paid succeeding year remaining requirements classified longterm liabilities accounting selfinsured plans requires significant judgments estimates made respect future liabilities paid known claims incurred reported claims reporting date company relies heavily historical trends certain cases advice calculations third party actuarial consultants determining appropriate insurance reserves record substantial portion workers compensation general product liability losses certain cases partial insurance coverage exists company must estimate portion liability covered existing insurance policies arrive net expected liability company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimated amounts adjusted actual insurance claims paid contingencies company subject contingencies including legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims workmen’s compensation claims product liability warranty modification adjustment replacement component parts units sold may include product recalls product liability environmental legal proceedings also include matters respect businesses previously owned company provides accruals direct costs associated estimated resolution contingencies earliest date deemed probable liability incurred amount liability reasonably estimated costs accrued estimated based consultation legal counsel experts based upon analysis potential results assuming combination litigation settlement strategies outcomes impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided covered insurance material adverse effect consolidated financial position results operations company possible however future results operations particular future period could materially affected changes assumptions strategies related contingencies changes company’s control results operations tables follow present net sales continuing operations operating earnings continuing operations depreciation amortization expense continuing operations company’s principal segments three years period ended december 31 2001 dollar amount percentage change results compared prior year percentage net sales operating earnings depreciation amortization expense three years ended december 31 2001 tables follow set forth three years period ended december 31 2001 certain consolidated operating results b percentage change results compared prior year c percentage results bear net sales change percentages compared prior year yearended december 31 2001 compared yearended december 31 2000 consolidated net sales increased approximately 2400000 approximately 01 2001 compared 2000 increased approximately 11000000 approximately 06 excluding effect changes foreign currency exchange rates acquisition july 3 2000 eatonwilliams air conditioning heating products segment contributed approximately 24100000 net sales first half 2001 compared 2000 excluding effect acquisition effect changes foreign currency exchange rates consolidated net sales decreased approximately 13100000 approximately 07 2001 compared 2000 summarized segment follows overall sales levels 2001 adversely affected general economic slowdown united states prolonged period cold wet weather hampered building remodeling activity first quarter 2001 cooler normal weather north american market late spring prime summer selling months reduced demand residential air conditioning products general slowdown manufactured housing market years ended december 31 2001 2000 company’s net sales customers serving manufactured housing market principally consisting air conditioners furnaces vinyl siding skirting products constituted approximately 94 119 respectively company’s consolidated net sales worldwide slowdown expenditures telecommunications infrastructure equipment tragic events occurred september 11 2001 caused slowdown incoming orders order releases primarily commercial products company’s air conditioning heating products segment decrease net sales air conditioning heating products segment principally result general economic slowdown continued decline sales customers serving manufactured housing industry line overall softness experienced industry cooler normal weather north american market late spring prime summer selling months residential air conditioning products particularly second half 2001 decrease net sales segment partially offset increased sales volume commercial products sold segment’s canadian operations increase net sales windows doors siding products segment principally due higher sales prices siding related products increased sales prices certain window product lines partially offset lower sales volume siding products development trend net sales occurred december 2001 january february 2002 continues company expects net sales earnings first quarter 2002 equal slightly 2001 comparable basis trend net sales continues remainder 2002 company believes potential exists incremental shipments expects net sales earnings full year 2002 would slightly 2001 economic conditions fail improve deteriorate results may achieved cost products sold percentage net sales decreased approximately 746 2000 approximately 735 2001 effect acquisition eatonwilliams higher cost products sold percentage net sales overall group businesses owned prior acquisition increase consolidated percentage cost products sold percentage net sales 2001 included cost products sold approximately 3000000 costs incurred startup residential hvac manufacturing facility vinyl fence decking facility excluding effect eatonwilliams acquisition effect changes foreign currency exchange rates costs incurred startup facilities cost products sold percentage net sales decreased approximately 746 2000 approximately 732 2001 decrease percentages 2001 principally resulted reductions realized cost certain purchased materials particularly pvc resin aluminum steel part due declining prices effect lower costs cost reduction measures implemented late 2000 early 2001 addition improved sales prices siding related products increased sales prices certain window product lines windows doors siding products segment lesser extent lower manufacturing costs residential building products segment also factor effect higher cost levels commercial hvac products lower sales volume residential products customers serving manufactured sitebuilt housing markets without proportionate decrease costs air conditioning heating products segment partially offset effect cost reductions 2001 company estimates realized approximately 4000000 6000000 implementation costs lower cost sales related company’s material procurement strategy discussed next paragraph strategy expected result approximately 15000000 annualized savings fully implemented yearend inventory values stated fifo basis yearend inventory would approximately 1792000 higher 2001 2209000 higher 2000 1939000 higher 1999 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material costs changes productivity levels selling general administrative expense percentage net sales increased approximately 153 2000 approximately 168 2001 effect acquisition eatonwilliams higher level selling general administrative expense percentage net sales overall group businesses owned prior acquisition contributed slightly increase consolidated percentages selling general administrative expense net sales selling general administrative expense 2001 reduced approximately 3200000 related nontaxable gain net death benefit insurance proceeds related life insurance maintained former managers recorded first half 2001 selling general administrative expense also included approximately 6300000 2001 consulting fees expenses related company’s material procurement strategy selling general administrative expense 2000 reduced approximately 1700000 gain sale land recorded first half 2000 excluding effect eatonwilliams acquisition net life insurance proceeds expenses related company’s material procurement strategy gain sale land 2000 effect changes foreign currency exchange rates selling general administrative expense increased approximately 285600000 154 percentage net sales 2000 approximately 305500000 166 2001 increase percentages principally result lower sales volume siding related products windows doors siding products segment lower sales volume residential products customers serving manufactured sitebuilt housing markets air conditioning heating products segment without proportionate decrease expense segments addition higher expense levels commercial products air conditioning heating products segment also factor amortization goodwill intangible assets percentage net sales remained unchanged approximately 12 2000 2001 effective january 1 2002 goodwill longer amortized accordance adoption sfas 142 see consolidated operating earnings decreased approximately 8400000 approximately 165600000 2000 approximately 157200000 2001 result factors discussed acquisition eatonwilliams july 3 2000 contributed approximately 1000000 2001 decrease operating earnings air conditioning heating products segment consolidated operating earnings reduced depreciation amortization expense amortization deferred debt expense debt discount approximately 59900000 54700000 2001 2000 respectively excluding effect approximate 6300000 consulting fees expenses incurred 2001 b approximate 3200000 nontaxable gain net death benefit insurance proceeds 2001 c approximately 700000 lower operating earnings effect changes foreign currency exchange rates effect eatonwilliams acquisition e approximate 1700000 gain sale land 2000 noted operating earnings decreased approximately 1900000 approximately 163900000 2000 162000000 2001 summarized decrease operating earnings air conditioning heating products segment principally due decline sales level residential products sold customers serving manufactured housing market lesser extent sitebuilt housing market b higher cost levels certain commercial products c costs incurred start residential hvac manufacturing facility noted slowdown manufactured housing industry adversely effected segment’s operating earnings 2001 compared 2000 increase operating earnings windows doors siding products segment 2001 principally due increase earnings siding related products benefited reduced material costs result price cost improvements compared 2001 increased sales prices siding window products also factor improvement segment’s operating earnings operating earnings foreign operations consisting primarily results operations company’s canadian european subsidiaries approximately 67 70 operating earnings corporate overhead 2001 2000 respectively sales earnings derived international markets subject risks currency fluctuations interest expense 2001 increased approximately 4500000 approximately 46 compared 2000 duplicative interest expense approximately 1750000 incurred 2001 connection refinancing company’s 9 78 senior subordinated notes due 2004 since redemption occurred subsequent financing see note 5 notes consolidated financial statements included elsewhere herein adoption sfas 133 first quarter 2001 resulted noncash increase interest expense approximately 1200000 2001 compared 2000 see notes 1 5 notes consolidated financial statements included elsewhere herein higher average borrowings 2001 also contributed increase interest expense investment income increased approximately 3100000 approximately 408 2001 compared 2000 primarily result approximately 1700000 interest income resulting favorable abatement state income taxes 2001 b additional interest income approximately 500000 2001 earned funds financing held escrow subsequent redemption 9 78 senior subordinated notes due 2004 c higher average invested balances partially offset lower investment income rates provision income taxes continuing operations 2001 approximately 31500000 compared approximately 34100000 2000 income tax rates differed united states federal statutory rate 35 principally result nondeductible amortization expense tax purposes nontaxable gain life insurance policies tax purposes state income tax provisions effect foreign income tax foreign source income company expects effective income tax rate approximate 40 2002 result implementation sfas 142 since beginning january 1 2002 goodwill intangible assets determined indefinite life longer amortized nondeductible tax purposes loss discontinued operations approximately 22900000 2001 compared loss approximately 100000 2000 loss 2001 included tax loss sale discontinued operations approximately 20000000 net tax benefits approximately 14000000 table follows presents summary operating results discontinued operations 2001 2000 see notes 1 9 notes consolidated financial statements included elsewhere herein july 11 2001 company redeemed 204822000 principal amount company’s 9 78 senior subordinated notes due 2004 plus approximate 2900000 redemption premium thereon result redemption company recorded extraordinary loss approximately 5500000 32 per share net tax third quarter 2001 see note 5 notes consolidated financial statements included elsewhere herein july 2001 financial accounting standards board fasb issued sfas 141 “business combinations” “sfas 141” sfas 141 requires business combinations initiated june 30 2001 accounted using purchase method july 2001 fasb issued sfas 142 “goodwill intangible assets” “sfas 142” sfas 142 applies goodwill intangible assets acquired june 30 2001 well previously acquired goodwill intangible assets sfas 142 goodwill well certain intangible assets determined indefinite life longer amortized instead assets reviewed impairment periodic basis sfas 142 became effective july 1 2001 goodwill intangible assets acquired june 30 2001 effective goodwill intangible assets beginning january 1 2002 company currently evaluating impact statement may respect carrying value goodwill principally relates fair valuation company’s reporting units goodwill amortization ceased company january 1 2002 approximately 16394000 16505000 15593000 2001 2000 1999 respectively determined applicable accounting principles generally accepted united states see note 1 notes consolidated financial statements included elsewhere herein july 2001 fasb issued sfas 143 “accounting asset retirement obligations” “sfas 143” sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs sfas 143 requires fair value liability asset retirement obligation recognized period incurred reasonable estimate fair value made associated asset retirement costs capitalized part carrying amount longlived asset sfas 143 effective financial statements issued fiscal years beginning june 15 2002 early adoption permitted company currently assessing impact adopting sfas 143 consolidated financial statements comprehensive loss included stockholders’ investment approximately 12400000 2001 included loss 2001 loss approximately 15800000 net tax benefits approximately 9000000 primarily result actuarial losses due market declines plan assets increases participant’s benefits result plan amendments certain company’s employee retirement benefit plans well change cumulative amount currency translation adjustments approximately 4400000 see note 7 consolidated financial statements included elsewhere herein yearended december 31 2000 compared yearended december 31 1999 consolidated net sales increased approximately 181600000 approximately 109 2000 increased approximately 191600000 approximately 115 excluding effect changes foreign currency exchange rates compared 1999 consolidated net sales increased 2000 principally result acquisitions price increases higher net sales volume acquisitions contributed approximately 94700000 increase consolidated net sales residential building products segment net sales increased approximately 27500000 approximately 43 2000 approximately 37500000 excluding effect changes foreign currency exchange rates compared 1999 principally result approximately 20900000 sales acquisitions higher sales volume kitchen range hoods bath fans air conditioning heating products segment net sales increased approximately 89800000 166 compared 1999 increase net sales segment principally result higher sales volume products sold customers serving residential sitebuilt commercial markets including sales contributed acquisitions approximately 30800000 partially offset lower sales products customers serving manufactured housing market line overall softness experienced manufactured housing industry years ended december 31 2000 1999 company’s net sales customers serving manufactured housing market constituted approximately 119 162 respectively company’s consolidated net sales windows doors siding segment net sales increased approximately 69300000 167 2000 principally result 1999 acquisitions contributed approximately 43000000 increase net sales 2000 balance increase net sales segment approximately 26300000 2000 principally resulted increased sales prices sales volume vinyl siding related products accessories partially offset lower sales volume window door products cost products sold percentage net sales increased approximately 726 1999 approximately 746 2000 increase percentage principally resulted effect higher material costs principally vinyl resin costs without proportionate increase sales prices customers windows doors siding products segment certain product mix changes integration costs incurred 2000 principally residential building products segment although overall cost vinyl resin 2000 windows doors siding products segment higher 1999 cost resin began decrease slightly latter part 2000 lesser extent higher anticipated costs result delays rationalization relocation nutone’s manufacturing operations residential building products segment also factor increase 2000 percentage cost products sold percentage net sales acquisitions air conditioning heating products segment higher cost products sold percentage net sales effect increase percentage offset effect acquisitions residential building products segment lower cost products sold percentage net sales overall group businesses owned prior acquisitions overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material costs changes productivity levels selling general administrative expense percentage net sales increased slightly approximately 152 1999 approximately 153 2000 selling general administrative expense 2000 reduced approximately 1700000 gain sale land second quarter 2000 selling general administrative expense percentage net sales excluding effect gain sale land second quarter 2000 increased approximately 152 1999 approximately 154 2000 increase percentage 2000 principally result 1999 acquisitions residential building products windows doors siding products segments higher expense level percentage net sales overall group businesses owned prior acquisitions partially offset lower expense levels window door product lines windows doors siding products segment amortization goodwill intangible assets percentage net sales remained unchanged 12 net sales 2000 1999 principally result increased amortization related acquisitions offset increased sales volume consolidated operating earnings decreased approximately 19100000 approximately 184700000 1999 approximately 165600000 2000 result factors discussed consolidated operating earnings 2000 include gain second quarter sale land approximately 1700000 acquisitions contributed approximately 7400000 operating earnings 2000 consisted increase approximately 2200000 residential building products segment increase approximately 900000 air conditioning heating products segment increase approximately 4300000 windows doors siding products segment consolidated operating earnings reduced depreciation amortization expense amortization deferred debt expense debt discount approximately 54700000 51200000 2000 1999 respectively businesses acquired contributed approximately 3100000 increase depreciation amortization expense 2000 approximately 900000 residential building products segment approximately 500000 air conditioning heating products segment approximately 1700000 windows doors siding products segment consolidated operating earnings excluding earnings acquisitions 1700000 gain sale land decreased approximately 28200000 184700000 1999 approximately 156500000 2000 due part decrease approximately 6000000 operating earnings residential building products segment decrease within residential building products segment due primarily increased manufacturing costs result delays rationalization relocation certain nutone’s manufacturing operations partially offset increased sales volume without proportionate increase cost expenses operating earnings increased approximately 6900000 2000 excluding effect acquisitions air conditioning heating products segment increase operating earnings air conditioning heating products segment arose higher sales levels commercial sitebuilt residential products partially offset decline operating earnings lower sales volume air conditioning heating products sold manufactured housing market compared 1999 due slowdown manufactured housing industry operating earnings decreased approximately 23800000 2000 excluding acquisitions windows doors siding products segment decrease operating earnings primarily result higher material costs principally vinyl resin cost substantially raised manufacturing costs vinyl products segment decrease earnings partially offset increased sales prices siding related products door window products b increased sales volume siding related products c reduction level costs expenses certain window door products operating earnings foreign operations consisting primarily results operations company’s canadian european subsidiaries manufacture builtin ventilation products windows doors certain air conditioning humidification equipment approximately 70 71 operating earnings corporate overhead 2000 1999 respectively decrease foreign operating earnings percentage total operating earnings principally result decline foreign exchange rates sales earnings derived international market subject risks currency fluctuations interest expense 2000 increased approximately 900000 approximately 09 compared 1999 increase primarily result debt acquired issued connection acquisitions net payments investment income decreased approximately 400000 approximately 5 2000 compared 1999 primarily due lower average invested balances result funds used acquisitions 1999 2000 partially offset slightly higher yields provision income taxes approximately 34100000 2000 compared 42900000 1999 income tax rates differed united states federal statutory income tax rate 35 principally result state income tax provisions nondeductible amortization expense tax purposes tax effect resulting foreign activities see note 4 notes consolidated financial statements included elsewhere herein loss discontinued operations approximately 100000 2000 compared approximately 4000000 1999 table follows presents summary operating results discontinued operations 2000 1999 see notes 1 9 notes consolidated financial statements included elsewhere herein liquidity capital resources 2001 company improved liquidity june 2001 company sold 250000000 principal amount 9 78 senior subordinated notes due 2011 “9 78 notes” slight discount net proceeds sale 9 78 notes deducting underwriting commissions expenses amounted approximately 241800000 portion proceeds approximately 215000000 held escrow used redeem july 11 2001 204822000 principal amount company’s 9 78 senior subordinated notes due 2004 pay approximately 2900000 7400000 redemption premium accrued interest respectively september 2001 company sold sne peachtree approximately 45000000 used portion cash proceeds pay approximately 20500000 outstanding debt company’s ply gem credit facility remaining balance approximately 53400000 due august 26 2002 ply gem credit facility included current liability current maturities longterm debt company’s consolidated financial statements december 31 2001 see notes 5 9 notes consolidated financial statements included elsewhere herein company highly leveraged expects continue highly leveraged foreseeable future company consolidated debt december 31 2001 approximately 1055220000 consisting 64450000 shortterm borrowings current maturities longterm debt ii 51304000 notes mortgage notes indebtedness iii 209433000 8 78 senior notes due 2008 “8 78 notes” iv 308312000 9 18 senior notes due 2007 “9 18 notes” v 174358000 9 14 senior notes due 2007 “9 14 notes” vi 247363000 9 78 notes december 31 2001 company consolidated unrestricted cash equivalents marketable securities approximately 255837000 compared approximately 138971000 december 31 2000 company’s debt equity ratio approximately 391 december 31 2001 compared approximately 371 december 31 2000 change ratio primarily due increase indebtedness decrease stockholders investment relating increase comprehensive loss primarily result actuarial losses due market declines plan assets increases participants benefits result plan amendments changes cumulative amount currency translation adjustments see notes 1 7 notes consolidated financial statements included elsewhere herein company’s ability pay interest refinance indebtedness depends company’s future performance subject general economic financial competitive legislative regulatory factors beyond control assurance company generate sufficient cash flow operation subsidiaries future financings available acceptable terms amounts sufficient enable company service refinance indebtedness make necessary capital expenditures company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions indentures agreements governing company subsidiaries’indebtedness including indentures 8 78 notes 9 18 notes 9 14 notes 9 78 notes credit agreement ply gem credit facility contain certain restrictive financial operating covenants including covenants restrict ability company subsidiaries complete acquisitions pay dividends incur indebtedness make investments sell assets take certain corporate actions following summary company’s future cash obligations debt obligations excluding notes payable shortterm obligations 6248000 unamortized debt discount minimum annual rental obligations noncancelable lease obligations operating leases see notes 5 8 notes consolidated financial statements included elsewhere herein company subsidiaries guaranteed certain obligations various third parties aggregate approximately 30800000 december 31 2001 approximately 28100000 relates ply gem’s guarantee base rental payments 2016 facility leased sne sold september 21 2001 buyer sne provided certain indemnifications rights ply gem payments might required make pursuant guarantee company believes obligation make payments ply gem exists guarantee accordingly recorded liabilities december 31 2001 company’s accompanying consolidated balance sheet accordance generally accepted accounting principles currently effect united states noted 53422000 due company’s ply gem credit facility august 26 2002 included current maturities longterm debt december 31 2001 addition approximately 30400000 letters credit issued ply gem credit facility additional security approximately 29000000 industrial revenue bonds capital leases outstanding included mortgage notes payable note 5 notes consolidated financial statements included elsewhere herein december 31 2001 relating several company’s manufacturing facilities company currently exploring various financing alternatives including possibility new credit facility availability issuing letters credit december 31 2001 company approximately 255837000 unrestricted cash equivalents marketable securities fund cash flow needs 2002 company expects reasonably likely following major cash requirements occur compared 2001 yearended december 31 2001 company consolidated earnings depreciation amortization interest net income taxes approximately 217130000 available cover major cash requirements discussed company believes earnings 2002 could slightly 2001 recent sales trends continue accordingly company expects meet cash flow requirements fiscal 2002 cash generated operations existing cash equivalents marketable securities financings may include securitization accounts receivable mortgage capital lease financings july 3 2000 company acquired eatonwilliams edenbridge england acquisition 2000 funded use unrestricted cash investments eatonwilliams designs manufactures installs services custommade standard air conditioning humidification equipment see note 2 notes consolidated financial statements included elsewhere herein unrestricted cash equivalents increased approximately 130929000 december 31 2000 approximately 159599000 december 31 2001 marketable securities available sale increased approximately 8042000 december 31 2000 approximately 96238000 december 31 2001 company’s investment marketable securities december 31 2001 consisted primarily commercial paper bank issued money market instruments company classified restricted accompanying consolidated balance sheet certain investments marketable securities fully available use operations december 31 2001 approximately 77955000 4360000 included current assets cash investments marketable securities pledged collateral held pension trusts pledged collateral insurance employee benefits requirements see notes 1 7 notes consolidated financial statements included elsewhere herein capital expenditures approximately 42100000 2001 expected approximately 40000000 2002 december 31 2001 company obligated fund future cash payments primarily related operating leases facilities equipment approximately 76679000 approximately 15911000 funded 2002 since payments operating leases future cash requirements value assets leased included company’s consolidated financial statements accordance generally accepted accounting principles currently effect united states america see note 8 notes consolidated financial statements included elsewhere herein company’s board directors authorized number programs purchase shares company’s common special common stock recent programs announced may 4 2000 allows company purchase 1000000 shares company’s common special common stock open market negotiated transactions subject market conditions cash availability provisions company’s outstanding debt instruments february 22 2002 company purchased approximately 461000 shares common special common stock program approximately 9200000 accounted share purchases treasury stock february 22 2002 approximately 121300000 available payment cash dividends stock purchases restricted payments defined terms company’s restrictive indenture see note 5 notes consolidated financial statements included elsewhere herein company’s working capital current ratio decreased approximately 409632000 221 respectively december 31 2000 approximately 376173000 201 respectively december 31 2001 principally result ply gem credit facility approximately 53422000 reclassified longterm current payable august 2002 factors described accounts receivable decreased approximately 7606000 approximately 34 december 31 2000 december 31 2001 net sales increased approximately 11618000 approximately 27 fourth quarter 2001 compared fourth quarter 2000 rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales increases decreases net sales near end period generally result significant changes amount accounts receivable date balance sheet end period situation december 31 2001 compared december 31 2000 company experience significant overall changes credit terms collection efforts credit utilization delinquency accounts receivable 2001 inventories decreased approximately 8777000 approximately 45 december 31 2000 december 31 2001 accounts payable decreased approximately 4462000 approximately 33 december 31 2000 december 31 2001 unrestricted cash equivalents increased approximately 28670000 december 31 2000 december 31 2001 principally result following prepared company’s consolidated statement cash flows yearended december 31 2001 see nortek inc subsidiaries consolidated financial statements 2001 included elsewhere herein impact changes foreign currency exchange rates cash material included net income tax payments net refunds approximately 4500000 2001 company utilized approximately 17500000 net operating loss carryforwards related company’s wholly owned subsidiary ply gem utilization carryforwards 2001 resulted reduction us federal income tax payments approximately 6125000 remaining operating loss carryforwards would significantly reduce future tax payments december 31 2001 company approximately 25600000 capital loss carryforwards utilized offset capital gains future periods inflation trends general considerations company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions company’s performance dependent significant extent upon levels new residential construction residential replacement remodeling nonresidential construction affected factors interest rates inflation consumer confidence unemployment first part 2002 company expects operate overall environment construction remodeling activity equal slightly 2001 demand company’s commercial air conditioning products however expected remain weak first part 2002 improvement later part year overall demand company’s products sold manufactured housing industry 2002 expected remain levels experienced 2001 overall company believes potential exists incremental shipments full year 2002 expects consolidated net sales earnings would slightly full year 2001 trend net sales experienced december 2001 january february 2002 continues results may achieved conditions 2002 fail improve declines consumer confidence unfavorable changes interest rates higher unemployment rates resulting negative impact general economic conditions lower levels housing construction remodeling activity instead would adverse effect company’s operating results demand company’s products seasonal particularly northeast midwest regions united states inclement weather winter months usually reduces level building remodeling activity home improvement new construction markets company’s lower sales levels usually occur first fourth quarters since high percentage company’s manufacturing overhead operating expenses relatively fixed throughout year operating income net earnings tend lower quarters lower sales levels addition demand cash fund working capital company’s subsidiaries greater late first quarter early fourth quarter company expects increases working capital levels year 2002 distribution hvac residential sitebuilt products continue expand air conditioning heating products segment market risk company exposed market risks related changes interest rates foreign currencies commodity pricing company use derivative financial instruments except limited basis periodically hedge certain economic exposures company enter derivative financial instruments financial instruments trading purposes june 1998 fasb issued sfas 133 “accounting derivative instruments hedging activities”“sfas 133” subsequently amended establishes accounting reporting standards requiring every derivative instrument recorded balance sheet either asset liability measured fair value requires changes derivative’s fair value recognized currently earnings unless specific hedge accounting criteria met first quarter 2001 company adopted sfas 133 recording liability approximately 800000 balance sheet march 31 2001 representing fair value company’s interest rate collar agreement cumulative affect adopting accounting method december 31 2000 material interest expense yearended december 31 2001 includes noncash charge approximately 1200000 07 per share net tax related company’s interest rate collar agreement interest rate risk company exposed market risk changes interest rates primarily investing borrowing activities addition company’s ability finance future acquisition transactions may impacted company unable obtain appropriate financing acceptable interest rates company’s investing strategy manage interest rate exposure invest shortterm highly liquid investments marketable securities shortterm investments primarily consist money market accounts corporate commercial paper original maturities 90 days less marketable securities primarily consist certificates deposit bank issued money market instruments original maturities 91 180 days restricted investments marketable securities primarily consist money market accounts certificates deposit commercial paper original maturities 90 days less december 31 2001 fair value company’s unrestricted restricted investments marketable securities approximated market value company manages borrowing exposure changes interest rates optimizing use fixed rate debt extended maturities addition december 31 2001 company ply gem subsidiary hedged exposure substantial portion variable rate debt entering interest rate collar transaction lock interest rate floor 576 cap 7 december 31 2001 approximately 96 carrying values company’s longterm debt either fixed interest rates covered interest rate collar agreement see table set forth item longterm debt notes 1 5 notes consolidated financial statements included elsewhere herein disclosure terms company’s debt interest rate collar agreement b foreign currency risk company’s results operations affected fluctuations value us dollar compared value currencies foreign markets primarily related changes euro italian lira canadian dollar british pound 2001 net impact foreign currency changes material company’s financial condition results operations impact foreign currency changes related translation resulted decrease stockholders’investment approximately 4444000 2001 company manages exposure foreign currency exchange risk principally trying minimize company’s net investment foreign assets use strategic short longterm borrowings foreign subsidiary level consistent strategy notes payable shortterm obligations december 31 2001 consist primarily shortterm borrowings certain company’s foreign subsidiaries december 31 2001 company’s net investment foreign assets approximately 100525000 overall unfavorable change foreign exchange rates 10 would result approximate 9100000 reduction equity result impact cumulative translation adjustment company generally enter derivative financial instruments manage foreign currency exposure december 31 2001 company outstanding foreign currency hedging contracts effective january 1 2002 euro became legal currency used within number european countries introduction euro material effect company’s subsidiaries operating business countries euro legal currency company expect transition euro certain european countries material future effects company’s consolidated financial statements c commodity pricing risk company subject significant market risk respect pricing principal raw materials include among others steel copper packaging material plastics resins glass wood aluminum prices raw materials increase dramatically company may able pass increases customers result gross margins could decline significantly company manages exposure commodity pricing risk continuing diversify product mix strategic buying programs vendor partnering company generally enter derivative financial instruments manage commoditypricing exposure december 31 2001 company outstanding commodity forward contracts march 5 2002 united states government imposed tariffs quotas wide range steel imports threeyear period many company’s products made steel contain steel parts company certain contracts place set price steel purchases covered contract contracts extend period quotas tariffs imposed price increases result imposition quotas tariffs gross profit net earnings cash flows company could decline longterm debt table follows sets forth december 31 2001 company’s longterm debt obligations principal cash flows scheduled maturity weighted average interest rates estimated fair market values approximately 104 company’s total longterm indebtedness denominated foreign currencies weighted average interest rates variable rate debt based december 31 2001 interest rates addition tables follow set forth outstanding notional amounts year floor cap interest rates company’s interest rate collar agreement longterm debt 1 senior subordinated notes total principal 945000000 weighted average interest rate 929 mature various times 2007 2011 see note 5 notes consolidated financial statements included elsewhere herein interest rate collar 2 interest rate 576 company pay difference 3 interest rate 7 company entitled receive difference forwardlooking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 used discussion throughout document words “intends”“plans”“estimates”“believes”“anticipates“and “expects“or similar expressions intended identify forwardlooking statements based company’s current plans expectations involve risks uncertainties company control could cause actual future activities results operations materially different set forth forwardlooking statements important factors could cause actual future activities operating results differ include availability cost certain raw materials including among others steel copper packaging materials plastics resins glass wood aluminum purchased components level domestic foreign construction remodeling activity affecting residential commercial markets interest rates employment inflation foreign currency fluctuations consumer spending levels exposure foreign economies rate sales growth price product warranty liability claims readers cautioned place undue reliance forwardlooking statements speak date hereof company undertakes obligation update publicly forwardlooking statements whether result new information future events otherwise subsequent written oral forwardlooking statements attributable company persons acting behalf expressly qualified entirety cautionary statements readers also urged carefully review consider various disclosures made company document well company’s periodic reports forms 10k 10q 8k filed securities exchange commission “sec” item 7aitem 7 managements discussion analysis financial condition results operations nortek holdings inc continuing whollyowned subsidiaries individually collectively “company” “holdings” diversified manufacturers residential commercial building products operating within two principal segments residential building products segment air conditioning heating products segment principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself “diy” professional remodeling renovation markets used report terms “company” “holdings” refer nortek holdings inc together subsidiaries unless context indicates otherwise terms “company” “holdings” used convenience intended precise description separate corporations manages affairs november 20 2002 company reorganized holding company structure outstanding share capital stock nortek inc “nortek” converted identical share capital stock holdings delaware corporation formed 2002 holdings becoming successor public company nortek becoming whollyowned subsidiary holdings “holdings reorganization” january 9 2003 company completed recapitalization transaction resulted acquisition company certain affiliates designees kelso company lp “kelso” certain members nortek’s management “recapitalization” see liquidity capital resources notes 1 2 7 notes consolidated financial statements included elsewhere herein february 12 2004 company’s whollyowned subsidiary wds llc sold capital stock ply gem industries inc “ply gem” april 2 2002 ply gem sold capital stock subsidiary hoover treated wood products inc “hoover” november 22 2002 ply gem sold capital stock subsidiary richwood building products inc “richwood” september 21 2001 ply gem sold capital stock subsidiaries peachtree doors windows inc “peachtree” sne enterprises inc “sne” results operations operating subsidiaries ply gem exception hoover comprised company’s entire windows doors siding products “wds” reporting segment hoover corporate expenses ply gem previously included unallocated net company’s segment reporting results ply gem hoover richwood peachtree sne excluded earnings continuing operations classified separately discontinued operations periods presented accordingly purposes presentation management’s discussion analysis financial condition results operations discussion relates results continuing operations see notes 1 10 11 notes consolidated financial statements included elsewhere herein residential building products segment manufactures distributes builtin products primarily residential new construction diy professional remodeling renovation markets principal products sold segment include kitchen range hoods builtin exhaust fans bath fans fan heater light combination units indoor air quality products air conditioning heating products segment manufactures sells heating ventilating air conditioning systems “hvac” sitebuilt residential manufactured housing structures customdesigned commercial applications standard light commercial products january 17 2003 company wholly owned subsidiary linear corporation “linear” acquired elan home systems llc “elan” elan located lexington ky manufactures sells home automation audio video distribution equipment july 11 2003 company linear acquired speakercraft inc “spc” spc located riverside ca manufactures sells inwall inceiling speakers amplifiers subwoofers december 15 2003 company linear acquired capital stock operator specialty company inc “osco” osco located casnovia mi manufactures sells gate operators door openers june 15 2001 company acquired senior air systems “sas” wholly owned subsidiary senior plc acquisitions accounted purchase method accounting accordingly results elan spc osco sas included company’s consolidated results since date acquisition see “liquidity capital resources” note 3 notes consolidated financial statements included elsewhere herein critical accounting policies company’s discussion analysis financial condition results operations based upon company’s consolidated financial statements prepared accordance accounting principles generally accepted united states see notes consolidated financial statements included elsewhere herein certain company’s accounting policies require application judgment selecting appropriate assumptions calculating financial estimates nature judgments subject inherent degree uncertainty company periodically evaluates judgments estimates used critical accounting policies ensure judgments estimates reasonable interim yearend reporting requirements judgments estimates based company’s historical experience current trends information available appropriate different conditions result assumptions used company’s judgments results could materially different company’s estimates company’s critical accounting policies include revenue recognition related expenses company recognizes sales based upon shipment products customers procedures place subsidiaries ensure accurate cutoff obtained reporting period allowances cash discounts volume rebates customer incentive programs well gross customer returns among others recorded reduction sales time sale based upon estimated future outcome cash discounts volume rebates customer incentive programs based upon certain percentages agreed company’s various customers typically earned customer annual period company records periodic estimates amounts based upon historical results date estimated future results end contract period contractual provisions customer agreements calendar year customer agreements company able adjust periodic estimates actual amounts december 31 year based upon contractual provisions customer agreements customers agreements calendar year cycle company records estimates december 31 consistent described methodology result end given reporting period amounts recorded allowances based upon estimates likely outcome future sales applicable customers may require adjustment future actual outcome differs company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimates adjusted actual amounts customer returns recorded actual basis throughout year also include estimate end reporting period future customer returns related sales recorded prior end period company generally estimates customer returns based upon time lag historically occurs date sale date return also factoring new business conditions might impact historical analysis new product introduction company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimates adjusted actual amounts provisions estimated costs future product warranty claims bad debts recorded cost sales selling general administrative expense respectively time sale recorded amounts recorded generally based upon historically derived percentages also factoring new business conditions might impact historical analysis new product introduction warranty bankruptcies particular customers bad debts company also periodically evaluates adequacy reserves warranty bad debts recorded consolidated balance sheet test ensure adequacy recorded provisions warranty claims extend far future bad debt analysis often involves subjective analysis particular customer’s ability pay result significant judgment required company determining appropriate amounts record judgments may prove incorrect future company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimates adjusted actual amounts inventory valuation company values inventories lower cost market approximately 57 december 31 2003 valued using lastin firstout “lifo” method remainder valued using firstin firstout “fifo” method connection lifo fifo inventories company record provisions appropriate writedown obsolete excess inventory estimated net realizable value process evaluating obsolete excess inventory often requires company make subjective judgments estimates concerning future sales levels quantities prices inventory able sold normal course business accelerating disposal process incorrect estimates future sales potential may cause actual results differ estimates time inventory disposed sold company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimates adjusted actual amounts prepaid income tax assets deferred tax liabilities company accounts income taxes using liability method accordance sfas 109 “accounting income taxes” “sfas 109” requires deferred tax consequences temporary differences amounts recorded company’s consolidated financial statements amounts included company’s federal state income foreign tax returns recognized balance sheet company generally file income tax returns well closing process december 31 financial statements complete amounts recorded december 31 reflect estimates final amounts actual income tax returns filed fiscal year addition estimates often required respect among things appropriate state income tax rates use various states company subsidiaries required file potential utilization operating capital loss carryforwards federal state income tax purposes valuation allowances required tax assets may realizable future company requires subsidiaries submit yearend tax information packages part yearend financial statement closing process information used estimate deferred tax accounts december 31 reasonably consistent amounts expected included filed tax returns sfas 109 requires balance sheet classification current longterm deferred income tax assets liabilities based upon classification underlying asset liability gives rise temporary difference company historically prepaid income tax assets due principally unfavorable tax consequences recording expenses required book reserves things among others bad debts inventory valuation insurance product liability warranty cannot deducted income tax purposes expenses actually paid company believes amounts recorded prepaid income tax assets recoverable future taxable income generated company although absolute assurance recognized prepaid income tax assets fully recovered company believes procedures estimates used accounting income taxes reasonable accordance established tax law income tax estimates used historically resulted material adjustments income tax expense subsequent periods estimates adjusted actual filed tax return amounts although may reclassifications current longterm portion deferred tax accounts goodwill longlived assets subsequent june 30 2001 company accounts acquired goodwill intangible assets accordance sfas 141 “business combinations” “sfas 141” prior july 1 2001 company accounted acquired goodwill intangible assets accordance apb 16 “business combinations” “apb 16” purchase accounting required sfas 141 apb 16 involves judgment respect valuation acquired assets liabilities order determine final amount goodwill company believes estimates used record prior acquisitions reasonable accordance sfas 141 apb 16 january 1 2002 company adopted sfas 142 “goodwill intangible assets” “sfas 142” result company accounts acquired goodwill impairment accordance sfas 142 see note 1 notes consolidated financial statements included elsewhere herein pronouncement requires considerable judgment valuation acquired goodwill ongoing evaluation goodwill impairment company primarily utilizes discounted cash flow approach order value company’s operating segments required tested impairment sfas 142 requires company forecast future cash flows operating segments discount cash flow stream based upon weighted average cost capital derived comparable companies within similar industries discounted cash flow calculations also include terminal value calculation based upon expected longterm growth rate applicable operating segment company believes procedures applying discounted cash flow methodology including estimates future cash flows weighted average cost capital longterm growth rate reasonable consistent market conditions time valuation company evaluated carrying value segment goodwill determined impairment existed either date adoption standard january 1 2002 annual evaluation date october 1 accordingly adjustments required recorded company’s consolidated financial statements result adopting sfas 142 result annual evaluation october 1 2003 company performs annual evaluation impairment longlived assets goodwill based expectations nondiscounted future cash flows compared carrying value subsidiary accordance sfas 144 company’s cash flow estimates based upon historical cash flows well future projected cash flows received subsidiary management connection annual company wide planning process include terminal valuation applicable subsidiary based upon multiple earnings interest expense net depreciation amortization expense income taxes “ebitda” company estimates ebitda multiple reviewing comparable company information industry data company believes procedures estimating gross future cash flows including terminal valuation reasonable consistent current market conditions company historically material impairment adjustments pensions post retirement health benefits company’s accounting pensions including supplemental executive retirement plans post retirement health benefit liabilities requires estimating items longterm average return plan assets discount rate compensation increase assumed medical cost inflation rate estimates require significant amount judgment evidenced 2002 2001 items stock market declines changes interest rates plan amendments significant impact assumptions used therefore ultimate final actuarial determinations particular year company believes procedures estimates used accounting pensions post retirement health benefits reasonable consistent acceptable actuarial practices accordance accounting principles generally accepted united states certain years 2002 2001 revisions actuarial assumptions caused adverse financial market conditions changes discount rates increased compensation levels resulted significant increases pension postretirement liabilities comprehensive loss amounts recognized prior years insurance liabilities company records insurance liabilities related expenses health workers compensation product general liability losses insurance reserves expenses accordance either contractual terms policies selfinsured total liabilities estimable probable reporting date insurance liabilities recorded current liabilities extent expected paid succeeding year remaining requirements classified longterm liabilities accounting selfinsured plans requires significant judgments estimates made respect future liabilities paid known claims incurred reported claims reporting date company considers historical trends determining appropriate insurance reserves record consolidated balance sheet certain cases partial insurance coverage exists company must estimate portion liability covered existing insurance policies arrive net expected liability company believes procedures estimating amounts reasonable historically resulted material adjustments subsequent periods estimated amounts adjusted actual insurance claims paid contingencies company subject contingencies including legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims workers compensation claims product liability warranty modification adjustment replacement component parts units sold may include product recalls product liability environmental legal proceedings also include matters respect businesses previously owned company provides accruals direct costs associated estimated resolution contingencies earliest date deemed probable liability incurred amount liability reasonably estimated costs accrued estimated based upon analysis potential results assuming combination litigation settlement strategies outcomes impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided covered insurance material adverse effect consolidated financial position results operations company possible however future results operations particular future period could materially affected changes assumptions strategies related contingencies changes company’s control overview leading diversified manufacturer distributor building products used residential remodeling replacement new construction markets including manufactured housing industry lesser extent commercial construction replacement markets diverse number products serve multiple markets various distribution channels operate two segments residential building products segment “rbp” air conditioning heating products segment “hvac” year ended december 31 2003 rbp accounted 55 consolidated net sales 71 operating earnings unallocated expense hvac accounted balance little half business believed used replacement remodeling markets balance serves new construction markets manufactured housing commercial construction industries seen significant declines level business activity past several years adverse effect business particularly hvac segment level new construction replacement remodeling activity sitebuilt residential markets strong past several years contributed positively operating performance key industry activity affecting businesses united states past three years follows manufactured housing business 2003 7 total sales vs 13 2000 hvac business serving commercial construction market 18 including foreign commercial sales consolidated sales 2003 large portion manufacturing activity customers located north america although manufacturing activity sell product customers canada europe china among countries including canada foreign sales 2003 20 total sales 14 total sales retail distribution 50 distributors wholesalers similar channels distribution principal rbp products include kitchen range hoods bath fans indoor air quality products large market shares principal hvac products include residential air conditioners heat pumps furnaces large custom semicustom commercial air handlers cooling equipment leading market shares hvac products manufactured housing custom semi custom commercial markets serve sitebuilt residential hvac market single digit market share increased share market considerably past several years segments employed strategy using wellrecognized respected brand names owned licensed introduced new products made selected acquisitions improve growth profitability result experienced stable strong cash flow continuing operations past three years manufactured housing commercial hvac products businesses maintained market shares believe quickly respond rebounds markets long term 2004 expect manufactured housing commercial construction markets remain weak residential new construction decline moderately remodeling replacement activity grow moderately also expect brand strategy residential sitebuilt hvac products allow us gain market share rbp 2004 expect continue grow improve profitability electronics products integration acquisitions 2004 also expect achieve cost reductions raw material purchased components businesses strategic sourcing software systems development 2002 2003 first quarter 2004 periodically experienced significant increases price pay raw steel fabricated parts overall annual purchases category 6 total cost products sold also buy component parts suppliers use steel manufacturing process success raising prices customers products result higher steel costs assurance able offset steel increases 2004 due extremely tight steel supply united states also rely strategic sourcing initiatives mitigate effect higher steel costs material cost percentage net sales improved part initiatives approximately 454 2001 440 2002 437 2003 following discussion results operations year 2003 compared 2002 talk significance number factors affected operations including among others following effect acquisition kelso changes accounting strong growth residential sitebuilt hvac business brand strategy effect acquisitions rbp electronics businesses softness manufactured housing commercial markets effect changes foreign exchange discussion liquidity capital resources reviewed number transactions summarized analyzed cash flow activity past year began year 295000000 unrestricted cash investments ended year 194100000 also enclosed information respect future cash flow requirements past year number transactions significantly affected financial position beginning recapitalization kelso january 9 2003 whereby used 160700000 existing cash significant equity investments made kelso management rollover stock options take company private transaction valued 16 billion fourth quarter 2003 company sold 515000000 aggregate principal amount maturity 349400000 gross proceeds company’s senior discount notes used proceeds pay dividend 298500000 holders company’s capital stock 41000000 purchase additional capital stock nortek used proceeds fund majority cash distribution 41600000 option holders rollover options year worked sale ply gem completed early 2004 net proceeds 450000000 sale ply gem together cash sale 200000000 principal amount senior variable interest rate notes existing cash allowed us redeem 695000000 principal amount fixed rate senior notes first quarter 2004 result also reduced size senior secured credit facility 200000000 175000000 borrowings outstanding facility together existing cash subsidiaries provides company primary source liquidity also used 76000000 2003 16500000 cash first quarter 2004 acquisitions grow electronics businesses rbp segment upon completion first quarter 2004 debt redemptions company expects total indebtedness 835000000 unrestricted cash investments 130000000 results operations combined year ended december 31 2003 pre postrecapitalization periods compared year ended december 31 2002 purposes management’s discussion analysis results operations references year ended december 31 2003 shall refer combined periods material fluctuations operations resulting effect purchase accounting highlighted period january 10 2003 december 31 2003 company recorded approximately 5400000 amortization purchase price allocated inventory noncash charge cost products sold approximately 4800000 related residential building products segment approximately 600000 related air conditioning heating products segment tables follow present net sales continuing operations operating earnings continuing operations depreciation amortization expense continuing operations company’s principal segments combined period ended december 31 2003 years ended december 31 2002 2001 dollar amount percentage change results compared prior year percentage net sales operating earnings depreciation amortization expense combined period ended december 31 2003 years ended december 31 2002 2001 1 year ended december 31 2003 represents combined pre postrecapitalization periods january 1 2003 january 9 2003 january 10 2003 december 31 2003 respectively applicable meaningful combined year ended december 31 2003 pre postrecapitalization periods compared year ended december 31 2002 purposes management‘s discussion analysis results operations references year ended december 31 2003 shall refer combined periods material fluctuations operations resulting effect purchase accounting highlighted tables follow set forth three years period ended december 31 2003 certain consolidated operating results b percentage change results compared prior year c percentage results bear net sales change percentages compared prior year 1 year ended december 31 2003 represents combined pre postrecapitalization periods january 1 2003 january 9 2003 january 10 2003 december 31 2003 respectively applicable meaningful yearended december 31 2003 compared yearended december 31 2002 combined consolidated net sales continuing operations increased approximately 130900000 95 year ended december 31 2003 compared year ended december 31 2002 company’s segments significant number different products across wide range price points numerous distribution channels always allow meaningful quantitative analysis performed respect effect net sales changes units sold price per unit sold company however ensure whenever underlying causes material increases decreases consolidated net sales adequately analyzed quantified appropriate disclosure reasons including changes price volume mix products made effect changes foreign currency exchange rates accounted approximately 38600000 increase net sales continuing operations year ended december 31 2003 compared year ended december 31 2002 net sales increased year ended december 31 2003 compared year ended december 31 2002 result acquisitions elan spc price increases higher net sales volume residential building products segment net sales increased approximately 101500000 139 include increase approximately 29300000 attributable effect changes foreign currency exchange rates acquisition elan january 2003 spc july 2003 contributed approximately 46000000 increase net sales residential building products segment air conditioning heating products segment net sales increased approximately 29400000 45 include increase approximately 9300000 attributable effect changes foreign currency exchange rates overall increases sales levels year ended december 31 2003 reflect ongoing stability housing construction remodeling markets expanded branding effort line air conditioning heating products partially offset general slowdown commercial construction activity continued softness manufactured housing market years ended december 31 2003 2002 company’s net sales customers serving manufactured housing markets principally consisting air conditioners furnaces constituted approximately 71 85 respectively company’s consolidated net sales increase net sales volume residential building products segment year ended december 31 2003 compared year ended december 31 2002 part result new products ongoing stability residential housing construction remodeling markets increased sales volume bathroom exhaust fans range hoods garage door openers also factor increase segment net sales air conditioning heating products segment hvac products sold residential sitebuilt customers constituted largest category product sold particular group customers within segment 2003 increased approximately 22 2002 increase net sales segment year ended december 31 2003 compared 2002 due continued growth principally segments brandname strategy hvac products residential site built market year ended december 31 2003 segment benefited introduction westinghouse ® maytag ® brands introduced third quarter 2002 ongoing success existing brands lesser extent increased sales prices hvac residential products also factor increase net sales increases partially offset general slowdown commercial construction activity reduced sales company’s commercial hvac products approximately 6 approximate 9 decrease sales manufactured housing market segment continued softness experienced industry trend lower levels orders shipments commercial hvac products particularly office building telecommunications markets expected continue 2004 combined cost products sold approximately 1078600000 year ended 2003 approximately 992300000 year ended 2002 cost products sold percentage net sales decreased approximately 717 year ended december 31 2002 approximately 712 year ended december 31 2003 cost products sold 2003 includes approximately 23600000 cost products sold acquisitions elan spc including noncash charges approximately 800000 related amortization purchase price allocated inventory increase approximately 30600000 related effect changes foreign currency exchange rates noncash charge approximately 4600000 related amortization purchase price allocated inventory result recapitalization approximately 8100000 lower depreciation expense result fair value adjustment property plant equipment approximately 6900000 restructuring charges startup costs complete discussion depreciation impact year ended december 31 2003 expected impact 2004 available second paragraph residential building products segment cost products sold 2003 approximately 541800000 compared approximately 480000000 2002 includes approximately 23600000 cost products sold acquisitions elan spc including noncash charges approximately 800000 related amortization purchase price allocated inventory increase approximately 22700000 related effect changes foreign currency exchange rates noncash charge approximately 4000000 related amortization purchase price allocated inventory related recapitalization approximately 4600000 lower depreciation expense result fair value adjustment property plant equipment air conditioning heating products segment cost products sold 2003 approximately 536800000 compared approximately 512300000 2002 includes increase approximately 7900000 related effect changes foreign currency exchange rates noncash charge approximately 600000 related amortization purchase price allocated inventory approximately 6900000 restructuring charges startup costs approximately 3500000 lower depreciation expense result fair value adjustment property plant equipment material costs approximately 437 440 net sales years ended december 31 2003 2002 respectively cost reductions due strategic sourcing software systems development primarily responsible decrease material costs percentage net sales 2003 compared 2002 manufacturing cost reduction measures implemented 2002 2003 combined net sales increases contributed decrease cost products sold percentage net sales year ended december 31 2003 compared 2002 increased sales volume hvac products residential site built customers air conditioning heating products segment without proportionate increase cost part reflecting increased sales without increase fixed costs factor decrease costs year ended december 31 2003 cost products sold air conditioning heating products segment year ended december 31 2003 include approximately 5800000 severance costs associated closure certain manufacturing facilities include approximately 1100000 expenses associated startup new manufacturing facility connection initial final allocations purchase price property plant equipment acquired part recapitalization company assigned new useful lives based upon initial estimated final useful lives adopted date recapitalization respectively order determine depreciation expense periods subsequent recapitalization period january 10 2003 december 31 2003 company reflected approximately 8100000 lower depreciation expense continuing operations cost sales compared company’s historical basis accounting prior recapitalization lower depreciation expense reflects favorable impact approximately 12200000 related revisions remaining useful lives partially offset unfavorable impact approximately 4100000 related increase property plant equipment related allocation purchase price 2004 company expects record approximately 5100000 lower depreciation expense cost products sold compared company’s historical basis accounting prior recapitalization depreciation expense related property plant equipment acquired part recapitalization recorded based upon initial allocation purchase price initial estimated useful lives period january 10 2003 october 4 2003 based upon final allocation purchase price final useful lives adopted period october 5 2003 december 31 2003 depreciation expense would approximately 3600000 higher period january 10 2003 december 31 2003 final allocation purchase price final useful lives adopted used record depreciation expense period january 10 2003 october 4 2003 primarily due final remaining useful lives adopted shorter initial estimates partially offset reduction amount final purchase price allocation period january 10 2003 december 31 2003 company reflected amortization purchase price allocated inventory approximately 4600000 continuing operations cost sales related inventory acquired part recapitalization see note 1 notes consolidated financial statements included elsewhere herein additionally amortization purchase price allocated inventory approximately 800000 reflected continuing operations cost sales relating acquisition elan spc similar amortization required inventory 2002 company’s historical basis accounting see note 1 notes consolidated financial statements included elsewhere herein yearend inventory values stated fifo basis yearend inventory would approximately 7800000 lower 2003 800000 higher 2002 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material costs changes productivity levels combined selling general administrative expense “sga” approximately 266600000 year ended 2003 approximately 262600000 year ended 2002 sga percentage net sales decreased approximately 190 2002 approximately 176 2003 sga 2003 includes approximately 15200000 sga acquisitions elan spc residential building products segment increase approximately 6400000 related effect changes foreign currency exchange rates approximately 4200000 included residential building products segment 2200000 included air conditioning heating products segment sga also includes unallocated approximately 3500000 direct expenses fees associated company’s strategic sourcing software systems development sga 2003 also higher due approximately 1400000 stock based compensation adopting sfas 123 “accounting stockbased compensation” “sfas 123” 600000 compensation expense fourth quarter 2003 sale stock sga 2002 includes approximately 3700000 direct expenses fees associated company’s strategic sourcing software systems development approximately 2100000 fees expenses incurred connection nortek’s reaudit nortek’s consolidated financial statements three years period ended december 31 2001 4400000 charge relating incentive earned certain nortek’s officers nortek’s 1999 equity performance plan approximately 700000 stock basedcompensation charges recorded unallocated approximately 1000000 fourth quarter 2002 relating restructuring charges residential building products segment direct expenses fees associated company’s strategic sourcing software systems development fees expenses related reaudit nortek’s consolidated financial statements charge relating incentive earned certain nortek’s officers nortek’s 1999 equity performance plan setforth separately segment data decrease percentage principally due part lower compensation benefit expenses certain members management subsequent recapitalization higher sales without proportionate increase expense part reflecting increased sales without increase fixed expenses air conditioning heating products segment fourth quarter year ended december 312003 residential building products segment decreases partially offset increased expense levels associated company’s brand name strategy hvac products sold residential site built market amortization intangible assets percentage net sales continuing operations increased approximately 2 year ended december 31 2002 approximately 6 year ended december 31 2003 principally result approximately 6300000 higher amortization intangible assets arising recapitalization compared company’s historical basis accounting prior recapitalization approximately 3600000 2700000 relates residential building products segment air conditioning heating products segment respectively higher amortization reflects combination unfavorable impact approximately 1400000 related revisions remaining useful lives unfavorable impact approximately 4900000 related increase intangible assets result allocation purchase price acquisitions elan spc residential building products segment accounted additional increase approximately 700000 2004 company expects record approximately 8400000 higher amortization intangible assets compared company’s historical basis accounting prior recapitalization amortization expense related intangible assets acquired part recapitalization recorded based upon initial allocation purchase price estimated useful lives period january 10 2003 october 4 2003 based upon final allocation purchase price final useful lives adopted period october 5 2003 december 31 2003 amortization expense would approximately 1800000 higher period january 10 2003 december 31 2003 final allocation purchase price final remaining useful lives adopted used record amortization expense period january 10 2003 october 4 2003 primarily due final remaining useful lives adopted shorter initial estimates partially offset reduction amount allocation purchase price see note 1 notes consolidated financial statements included elsewhere herein expenses charges arising recapitalization 83000000 55 percentage net sales 6600000 5 percentage net sales 2003 2002 respectively see liquidity capital resources notes 1 2 14 notes consolidated financial statements included elsewhere herein discussion expenses charges consolidated operating earnings decreased approximately 41900000 approximately 119600000 86 percent net sales 2002 approximately 77700000 51 percent net sales 2003 result factors discussed consolidated operating earnings reduced depreciation amortization expense amortization deferred debt expense debt premium discount approximately 32600000 29100000 years ended december 31 2003 2002 respectively consolidated operating earnings year ended december 31 2003 includes approximately 5400000 amortization expense purchase price allocated inventory approximately 6300000 additional amortization expense intangible assets partially offset approximately 8100000 lower depreciation expense property plant equipment result fair value adjustments arising acquisitions recapitalization operating earnings residential building products segment approximately 140000000 2003 compared approximately 122900000 2002 include increase approximately 2400000 effect foreign currency exchange rates 7600000 operating earnings contributed acquisition elan spc increase approximately 4600000 lower depreciation expense result fair value adjustment property plant equipment 2003 increases offset decreased operating earnings approximately 4800000 amortization expense purchase price allocated inventory 2003 3600000 increased amortization estimated amount fair value adjustment intangible assets 2003 operating earnings 2002 include decrease 1000000 relating restructuring charges recorded fourth quarter 2002 operating earnings air conditioning heating products segment approximately 57200000 2003 compared approximately 61500000 2002 include increase approximately 3500000 lower depreciation expense result fair value adjustment property plant equipment 2003 increase offset decreased operating earnings approximately 800000 effect foreign currency exchange rates approximately 600000 amortization expense purchase price allocated inventory 2003 2700000 increased amortization estimated amount fair value adjustment intangible assets 2003 6900000 restructuring charges plant startup costs 2003 operating expense unallocated approximately 119500000 year ended december 31 2003 compared expense approximately 64800000 2002 includes effect approximately 83000000 fees expenses associated recapitalization approximately 3500000 direct expenses fees associated company’s strategic sourcing software systems development incurred 2003 approximately 1800000 stock based compensation expense 2003 operating expense unallocated 2002 includes approximately 6600000 fees expenses associated recapitalization effect incentive earned certain nortek’s officers nortek’s 1999 equity performance plan approximately 4400000 second quarter 2002 effect fees expenses incurred connection nortek’s reaudit nortek’s consolidated financial statements three years period ended december 31 2001 approximately 2100000 third quarter 2002 3700000 direct expenses fees associated company’s strategic sourcing software systems development approximately 700000 stock based compensation expense increase operating earnings residential building products segment 2003 primarily result increased sales volume principally bathroom exhaust fans kitchen range hoods due continued stability new home construction remodeling markets increased sales garage door openers increase operating earnings air conditioning heating products segment 2003 principally due increased sales volume hvac products customers serving residential site built market without proportionate increase costs expenses part reflecting increased sales without increase fixed costs expenses strategic sourcing software systems development cost reduction measures implemented 2002 partially offset decrease operating earnings certain product lines due general slowdown commercial construction manufactured housing markets operating results air conditioning heating products segment year ended december 31 2003 include approximately 5800000 severance costs associated closure certain manufacturing facilities include approximately 1100000 costs associated startup new manufacturing facility operating earnings foreign operations consisting primarily results operations companys canadian european subsidiaries approximately 66 72 operating earnings unallocated corporate expense 2003 2002 respectively sales earnings derived international markets subject among others risks currency fluctuations interest expense increased approximately 6300000 approximately 120 2003 compared 2002 increase interest expense 2003 primarily due approximately 3600000 interest expense associated sale november 24 2003 515000000 aggregate principal amount maturity 10 senior discount notes due may 15 2011 approximately 4100000 interest expense amortization bridge facility commitment fees related expenses reflects effect net increase debt approximately 3200000 lower interest expense allocated discontinued operations 2003 increases partially offset approximately 5700000 year ended december 31 2003 lower interest expense amortization premium arising fair value adjustment date recapitalization allocated indebtedness compared company’s historical basis accounting prior recapitalization interest allocated discontinued operations approximately 38600000 41800000 years ended december 31 2003 2002 respectively see liquidity capital resources notes 2 10 notes consolidated financial statements included elsewhere herein investment income decreased approximately 4300000 729 2003 compared 2002 primarily result lower average invested balances 2003 result funds utilized recapitalization acquisitions included investment income year ended december 31 2002 approximately 2600000 related restricted investments marketable securities held certain pension trusts including related party amounts funds distributed participants date recapitalization see note 8 notes consolidated financial statements included elsewhere herein provision income taxes continuing operations approximately 19500000 year ended december 31 2003 compared approximately 29500000 year ended december 31 2002 income tax rates 2003 2002 differed united states federal statutory rate 35 principally result effect nondeductible expenses foreign income tax foreign source income state income tax provisions 2003 due recapitalization see notes 1 2 5 notes consolidated financial statements included elsewhere herein table follows presents summary operating results discontinued operations periods presented see note 10 notes consolidated financial statements included elsewhere herein operating earnings loss discontinued operations net ply gem corporate expenses previously included within unallocated net company’s segment reporting operating earnings loss discontinued operations period january 10 2003 december 31 2003 include approximately 600000 severance costs associated closure certain manufacturing facilities operating earnings loss discontinued operations period january 10 2003 december 31 2003 also include approximately 1300000 costs expenses expanded distribution including new customers sfas 143 “accounting asset retirement obligations” “sfas 143” addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs sfas 143 requires fair value liability asset retirement obligation recognized period incurred reasonable estimate fair value made associated asset retirement costs capitalized part carrying amount longlived asset sfas 143 effective financial statements issued fiscal years beginning june 15 2002 early adoption permitted company adopted sfas 143 january 1 2003 adoption accounting standard material company’s consolidated financial statements sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” “sfas 145” issued april 2002 addresses reporting gains losses resulting extinguishment debt accounting saleleaseback transactions rescinds amends existing authoritative pronouncements sfas 145 requires gain loss extinguishment debt meet criteria apb 30 classification extraordinary item shall classified extraordinary shall included earnings continuing operations company adopted sfas 145 january 1 2003 adoption accounting standard material results presented consolidated financial statements require reclassification company’s 5500000 pre tax extraordinary loss recorded 2001 earnings continuing operations effective january 1 2003 company adopted sfas 146 “accounting costs associated exit disposal activities” “sfas 146” addresses accounting reporting costs associated exit disposal activities nullifies emerging issues task force “eitf” issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” “eitf 943” substantially nullifies eitf issue 8810 “costs associated lease modification termination” “eitf 8810” sfas 146 requires liability cost associated exit disposal activity recognized liability incurred eitf 943 liability exit cost defined eitf 943 recognized date entity’s commitment exit plan provisions sfas 146 effective exit disposal activities initiated december 31 2002 adoption sfas 146 material effect company’s consolidated financial statements see note 13 notes consolidated financial statements included elsewhere herein december 31 2002 financial accounting standards board “fasb” issued sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” sfas 148 amends sfas 123 “accounting stockbased compensation” “sfas 123” provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation sfas 148 also amends disclosure provisions sfas 123 apb opinion 28 “interim financial reporting” fourth quarter 2003 company adopted fair value method accounting stock based employee compensation accordance sfas 123 see note 1 notes consolidated financial statements included elsewhere herein november 2002 fasb issued interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” “fin 45” along new disclosure requirements fin 45 requires guarantors recognize inception certain guarantees liability fair value obligation undertaken issuing guarantee differs prior practice record liability loss probable reasonably estimable recognition measurement provisions fin 45 applicable prospective basis guarantees issued modified december 31 2002 company adopted disclosure provisions fin 45 december 31 2002 adopted entire interpretation january 1 2003 adoption fin 45 material company’s consolidated financial statements see note 9 notes consolidated financial statements included elsewhere herein january 2003 fasb issued interpretation 46 “consolidation variable interest entities interpretation arb 51” “fin 46” fin 46 clarifies application arb 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties consolidation requirements fin 46 apply company immediately variable interest entities created january 31 2003 existing variable interest entities later end first annual reporting period beginning december 15 2003 adoption fin 46 expected material impact company’s consolidated financial statements april 2003 fasb issued sfas 149 “amendment statement 133 derivative instruments hedging activities” “sfas 149” clarifies financial accounting reporting proscribed sfas 133 “accounting derivative instruments hedging activities” “sfas 133” derivative instruments including certain derivative instruments embedded contracts certain provisions sfas 149 related implementation issues sfas 133 already effective provisions related forward purchases sales effective existing contracts new contracts entered june 30 2003 company previously adopted sfas 133 including implementation issues addressed sfas 149 adoption new provisions sfas 149 july 1 2003 impact company’s consolidated financial statements may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” “sfas 150” addresses accounting reporting classification measurement certain financial instruments characteristics liabilities equity sfas 150 effective financial instruments entered modified may 31 2003 existing financial instruments beginning first interim period june 15 2003 except mandatorily redeemable financial instruments nonpublic entities subject provisions first fiscal period beginning december 15 2004 company adopted sfas 150 july 1 2003 adoption accounting standard impact company’s consolidated financial statements december 2003 fasb issued revised sfas 132 “employers’ disclosures pensions postretirement benefits” “sfas 132” require additional disclosures original sfas 132 assets obligations cash flows net periodic benefit cost defined benefit pension plans defined benefit postretirement plans revised sfas 132 provides additional disclosures change accounting pension postretirement plans company previously adopted sfas 132 provided required new disclosures revised sfas 132 note 8 notes consolidated financial statements included elsewhere herein company uses ebitda operating performance liquidity measure operating performance measure disclosures respect ebitda provided refer liquidity capital resources section liquidity measure disclosures respect ebitda reconciliation net cash flows operating activities ebitda defined net earnings loss interest taxes depreciation amortization expense ebitda measure operating performance generally accepted accounting principles united states “gaap” considered alternative substitute gaap profitability measures operating earnings loss continuing operations discontinued operations extraordinary items net income loss ebitda operating performance measure material limitations since excludes among things statement operations impact depreciation amortization expense interest expense provision benefit income taxes therefore necessarily represent accurate measure profitability particularly situations company highly leveraged disadvantageous tax structure company uses significant amount capital assets depreciation amortization expense necessary element company’s costs ability generate revenue therefore exclusion ebitda material limitation company significant amount debt interest expense necessary element company’s costs ability generate revenue therefore exclusion ebitda material limitation company generally incurs significant us federal state foreign income taxes year provision benefit income taxes necessary element company’s costs therefore exclusion ebitda material limitation result ebitda evaluated conjunction net income loss complete analysis company’s profitability net income loss includes financial statement impact items directly comparable gaap operating performance measure ebitda defined gaap company’s definition ebitda may differ therefore may comparable similarly titled measures used companies thereby limiting usefulness comparative measure limitations ebitda analytical tool investors consider isolation substitute analysis company’s operating results reported gaap company management uses ebitda supplementary nongaap operating performance measure assist overall evaluation company subsidiary operating performance including performance subsidiary management relative outside peer group companies addition company uses ebitda operating performance measure financial presentations company’s board directors shareholders various banks participating company’s credit facility note holders bond rating agencies among others supplemental nongaap operating measure assist evaluation company’s performance company also active mergers acquisitions divestitures uses ebitda additional operating performance measure assess company subsidiary potential acquisition target enterprise value assist overall evaluation company subsidiary potential acquisition target performance internal basis relative peer group companies company uses ebitda conjunction traditional gaap operating performance measures part overall assessment potential valuation relative performance therefore place undue reliance ebitda measure operating performance company believes ebitda useful company investors commonly used analytical measurement comparing company profitability eliminates effects financing differing valuations fixed intangible assets tax structure decisions company believes ebitda specifically relevant company due different degrees leverage among competitors impact purchase accounting associated recapitalization impacts comparability competitors may recently revalued fixed intangible assets differing tax structures tax jurisdictions certain company’s competitors company included ebitda supplemental operating performance measure evaluated investors conjunction traditional gaap performance measures discussed earlier results operations section complete evaluation company’s operating performance following table presents reconciliation net earnings loss directly comparable gaap operating performance measure ebitda includes approximately 12200000 1000000 18900000 earnings loss discontinued operations periods january 10 2003 december 31 2003 january 1 2003 january 9 2003 year ended december 31 2002 respectively see note 10 notes consolidated financial statements included elsewhere herein ebitda includes approximately 83000000 6600000 expenses charges arising recapitalization recorded period january 1 2003 january 9 2003 year ended december 31 2002 respectively see notes 2 11 notes consolidated financial statements included elsewhere herein approximately 1500000 stock based compensation adopting sfas 123 600000 compensation expense fourth quarter 2003 sale stock see note 1 notes consolidated financial statements included elsewhere herein yearended december 31 2002 compared yearended december 31 2001 consolidated net sales increased approximately 90300000 70 2002 compared 2001 company’s segments significant number different products across wide range price points numerous distribution channels always allow meaningful quantitative analysis performed respect effect net sales changes units sold price per unit sold company however ensure whenever underlying causes material increases decreases consolidated net sales adequately analyzed quantified appropriate disclosure reasons including changes price volume mix products made effect changes foreign currency exchange rates accounted approximately 5600000 increase net sales 2002 residential building products segment net sales increased approximately 69600000 105 include increase approximately 3800000 attributable effect changes foreign currency exchange rates air conditioning heating products segment net sales increased approximately 20700000 33 include increase approximately 1800000 attributable effect changes foreign currency exchange rates overall increases sales levels 2002 reflect continued strength new home construction remodeling markets favorable weather conditions partially offset continued slowdown manufactured housing market years ended december 31 2002 2001 company’s net sales customers serving manufactured housing markets principally consisting air conditioners furnaces constituted approximately 85 98 respectively company’s consolidated net sales increase net sales volume residential building products segment part result steady new home construction strong remodeling business increases average unit sales prices range hoods due changes product mix increased sales garage door openers increase net sales air conditioning heating products segment principally due continued growth resulting segments brandname strategy resulting increased sales volume hvac products residential site built market partially offset general slowdown commercial construction activity reduced level shipments company’s commercial hvac products lower sales manufactured housing market segment 2002 continued softness experienced industry cost products sold percentage net sales decreased approximately 731 year ended 2001 approximately 717 year ended 2002 residential building products segment cost products sold 2002 approximately 480000000 compared 443200000 2001 includes increase approximately 3200000 related effect changes foreign currency exchange rates air conditioning heating products segment cost products sold approximately 512300000 2002 compared approximately 502400000 2001 cost products sold 2002 includes increase approximately 1500000 related effect changes foreign currency exchange rates cost products sold 2001 includes increase 2700000 2000 attributable costs incurred startup residential hvac manufacturing facility material costs represented approximately 440 454 net sales year 2002 2001 respectively material costs percentage net sales decreased year 2002 compared year 2001 primarily due increased net sales levels decreases product costs including lower costs achieved company’s strategic sourcing software systems development discussed decrease percentage 2002 compared 2001 principally resulted reductions realized cost certain purchased materials component parts part due lower prices effect lower costs cost reduction measures implemented 2001 company realized slightly lower prices steel products first half 2002 compared 2001 higher steel prices second half 2002 began mitigate cost savings achieved addition increased sales volume hvac products residential site built customers air conditioning heating products segment increased sales volume higher average unit sales prices range hoods due changes product mix toward higher priced units residential building products segment without proportionate increase cost part reflecting increased sales without increase fixed costs also factor 2002 company estimates realized benefits related strategic sourcing software systems development approximately 9000000 17000000 lower cost sales implementation costs compared approximately 4000000 6000000 lower cost sales implementation costs 2001 cost savings achieved strategy partially offset effect increases steel prices noted yearend inventory values stated fifo basis yearend inventory would approximately 800000 higher 2002 2700000 higher 2001 overall changes cost products sold percentage net sales one period compared another period may reflect number factors including changes relative mix products sold effect changes sales prices material costs changes productivity levels selling general administrative expense increased 226500000 approximately 175 percentage net sales year 2001 approximately 262600000 approximately 190 percentage net sales year 2002 sga 2002 includes approximately 3700000 direct expenses fees associated company’s strategic sourcing software systems development approximately 2100000 fees expenses incurred connection nortek’s reaudit nortek’s consolidated financial statements three years period ended december 31 2001 4400000 charge relating incentive earned certain nortek’s officers nortek’s 1999 equity performance plan recorded unallocated approximately 1000000 fourth quarter 2002 relating restructuring charges residential building products segment direct expenses third party fees associated company’s strategic sourcing software systems development fees expenses related reaudit nortek’s consolidated financial statements charge relating incentive earned certain nortek’s officers nortek’s 1999 equity performance plan forth separately segment data selling general administrative expense 2001 included approximately 5500000 fees expenses related company’s strategic sourcing software systems development recorded unallocated amounts set forth separately segment data except restructuring charges fourth quarter 2002 recorded residential building products segment increase percentage due part compensation benefit expenses certain members management prior recapitalization 2002 amortization goodwill intangible assets percentage net sales decreased approximately 09 2001 approximately 02 2002 beginning january 1 2002 goodwill longer amortized company accordance adoption sfas 142 amortization goodwill continuing operations approximately 8700000 2001 determined accounting principles generally accepted united states effect year 2001 see expenses charges arising recapitalization 6600000 5 percentage net sales 2002 see liquidity capital resources notes 1 2 14 notes consolidated financial statements included elsewhere herein discussion expenses charges consolidated operating earnings increased approximately 9900000 approximately 90 approximately 109700000 2001 approximately 119600000 2002 result factors discussed consolidated operating earnings reduced depreciation amortization expense amortization deferred debt expense debt discount approximately 29100000 37100000 2002 2001 respectively operating earnings residential building products segment approximately 122900000 2002 compared approximately 93700000 2001 include increase approximately 200000 effect foreign currency exchange rates 2002 decrease 1000000 relating restructuring charges recorded fourth quarter 2002 operating earnings air conditioning heating products segment approximately 61500000 2002 compared approximately 53800000 2001 include decrease approximately 100000 effect foreign currency exchange rates 2002 approximately 2700000 attributable costs incurred startup residential hvac manufacturing facility 2001 operating expense unallocated approximately 64800000 year ended december 31 2002 compared expense approximately 37800000 2001 includes effect approximately 6600000 fees expenses 2002 associated recapitalization company effect incentive earned certain nortek’s officers nortek’s 1999 equity performance plan approximately 4400000 second quarter 2002 effect fees expenses incurred connection nortek’s reaudit nortek’s consolidated financial statements three years period ended december 31 2001 approximately 2100000 third quarter 2002 3700000 direct expenses fees associated company’s strategic sourcing software systems development incurred 2002 increase operating earnings residential building products segment primarily result increased sales volume due continued strength 2002 new home construction remodeling markets favorable weather conditions increases sales volume higher average unit sales prices range hoods due changes product mix increased sales garage door openers increase operating earnings air conditioning heating products segment 2002 principally due increased sales volume hvac products customers serving residential site built market partially offset decrease operating earnings commercial products principally due softness commercial construction market 2002 segments realized benefits associated company’s strategic sourcing software systems development operating earnings foreign operations consisting primarily results operations companys canadian european subsidiaries approximately 72 63 operating earnings unallocated corporate expense 2002 2001 respectively sales earnings derived international markets subject among others risks currency fluctuations interest expense 2002 increased approximately 600000 approximately 12 compared 2001 increase interest expense primarily due approximately 2200000 2002 associated refinancing nortek’s 9 78 senior subordinated notes due 2011 increased interest deferred debt amortization associated nortek’s senior secured credit facility entered 2002 partially offset duplicative interest expense approximately 1750000 incurred 2001 connection refinancing nortek’s 9 78 senior subordinated notes due 2004 since redemption 9 78 senior subordinated notes due 2004 occur day financing interest allocated discontinued operations remained unchanged approximately 41800000 years ended december 31 2002 2001 see liquidity capital resources notes 6 10 16 notes consolidated financial statements included elsewhere herein july 11 2001 nortek redeemed 204822000 principal amount nortek’s 9 78 senior subordinated notes due 2004 plus approximate 2900000 redemption premium thereon result redemption company recorded pretax loss approximately 5500000 third quarter 2001 see note 6 notes consolidated financial statements included elsewhere herein investment income decreased approximately 2300000 280 2002 compared 2001 primarily result approximately 1700000 interest income resulting favorable abatement state income taxes 2001 b additional interest income approximately 500000 2001 earned funds financing held escrow subsequent redemption 9 78 senior subordinated notes due 2004 c lower investment income rates 2002 included investment income approximately 2600000 2002 2200000 2001 respectively related restricted investments marketable securities held certain pension trusts including related party amounts see note 8 notes consolidated financial statements included elsewhere herein provision income taxes continuing operations approximately 29500000 2002 compared approximately 27800000 2001 income tax rates years differed united states federal statutory rate 35 principally result effect nondeductible expenses foreign income tax foreign source income state income tax provisions 2002 effect approximately 2000000 income taxes longer required result company’s hong kong subsidiary permanently investing unremitted foreign earnings outside united states 2001 nondeductible amortization expense tax purposes beginning january 1 2002 goodwill intangible assets determined indefinite life longer amortized nondeductible tax purposes see notes 1 5 notes consolidated financial statements included elsewhere herein table follows presents summary operating results discontinued operations 2002 2001 see notes 1 10 notes consolidated financial statements included elsewhere herein operating earnings loss discontinued operations net ply gem corporate expenses previously included within unallocated net company’s segment reporting operating earnings loss discontinued operations year ended december 31 2001 include approximately 600000 direct expenses third party fees associated company’s strategic sourcing software systems development approximately 3200000 net death benefit insurance proceeds related life insurance maintained former managers previously included within unallocated net company’s segment reporting operating earnings loss discontinued operations year ended december 31 2001 also include approximately 300000 manufacturing costs incurred connection startup vinyl fence decking facility previously included wds segment company’s segment reporting accordance adoption sfas 142 company ceased recording goodwill amortization expense january 1 2002 table follows presents earnings continuing operations net earnings year ended december 31 2001 adjusted reflect elimination goodwill amortization expense related income tax impact comprehensive income included stockholders’ investment approximately 44700000 2002 included comprehensive income loss approximately 22700000 net tax benefit approximately 12900000 primarily result actuarial losses due market declines plan assets compensation increases changes discount rates gain recorded change cumulative amount currency translation adjustment approximately 5250000 see notes 1 8 notes consolidated financial statements included elsewhere herein company uses ebitda operating performance liquidity measure operating performance measure disclosures respect ebitda provided refer liquidity capital resources section liquidity measure disclosures respect ebitda reconciliation net cash flows operating activities ebitda defined net earnings loss interest taxes depreciation amortization expense ebitda measure operating performance generally accepted accounting principles united states “gaap” considered alternative substitute gaap profitability measures operating earnings loss continuing operations discontinued operations extraordinary items net income loss ebitda operating performance measure material limitations since excludes among things statement operations impact depreciation amortization expense interest expense provision benefit income taxes therefore necessarily represent accurate measure profitability particularly situations company highly leveraged disadvantageous tax structure company uses significant amount capital assets depreciation amortization expense necessary element company’s costs ability generate revenue therefore exclusion ebitda material limitation company significant amount debt interest expense necessary element company’s costs ability generate revenue therefore exclusion ebitda material limitation company generally incurs significant us federal state foreign income taxes year provision benefit income taxes necessary element company’s costs therefore exclusion ebitda material limitation result ebitda evaluated conjunction net income loss complete analysis company’s profitability net income loss includes financial statement impact items directly comparable gaap operating performance measure ebitda defined gaap company’s definition ebitda may differ therefore may comparable similarly titled measures used companies thereby limiting usefulness comparative measure limitations ebitda analytical tool investors consider isolation substitute analysis company’s operating results reported gaap company management uses ebitda supplementary nongaap operating performance measure assist overall evaluation company subsidiary operating performance including performance subsidiary management relative outside peer group companies addition company uses ebitda operating performance measure financial presentations company’s board directors shareholders various banks participating company’s credit facility note holders bond rating agencies among others supplemental nongaap operating measure assist evaluation company’s performance company also active mergers acquisitions divestitures uses ebitda additional operating performance measure assess company subsidiary potential acquisition target enterprise value assist overall evaluation company subsidiary potential acquisition target performance internal basis relative peer group companies company uses ebitda conjunction traditional gaap operating performance measures part overall assessment potential valuation relative performance therefore place undue reliance ebitda measure operating performance company believes ebitda useful company investors commonly used analytical measurement comparing company profitability eliminates effects financing differing valuations fixed intangible assets tax structure decisions company believes ebitda specifically relevant company due different degrees leverage among competitors impact purchase accounting associated recapitalization impacts comparability competitors may recently revalued fixed intangible assets differing tax structures tax jurisdictions certain company’s competitors company included ebitda supplemental operating performance measure evaluated investors conjunction traditional gaap performance measures discussed earlier results operations section complete evaluation company’s operating performance following table presents reconciliation net earnings directly comparable gaap operating performance measure ebitda includes approximately 18900000 24800000 earnings loss discontinued operations years ended december 31 2002 2001 respectively see note 10 notes consolidated financial statements included elsewhere herein ebitda includes approximately 6600000 expenses charges arising recapitalization recorded year ended december 31 2002 see notes 2 11 notes consolidated financial statements included elsewhere herein liquidity capital resources january 1 2004 february 3 2004 company purchased approximately 14800000 nortek’s 9 14 senior notes due 2007 “9 14 notes” approximately 10700000 nortek’s 9 18 senior notes due 2007 “9 18 notes” open market transactions purchases resulted pretax loss approximately 400000 recorded first quarter 2004 february 13 2004 company called redemption march 15 2004 nortek’s outstanding 9 14 notes approximately 160200000 principal amount called redemption march 14 2004 nortek’s outstanding 9 18 notes approximately 299300000 principal amount 9 14 notes 9 18 notes called redemption price 101542 103042 respectively principal amount thereof plus accrued unpaid interest 9 14 notes 9 18 notes ceased accrue interest respective redemption dates indicated company used estimated net tax proceeds sale ply gem approximately 450000000 together existing cash hand fund redemption 9 14 notes 9 18 notes february 13 2004 company called redemption march 14 2004 60000000 nortek’s outstanding 8 78 senior notes due 2008 “8 78 notes” march 1 2004 company called redemption march 31 2004 remaining 150000000 nortek’s outstanding 8 78 notes see 8 78 notes called redemption price 104438 principal amount thereof plus accrued unpaid interest approximately 60000000 principal amount 8 78 notes ceased accrue interest march 14 2004 approximately 150000000 principal amount notes cease accrue interest march 31 2004 nortek use net proceeds approximately 196000000 sale floating rate notes together existing cash hand fund redemption 8 78 notes company expects redemption 9 14 notes 9 18 notes 8 78 result pretax loss approximately 11500000 based upon difference respective redemption prices indicated estimated carrying values redemption dates 9 14 notes 9 18 notes 8 78 notes include principal amount redeemed estimated remaining unamortized premium recorded connection recapitalization see note 16 notes consolidated financial statements included elsewhere herein company record loss first quarter 2004 march 1 2004 nortek completed sale 200000000 senior floating rate notes due 2010 “floating rate notes” floating rate notes bear interest rate per annum equal libor defined plus 3 417 march 1 2004 interest floating rate notes determined payable semiannually june 30 december 31 year commencing june 30 2004 nortek incurred fees expenses including initial purchaser’s discount approximately 4000000 connection sale amortized life floating rate notes floating rate notes unsecured obligations nortek mature december 31 2010 may redeemed whole part prior december 31 2010 redemption prices defined indenture governing floating rate notes “indenture” indenture contains covenants limit company’s ability engage certain transactions including incurring additional indebtedness paying dividends distributions terms floating rate notes require nortek register notes substantially identical terms “exchange notes” sec part offer exchange freely tradable exchange notes floating rate notes “exchange” event nortek complete exchange accordance timing requirements outlined indenture nortek may required pay higher interest rate nortek expects complete exchange within required time period november 24 2003 company completed sale 515000000 aggregate principal amount maturity approximately 349400000 gross proceeds 10 senior discount notes due may 15 2011 “senior discount notes” senior discount notes structurally subordinate debt liabilities company’s subsidiaries issued sold private rule 144a offering institutional investors net proceeds offering used pay dividend approximately 298474000 holders company’s capital stock approximately 41000000 proceeds used company purchase additional capital stock nortek used proceeds fund majority cash distribution approximately 41600000 option holders rollover options fourth quarter 2003 see note 1 6 7 notes consolidated financial statements included elsewhere herein accreted value 10 senior discount notes increase date issuance rate 10 per annum compounded semiannually accreted value equal principal amount 515000000 november 15 2007 cash interest accrue 10 senior discount notes prior november 15 2007 thereafter cash interest accrue 10 per annum payable semiannually arrears may 15 november 15 year senior discount notes unsecured obligations company mature may 15 2011 may redeemed whole part redemption prices defined indenture governing senior discount notes “indenture” indenture contains covenants limit company’s ability engage certain transactions including incurring additional indebtedness paying dividends distributions terms senior discount notes require company register notes substantially identical terms “holdings exchange notes” sec part offer exchange freely tradable holdings exchange notes senior discount notes “holdings exchange” event company complete holdings exchange accordance timing requirements outlined indenture company may required pay higher interest rate company expects complete holdings exchange within required time period certain limited circumstances nortek may required future guarantee senior discount notes senior subordinated basis requirement apply terms nortek’s senior indebtedness restricts issuance guarantee nortek’s senior secured credit facility permit guarantee addition issuance guarantee nortek would constitute restricted payment terms nortek’s indentures company’s pro forma interest expense year ended december 31 2003 would approximately 78300000 adjusting combined historical interest expense period january 1 2003 january 9 2003 period january 10 2003 december 31 2003 give effect redemption 9 14 notes 9 18 notes 8 78 notes sale floating rate notes 10 senior discount notes occurred january 1 2003 january 9 2003 holdings parent company nortek acquired kelso certain members nortek’s management “management investors” accordance agreement plan recapitalization among nortek inc nortek holdings inc k holdings inc “k holdings” dated june 20 2002 amended “recapitalization agreement” transaction valued approximately 16 billion including assumption certain indebtedness “recapitalization” january 8 2003 special meeting stockholders company stockholders approved following amendments certificate incorporation “stockholder approval” required connection terms recapitalization agreement new class common stock class common stock par value 100 per share nortek holdings created consisting 19000000 authorized shares time amendment certificate incorporation became effective share common stock par value 100 per share special common stock par value 100 per share outstanding reclassified one share new class mandatorily redeemable common stock class b common stock par value 100 per share nortek holdings consisting 14000000 authorized shares class b common stock required immediately redeemable 46 per share cash upon completion recapitalization authorized number shares series b preference stock par value 100 per share increased 19000000 authorized shares following stockholder approval common stock special common stock held management investors exchanged equal number newly created shares series b preference stock addition certain options purchase shares common special common stock held management investors exchanged fully vested options purchase equal number shares newly created class common stock remaining outstanding options including held management investors cancelled exchange right receive single lump sum cash payment equal product number shares common stock special common stock underlying option amount redemption price 46 per share greater per share exercise price option january 9 2003 connection recapitalization kelso purchased newly issued shares series b preference stock approximately 355923000 purchased shares series b preference stock held management investors approximately 18077000 newly issued class common stock approximately 3262000 purchased designated third parties shares series b preference stock held management investors purchased kelso converted equal number shares class common stock addition nortek declared distributed company dividend approximately 120000000 distributed approximately 27900000 reimbursement fees expenses kelso paid nortek’s unrestricted cash equivalents hand permissible restrictive covenants respect indentures nortek’s 8 78 senior notes due 2008 9 14 senior notes due 2007 9 18 senior notes due 2007 9 78 senior subordinated notes due 2011 “existing notes” company used proceeds purchase kelso newly issued series b preference stock class common stock dividend nortek redeem company’s class b common stock cash options purchase common special common stock totaling approximately 497262000 connection recapitalization nortek received bridge financing letter lender senior unsecured term loan facility exceed 955000000 “bridge facility” bridge facility intended used fund necessary change control offers nortek might made connection recapitalization nortek use bridge facility structure recapitalization require nortek make change control offers commitment letter expired january 31 2003 january 2003 company filed deregistration shares common special common stock securities exchange act 1934 company’s shares common special common stock longer publicly traded company continue file periodic reports sec required respective indentures company’s notes terms one nortek’s supplemental executive retirement plans “serp” nortek required make onetime cash payments participants plan satisfaction obligations plan recapitalization completed accordingly nortek made distribution approximately 75100000 participants plan funds included company’s consolidated balance sheet longterm assets restricted investments marketable securities held pension trusts transferred one participants life insurance policy approximately 10300000 cash surrender value satisfy portion participant’s obligation upon stockholder approval total amount transaction fees costs incurred nortek kelso associated recapitalization approximately 47300000 including 27900000 noted approximately 10500000 advisory fees expenses paid kelso company lp portion fees expenses recorded nortek selling general administrative expenses since obligations nortek prior recapitalization including approximately 6600000 year ended december 31 2002 additional amount approximately 12800000 recorded expense january 2003 since fees expenses became obligations nortek upon consummation recapitalization nortek 175000000 senior secured credit facility amended “senior secured credit facility” syndicated among several banks senior secured credit facility secured substantially nortek’s accounts receivable inventory well certain intellectual property rights amended permits borrowings lesser 175000000 total 85 eligible accounts receivable defined 50 eligible inventory defined outstanding principal balances senior secured credit facility accrue interest nortek’s option either libor plus margin ranging 20 25 banks’ prime rate plus margin ranging 05 10 depending upon excess available borrowing base defined timing borrowing margin rates adjusted quarterly addition nortek pays unused line fee 0375 05 excess available borrowing capacity defined senior secured credit facility includes customary limitations covenants require nortek maintain financial covenant unless excess available borrowing base defined less 30000000 case nortek would required maintain trailing four quarter basis minimum level 155000000 earnings interest taxes depreciation amortization defined december 31 2003 outstanding borrowings senior secured credit facility company highly leveraged expects continue highly leveraged foreseeable future company consolidated debt december 31 2003 approximately 1339975000 consisting 15349000 shortterm borrowings current maturities longterm debt ii 15843000 longterm notes mortgage notes indebtedness iii 212698000 8 78 notes iv 314456000 9 18 notes v 178136000 9 14 notes vi 250577000 9 78 senior subordinated notes due 2011 “9 78 notes” vii 352916000 10 senior discount notes due 2011 indentures agreements governing nortek’s subsidiaries’ indebtedness including indentures 8 78 notes 9 18 notes 9 14 notes collectively “senior notes” redeemed first quarter 2004 9 78 notes company’s senior discount notes well senior secured credit facility contain restrictive financial operating covenants including covenants restrict ability company subsidiaries complete acquisitions pay dividends incur indebtedness make investments sell assets take certain corporate actions senior floating rate notes also contain restrictive covenants apply company beginning march 1 2004 year 2003 company net increase consolidated debt approximately 1300000 march 26 2004 approximately 34300000 available payment cash dividends stock purchases restricted payments company defined terms company’s restrictive indenture based redemption refinancing certain nortek’s notes restricted payments holdings nortek limited amount cash available payment terms nortek’s restrictive indenture approximately 91100000 march 26 2004 see notes 6 7 16 notes consolidated financial statements included elsewhere herein december 31 2003 company consolidated unrestricted cash equivalents marketable securities approximately 194120000 compared approximately 294804000 december 31 2002 approximately 160748000 company’s consolidated cash equivalents used fund portion cost recapitalization company’s debt equity ratio approximately 671 december 31 2003 compared approximately 301 december 31 2002 change ratio primarily due increase debt sale company’s senior discount notes decrease stockholders’ investment primarily result distributions company’s shareholders stock option holders see notes 1 8 notes consolidated financial statements included elsewhere herein companys ability pay interest refinance indebtedness depends company’s future performance working capital levels capital structure subject general economic financial competitive legislative regulatory factors may beyond control assurance company generate sufficient cash flow operation subsidiaries future financings available acceptable terms amounts sufficient enable company service refinance indebtedness make necessary capital expenditures company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions following summary company’s estimated future cash obligations current longterm debt obligations excluding unamortized debt premium approximately 10867000 interest expense based upon interest rates effect time preparation summary capital lease obligations minimum annual rental obligations primarily noncancelable lease obligations operating leases purchase obligations longterm liabilities obligations longterm debt interest payments table consider financing transactions subsequent december 31 2003 previously described see notes 6 8 9 12 16 notes consolidated financial statements included elsewhere herein subsidiary debt used working capital purposes lines credit estimated continue december 31 2011 table certain subsidiaries classified discontinued operations guaranteed approximately 27700000 third party obligations relating guarantees rental payments june 30 2016 facility leased sne sold september 21 2001 company indemnified guarantees connection sale ply gem february 12 2004 see notes 9 10 notes consolidated financial statements included elsewhere herein buyer sne provided certain indemnifications rights subsidiary payments might required make pursuant guarantee buyer sne cease making payments company may required make payments indemnifications company anticipate incurring loss guarantees accordingly recorded liabilities december 31 2003 accompanying consolidated balance sheet accordance accounting principles generally accepted united states company guaranteed certain obligations third parties approximately 4300000 relates guarantees remaining principal interest balances mortgages thirdparty certain buildings one houses company’s corporate headquarters guarantees expire december 31 2020 payable event nonpayment mortgage guarantees collateralized buildings mortgages relate liability company would first reduced company’s prorata share proceeds received sale buildings company anticipate incurring loss guarantees accordingly recorded liabilities december 31 2003 accompanying consolidated balance sheet accordance accounting principles generally accepted united states december 31 2003 approximately 6900000 letters credit issued additional security certain companys insurance programs december 31 2003 company approximately 194120000 unrestricted cash equivalents fund cash flow needs 2004 company expects reasonably likely following major cash requirements occur compared 2003 company expects meet cash flow requirements debt payments retirements fiscal 2004 net proceeds sale ply gem february 2004 net proceeds sale senior floating rate notes february 2004 existing cash equivalents company recorded pension liabilities company’s defined benefit retirement plans fair values based upon projected benefit obligations determined result january 9 2003 amount nortek’s projected benefit obligation increased approximately 5000000 compared amount recorded consolidated balance sheet prior recapitalization accordingly january 10 2003 company recorded accrued pension liabilities approximately 59500000 represent estimated combined funding company’s various pension plans addition discussed previously nortek settled obligations related nortek’s serp connection recapitalization company’s policy generally make annual contributions various pension plans amounts times meet least minimum funding requirements employee retirement income security act 1974 amount funding change future periods variety factors including among others actual performance various pension plan’s investments changes actuarial assumptions resulting changing external economic conditions consistent many pension plans united states company’s various pension plans negatively impacted performance united states equity markets past several years decline yields available fixed income markets company recorded post retirement health benefit plan liabilities fair values based upon accumulated projected benefit obligations determined result january 9 2003 amount company’s accumulated projected benefit obligation increased approximately 17231000 compared amount recorded consolidated balance sheet prior recapitalization accordingly january 10 2003 company recorded accrued post retirement health liabilities approximately 35000000 represents current discounted amount remaining estimated amounts paid company’s various post retirement health benefit plans company’s policy fund costs associated various post retirement health benefit plans become due investments assets associated plans consistent many post retirement health benefit plans united states company’s liabilities plans negatively impacted rising medical costs united states unrestricted cash equivalents decreased approximately 294804000 december 31 2002 approximately 194120000 december 31 2003 company classified restricted accompanying consolidated balance sheet certain investments fully available use operations december 31 2003 approximately 2346000 1223000 included current assets cash investments marketable securities held primarily collateral insurance letter credit requirements see note 1 notes consolidated financial statements included elsewhere herein capital expenditures approximately 17400000 2003 expected 30000000 35000000 2004 december 31 2003 company obligated fund future cash payments primarily related operating leases facilities equipment approximately 69800000 approximately 12000000 funded 2004 since payments operating leases future cash requirements value assets leased included company’s consolidated financial statements accordance generally accepted accounting principles currently effect united states see note 9 notes consolidated financial statements included elsewhere herein companys working capital current ratio decreased approximately 813300000 301 respectively december 31 2002 approximately 686400000 261 respectively december 31 2003 principally result factors described accounts receivable increased approximately 34487000 approximately 192 december 31 2002 december 31 2003 net sales increased approximately 41235000 approximately 127 fourth quarter 2003 compared fourth quarter 2002 increases primarily result increased sales levels acquisitions elan spc contributed approximately 18000000 net sales fourth quarter 2003 approximately 9200000 accounts receivable december 31 2003 rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales increases decreases net sales near end period generally result significant changes amount accounts receivable date balance sheet end period situation december 31 2003 compared december 31 2002 company experience significant overall changes credit terms collection efforts credit utilization delinquency accounts receivable 2003 inventories increased approximately 27011000 approximately 204 december 31 2002 december 31 2003 approximately 7000000 increase result net remaining fair market value adjustment inventories december 31 2003 arising recapitalization acquisition elan spc contributed approximately 9400000 increase inventories increased levels inventory anticipation relocation certain manufacturing facilities within hvac segment also contributed increase accounts payable increased approximately 3699000 approximately 34 december 31 2002 december 31 2003 acquisitions elan spc contributed approximately 3200000 increase changes certain working capital accounts noted december 31 2002 december 31 2003 differ changes reflected company’s condensed consolidated statement cash flows period result specific items mentioned three preceding paragraphs noncash items including among others effect changes foreign currency exchange rates unrestricted cash equivalents decreased approximately 11204000 december 31 2002 january 9 2003 decreased approximately 89480000 january 10 2003 december 31 2003 principally result following prepared company’s consolidated statement cash flows period january 1 2003 january 9 2003 period january 10 2003 december 31 2003 see nortek inc subsidiaries consolidated financial statements 2003 included elsewhere herein impact changes foreign currency exchange rates cash material included net income tax payments net refunds approximately 11971000 2003 december 31 2003 company approximately 8500000 foreign net operating loss carryforwards utilized would offset future foreign tax payments company uses ebitda liquidity operating performance measure liquidity measure disclosures respect ebitda provided refer results operations section operating performance measure disclosures respect ebitda reconciliation net income loss ebitda defined net earnings loss interest taxes depreciation amortization expense ebitda measure cash flow generally accepted accounting principles united states “gaap” considered alternative substitute gaap cash flow measures cash flows operating investing financing activities ebitda necessarily represent accurate measure cash flow performance excludes among things capital expenditures working capital requirements significant debt service principal interest payments income tax payments contractual obligations may significant adverse impact company’s cash flow performance thereby limiting usefulness evaluating company’s cash flow performance company uses significant amount capital assets capital expenditures significant component company’s annual cash expenditures therefore exclusion ebitda material limitation company significant working capital requirements year due seasonality business require significant cash expenditures therefore exclusion ebitda material limitation company significant amount debt company significant cash expenditures year related principal interest payments therefore exclusion ebitda material limitation company generally pays significant us federal state foreign income taxes year therefore exclusion ebitda material limitation result ebitda evaluated conjunction net cash operating investing financing activities complete analysis company’s cash flow performance include financial statement impact items although depreciation amortization noncash charges assets depreciated amortized often replaced future ebitda reflect cash requirements replacements ebitda defined gaap company’s definition ebitda may differ therefore may comparable similarly titled measures used companies thereby limiting usefulness comparative measure limitations ebitda analytical tool investors consider isolation substitute analysis company’s cash flows reported gaap company management uses ebitda supplementary nongaap liquidity measure allow company evaluate operating units cashgenerating ability fund income tax payments corporate overhead capital expenditures increases working capital ebitda also used management allocate resources growth among businesses identify possible impairment charges evaluate company’s ability service debt raise capital growth opportunities including acquisitions addition company uses ebitda liquidity measure financial presentations company’s board directors shareholders various banks participating company’s credit facility note holders bond rating agencies among others supplemental nongaap liquidity measure assist evaluation company’s cash flow performance company uses ebitda conjunction traditional gaap liquidity measures part overall assessment therefore place undue reliance ebitda measure cash flow performance company believes ebitda useful company investors commonly used analytical measurement assessing company’s cash flow ability service andor incur additional indebtedness eliminates impact certain noncash items depreciation amortization company believes ebitda specifically relevant company due company’s leveraged position well common use ebitda liquidity measure within company’s industries lenders investors others financial community peer group companies company included ebitda supplemental liquidity measure evaluated investors conjunction traditional gaap liquidity measures discussed earlier liquidity capital resources section complete evaluation company’s cash flow performance following table presents reconciliation net cash provided used operating activities directly comparable gaap liquidity measure ebitda includes approximately 12200000 1000000 18900000 24800000 earnings loss discontinued operations periods january 10 2003 december 31 2003 january 1 2003 january 9 2003 years ended december 31 2002 2001 see note 10 notes consolidated financial statements included elsewhere herein ebitda includes approximately 83000000 6600000 expenses charges arising recapitalization recorded period january 1 2003 january 9 2003 year ended december 31 2002 respectively see notes 2 11 notes consolidated financial statements included elsewhere herein approximately 1500000 stock based compensation adopting sfas 123 600000 compensation expense fourth quarter 2003 sale stock see note 1 notes consolidated financial statements included elsewhere herein inflation trends general considerations company evaluated expects continue evaluate possible acquisition transactions possible dispositions certain businesses ongoing basis given time may engaged discussions negotiations respect possible acquisitions dispositions companys performance dependent significant extent upon levels new residential construction residential replacement remodeling nonresidential construction affected factors interest rates inflation consumer confidence unemployment demand companys products seasonal particularly northeast midwest regions united states inclement weather winter months usually reduces level building remodeling activity home improvement new construction markets companys lower sales levels usually occur first fourth quarters since high percentage companys manufacturing overhead operating expenses relatively fixed throughout year operating income net earnings tend lower quarters lower sales levels addition demand cash fund working capital companys subsidiaries greater late first quarter early fourth quarter market risk discussed specifically company exposed market risks related changes interest rates foreign currencies commodity pricing company use derivative financial instruments except limited basis periodically mitigate certain economic exposures company enter derivative financial instruments financial instruments trading purposes interest rate risk company exposed market risk changes interest rates primarily investing borrowing activities addition company’s ability finance future acquisition transactions may impacted company unable obtain appropriate financing acceptable interest rates company’s investing strategy manage interest rate exposure invest shortterm highly liquid investments marketable securities shortterm investments primarily consist federal agency discount notes treasury bills bank issued money market instruments original maturities 90 days less december 31 2003 fair value company’s unrestricted restricted investments marketable securities materially different cost basis company manages borrowing exposure changes interest rates optimizing use fixed rate debt extended maturities december 31 2003 approximately 997 carrying values company’s longterm debt fixed interest rates see table set forth item longterm debt notes 1 6 notes consolidated financial statements included elsewhere herein disclosure terms company’s debt b foreign currency risk company’s results operations affected fluctuations value us dollar compared value currencies foreign markets primarily related changes euro canadian dollar british pound 2003 net impact foreign currency changes material company’s financial condition results operations impact foreign currency changes related translation resulted increase stockholders’ investment approximately 1096000 19501000 periods january 1 2003 january 9 2003 january 10 2003 december 31 2003 respectively company manages exposure foreign currency exchange risk principally trying minimize company’s net investment foreign assets use strategic short longterm borrowings foreign subsidiary level consistent strategy notes payable shortterm obligations december 31 2003 consist primarily shortterm borrowings certain company’s foreign subsidiaries december 31 2003 company’s net investment foreign assets approximately 113500000 overall unfavorable change foreign exchange rates 10 would result approximate 10300000 reduction equity result impact cumulative translation adjustment company generally enter derivative financial instruments manage foreign currency exposure december 31 2003 company significant outstanding foreign currency hedging contracts c commodity pricing risk company subject significant market risk respect pricing principal raw materials include among others steel copper packaging material plastics resins glass wood aluminum prices raw materials increase dramatically company may able pass increases customers result gross margins could decline significantly company manages exposure commodity pricing risk continuing diversify product mix strategic buying programs vendor partnering company generally enter derivative financial instruments manage commoditypricing exposure december 31 2003 company material outstanding commodity forward contracts longterm debt table follows sets forth december 31 2003 company’s longterm debt obligations principal cash flows scheduled maturity weighted average interest rates estimated fair market values 03 company’s total longterm indebtedness denominated foreign currencies weighted average interest rates variable rate debt based december 31 2003 interest rates see liquidity capital resources discussion changes company debt subsequent december 31 2003 longterm debt 1 senior subordinated notes total principal 1297900000 weighted average interest rate 95 mature various times 2007 2011 substantial portion nortek’s fixed rate debt called redemption refinanced variable rate debt first quarter 2004 see liquidity capital resources notes 6 16 notes consolidated financial statements included elsewhere herein recent developments december 15 2003 company linear acquired operator specialty company inc “osco” located casnovia mi approximately 2600000 osco manufacturer designer gate operators access controls february 12 2004 company sold capital stock ply gem industries inc approximately 560000000 march 9 2004 company linear acquired omnimount systems inc “omnimount” located phoenix az approximately 16500000 omnimount leading designer supplier audio video mounting devices speakerstands related furniture forwardlooking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 used discussion throughout document words “intends” “plans” “estimates” “believes” “anticipates” “expects” similar expressions intended identify forwardlooking statements based company’s current plans expectations involve risks uncertainties company control could cause actual future activities results operations materially different set forth forwardlooking statements important factors could cause actual future activities operating results differ include availability cost certain raw materials including among others steel copper packaging materials plastics resins glass wood aluminum purchased components level domestic foreign construction remodeling activity affecting residential commercial markets interest rates employment inflation foreign currency fluctuations consumer spending levels exposure foreign economies rate sales growth price product warranty liability claims readers cautioned place undue reliance forwardlooking statements speak date hereof company undertakes obligation update publicly forwardlooking statements whether result new information future events otherwise subsequent written oral forwardlooking statements attributable company persons acting behalf expressly qualified entirety cautionary statements readers also urged carefully review consider various disclosures made company document well companys periodic reports forms 10k 10q 8k filed sec item 7aitem 7 managements discussion analysis financial condition results operations company diversified manufacturer residential commercial building products operating within three principal product groups residential building products group air conditioning heating products group plumbing products group product groups company manufactures sells primarily united states canada wide variety products residential commercial construction manufactured housing doityourself professional remodeling renovation markets march 1994 company sold retail home center operations dixieline purposes managements discussion analysis financial condition results operations results operations attributable dixieline excluded data reported ongoing operations including net sales cost products sold selling general administrative expense segment earnings total consolidated operating results company however include operating results dixieline october 2 1993 date business accounted business held sale see notes 1 9 notes consolidated financial statements results operations following tables set forth three years ended december 31 1994 certain consolidated operating results b percentage change results compared prior year c percentage results bears net sales change percentages compared prior year percentage change year ended december 31 1993 1992 1994 1993 1992 1994 1993 amounts millions net sales 7372 7441 8000 9 70 cost products sold 5204 5325 5952 23 105 selling general admini strative expense 1668 1813 1844 80 17 operating earnings 500 303 204 650 485 interest expense 262 265 292 11 93 interest income 53 32 44 656 273 net gain investment marketable securities 17 9 1000 889 loss businesses sold 17 203 145 916 400 earnings loss continuing operations provision income taxes 274 116 180 356 provision income taxes 102 10 30 9200 667 earnings loss continuing operations 172 126 210 400 loss discontinued operations 33 1000 extraordinary gain loss debt retirements 2 61 1 cumulative effect accounting changes 4 21 net earnings loss 178 208 242 141 percentage net sales change year ended december 31 1993 1992 1994 1993 1992 1994 1993 net sales 1000 cost products sold 706 715 744 9 29 selling general admini strative expense 226 244 230 18 14 operating earnings 68 41 26 27 15 interest expense 36 37 1 interest income 7 4 6 3 2 net gain investment marketable securities 2 loss businesses sold 2 27 18 25 9 earnings loss continuing operations provision income taxes 37 16 23 53 7 provision income taxes 14 1 3 13 2 earnings loss continuing operations 23 17 26 40 9 loss discontinued operations 4 extraordinary gain loss debt retirements 8 cumulative effect accounting changes 1 3 4 3 net earnings loss 24 28 30 52 2 following table presents net sales companys principal product groups three years ended december 31 1994 percentage change results compared prior year percentage change 1993 1992 year ended december 31 1994 1993 1992 1994 1993 amounts millions net sales residential building products 2652 2572 2492 31 32 air conditioning heating products 3380 2756 2370 226 163 plumbing products 1340 1281 1261 46 16 net sales ongoing operations 7372 6609 6123 115 79 businesses sold 832 1877 1000 557 7372 7441 8000 9 70 year ended december 31 1994 compared year ended december 31 1993 net sales ongoing operations increased approximately 76300000 115 compared 1993 total net sales decreased approximately 6900000 approximately 9 1994 compared 1993 result sale dixieline partially offset following factors net sales ongoing operations increased principally result increased sales volume residential air conditioning heating hvac products increased shipments new replacement hvac products manufactured housing customers increased sales levels commercial industrial hvac products increased sales plumbing products group principally due increased shipments water efficient toilets partially offset decreased sales levels approximately 7100000 bathroom fixtures result restructure certain product lines fourth quarter 1993 cost products sold ongoing operations percentage net sales ongoing operations decreased approximately 711 1993 approximately 706 1994 total cost products sold percentage total net sales decreased approximately 715 1993 approximately 706 1994 result factors described effect dixieline operated higher cost levels companys product groups decrease cost products sold percentage net sales ongoing operations primarily attributable increase plumbing products group net sales increased sales residential commercial hvac products air conditioning heating products group without proportionate increase costs lesser extent decreases percentage partially offset slightly higher cost levels residential building products group part due effect increased competition impact consolidating certain manufacturing facilities overall improvement cost levels due part companys ongoing cost control efforts selling general administrative expense ongoing operations percentage net sales ongoing operations decreased approximately 243 1993 approximately 226 1994 total selling general administrative expense percentage total net sales decreased approximately 244 1993 approximately 226 1994 result factors described effect dixieline operated higher expense levels companys product groups decrease selling general administrative expense ongoing operations percentage net sales ongoing operations 1994 principally due lower nonsegment expense effect 1993 pretax losses approximately 2800000 restructure certain product lines plumbing products group approximately 1600000 result sale october 1993 certain real property 700000 connection consolidation certain manufacturing facilities companys building products group approximately 3200000 income settlement insurance claims disputes 1994 combined effect increased net sales ongoing operations 1994 effect percentage increase net sales air conditioning heating products group excess percentage increases net sales companys product groups also factor overall decrease percentage ongoing net sales since group operates lower expense levels total expense level ongoing operations improvements percentage partially offset effect approximately 11300000 expenses relating implementation certain cost reduction activities manufacturing process improvements year ended december 31 1994 compared year ended december 31 1993 continued companys operating groups cost installing new system marketing expenses result competitive conditions expenses certain litigation matters dispute approximately 2600000 expenses relating certain cost reduction activities manufacturing process improvements incurred 1993 segment earnings ongoing operations approximately 61300000 1994 compared approximately 47200000 1993 total segment earnings approximately 61300000 1994 compared approximately 46900000 1993 result effect dixieline following factors segment earnings operating earnings plus corporate expenses directly attributable companys operating activities increase segment earnings ongoing operations principally due increased sales levels air conditioning heating products plumbing products groups without proportionate increase cost effect 1993 pretax losses approximately 2800000 1600000 700000 described approximately 1500000 increase segment earnings 1994 related income settlement insurance claims increase segment earnings partially offset effect approximately 10000000 1994 expenses incurred connection implementation certain cost reduction activities manufacturing process improvements companys operating groups cost installing new systems marketing expenses result competitive conditions residential building products group expenses incurred connection cost reduction activities manufacturing process improvements 1993 approximately 2600000 foreign segment earnings consisting primarily results operations companys canadian subsidiary manufactures builtin ventilating products declined approximately 7 segment earnings ongoing operations 1994 approximately 11 earnings 1993 decline primarily due approximate 36 increase domestic segment earnings ongoing operations 1994 well approximate 20 decrease foreign segment earnings 1994 decrease foreign segment earnings primarily result continued weakness residential construction market canada operating earnings 1994 increased approximately 19700000 approximately 65 compared 1993 primarily result factors discussed effect dixielines operating results operating earnings also include approximately 1700000 nonsegment income settlement 1994 insurance claims disputes partially offset approximately 1300000 nonsegment expense certain litigation matters dispute 1994 dixielines loss included companys consolidated operating results approximately 300000 1993 dixielines operating results longer included companys consolidated operating results 1994 see notes 1 9 notes consolidated financial statements included elsewhere herein interest expense decreased approximately 300000 approximately 11 1994 compared 1993 february 1994 company sold public offering 218500000 9 78 senior subordinated notes due 2004 9 78 notes used proceeds redeem approximately 153000000 certain companys outstanding indebtedness interest expense net interest year ended december 31 1994 compared year ended december 31 1993 continued income approximately 1300000 greater 1994 would debt redemption occurred day financing increase partially offset effect redemption certain outstanding indebtedness january 1994 decrease interest expense primarily due redemption financing discussed see note 4 notes consolidated financial statements included elsewhere herein interest income 1994 increased approximately 2100000 approximately 656 compared 1993 increases principally due higher average invested balances shortterm investments marketable securities investments effect slightly higher yields earned investment marketable securities net gain investment marketable securities approximately 1650000 1993 portion unrealized gains recorded companys statement operations 1993 due adoption 1994 statement financial accounting standards sfas 115 unrealized gains losses recorded adjustments stockholders investment see note 11 notes consolidated financial statements included elsewhere herein pretax loss businesses sold approximately 1750000 1994 significantly lower approximate 20300000 loss 1993 related dixieline see note 9 notes consolidated financial statements included elsewhere herein provision income taxes approximately 10200000 1994 compared approximately 1000000 1993 provision income taxes percentage pretax earnings continuing operations approximately 372 1994 approximately 86 pretax loss continuing operations 1993 provision income taxes 1994 reduced approximately 1600000 principally reflecting reversal tax valuation reserves result realization certain tax assets effect nondeductible losses businesses sold years increase income tax valuation reserves 1993 significant factors percentages income tax rates also differ united states federal statutory rate 35 result effect foreign income tax foreign source income state income taxes nondeductible amortization expense tax purposes see note 3 notes consolidated financial statements included elsewhere herein company recorded extraordinary gain approximately 200000 1994 resulting call redemption purchases open market companys 7 12 convertible debentures compared approximate 6100000 loss 1993 loss 1993 resulted primarily call redemption february 22 1994 certain companys various notes debentures connection refinancing described note 4 notes consolidated financial statements cumulative effect accounting changes resulted earnings approximately 400000 1994 loss approximately 2100000 1993 adoption sfas 115 106 respectively see notes 11 6 notes consolidated financial statements included elsewhere herein year ended december 31 1994 compared year ended december 31 1993 continued 1994 company incurred increased marketing expenses principally residential building products group result competitive conditions assurance conditions continue future effect conditions persist may future operations year ended december 31 1993 compared year ended december 31 1992 net sales ongoing operations increased approximately 48598000 approximately 79 1993 compared 1992 total net sales decreased approximately 55866000 approximately 70 1993 compared 1992 result businesses sold 1992 effect dixieline partially offset following factors net sales ongoing operations increased principally result increased sales volume residential air conditioning heating products part result addition certain distributors increased shipments new replacement air conditioning heating products manufactured housing customers air conditioning heating products group lesser extent increased sales levels residential building products group increased sales levels bathroom fixtures principally vitreous china products plumbing products group also factor cost products sold ongoing operations percentage net sales ongoing operations decreased approximately 725 1992 approximately 711 1993 total cost products sold percentage total net sales decreased approximately 744 1992 approximately 715 1993 result effect businesses sold 1992 partially offset effect increases cost products sold percentage net sales dixieline following factors decrease cost products sold ongoing operations percentage net sales ongoing operations primarily attributable increased sales levels reduction cost plumbing products group lesser extent increased sales residential building products group air conditioning heating products group cases without proportionate increase costs improvement cost levels due part companys ongoing cost control efforts selling general administrative expense ongoing operations percentage net sales ongoing operations increased approximately 233 1992 approximately 243 1993 total selling general administrative expense percentage total net sales increased approximately 230 1992 approximately 244 1993 result factors described effect businesses sold 1992 sold businesses operated lower expense levels companys product groups partially offset lower expense levels dixieline increase percentage net sales ongoing operations 1993 principally due effect pretax loss fourth quarter 1993 approximately 2800000 connection restructure certain product lines companys plumbing products group effect pretax losses third quarter 1993 approximately 1600000 result sale october 1993 certain real property approximately 700000 connection consolidation certain manufacturing facilities companys residential building products group increase percentage net sales ongoing operations partially offset effect increased sales volume year ended december 31 1993 compared year ended december 31 1992 continued residential manufactured housing air conditioning heating products air conditioning heating products group without proportionate increases expense segment earnings ongoing operations approximately 47200000 1993 compared approximately 38100000 1992 total segment earnings approximately 46900000 1993 compared approximately 32700000 1992 result effect changes results dixieline business sold 1992 following factors increase segment earnings ongoing operations principally due increased sales level reduced costs plumbing products group part due companys ongoing cost control efforts increased sales volume residential manufactured housing air conditioning heating products air conditioning heating products group increased sales level residential building products group without proportionate increase cost expense increase segment earnings ongoing operations partially offset effect 1993 pretax losses approximately 2800000 1600000 700000 described foreign segment earnings consisting primarily results operations companys canadian subsidiary manufactures builtin ventilating products declined approximately 11 segment earnings ongoing operations 1993 approximately 16 earnings 1992 decline primarily due approximate 30 increase domestic segment earnings ongoing operations 1993 well approximate 11 decrease foreign segment earnings 1993 decrease foreign segment earnings primarily result continued weakness residential construction market canada dixielines operating loss decreased approximately 700000 loss approximately 300000 1993 net sales dixieline approximately 83200000 1993 approximately 94800000 1992 total consolidated operating results company include operating results dixieline october 2 1993 weakness san diego area residential construction market increased competition continued affect dixielines results adversely operating earnings 1993 increased approximately 9900000 approximately 485 compared 1992 primarily result factors discussed include effect results dixieline business sold 1992 interest expense 1993 decreased approximately 2700000 approximately 93 compared 1992 primarily result purchases discount open market negotiated transactions companys debentures notes 1992 payment current maturities longterm debt interest income 1993 decreased approximately 1200000 approximately 273 compared 1992 principally due lower average invested balances shortterm investments marketable securities investments year ended december 31 1993 compared year ended december 31 1992 continued part due reduction indebtedness lower yields earned investment marketable securities net gain investment marketable securities approximately 1650000 1993 compared approximately 850000 1992 pretax loss businesses sold approximately 20300000 1993 approximately 14500000 1992 resulted approximate 11600000 loss provision income taxes 1993 primary reason approximate 18000000 loss provision income taxes 1992 pretax loss businesses sold 1993 resulted companys decision sell dixieline therefore reduce companys net investment business estimated net realizable value see notes 1 9 notes consolidated financial statements provision income taxes approximately 1000000 1993 compared approximately 3000000 1992 provision income taxes percentage pretax loss continuing operations approximately 86 1993 compared approximately 167 1992 income tax rates differed united states federal statutory rate 35 1993 34 1992 result effect increase income tax valuation reserves 1993 higher foreign income tax foreign source income limited amount state income tax benefits recorded nondeductible amortization expense tax purposes years 1992 result certain nondeductible costs associated business sold unrecorded income tax credits relating capital loss carryforwards since income tax benefits attributable thereto may realized see note 3 notes consolidated financial statements extraordinary loss approximately 6100000 1993 compared approximate 100000 gain 1992 loss 1993 resulted primarily call redemption february 22 1994 certain companys various notes debentures connection financing described note 4 notes consolidated financial statements charge operations 1993 cumulative effect accounting change approximately 2100000 resulted adoption statement financial accounting standards sfas 106 see note 6 notes consolidated financial statements liquidity capital resources companys primary sources liquidity 1994 funds provided sale notes see note 4 notes consolidated financial statements proceeds business sold 1994 1993 subsidiary operations unrestricted investments marketable securities companys canadian subsidiary broan limited 20100000 canadian approximately 14300000 u exchange rates prevailing december 31 1994 secured line credit approximately 14800000 canadian approximately 10550000 u exchange rates prevailing february 17 1995 aggregate available company line credit february 17 1995 liquidity capital resources continued borrowings line credit available working capital general corporate purposes line credit contains covenants requiring broan limited maintain ratio earnings interest taxes interest least 2 1 ii working capital ratio least 15 1 iii debt equity ratio higher 3 1 line credit also limits annual amount capital expenditures broan limited may make 1000000 canadian approximately 713000 u exchange rates prevailing december 31 1994 broan limited pays commitment fee 25 per annum unutilized portion line credit payable monthly pro rata basis line credit subject annual review lender april year february 17 1995 outstanding borrowings line credit march 1994 company sold dixieline approximately 18800000 cash 6000000 preferred stock purchaser see note 9 notes consolidated financial statements january 14 1994 company redeemed 22600000 principal amount 11 12 senior subordinated debentures due may 1994 called redemption december 1993 february 1994 company sold public offering 218500000 9 78 senior subordinated notes due 2004 9 78 notes slight discount portion net proceeds sale 9 78 notes used redeem march 24 1994 approximately 153000000 certain companys outstanding principal amount indebtedness pay accrued interest see note 4 notes consolidated financial statements october 1994 companys 9 78 notes upgraded unsolicited basis major rating agency indenture governing 9 78 notes restricts among things payment cash dividends repurchase companys capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indenture upon certain asset sales defined indenture company required offer purchase 100 principal amount plus accrued interest date purchase 9 78 notes principal amount equal net cash proceeds defined indenture invested properties assets used primarily related business owned operated company issue date 9 78 notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indenture december 31 1994 approximately 28800000 available payment cash dividends stock payments terms companys indenture governing 9 78 notes 1992 former subsidiary company sold 1984 defaulted certain principal interest payments relating obligations company contingently liable march 1994 company paid approximately 1594000 interest payments date obligations third fourth quarter 1994 company purchased slight discount liquidity capital resources continued approximately 6640000 principal amount obligations consisting obligations several holders company record losses 1994 connection settlement contingent obligations see note 7 notes consolidated financial statements unrestricted cash investments approximately 105080000 december 31 1994 company believes cash flow subsidiary operations unrestricted cash marketable securities borrowings line credit new credit facilities arrangements may entered provide sufficient liquidity meet companys working capital expenditure debt service ongoing business needs next 12 months capital expenditures approximately 19400000 1994 expected approximately 18000000 1995 companys investment marketable securities december 31 1994 consisted primarily investments united states treasury securities see note 11 notes consolidated financial statements december 31 1994 approximately 9337000 companys cash investments pledged collateral insurance companies classified restricted current assets companys accompanying consolidated balance sheet companys working capital current ratio increased approximately 117926000 approximately 161 respectively december 31 1993 approximately 173459000 approximately 211 respectively december 31 1994 principally result reduction current indebtedness factors described accounts receivable increased approximately 6844000 approximately 81 december 31 1993 december 31 1994 net sales ongoing operations approximately 9088000 54 greater fourth quarter 1994 compared fourth quarter 1993 increase accounts receivable principally result increased net sales new replacement products residential manufactured housing customers air conditioning heating products group rate change accounts receivable certain periods may different rate change sales periods principally due timing net sales significant net sales near end period generally result significant amounts accounts receivable date balance sheet end period recent periods company experienced significant changes credit terms collection efforts credit utilization delinquency inventories increased approximately 13335000 approximately 163 december 31 1993 december 31 1994 accounts payable increased approximately 5774000 approximately 123 december 31 1993 december 31 1994 unrestricted cash investments increased approximately 20500000 december 31 1993 december 31 1994 principally result cash liquidity capital resources continued provided used following condensed consolidated cash flows operating activities cash flow operations net 40710000 increase accounts receivable net 5501000 increase inventories 12593000 increase trade accounts payable 6364000 change accrued expenses taxes prepaids assets liabilities net 2801000 investing activities net cash proceeds relating businesses sold 12465000 purchase marketable securities 5032000 capital expenditures 19424000 change restricted cash investments 2475000 financing activities increases borrowings net payments including purchase debentures 8651000 net 136000 20500000 companys debttoequity ratio decreased approximately 211 december 31 1993 approximately 191 december 31 1994 primarily result effect increased stockholders investment result net earnings 1994 partially offset net increase indebtedness approximately 8800000 see note 4 notes consolidated financial statements companys st louis missouri plant part companys air conditioning heating products group manufactures products residential sitebuilt manufactured housing markets experienced damage result flooding mississippi river july 1993 plant closed several weeks returned full operation late august 1993 second quarter 1994 company settled claims insurance carrier respect matter recorded approximately 1500000 income december 31 1994 company approximately 3000000 net u federal prepaid income tax assets expected realized future operating earnings see note 3 notes consolidated financial statements company believes growth generated largely internal growth product groups augmented strategic acquisitions company regularly reviews potential acquisitions would increase expand market penetration otherwise complement current product lines although pending agreements material acquisitions company made material acquisitions since early 1988 inflation trends general considerations companys performance dependent significant extent upon levels new residential construction residential replacement remodeling non residential construction affected factors interest rates inflation unemployment recent periods companys product groups operated environment increasing levels construction remodeling activity particularly new housing starts increased approximately 20 1990 1994 new residential construction housing starts however remain levels experienced mid1980s companys operations affected difficult economic conditions northeastern united states california canada however actions taken reduce production costs overhead levels improve efficiency profitability companys operations enabled significantly increase operating earnings well position company growth near term company expects operate environment relatively stable levels construction remodeling activity however recent increases interest rates could negative impact level housing construction remodeling activity inflation material effect companys results operations financial condition mid1994 company experienced significant increases certain costs expenses including raw material costs assurance company able sufficiently increase sales prices cost increases persist item 8 nannannanitem 7a quantitative qualitative disclosure market risk applicable item 8item 7a quantitative qualitative disclosure market risk quantitative qualitative disclosure market risk required item 7a set forth item 7 managements discussion analysis financial condition results operations market risk item 8item 7a quantitative qualitative disclosure market risk quantitative qualitative disclosure market risk required item 7a set forth item 7 managements discussion analysis financial condition results operations market risk item 8item 7a quantitative qualitative disclosure market risk quantitative qualitative disclosure market risk required item 7a set forth item 7 managements discussion analysis financial condition results operations market risk item 8item 7a quantitative qualitative disclosure market risk quantitative qualitative disclosure market risk required item 7a set forth item 7 management’s discussion analysis financial condition results operations market risk item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosure market risk set forth management’s discussion analysis financial condition results operations market risk item 8nan item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 14a included elsewhere herein item 9item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 14a included elsewhere herein item 9item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 14a included elsewhere herein item 9item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 14a included elsewhere herein item 9item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 14a included elsewhere herein item 9item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 14a included elsewhere herein item 9item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 14a included elsewhere herein item 9item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 14a included elsewhere herein item 9item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 15a including exhibits part iv report incorporated herein reference item 9item 8 financial statements supplementary data financial statements supplementary data required item 8 set forth pages indicated item 14a included elsewhere herein item 9 nannannannannannannannanitem 15 exhibits financial schedules reports form 8k financial statements schedules following documents filed part report 1 financial statements consolidated statement operations period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 consolidated balance sheet december 31 2003 2002 consolidated statement cash flows period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 consolidated statement stockholders’ investment period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 notes consolidated financial statements report independent auditors 2 financial statement schedule consolidated parent company financial statements schedule ii valuation qualifying accounts financial statements required related instructions inapplicable therefore omitted 3 exhibits listed exhibit index incorporated herein reference b reports form 8k march 12 2003 item 5 events may 15 2003 item 9 regulation fd disclosure august 7 2003 item 7 financial statements exhibits november 6 2003 item 12 results operations financial condition december 22 2003 item 5 events february 13 2004 item 5 current report february 17 2004 item 2 acquisition disposition assets february 17 2004 item 7 financial statements exhibits march 1 2004 item 5 current report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 30 2004 nortek inc richard l bready richard l bready chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 30 2004 richard l bready philip e berney richard l bready chairman philip e berney president chief executive officer director almon c hall jeffrey c bloomberg almon c hall vice president jeffrey c bloomberg chief financial officer director joseph cianciolo joseph cianciolo director david b hiley david b hiley director consolidated statement operations accompanying notes integral part consolidated financial statements consolidated balance sheet accompanying notes integral part consolidated financial statements consolidated statement cash flows accompanying notes integral part consolidated financial statements consolidated statement stockholders investment year ended december 31 2001 dollar amounts thousands accompanying notes integral part consolidated financial statements consolidated statement stockholders investment year ended december 31 2002 dollar amounts thousands accompanying notes integral part consolidated financial statements consolidated statement stockholders investment period january 1 2003 january 9 2003 dollar amounts thousands accompanying notes integral part consolidated financial statements consolidated statement stockholders investment period january 10 2003 december 31 2003 dollar amounts thousands accompanying notes integral part consolidated financial statements nortek holdings inc subsidiaries notes consolidated financial statements december 31 2003 1 summary significant accounting policies nortek holdings inc continuing whollyowned subsidiaries individually collectively “company” “holdings” diversified manufacturers residential commercial building products operating within two principal segments see note 10 discussion discontinued operations related company’s subsidiary ply gem industries inc “ply gem” ply gem’s current former subsidiaries residential building products segment air conditioning heating products segment remaining principal segments company manufactures sells primarily united states canada europe wide variety products residential commercial construction manufactured housing doityourself “diy” professional remodeling renovation markets consolidated financial statements prior november 20 2002 reflect financial position results operations cash flows nortek inc “nortek” predecessor company november 20 2002 nortek holdings reorganized holding company structure outstanding share capital stock nortek converted identical share capital stock holdings delaware corporation formed 2002 holdings becoming successor public company nortek becoming whollyowned subsidiary holdings “holdings reorganization” subsequent november 20 2002 consolidated financial statements reflect financial position results operations cash flows holdings successor company january 9 2003 holdings acquired certain affiliates designees kelso company lp “kelso” certain members nortek’s management “management investors” accordance agreement plan recapitalization among nortek inc nortek holdings inc k holdings inc “k holdings” dated june 20 2002 amended “recapitalization agreement” transaction valued approximately 16 billion including company’s indebtedness “recapitalization” see notes 2 7 beginning january 9 2003 company accounted recapitalization purchase accordance provisions statement financial accounting standards “sfas” 141 “business combinations” “sfas 141” resulted new valuation assets liabilities company subsidiaries based upon fair values date recapitalization sfas 141 requires company establish new basis assets liabilities based amount paid ownership january 9 2003 accordingly company’s ownership basis including fair value options rolled management investors reflected company’s consolidated financial statements beginning upon completion recapitalization company’s purchase price approximately 586266000 including net dividends distributions nortek approximately 115397000 fund recapitalization allocated assets liabilities based relative fair values approximately 442969000 reflected stockholders’ investment value company’s ownership upon completion recapitalization immediately prior recapitalization stockholders’ investment approximately 272099000 company completed final allocation purchase price october 5 2003 reflects excess purchase price net assets acquired recapitalization following table shows comparison initial allocation purchase price reflected nortek’s form 10q quarter ended april 5 2003 final allocation purchase price included company’s accompanying consolidated financial statements year ended december 31 2003 include amounts allocated discontinued operations sold subsequent january 9 2003 see note 10 following summary material adjustments made initial allocation purchase price final allocation purchase price purchase price increased 2132000 584134000 586266000 due refinements made fair value options purchase common stock management investors included purchase price exchanged fully vested options purchase common stock new entity see note 2 change allocations property plant equipment intangible assets reflect adjustments recorded based upon finalization company’s asset appraisals company’s significant locations fourth quarter 2003 change allocations pension post retirement health benefits reflect adjustments recorded subsequent april 5 2003 based upon finalization company’s actuarial studies significant pension post retirement health benefit liabilities change allocation prepaid deferred income taxes principally reflects deferred tax consequences adjustments made property plant equipment intangible assets pensions postretirement health benefits discussed increase allocation goodwill principally reflects net impact changes property plant equipment intangible assets pensions postretirement health benefits prepaid deferred income taxes 2132000 additional purchase price discussed goodwill associated recapitalization deductible federal state foreign income tax purposes following table shows comparison initial allocation purchase price reflected quarter ended april 5 2003 final allocation purchase price year ended december 31 2003 allocated discontinued operations discontinued subsequent january 9 2003 see note 10 following table presents summary activity goodwill continuing operations discontinued operations period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 goodwill related discontinued operations included assets discontinued operations accompanying consolidated balance sheets december 31 2003 2002 goodwill associated recapitalization deductible income tax purposes approximately 7300000 goodwill associated acquisitions period january 10 2003 december 31 2003 deductible income tax purposes purchase accounting adjustments relate principally final revisions resulting completion fair value adjustments deferred income taxes impact goodwill period january 10 2003 december 31 2003 company reflected amortization purchase price allocated inventory approximately 4600000 continuing operations cost sales related inventory acquired part recapitalization similar amortization required inventory 2002 company’s historical basis accounting connection initial final allocations purchase price property plant equipment acquired part recapitalization company assigned new useful lives based upon initial estimate final remaining useful lives adopted date recapitalization respectively order determine depreciation expense periods subsequent recapitalization period january 10 2003 december 31 2003 company reflected approximately 8057000 lower depreciation expense continuing operations cost sales compared company’s historical basis accounting prior recapitalization lower depreciation expense reflects favorable impact approximately 12212000 related revisions remaining useful lives partially offset unfavorable impact approximately 4155000 related increase property plant equipment related allocation purchase price depreciation expense related property plant equipment acquired part recapitalization recorded based upon initial allocation purchase price initial estimated useful lives period january 10 2003 october 4 2003 based upon final allocation purchase price final useful lives adopted period october 5 2003 december 31 2003 depreciation expense would approximately 3633000 higher period january 10 2003 december 31 2003 final allocation purchase price final remaining useful lives adopted used record depreciation expense period january 10 2003 october 4 2003 primarily due final remaining useful lives adopted shorter initial estimates partially offset reduction final purchase price allocation connection initial final allocations purchase price intangible assets acquired part recapitalization company assigned new useful lives based upon initial estimated final remaining useful lives adopted date recapitalization respectively order determine amortization expense periods subsequent recapitalization period january 10 2003 december 31 2003 company reflected continuing operations approximately 6325000 higher amortization intangible assets compared company’s historical basis accounting prior recapitalization higher amortization reflects combination unfavorable impact approximately 1460000 related revisions remaining useful lives adopted unfavorable impact approximately 4865000 related increase intangible assets result allocation purchase price amortization expense related intangible assets acquired part recapitalization recorded based upon initial allocation purchase price estimated useful lives period january 10 2003 october 4 2003 based upon final allocation purchase price final useful lives adopted period october 5 2003 december 31 2003 amortization expense would approximately 1839000 higher period january 10 2003 december 31 2003 final allocation purchase price final remaining useful lives adopted used record amortization expense period january 10 2003 october 4 2003 primarily due final remaining useful lives adopted shorter initial estimates partially offset reduction amount allocation purchase price allocated intangible assets goodwill result allocation purchase price indebtedness period january 10 2003 december 31 2003 company reflected approximately 5700000 lower interest expense compared company’s historical basis accounting prior recapitalization principles consolidation consolidated financial statements include accounts company whollyowned continuing subsidiaries elimination intercompany accounts transactions certain amounts prior years’ consolidated financial statements reclassified conform current year presentation accounting policies use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states involves estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts income expense reporting periods certain company’s accounting policies require application judgment selecting appropriate assumptions calculating financial estimates nature judgments subject inherent degree uncertainty company periodically evaluates judgments estimates used critical accounting policies ensure judgments estimates reasonable interim yearend reporting requirements judgments estimates based company’s historical experience current trends information available sources appropriate different conditions result assumptions used company’s judgments results could materially different company’s estimates recognition sales related costs incentives allowances company recognizes sales upon shipment products net applicable provisions discounts allowances cash discounts volume rebates customer incentive programs well gross customer returns among others recorded reduction sales time sale based upon estimated future outcome cash discounts volume rebates customer incentive programs based upon certain percentages agreed company’s various customers typically earned customer annual period company records periodic estimates amounts based upon historical results date estimated future results end contract period contractual provisions customer agreements calendar year customer agreements company able adjust periodic estimates actual amounts december 31 year based upon contractual provisions customer agreements customers agreements calendar year cycle company records estimates december 31 consistent described methodology customer returns recorded actual basis throughout year also include estimate end reporting period future customer returns related sales recorded prior end period company generally estimates customer returns based upon time lag historically occurs date sale date return also factoring new business conditions might impact historical analysis new product introduction company also provides estimate warranty bad debts shipping costs time sale shipping warranty costs included cost products sold bad debt provisions included selling general administrative expense amounts recorded generally based upon historically derived percentages also factoring new business conditions might impact historical analysis new product introduction warranty bankruptcies particular customers bad debts cash investments marketable securities cash equivalents consist shortterm highly liquid investments original maturities three months less readily convertible cash december 31 2003 2002 company marketable securities available sale fourth quarter 2002 marketable securities available sale matured proceeds invested shortterm investments company classified restricted accompanying consolidated balance sheet certain investments marketable securities fully available use operations december 31 2003 2002 approximately 2346000 1223000 included current assets 79311000 2808000 included current assets respectively cash investments marketable securities pledged collateral held pension trusts including related party amounts insurance employee benefits requirements see notes 2 8 disclosures fair value financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents carrying amount approximates fair value short maturity instruments investments fair value investments based quoted market prices fair value investments materially different cost basis december 31 2003 2002 longterm debtat december 31 2003 fair value company’s longterm indebtedness approximately 69800000 higher unamortized premium 17600000 higher original issue discount december 31 2002 amount company’s consolidated balance sheet december 31 2003 carrying value company’s 10 senior discount notes due may 15 2011 “senior discount notes” approximately 352916000 continue accrete interest november 15 2007 time carrying value obligation 515000000 see note 6 inventories accompanying consolidated balance sheet valued lower cost market december 31 2003 2002 approximately 91099000 78909000 total inventories respectively valued lastin firstout method “lifo” firstin firstout method “fifo” accounting inventories would approximately 7755000 lower 840000 higher december 31 2003 2002 respectively inventories valued fifo method connection lifo fifo inventories company record provisions appropriate writedown obsolete excess inventory estimated net realizable value process evaluating obsolete excess inventory often requires company make subjective judgments estimates concerning future sales levels quantities prices inventory able sold normal course business accelerating disposal process incorrect estimates future sales potential may cause actual results differ estimates time inventory disposed sold depreciation amortization depreciation amortization property equipment provided straightline basis estimated useful lives generally follows buildings improvements 1035 years machinery equipment including leases 315 years leasehold improvements term lease expenditures maintenance repairs expensed incurred expenditures renewals betterments capitalized assets sold otherwise disposed cost related accumulated depreciation eliminated resulting gain loss recognized purchase price allocated fair value inventory amortized estimated period inventory sold intangible assets goodwill third quarter 2001 company adopted statement financial accounting standards “sfas” 144 “accounting impairment disposal longlived assets” “sfas 144” addresses financial accounting reporting impairment disposal longlived assets apply goodwill intangible assets amortized certain longlived assets required standard applied accounting standard january 1 2001 adoption accounting standard result material changes net earnings accounting standards previously applied adoption standard result accounting gain loss sale certain businesses related operating results discontinued operations presentation periods presented reclassified conform new standard see note 10 subsequent june 30 2001 company accounts acquired goodwill intangible assets accordance sfas 141 “business combinations” “sfas 141” prior july 1 2001 company accounted acquired goodwill intangible assets accordance apb 16 “business combinations” “apb 16” purchase accounting required sfas 141 apb 16 involves judgment respect valuation acquired assets liabilities order determine final amount goodwill company believes estimates used record prior acquisitions reasonable accordance sfas 141 apb 16 see note 3 january 1 2002 company adopted sfas 142 “goodwill intangible assets” “sfas 142” statement applies goodwill intangible assets acquired june 30 2001 well goodwill intangible assets previously acquired statement goodwill intangible assets determined indefinite useful life longer amortized instead assets evaluated impairment annual basis whenever events business conditions warrant intangible assets continue amortized remaining estimated useful lives evaluated impairment accordance provisions sfas 144 adoption sfas 142 result material changes company’s accounting intangible assets company evaluated carrying value goodwill determined impairment exists therefore impairment loss required recorded company’s consolidated financial statements result adopting sfas 142 accordance sfas 144 company evaluated realizability nongoodwill longlived assets primarily consist property plant equipment intangible assets “sfas 144 longlived assets” based expectations nondiscounted future cash flows subsidiary material amount sfas 144 longlived assets sum expected nondiscounted future cash flows less carrying amount assets including sfas 144 longlived assets company would recognize impairment loss company’s cash flow estimates based upon historical cash flows well future projected cash flows received subsidiary management connection annual company wide planning process include terminal valuation applicable subsidiary based upon multiple earnings interest expense net depreciation amortization expense income taxes “ebitda” company estimates ebitda multiple reviewing comparable company information industry data company believes procedures estimating gross future cash flows including terminal valuation reasonable consistent current market conditions based recent analysis company believes material impairment sfas 144 longlived assets exists december 31 2003 prior adoption sfas 144 sfas 142 company accounted impairment longlived assets including goodwill accordance existing accounting standards result impairment losses prior years intangible assets consist principally patents trademarks customer relationships noncompete agreements amortized straightline basis weighted average estimated useful life approximately 85 years amortization intangible assets charged operations amounted approximately 9055000 67000 2988000 3237000 period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 respectively table follows presents major components intangible assets december 31 2003 2002 december 31 2003 estimated annual intangible asset amortization expense succeeding five years aggregates approximately 54100000 follows company classified goodwill cost excess fair value net assets including tax attributes companies acquired purchase transactions prior january 1 2002 goodwill amortized straightline basis 40 years december 31 2001 goodwill amortization related continuing operations discontinued operations approximately 8718000 7676000 respectively 2001 determined applicable accounting principles generally accepted united states see note 11 rollforward activity goodwill operating segment years ended december 31 2003 2002 table follows presents earnings continuing operations net earnings year ended december 31 2001 adjusted reflect elimination goodwill amortization expense related income tax impact pensions post retirement health benefits company accounts pensions including supplemental executive retirement plans post retirement health benefit liabilities sfas 87 “employers accounting pensions” “sfas 87” sfas 106 “employers accounting post retirement benefits pensions” “sfas 106” sfas 87 sfas 106 require estimating items longterm average return plan assets discount rate compensation increase assumed medical cost inflation rate estimates require significant amount judgment insurance liabilities company records insurance liabilities related expenses health workers compensation product general liability losses insurance reserves expenses accordance either contractual terms policies selfinsured total liabilities estimable probable reporting date insurance liabilities recorded current liabilities extent expected paid succeeding year remaining requirements classified longterm liabilities accounting selfinsured plans requires significant judgments estimates made respect future liabilities paid known claims incurred reported claims reporting date company considers historical trends determining appropriate insurance reserves record consolidated balance sheet substantial portion workers compensation general product liability losses certain cases partial insurance coverage exists company must estimate portion liability covered existing insurance policies arrive net expected liability company income taxes company accounts income taxes using liability method accordance sfas 109 “accounting income taxes” “sfas 109” requires deferred tax consequences temporary differences amounts recorded company’s consolidated financial statements amounts included company’s federal state income tax returns recognized balance sheet company generally file income tax returns well closing process december 31 financial statements complete amounts recorded december 31 reflect estimates final amounts actual income tax returns filed fiscal year addition estimates often required respect among things appropriate state income tax rates use various states company subsidiaries required file potential utilization operating capital loss carryforwards federal state income tax purposes valuation allowances required tax assets may realizable future sfas 109 requires balance sheet classification current longterm deferred income tax assets liabilities based upon classification underlying asset liability gives rise temporary difference see note 5 interest allocation dispositions company allocates interest dispositions qualify discontinued operation debt instruments entered specifically solely entity disposed debt settled proceeds received disposition stockbased compensation employees officers directors fourth quarter 2003 company adopted fair value method accounting stockbased employee compensation accordance sfas 123 “accounting stockbased compensation” “sfas 123” recorded pretax charges approximately 1400000 selling general administrative expense 100000 earnings discontinued operations accompanying consolidated statement operations period january 10 2003 december 31 2003 related stock options issued period stock options issued period january 1 2003 january 9 2003 company previously accounted stockbased employee compensation accordance accounting principles board “apb” opinion 25 “accounting stock issued employees” “apb 25” including related interpretations followed disclosure provisions sfas 123 company adopted sfas 123 using prospective method transition accordance sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” prospective method sfas 148 required company adopt sfas 123 effective january 1 2003 employee awards granted modified settled january 1 2003 1400000 total charge approximately 700000 200000 300000 200000 related period january 10 2003 april 5 2003 quarters ended july 5 2003 october 4 2003 december 31 2003 respectively addition fourth quarter 2003 company recorded 600000 compensation based charge related sale certain capital stock period january 1 2003 january 9 2003 company previously recorded pretax stockbased employee compensation charge approximately 4710000 approximately 3000000 net tax related cash settlement cancellation outstanding stock options tendered connection recapitalization accordance provisions apb 25 connection adoption sfas 123 compensation charge net tax approximately 3000000 reclassified accordance provisions sfas 123 reflected equity adjustment additional paidin capital accompanying consolidated statement stockholders’ investment period january 1 2003 january 9 2003 following tables summarize company’s common special common stock option transactions stock options issued prior recapitalization class stock options issued subsequent recapitalization including options held management investors exchanged connection recapitalization options issued prior holdings reorganization november 20 2002 common special common stock nortek converted options purchase common special common stock holdings connection holdings reorganization see note 7 stock options issued december 31 2002 2001 1948525 1854411 respectively options acquire shares common special common stock exercisable defined stock option plans options became fully vested upon completion recapitalization january 9 2003 options purchase 217226 common stock company exercised tendered connection recapitalization cash settlement approximately 4700000 options purchase 1868320 shares common stock special common stock company rolledover management investors exchanged fully vested stock options purchase equal number shares class common stock company price per share “rollover options” rolledover options expire january 9 2013 see note 2 connection dividend approximately 298474000 paid company’s shareholders fourth quarter 2003 option holders rollover options received cash distribution approximately 41600000 see note 7 treated charge additional paidin capital accompanying consolidated statement stockholders’ investment accordance provisions sfas 123 distribution individual option holder equal number shares held multiplied lesser 35 per share ii 46 per share minus amount per share exercise price reduced conjunction shareholder distribution company adjusted exercise price rollover options equal 1050 per share class stock options equal 1100 per share reflected table rollover options fully vested class common stock options vest quarterly equal installments three years december 31 2003 1977026 class common stock options exercisable weighted average remaining contractual life class stock options approximately 9 years december 31 2003 approximately 2500000 remaining unamortized stockbased employee compensation respect class stock options amortized prorata basis remaining vesting period respective options 2003 company issued 846534 class b common stock options 841867 remain outstanding december 31 2003 4667 class b common stock options cancelled year class b stock options vest event certain performancebased criteria defined met weighted average remaining contractual life class b stock options approximately 9 years stockbased employee compensation charges recognized class b common stock options sfas 123 uncertain ever options vest december 31 2003 approximately 6400000 unamortized stockbased employee compensation respect class b stock options amortized event becomes probable class b options portion thereof vest company uses blackscholes option pricing model determine fair value stock options date grant following table summarizes weightedaverage assumptions periods presented weightedaverage assumptions options granted subsequent january 1 2003 used calculate stockbased employee compensation charge approximately 1400000 period january 10 2003 december 31 2003 connection company’s adoption sfas 123 holdings longer public company period weightedaverage assumptions reflect use minimum value calculations permitted sfas 123 nonpublic companies whereby volatility assumption excluded calculation weightedaverage assumptions options granted prior january 1 2003 included pro forma information period january 1 2003 january 9 2003 years ended december 31 2002 2001 presented include volatility assumption holdings prior holdings reorganization nortek’s common stock publicly traded end periods weighted average assumptions related earnings loss continuing operations exclude options issued employees ply gem treated discontinued operation periods presented proforma information period january 10 2003 december 31 2003 required sfas 148 options issued prior january 1 2003 fully vested january 9 2003 consolidated statement operations period includes actual stockbased employee compensation options issued subsequent january 1 2003 pro forma information period january 1 2003 january 9 2003 years ended december 31 2002 2001 determined company accounting employee stock options fair value method sfas 123 options issued prior january 1 2003 subsequent initial effective date sfas 123 pro forma stockbased employee compensation charge period january 1 2003 january 9 2003 reflects pro forma impact accelerated vesting associated immediate vesting unvested options connection recapitalization historical stockbased employee compensation reflected period january 1 2003 january 9 2003 options issued historical stockbased employee compensation reflected years ended december 31 2002 2001 employee options granted plans intrinsic value zero date grant pro forma amounts respect earnings loss continuing operations exclude pro forma impact options issued employees ply gem treated discontinued operation periods presented commitments contingencies company provides accruals direct costs associated estimated resolution contingencies earliest date deemed probable liability incurred amount liability reasonably estimated costs accrued estimated based upon analysis potential results assuming combination litigation settlement strategies outcomes see note 9 comprehensive income loss comprehensive income loss includes net earnings unrealized gains losses currency translation marketable securities available sale minimum pension liability adjustments net tax attributes components company’s comprehensive income loss effect earnings periods presented detailed accompanying consolidated statement stockholders’ investment balances classification net tax attributes within accumulated comprehensive loss periods presented follows foreign currency translation financial statements subsidiaries outside united states generally measured using foreign subsidiaries’ local currency functional currency company translates assets liabilities foreign subsidiaries exchange rates effect yearend net sales expenses translated using average exchange rates effect year gains losses foreign currency translation credited charged accumulated comprehensive loss included stockholders’ investment accompanying consolidated balance sheet transaction gains losses recorded selling general administrative expense material periods january 10 2003 december 31 2003 january 1 2003 january 9 2003 years ending december 31 2002 2001 derivative instruments hedging activities company accounts derivative instruments hedging activities accordance sfas 133 “accounting derivative instruments hedging activities” amended 1999 sfas 137 “accounting derivative instruments hedging activities deferral effective date sfas 133 amendment sfas 133” amended june 2000 sfas 138 “accounting certain derivative instruments certain hedging activities amendment sfas 133” combined “sfas 133” sfas 133 requires every derivative instrument including certain derivative instruments embedded contracts issued acquired substantially modified december 31 1997 recorded balance sheet either asset liability measured fair value sfas 133 requires changes derivative’s fair value recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivative’s gains losses offset related results hedged item income statement requires company formally document designate assess effectiveness transactions receive hedge accounting new accounting pronouncements sfas 143 “accounting asset retirement obligations” “sfas 143” addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs sfas 143 requires fair value liability asset retirement obligation recognized period incurred reasonable estimate fair value made associated asset retirement costs capitalized part carrying amount longlived asset sfas 143 effective financial statements issued fiscal years beginning june 15 2002 early adoption permitted company adopted sfas 143 january 1 2003 adoption accounting standard material company’s consolidated financial statements sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” “sfas 145” issued april 2002 addresses reporting gains losses resulting extinguishment debt accounting saleleaseback transactions rescinds amends existing authoritative pronouncements sfas 145 requires gain loss extinguishment debt meet criteria apb 30 classification extraordinary item shall classified extraordinary shall included earnings continuing operations company adopted sfas 145 january 1 2003 adoption accounting standard material results presented consolidated financial statements require reclassification company’s 5500000 pre tax extraordinary loss recorded 2001 earnings continuing operations effective january 1 2003 company adopted sfas 146 “accounting costs associated exit disposal activities” “sfas 146” addresses accounting reporting costs associated exit disposal activities nullifies emerging issues task force “eitf” issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” “eitf 943” substantially nullifies eitf issue 8810 “costs associated lease modification termination” “eitf 8810” sfas 146 requires liability cost associated exit disposal activity recognized liability incurred eitf 943 liability exit cost defined eitf 943 recognized date entity’s commitment exit plan provisions sfas 146 effective exit disposal activities initiated december 31 2002 adoption sfas 146 material effect company’s consolidated financial statements see note 13 november 2002 financial accounting standards board “fasb” issued interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” “fin 45” along new disclosure requirements fin 45 requires guarantors recognize inception certain guarantees liability fair value obligation undertaken issuing guarantee differs prior practice record liability loss probable reasonably estimable recognition measurement provisions fin 45 applicable prospective basis guarantees issued modified december 31 2002 company adopted disclosure provisions fin 45 december 31 2002 adopted entire interpretation january 1 2003 adoption fin 45 january 1 2003 material company’s consolidated financial statements january 2003 fasb issued interpretation 46 “consolidation variable interest entities interpretation arb 51” “fin 46” fin 46 clarifies application arb 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties consolidation requirements fin 46 apply company immediately variable interest entities created december 31 2003 begin january 1 2005 variable interest entities created prior january 1 2004 adoption fin 46 expected impact company’s consolidated financial statements april 2003 fasb issued sfas 149 “amendment statement 133 derivative instruments hedging activities” “sfas 149” clarifies financial accounting reporting proscribed sfas 133 “accounting derivative instruments hedging activities” “sfas 133” derivative instruments including certain derivative instruments embedded contracts certain provisions sfas 149 related implementation issues sfas 133 already effective provisions related forward purchases sales effective existing contracts new contracts entered june 30 2003 company previously adopted sfas 133 including implementation issues addressed sfas 149 adoption new provisions sfas 149 july 1 2003 impact company’s consolidated financial statements may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” “sfas 150” addresses accounting reporting classification measurement certain financial instruments characteristics liabilities equity sfas 150 effective financial instruments entered modified may 31 2003 existing financial instruments beginning first interim period june 15 2003 except mandatorily redeemable financial instruments nonpublic entities subject provisions first fiscal period beginning december 15 2003 company adopted sfas 150 july 1 2003 adoption accounting standard impact company’s consolidated financial statements december 2003 fasb issued revised sfas 132 “employers’ disclosures pensions postretirement benefits” “sfas 132” require additional disclosures original sfas 132 assets obligations cash flows net periodic benefit cost defined benefit pension plans defined benefit postretirement plans revised sfas 132 provides additional disclosures change accounting pension postretirement plans company previously adopted sfas 132 provided required new disclosures revised sfas 132 note 8 2 recapitalization transaction january 8 2003 special meeting stockholders company stockholders approved following amendments certificate incorporation “stockholder approval” required order complete recapitalization new class common stock class common stock par value 100 per share nortek holdings created consisting 19000000 authorized shares time amendment certificate incorporation became effective share common stock par value 100 per share special common stock par value 100 per share outstanding reclassified one share new class mandatorily redeemable common stock class b common stock par value 100 per share nortek holdings consisting 14000000 authorized shares class b common stock required immediately redeemed 46 per share cash upon completion recapitalization authorized number shares series b preference stock par value 100 per share increased 19000000 authorized shares following stockholder approval common stock special common stock held management investors exchanged equal number newly created shares series b preference stock addition certain options purchase shares common special common stock held management investors exchanged fully vested options purchase equal number shares newly created class common stock remaining outstanding options including held management investors cancelled exchange right receive single lump sum cash payment equal product number shares common stock special common stock underlying option amount redemption price 46 per share exceeded per share exercise price option january 9 2003 connection recapitalization kelso purchased newly issued shares series b preference stock approximately 355923000 purchased shares series b preference stock held management investors approximately 18077000 newly issued class common stock approximately 3262000 purchased designated third parties shares series b preference stock held management investors purchased kelso converted equal number shares class common stock addition nortek declared distributed company dividend approximately 120000000 distributed approximately 27900000 reimbursement fees expenses kelso paid company’s unrestricted cash equivalents hand permissible restrictive covenants respect indentures nortek’s 8 78 senior notes due 2008 9 14 senior notes due 2007 9 18 senior notes due 2007 9 78 senior subordinated notes due 2011 “existing notes” company used proceeds purchase kelso designated third parties newly issued series b preference stock class common stock dividend nortek redeem company’s class b common stock cash options purchase common special common stock totaling approximately 479185000 kelso also purchased certain management investors 392978 shares series b preference stock approximately 18077000 connection recapitalization k holdings received bridge financing letter lender senior unsecured term loan facility exceed 955000000 “bridge facility” bridge facility intended used fund necessary change control offers nortek might made connection recapitalization nortek use bridge facility structure recapitalization require nortek make change control offers commitment letter expired january 31 2003 result company’s consolidated interest expense period january 10 2003 december 31 2003 includes approximately 4100000 interest expense amortization bridge facility commitment fees related expenses january 2003 company filed deregistration shares common special common stock securities exchange act 1934 company’s shares common special common stock longer publicly traded company continue file periodic reports sec required respective indentures nortek’s existing notes terms one nortek’s supplemental executive retirement plans “serp” nortek required make onetime cash payments participants plan satisfaction obligations plan recapitalization completed accordingly nortek made distribution approximately 75100000 participants plan funds included company’s consolidated balance sheet december 31 2002 classified longterm assets restricted investments marketable securities held pension trusts transferred one participants life insurance policy approximately 10300000 cash surrender value satisfy portion serp’s obligation participant’s obligation upon stockholder approval termination settlement obligation serp resulted curtailment loss january 9 2003 see notes 8 14 total amount transaction fees related costs incurred nortek kelso associated recapitalization approximately 47300000 including 27900000 noted approximately 10500000 advisory fees expenses paid kelso company lp portion fees expenses recorded nortek selling general administrative expense since obligations nortek prior recapitalization approximately 12800000 recorded expense january 9 2003 since fees expenses became obligations nortek upon consummation recapitalization see note 14 approximately 6600000 expense previously recorded nortek year ended december 31 2002 following reflects unaudited pro forma effect recapitalization continuing operations period january 1 2003 january 9 2003 year ended december 31 2002 unaudited pro forma condensed consolidated summary operations period january 1 2003 january 9 2003 presented prepared adjusting historical amounts period give effect recapitalization occurred january 1 2003 pro forma adjustments historical results operations period january 1 2003 january 9 2003 include pro forma impact pushdown accounting period elimination approximately 83000000 expenses charges recapitalization recorded period unaudited pro forma condensed consolidated summary operations assumes recapitalization occurred january 1 2003 see note 1 unaudited pro forma condensed consolidated summary operations year ended december 31 2002 presented prepared adjusting historical amounts year give effect recapitalization occurred january 1 2002 3 acquisitions accounted purchases accordingly included companys consolidated results operations since acquisition date purchase price allocations subject refinement pertinent information regarding acquisitions obtained see note 2 january 17 2003 company acquired elan home systems llc “elan” manufacturer seller consumer electronic equipment controls wholehouse entertainment communication automation systems new residential construction retrofit markets year ended december 31 2002 elan reported net sales approximately 21300000 unaudited july 11 2003 company acquired speakercraft inc “spc” leading designer supplier architectural loudspeakers audio products used residential custom applications year ended december 31 2002 spc reported net sales approximately 34800000 unaudited pro forma results related acquisitions elan spc presented effect material operating earnings depreciation amortization expense acquisitions january 1 2003 date acquisition approximately 4600000 unaudited 200000 unaudited respectively june 15 2001 company acquired senior air systems sas whollyowned subsidiary senior plc acquired company located stokeontrent england manufactures sells air conditioning equipment 4 cash flows interest paid 91991000 95352000 102406000 period january 10 2003 december 31 2003 years ended december 31 2002 2001 respectively interest paid period january 1 2003 january 9 2003 fair value assets businesses acquired approximately 95000000 1950000 period january 10 2003 december 31 2003 year ended december 31 2001 respectively liabilities assumed created businesses acquired approximately 17184000 50000 period january 10 2003 december 31 2003 year ended december 31 2001 respectively net cash paid acquisitions approximately 76000000 1900000 period january 10 2003 december 31 2003 year ended december 31 2001 respectively company acquisitions period january 1 2003 january 9 2003 2002 significant noncash financing investing activities excluded accompanying consolidated statement cash flows include capitalized lease additions approximately 7589000 period january 10 2003 december 31 2003 decline approximately 306000 91000 fair market value marketable securities available sale years ended december 31 2002 2001 respectively declines fair market value marketable securities available sale periods january 10 2003 december 31 2003 january 1 2003 january 9 2003 5 income taxes following summary components earnings loss continuing operations provision benefit income taxes following summary provision benefit income taxes continuing operations included accompanying consolidated statement operations income tax payments net refunds approximately 11690000 281000 49879000 4500000 period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 respectively income tax benefits approximately 14600000 related cash distribution approximately 41600000 option holders rollover options period january 10 2003 december 31 2003 reflected reduction goodwill income tax benefits approximately 1710000 related settlement certain stock options reflected equity adjustment additional paidincapital period january 1 2003 january 9 2003 table follows reconciles federal statutory income tax rate continuing operations effective tax rate earnings approximately 400 264 404 459 period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 respectively effective tax rate tax effect temporary differences give rise significant portions deferred income tax assets liabilities continuing operations december 31 2003 december 31 2002 follows company established valuation allowances related certain reserves foreign net operating loss carryforwards company provided united states income taxes foreign withholding taxes unremitted foreign earnings exception hong kong subsidiary considered permanently invested fourth quarter 2002 cumulative earnings company’s hong kong subsidiary permanently invested resulted reduction tax provision approximately 2000000 previously provided united states income taxes longer required addition company approximately 8500000 foreign net operating loss carryforwards utilized would offset future foreign tax payments included valuation allowances 5411000 december 31 2003 valuation allowances approximately 3963000 reduce goodwill future tax assets relate realized tax assets existed date recapitalization 6 notes mortgage notes obligations payable shortterm bank obligations continuing operations december 31 2003 2002 consist following shortterm bank obligations secured approximately 34165000 accounts receivable inventory assets weighted average interest rate approximately 252 december 31 2003 notes mortgage notes obligations payable continuing operations included accompanying consolidated balance sheet december 31 2003 2002 consist following november 24 2003 company completed sale 515000000 aggregate principal amount maturity 349400000 gross proceeds 10 senior discount notes due may 15 2011 “senior discount notes” notes structurally subordinate debt liabilities company’s subsidiaries issued sold private rule 144a offering institutional investors net proceeds offering used pay dividend approximately 298474000 holders company’s capital stock approximately 41000000 proceeds used company purchase additional capital stock nortek used proceeds fund majority cash distribution approximately 41600000 option holders rollover options fourth quarter 2003 see note 1 accreted value 10 senior discount notes increase date issuance rate 10 per annum compounded semiannually accreted value equal principal amount 515000000 november 15 2007 cash interest accrue 10 senior discount notes prior november 15 2007 thereafter cash interest accrue 10 per annum payable semiannually arrears may 15 november 15 year senior discount notes unsecured obligations company mature may 15 2011 may redeemed whole part redemption prices defined indenture governing senior discount notes “indenture” indenture contains covenants limit company’s ability engage certain transactions including incurring additional indebtedness paying dividends distributions terms senior discount notes require company register notes substantially identical terms “holdings exchange notes” sec part offer exchange freely tradable holdings exchange notes senior discount notes “holdings exchange” event company complete holdings exchange accordance timing requirements outlined indenture company may required pay higher interest rate company expects complete holdings exchange within required time period certain limited circumstances nortek may required future guarantee senior discount notes senior subordinated basis requirement apply terms nortek’s senior indebtedness restricts issuance guarantee nortek’s senior secured credit facility permit guarantee addition issuance guarantee nortek would constitute restricted payment terms nortek’s indentures nortek 175000000 senior secured credit facility amended “senior secured credit facility” syndicated among several banks senior secured credit facility secured substantially nortek’s accounts receivable inventory well certain intellectual property rights amended permits borrowings lesser 175000000 total 85 eligible accounts receivable defined 50 eligible inventory defined outstanding principal balances senior secured credit facility accrue interest company’s option either libor plus margin ranging 20 25 banks’ prime rate plus margin ranging 05 10 depending upon excess available borrowing base defined timing borrowing margin rates adjusted quarterly addition nortek pays unused line fee 0375 05 excess available borrowing capacity defined senior secured credit facility includes customary limitations covenants require nortek maintain financial covenant unless excess available borrowing base defined less 30000000 case nortek would required maintain trailing four quarter basis minimum level 155000000 earnings interest taxes depreciation amortization defined december 31 2003 outstanding borrowings senior secured credit facility indentures agreements governing nortek’s subsidiaries’ indebtedness including indentures 8 78 notes 9 18 notes 9 14 notes collectively “senior notes” 9 78 notes senior secured credit facility company’s senior discount notes 2004 nortek’s senior floating rate notes contain restrictive financial operating covenants including covenants restrict among things payment cash dividends repurchase company’s capital stock making certain restricted payments incurrence additional indebtedness making certain investments mergers consolidations sale assets defined indentures agreements upon certain asset sales defined indentures company required offer purchase 100 principal amount plus accrued interest date purchase senior notes principal amount equal net cash proceeds defined indentures invested properties assets used primarily related business owned operated company issue date senior notes date asset sale net cash proceeds applied permanently reduce senior indebtedness defined indentures march 26 2004 approximately 34300000 available payment cash dividends stock purchases restricted payments company defined terms companys restrictive indenture based redemption refinancing certain nortek’s notes see notes 7 16 restricted payments holdings nortek limited amount cash available payment terms nortek’s restrictive indenture approximately 91100000 march 26 2004 mortgage notes payable approximately 1647000 outstanding december 31 2003 include various mortgage notes related indebtedness payable installments 2009 notes bear interest rates ranging approximately 325 625 collateralized property equipment aggregate net book value approximately 6847000 december 31 2003 obligations approximately 21425000 outstanding december 31 2003 include borrowings relating equipment purchases notes payable issued acquisitions borrowings bearing interest rates primarily ranging 325 105 maturing various dates 2018 approximately 13700000 indebtedness collateralized property equipment aggregate net book value approximately 14039000 december 31 2003 table follows summary maturities company’s debt obligations excluding unamortized debt premium approximately 10867000 remaining approximately 162084000 accreted senior discount notes due december 31 2004 december 31 2003 approximately 6900000 letters credit issued additional security certain companys insurance programs substantial portion nortek’s fixed rate debt called redemption refinanced variable rate debt first quarter 2004 table maturities reflect effect subsequent events see note 16 7 common stock special common stock preference stock options deferred compensation connection holdings reorganization november 20 2002 nortek became whollyowned subsidiary company outstanding share capital stock nortek converted identical share capital stock company receiving 100 shares nortek’s common stock result holdings reorganization nortek’s previously outstanding common stock treasury stock balances reclassified additional paidin capital reflect company’s new capital structure shown accompanying consolidated statement stockholders’ investment year ended december 31 2002 january 9 2003 nortek declared distributed company cash dividend approximately 120000000 distributed approximately 27900000 reimbursement fees expenses kelso contemplated recapitalization see note 2 prior holdings reorganization share nortek’s special common stock 10 votes matters submitted stockholder vote except holders common stock voting separately class right elect 25 directors elected meeting remaining 75 elected combined vote classes shares nortek’s special common stock generally nontransferable freely convertible shareforshare basis shares nortek’s common stock prior holdings reorganization nortek shareholder rights plan expired march 31 2006 shareholder right entitled shareholders buy 1100 share new series preference stock nortek exercise price 72 per share subject adjustments stock dividends splits similar events rights never exercisable attached share nortek’s common stock company assumed shareholder rights plan connection holdings reorganization prior holdings reorganization nortek several equity cash incentive plans provided granting options awards certain officers employees nonemployee directors nortek also cash incentive program certain key employees 1999 equity cash incentive plan 1999 equity performance plan based performance nortek’s stock price 2002 approximately 4400000 paid participants plan cash incentive program included selling general administrative expenses accompanying consolidated statement operations year ended december 31 2002 amounts required paid cash incentive program prior years options granted equity cash incentive plans vested periods ranging five years expired ten years date grant date holdings reorganization company assumed assigned plans nortek longer stockbased compensation programs granting options awards certain officers employees consultants directors nortek subsidiaries however recipients stock option awards stock company see note 1 summary significant accounting policies discussion related stock options december 31 2002 company 40000000 authorized shares common stock 10502627 shares issued outstanding 5000000 authorized shares special common stock 501224 shares issued outstanding connection holdings reorganization nortek retired treasury shares held nortek consisted 8377968 shares common stock 290136 shares special common stock retirement nortek’s treasury shares recorded reduction nortek’s common stock special common stock par value retired shares remaining balance recorded reduction additional paidin capital net outstanding nortek shares common special common stock retirement respective treasury shares converted equal number outstanding shares holdings common special common stock date holdings reorganization impact retirement norteks treasury shares conversion nortek common special common stock holdings common special common stock included accompanying consolidated statement stockholders’ investment year ended december 31 2002 company’s preference stock convertible time subsequent january 9 2004 one full share class common stock upon occurrence certain events preference stock automatically converted class common stock preference stock provide distributions shareholders liquidation preference 001 per share addition election directors preference stock following rights consent least majority outstanding shares amend certificate incorporation nortek modify powers preferences special rights holders series b preference stock ii authorize issue series capital stock ranking senior parity series b preference stock either payments dividends rights liquidation iii material transactions excess 50000000 iv incurrence indebtedness outside ordinary course business v certain capital expenditures vi agreements arrangements members senior management nortek vii creation issuance grant delivery sale equity securities including warrants options 2002 stock option plan agreements arrangements existence prior date completion recapitalization viii legal settlements excess 25000000 ix significant matters involving company 8 pension profit sharing post retirement benefits company subsidiaries various pension supplemental retirement plans certain officers profit sharing post retirement benefit plans requiring contributions qualified trusts union administered funds pension profit sharing expense charged operations aggregated approximately 14400000 period january 10 2003 december 31 2003 950000 period january 1 2003 january 9 2003 19300000 2002 14900000 2001 company’s policy generally fund currently maximum allowable annual contribution various qualified defined benefit plans 2004 company expects contribute approximately 7600000 defined benefit pension plans company uses september 30 measurement date plans table follows provides reconciliation benefit obligations plan assets funded status plans accompanying consolidated balance sheet december 31 2003 2002 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets approximately 161699000 155004000 108552000 respectively december 31 2003 238910000 208470000 96930000 respectively december 31 2002 result recapitalization purchase accounting adjustments made defined benefit plans january 9 2003 transaction date purchase accounting adjustments reflect immediate recognition unrecognized actuarial losses unrecognized prior service costs well reversal accumulated comprehensive loss tax benefit intangible pension asset actuarial loss excluding assumption changes decreased approximately 33282000 december 31 2002 december 31 2003 primarily due termination one nortek’s supplemental executive retirement plans part recapitalization discussed plan assets primarily consist cash equivalents common stock including 283063 shares company’s common stock special common stock fair market value approximately 12248000 september 30 2002 shares company’s common stock held plan assets september 30 2003 us government securities corporate debt mutual funds well investments include certain commingled funds december 31 2003 2002 company recorded longterm restricted investments marketable securities held pension trusts including related party amounts accompanying consolidated balance sheet approximately 1123000 76500000 respectively contributed trusts assets included amount fair value plan assets december 31 2003 2002 available fund certain benefit obligations included table relating certain supplemental retirement plans period january 1 2003 january 9 2003 used fund payment required upon termination one nortek’s supplemental executive retirement plans primary reason increase employer contributions benefits paid table terms one nortek’s supplemental executive retirement plans nortek required make onetime distributions participants plan satisfaction obligations plan upon change control defined accordingly upon completion recapitalization plan terminated nortek made distributions approximately 75100000 participants plan transferred one participants life insurance policy approximately 10300000 cash surrender value satisfy portion participant’s obligation assets related pension trust used pay amounts due plan participants amounts included benefits expenses paid employer contributions table result plan termination settlement participant benefit obligations company recorded january 2003 curtailment loss approximately 65800000 2001 2000 pension trust loaned funds certain officers company fully vested retirement benefits plans december 31 2002 approximately 34622000 notes receivable officers included restricted investments marketable securities held pension trusts company’s accompanying consolidated balance sheet notes receivable officers repaid full january 9 2003 connection recapitalization weighted average rate assumptions used determining pension supplemental retirement plans post retirement costs projected benefit obligation follows company’s net periodic benefit cost defined benefit plans periods presented consist following components company’s pension plan weightedaverage asset allocations december 31 2003 2002 asset category follows company’s domestic qualified defined benefit plans’ assets invested maximize returns without undue exposure risk investment objectives also produce total return exceeding median universe portfolios similar average asset allocation investment style objectives earn return net fees greater equal longterm rate return used company determining pension expense risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers plans’ asset allocation policies consistent established investment objectives risk tolerances asset allocation policies developed examining historical relationships risk return among asset classes designed provide highest probability meeting exceeding return objectives lowest possible risk 2004 target allocation 57 equity securities 41 fixed income securities 2 cash table follows provides reconciliation benefit obligations plan assets funded status company’s post retirement health benefit plans included accompanying consolidated balance sheet december 31 2003 2002 company’s net periodic benefit cost subsidiary’s post retirement health benefit plan periods presented consists following components purposes calculating post retirement health benefit cost medical inflation rate 12 assumed 2002 rate assumed decrease gradually ultimate rate 55 2010 assumed health care cost trend rates significant effect amounts reported post retirement health benefit plan onepercentagepoint change assumed health care cost trend rate would following effect december 8 2003 president bush signed law medicare prescription drug improvement modernization act 2003 “the act” act expanded medicare include first time coverage prescription drugs company sponsors retiree medical program certain locations company expects legislation eventually reduce company’s cost program point company’s investigation response legislation preliminary await guidance various governmental regulatory agencies concerning requirements must met obtain cost reductions well manner savings measured various uncertainties related company’s response legislation appropriate accounting methodology event company elected defer financial recognition legislation fasb issues final accounting guidance issued final guidance could require company change previously reported information deferral election permitted fasb staff position fas 1061 9 commitments contingencies company provides accruals direct costs associated estimated resolution contingencies earliest date deemed probable liability incurred amount liability reasonably estimated december 31 2003 company subsidiaries obligated lease agreements rental certain real estate machinery equipment used operations future minimum rental obligations related continuing operations aggregate approximately 69849000 december 31 2003 obligations payable follows certain lease agreements provide increased payments based changes consumer price index rental expense charged continuing operations accompanying consolidated statement operations approximately 16600000 400000 15600000 15000000 period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 respectively certain lease agreements company subsidiaries also obligated pay insurance taxes certain subsidiaries classified discontinued operations guaranteed approximately 27700000 third party obligations relating guarantees rental payments june 30 2016 facility leased sne sold september 21 2001 company indemnified guarantees connection sale ply gem february 12 2004 see note 10 buyer sne provided certain indemnifications rights subsidiary payments might required make pursuant guarantee buyer sne cease making payments company may required make payments indemnification company anticipate incurring loss indemnification accordingly recorded liabilities december 31 2003 accompanying consolidated balance sheet accordance accounting principles generally accepted united states company guaranteed certain obligations third parties approximately 4300000 relates guarantees remaining principal interest balances mortgages thirdparty certain buildings one houses company’s corporate headquarters guarantees expire december 31 2020 payable event nonpayment mortgage guarantees collateralized buildings mortgages relate liability company would first reduced company’s prorata share proceeds received sale buildings company anticipate incurring loss guarantees accordingly recorded liabilities december 31 2003 accompanying consolidated balance sheet accordance accounting principles generally accepted united states company indemnified third parties certain matters number transactions involving dispositions former subsidiaries company recorded liabilities relation indemnifications approximately 20900000 december 31 2003 27100000 december 31 2002 approximately 18200000 24200000 liabilities included liabilities discontinued operations december 31 2003 2002 respectively company sells number products offers number warranties including instances extended warranties specific terms conditions warranties vary depending product sold country product sold company estimates costs may incurred warranties exception extended warranties records liability costs time sale proceeds received extended warranties amortized life warranty reviewed ensure liability recorded equal greater estimated future costs factors affect company’s warranty liability include number units sold historical anticipated rates warranty claims cost per claim new product introduction company periodically assesses adequacy recorded warranty claims adjusts amounts necessary changes company’s combined shortterm longterm warranty liabilities see note 12 periods presented follows company subject contingencies including legal proceedings claims arising businesses cover wide range matters including among others environmental matters contract employment claims product liability warranty modification adjustment replacement component parts units sold may include product recalls product liability environmental legal proceedings also include matters respect businesses previously owned company used various substances products manufacturing operations may deemed hazardous dangerous extent potential liability environmental product liability workers’ compensation statutes rules regulations case law unclear due lack adequate information potential impact present regulations future regulations certain circumstances range potential exposure may reasonably estimated former subsidiary company defendant number lawsuits alleging damage caused alleged defects certain pressure treated wood products subsidiary company indemnified buyer former subsidiary known liabilities future claims relating matters retained rights potential reimbursements related insurance coverage many lawsuits resolved dismissal settlement amounts paid insurance proceeds recoveries company former subsidiary continue vigorously defend remaining suits certain defense indemnity costs paid insurance proceeds settlement suppliers material used production treated wood products company recorded within liabilities discontinued operations liabilities approximately 6602000 december 31 2003 estimated costs resolve outstanding matters company also recorded within assets discontinued operations receivables december 31 2003 approximately 2385000 estimated recoveries deemed probable collection related primarily insurance litigation coverage claims company indemnified buyer ply gem liabilities connection sale ply gem february 12 2004 see note 10 impossible ascertain ultimate legal financial liability respect contingent liabilities including lawsuits company believes aggregate amount liabilities excess amounts provided covered insurance material adverse effect consolidated financial position results operations company possible however future results operations particular future period could materially affected changes assumptions strategies related contingencies changes company’s control 10 discontinued operations february 12 2004 company sold ply gem affiliate caxtoniseman capital inc transaction valued approximately 560000000 including debt assumed buyer expects record net aftertax gain upon sale approximately 60000000 70000000 first quarter 2004 ply gem operating subsidiaries manufacturer distributor range products use residential new construction doityourself professional renovation markets including vinyl siding windows patio doors fencing railing decking accessories results operations operating subsidiaries ply gem comprised company’s entire windows doors siding products “wds” reporting segment corporate expenses ply gem previously included unallocated net company’s segment reporting see note 11 november 22 2002 ply gem sold capital stock subsidiary richwood building products inc “richwood” approximately 8500000 net cash proceeds recorded pretax loss approximately 3000000 fourth quarter 2002 prior sale ply gem operating results richwood previously included wds company’s segment reporting required sfas 142 company allocated 4200000 goodwill richwood connection determination loss sale based upon relative fair value richwood total fair value wds operating segment related goodwill amortization prior january 1 2002 goodwill included results discontinued operations assets discontinued operations respectively periods presented required april 2 2002 ply gem sold capital stock subsidiary hoover treated wood products inc “hoover” approximately 20000000 net cash proceeds recorded pretax gain approximately 5400000 second quarter 2002 prior sale ply gem operating results hoover previously included company’s segment reporting approximately 8500000 cash proceeds used pay outstanding debt company’s ply gem credit facility second quarter 2002 september 21 2001 ply gem sold capital stock peachtree doors windows inc “peachtree” sne enterprises inc “sne” approximately 45000000 cash recorded pretax loss sale approximately 34000000 third quarter 2001 including write approximately 11700000 unamortized intangible assets prior sale ply gem peachtree sne previously part wds portion cash proceeds used pay approximately 20500000 outstanding debt company’s ply gem credit facility interest allocated discontinued operations included interest expense net table approximately 23600000 net taxes approximately 13800000 800000 net taxes approximately 400000 26300000 net taxes approximately 15500000 26300000 net taxes approximately 15500000 periods january 10 2003 december 31 2003 january 1 2003 january 9 2003 years ended december 31 2002 2001 respectively sale ply gem richwood hoover sne peachtree related operating results excluded earnings loss continuing operations classified discontinued operations periods presented table follows presents summary results discontinued operations periods presented operating earnings loss discontinued operations net ply gem corporate expenses previously included within unallocated net company’s segment reporting operating earnings loss discontinued operations period january 10 2003 december 31 2003 include approximately 600000 severance costs associated closure certain manufacturing facilities operating earnings loss discontinued operations period january 10 2003 december 31 2003 also include approximately 1300000 costs expenses expanded distribution including new customers operating earnings loss discontinued operations year ended december 31 2001 include approximately 600000 direct expenses third party fees associated company’s strategic sourcing software systems development approximately 3200000 net death benefit insurance proceeds related life insurance maintained former managers previously included within unallocated company’s segment reporting operating earnings loss discontinued operations year ended december 31 2001 also include approximately 300000 manufacturing costs incurred connection startup vinyl fence decking facility previously included wds segment company’s segment reporting table follows presents breakdown major components assets liabilities discontinued operations december 31 2003 2002 11 operating segment information concentration credit risk company diversified manufacturer residential commercial building products organized within two principal operating segments residential building products segment air conditioning heating products segment individual subsidiary companies included company’s two principal operating segments based way chief operating decision maker manages business similarity products production processes customers expected longterm financial performance tables unallocated includes corporate related items intersegment eliminations certain income expense items allocated reportable segments residential building products segment manufactures distributes builtin products primarily residential new construction diy professional remodeling renovation markets principal products sold segment include kitchen range hoods exhaust fans bath fans fan heater light combination units indoor air quality products bath cabinets radio intercoms central vacuum systems air conditioning heating products segment principally manufactures sells heating ventilating air conditioning “hvac” systems customdesigned commercial applications manufactured sitebuilt residential housing february 12 2004 company sold ply gem subsidiary encompasses wds segment corporate costs ply gem formerly included unallocated net company’s segment reporting november 22 2002 company sold capital stock richwood april 2 2002 company sold capital stock hoover september 21 2001 company sold capital stock peachtree sne accordingly results ply gem previously wds segment hoover previously part segment richwood peachtree sne previously part wds segment prior sale ply gem excluded earnings continuing operations classified separately discontinued operations periods presented see notes 1 10 accordingly segment information presented excludes wds segment richwood hoover peachtree sne periods accounting policies segments described note 1 summary significant accounting policies company evaluates segment performance based operating earnings allocations corporate overhead costs intersegment net sales intersegment eliminations material periods presented income statement impact purchase accounting adjustments including goodwill intangible assets amortization reflected operating earnings applicable operating segment unallocated assets consist primarily cash equivalents marketable securities prepaid deferred income taxes deferred debt expense longterm restricted investments marketable securities summarized financial information company’s reportable segments presented tables follow periods presented see notes 1 2 13 14 respect restructuring charges certain income expense items affecting segment earnings loss following table presents summary activity goodwill continuing operations reporting segment period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 accordance sfas 141 sfas 142 company allocated effect recapitalization goodwill reportable segments see note 1 purchase accounting adjustments relate principally fair value revisions resulting completion final valuation assets liabilities adjustments deferred income taxes impact goodwill foreign net sales approximately 203 215 194 181 consolidated net sales period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 respectively foreign longlived assets approximately 92 153 152 144 consolidated longlived assets period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 years ended december 31 2002 2001 respectively foreign net sales attributed based location company’s subsidiary responsible sale required longlived assets exclude financial instruments deferred income taxes single customer accounts 10 consolidated net sales accounts receivable company operates internationally exposed market risks changes foreign exchange rates financial instruments potentially subject company concentrations credit risk consist principally temporary cash investments trade receivables company places temporary cash investments high credit quality financial institutions limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers comprising companys customer base dispersion across many different geographical regions december 31 2003 company significant concentrations credit risk 12 accrued expenses taxes net accrued expenses taxes net included current liabilities accompanying consolidated balance sheet consist following december 31 2003 2002 accrued expenses included longterm liabilities accompanying consolidated balance sheet consist following december 31 2003 2002 january 2003 connection recapitalization approximately 62000000 110474000 employee pension retirement benefit obligations noted table december 31 2002 settled see note 8 13 restructuring charges company records restructuring costs primarily connection operations acquired facility closings management plans eliminate order improve future operating results company fourth quarter 2002 company provided approximately 1000000 liabilities related restructuring closing costs certain subsidiaries within residential building products segment period january 10 2003 december 31 2003 company recognized restructuring charges primarily associated plant closings air conditioning segment within air conditioning heating products segment company second quarter 2003 initiated restructuring activities related closure two facilities st louis missouri order relocate operations facilities end first quarter 2004 approximately 293 employees terminated date approximately 159 additional employees expected terminated 2004 facilities currently support manufacturing warehousing distribution activities segment’s residential hvac products year ended december 31 2003 company provided approximately 5800000 cost goods sold related liabilities incurred result restructuring expects provide additional estimated 2400000 costs early 2004 facilities closed owned company expected sold 2004 following table sets forth restructuring activity accompanying consolidated statement operations periods presented costs included cost goods sold selling general administrative expenses accompanying consolidated statement operations company employee separation expenses comprised severance vacation outplacement retention bonus payments restructuring costs include expenses associated terminating contractual arrangements costs prepare facilities closure costs move equipment products facilities writeoffs related equipment sales disposals attributable restructuring occurred prior december 31 2002 14 income expense nine days ended january 9 2003 company incurred certain charges connection recapitalization charges follows period january 10 2003 december 31 2003 company recorded pretax charge continuing operations approximately 1400000 compensation expense related stock options issued employees officers directors accordance sfas 123 recorded compensation expense approximately 600000 fourth quarter 2003 connection issuance common stock operating results air conditioning heating products segment period january 10 2003 december 31 2003 include approximately 5800000 severance costs associated closure certain manufacturing facilities see note 13 operating results air conditioning heating products segment period january 10 2003 december 31 2003 also include approximately 1100000 expenses associated startup new manufacturing facility fourth quarter 2002 company provided approximately 1000000 liabilities related restructuring closing costs certain subsidiaries within residential building products segment second quarter 2002 approximately 4400000 charged operating earnings included selling general administrative expenses relating incentive earned certain nortek’s officers nortek’s 1999 equity performance plan addition discussed note 2 nortek recorded expenses approximately 6600000 year ended 2002 related fees expenses associated recapitalization nortek third quarter 2002 company incurred approximately 2100000 connection reaudit nortek’s consolidated financial statements three years period ended december 31 2001 see note 10 year ended december 31 2002 company incurred approximately 3700000 direct expenses third party fees associated company’s strategic sourcing software systems development recorded unallocated company’s segment reporting 2001 company incurred approximately 5500000 direct expenses third party fees associated company’s strategic sourcing software systems development recorded unallocated expense 2001 company expensed approximately 2700000 manufacturing costs incurred connection start residential air conditioning facility 2001 company also incurred certain duplicative net interest expense discussed note 6 also third quarter 2001 company recorded approximately 1700000 interest income resulting favorable abatement state income taxes abatement state income taxes significant effect overall annual effective income tax rate 2001 15 summarized quarterly financial data unaudited tables follow summarize unaudited quarterly financial data years ended december 31 2003 december 31 2002 1 first quarter ended april 5 2003 represents combined pre postrecapitalization periods january 1 2003 january 9 2003 january 10 2003 april 5 2003 respectively see notes 1 2 3 13 management’s discussion analysis financial condition results operations item 7 part ii report regarding certain quarterly transactions impact operating results table including dispositions financing activities new accounting pronouncements acquisitions sales volume material costs rationalization relocation manufacturing operations material procurement strategies weakness manufactured housing industry 16 subsequent events unaudited january 1 2004 february 3 2004 company purchased approximately 14800000 nortek’s 9 14 senior notes due 2007 “9 14 notes” approximately 10700000 nortek’s 9 18 senior notes due 2007 “9 18 notes” open market transactions purchases resulted pretax loss approximately 400000 recorded first quarter 2004 february 13 2004 company called redemption march 15 2004 nortek’s outstanding 9 14 notes approximately 160200000 principal amount called redemption march 14 2004 nortek’s outstanding 9 18 notes approximately 299300000 principal amount 9 14 notes 9 18 notes called redemption price 101542 103042 respectively principal amount thereof plus accrued unpaid interest 9 14 notes 9 18 notes ceased accrue interest respective redemption dates indicated company used estimated net tax proceeds sale ply gem approximately 450000000 together existing cash hand fund redemption 9 14 notes 9 18 notes february 13 2004 company called redemption march 14 2004 60000000 nortek’s outstanding 8 78 senior notes due 2008 “8 78 notes” march 1 2004 company called redemption march 31 2004 remaining 150000000 nortek’s outstanding 8 78 notes see 8 78 notes called redemption price 104438 principal amount thereof plus accrued unpaid interest march 1 2004 nortek completed sale 200000000 senior floating rate notes due 2010 “floating rate notes” floating rate notes bear interest rate per annum equal libor defined plus 3 417 march 1 2004 interest floating rate notes determined payable semiannually june 30 december 31 year commencing june 30 2004 nortek incurred fees expenses including initial purchaser’s discount approximately 4000000 connection sale amortized life floating rate notes floating rate notes unsecured obligations nortek mature december 31 2010 may redeemed whole part prior december 31 2010 redemption prices defined indenture governing floating rate notes “nortek indenture” nortek indenture contains covenants limit nortek’s ability engage certain transactions including incurring additional indebtedness paying dividends distributions terms floating rate notes require nortek register notes substantially identical terms “nortek exchange notes” sec part offer exchange freely tradable nortek exchange notes floating rate notes “nortek exchange” event nortek complete nortek exchange accordance timing requirements outlined indenture nortek may required pay higher interest rate nortek expects complete exchange within required time period approximately 60000000 principal amount 8 78 notes ceased accrue interest march 14 2004 approximately 150000000 principal amount notes cease accrue interest march 31 2004 company use net proceeds approximately 196000000 sale floating rate notes together existing cash hand fund redemption 8 78 notes company expects redemption 9 14 notes 9 18 notes 8 78 result pretax loss approximately 11500000 based upon difference respective redemption prices indicated estimated carrying values redemption dates 9 14 notes 9 18 notes 8 78 notes include principal amount redeemed estimated remaining unamortized premium recorded connection recapitalization see note 16 notes consolidated financial statements included elsewhere herein company record loss first quarter 2004 company’s pro forma interest expense year ended december 31 2003 would approximately 78300000 adjusting combined historical interest expense period january 1 2003 january 9 2003 period january 10 2003 december 31 2003 give effect redemption 9 14 notes 9 18 notes 8 78 notes sale floating rate notes sale senior discount notes occurred january 1 2003 table follows summary maturities company’s debt obligations including offerings redemptions discussed previous paragraphs excluding unamortized debt premiums company expects meet cash flow requirements debt payments retirements fiscal 2004 net proceeds sale ply gem february 2004 net proceeds sale senior floating rate notes february 2004 existing cash equivalents march 9 2004 company acquired omnimount systems inc “omnimount” approximately 16500000 cash omnimount manufacturer designer speaker mountings products maximize home theater experience net sales operating earnings depreciation amortization approximately 28300000 3500000 231000 respectively year ended december 31 2003 report independent auditors nortek holdings inc audited accompanying consolidated balance sheets nortek holdings inc delaware corporation subsidiaries december 31 2003 2002 related consolidated statements operations stockholders’ investment cash flows period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 two years period ended december 31 2002 audits also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion consolidated financial statements schedules based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position nortek holdings inc subsidiaries december 31 2003 2002 consolidated results operations cash flows period january 10 2003 december 31 2003 period january 1 2003 january 9 2003 two years period ended december 31 2002 conformity accounting principles generally accepted united states also opinion related financial statement schedules considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements 2003 company changed method accounting stockbased compensation pursuant adoption statement financial accounting standards 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 discussed note 1 consolidated financial statements 2002 company changed method accounting goodwill intangible assets pursuant adoption statement financial accounting standards 142 goodwill intangible assets ernst young llp boston massachusetts march 26 2004 nortek holdings inc parent company schedule condensed financial information registrant condensed balance sheet accompanying notes integral part condensed financial statements condensed statement operations accompanying notes integral part condensed financial statements condensed statement cash flows accompanying notes integral part condensed financial statements notes condensed financial statements december 31 2003 1 november 20 2002 nortek inc “nortek” reorganized holding company structure outstanding share capital stock company converted identical share capital stock nortek holdings inc “holdings” delaware corporation formed june 19 2002 holdings becoming successor public company nortek becoming whollyowned subsidiary holdings “holdings reorganization” june 19 2002 november 20 2002 holdings wholly owned subsidiary nortek operating cash flow activity prior holdings reorganization nortek registrant parent company filings required securities exchange commission “sec” december 31 2001 nortek met restricted net asset requirements sec rules regulations financial statement schedules accordingly nortek filed schedule condensed financial information registrant form 10k year ended december 31 2001 december 31 2003 2002 holdings also met restricted net asset requirements sec rules regulation require holdings file schedule condensed financial information registrant schedule condensed financial information registrant included form 10k provides parent company information periods subsequent holdings reorganization holdings became parent company required presented accordance sec rules regulations financial statement schedules nortek inc parent company schedule condensed financial information nortek inc cover required periods prior holdings reorganization included elsewhere form 10k incorporated herein reference accompanying condensed financial statements prepared accordance reduced disclosure requirements permitted form 10k part iv item 14 schedule condensed financial information registrant consolidated financial statements related notes nortek holdings inc included elsewhere form 10k part ii item 8 incorporated herein reference january 9 2003 holdings parent company nortek acquired kelso company lp “kelso” certain members nortek’s management accordance agreement plan recapitalization among nortek inc nortek holdings inc k holdings inc dated june 20 2002 amended “recapitalization agreement” transaction valued approximately 16 billion including assumption certain indebtedness “recapitalization” holdings accounted recapitalization purchase accordance provisions statement financial standards 141 “business combinations” resulted new valuation assets liabilities holdings subsidiaries based upon fair values date recapitalization refer notes 1 2 notes nortek holdings inc subsidiaries consolidated financial statements incorporated herein reference complete discussion recapitalization related purchase accounting recorded holdings 2 third quarter 2001 holdings adopted statement financial accounting standards 144 “accounting impairment disposal longlived assets” addresses financial accounting reporting impairment disposal longlived assets apply goodwill intangible assets amortized certain longlived assets required standard applied accounting standard january 1 2001 adoption accounting standard result material changes net earnings accounting standards previously applied adoption standard result accounting gain loss sale certain businesses related operating results discontinued operations presentation periods presented reclassified conform new standard february 12 2004 nortek sold subsidiary ply gem industries inc “ply gem” 2002 2001 nortek sold certain former subsidiaries ply gem sale former subsidiaries ply gem 2002 2001 related operating results together operating results ply gem excluded earnings loss continuing operations classified discontinued operations periods presented information pertaining ply gem subsidiaries included note 10 notes nortek holdings inc subsidiaries consolidated financial statements incorporated herein reference 3 november 24 2003 holdings completed sale 515000000 aggregate principal amount maturity approximately 349400000 gross proceeds 10 senior discount notes due may 15 2011 “senior discount notes” notes structurally subordinate debt liabilities holding’s subsidiaries issued sold private rule 144a offering institutional investors holdings used net proceeds offering pay dividend holders capital stock approximately 298474000 make capital contribution nortek 41000000 nortek used capital contribution together cash hand make approximately 41600000 distribution option holders holdings’ common stock accreted value 10 senior discount notes increase date issuance rate 10 per annum compounded semiannually accreted value equal principal amount maturity 515000000 november 15 2007 cash interest accrue 10 senior discount notes prior november 15 2007 thereafter cash interest accrue 10 per annum payable semiannually arrears may 15 november 15 year senior discount notes unsecured obligations holdings mature may 15 2011 may redeemed whole part redemption prices defined indenture governing senior discount notes “indenture” indenture contains covenants limit company’s ability engage certain transactions including incurring additional indebtedness paying dividends distributions terms senior discount notes require holdings register notes substantially identical terms “holdings exchange notes” securities exchange commission part offer exchange freely tradable holdings exchange notes senior discount notes “holdings exchange” event company complete holdings exchange accordance timing requirements outlined indenture company may required pay higher interest rate company expects complete holdings exchange within required time period see notes 1 6 notes nortek holdings inc subsidiaries consolidated financial statements incorporated herein reference march 1 2004 nortek completed sale 200000000 floating rate notes floating rate notes bear interest rate per annum equal libor defined plus 3 417 march 1 2004 interest floating rate notes determined payable semiannually june 30 december 31 year commencing june 30 2004 nortek incurred fees expenses including initial purchaser’s discount approximately 4000000 connection sale amortized life floating rate notes see notes 6 16 notes nortek holdings inc subsidiaries consolidated financial statements incorporated herein reference 2004 nortek various times either purchased open market called redemption nortek’s 8 78 senior notes due 2008 9 14 senior notes due 2007 9 18 senior notes due 2007 nortek used proceeds sale ply gem floating rates notes fund redemptions see notes 6 16 notes nortek holdings inc subsidiaries consolidated financial statements incorporated herein reference descriptions material contingencies significant provisions longterm debt obligations commitments holdings subsidiaries included notes 1 6 9 notes nortek holdings inc subsidiaries consolidated financial statements incorporated herein reference 4 december 31 2003 nortek holding’s subsidiaries principally nortek unrestricted cash investments marketable securities approximately 182349000 5 nortek holdings directly owned subsidiary holding’s subsidiaries either directly indirectly owned nortek result holdings ability receive cash nortek limited amount cash transfers dividends paid nortek restricted terms certain nortek’s indebtedness part recapitalization nortek declared distributed company dividend approximately 120000000 distributed approximately 27900000 reimbursement fees expenses kelso paid nortek’s unrestricted cash equivalents hand permissible restrictive covenants respect indentures nortek’s 8 78 senior notes due 2008 9 14 senior notes due 2007 9 18 senior notes due 2007 9 78 senior subordinated notes due 2011 “existing notes” march 26 2004 approximately 92300000 available payment cash dividends stock purchases restricted payments defined terms nortek’s restrictive indenture based upon redemption refinancing certain nortek’s existing notes fiscal 2004 see notes 6 16 notes nortek holdings inc subsidiaries consolidated financial statements incorporated herein reference 6 combined liabilities excluding deferred income taxes nortek’s subsidiaries december 31 2003 approximately 1516474000 consisting 987059000 short longterm debt prior redemption refinancing discussed 5 112764000 accounts payable 278968000 short longterm accruals taxes obligations approximately 142135000 classified shortterm 137683000 liabilities discontinued operations nortek holdings inc parent company schedule condensed financial information nortek inc condensed statement operations accompanying notes integral part condensed financial statements condensed statement cash flows accompanying notes integral part condensed financial statements notes condensed financial statements period january 1 2002 december 31 2002 1 november 20 2002 nortek inc “nortek” reorganized holding company structure outstanding share capital stock company converted identical share capital stock nortek holdings inc “holdings” delaware corporation formed 2002 holdings becoming successor public company nortek becoming whollyowned subsidiary holdings “holdings reorganization” prior holdings reorganization nortek registrant parent company filings required securities exchange commission “sec” december 31 2001 nortek met restricted net asset requirements sec rules regulations financial statement schedules accordingly nortek filed schedule condensed financial information registrant form 10k year ended december 31 2001 december 31 2003 2002 holdings also met restricted net assets requirements sec rules regulation require holdings file schedule condensed financial information registrant schedule condensed financial information nortek included form 10k statement provides parent company information periods prior holdings reorganization nortek parent company required presented form 10k accordance sec rules regulations financial statement schedules nortek holdings inc parent company schedule condensed financial information registrant cover required periods subsequent holdings reorganization included elsewhere form 10k incorporated herein reference accompanying condensed financial statements prepared accordance reduced disclosure requirements permitted form 10k part iv item 14 schedule condensed financial information registrant consolidated financial statements related notes nortek holdings inc included elsewhere form 10k part ii item 8 incorporated herein reference 2 third quarter 2001 nortek adopted statement financial accounting standards 144 “accounting impairment disposal longlived assets” addresses financial accounting reporting impairment disposal longlived assets apply goodwill intangible assets amortized certain longlived assets required standard applied accounting standard january 1 2001 adoption accounting standard result material changes net earnings accounting standards previously applied adoption standard result accounting gain loss sale certain businesses related operating results discontinued operations presentation periods presented reclassified conform new standard february 12 2004 nortek sold subsidiary ply gem industries inc “ply gem” 2002 2001 nortek sold certain former subsidiaries ply gem sale former subsidiaries ply gem 2002 2001 related operating results together operating results ply gem excluded earnings continuing operations classified discontinued operations periods presented information pertaining ply gem subsidiaries included note 10 notes nortek holdings inc subsidiaries consolidated financial statements incorporated herein reference 3 descriptions material contingencies significant provisions longterm debt obligations commitments nortek holdings included notes 1 6 9 notes nortek holdings inc subsidiaries consolidated financial statements incorporated herein reference 4 included interest expense accompanying condensed statement operations period january 1 2002 november 20 2002 year ended december 31 2001 approximately 6900000 3900000 respectively related notes payable subsidiary nortek bear interest rates ranging 8 10 interest expense allocated discontinued operations accompanying condensed statement operations period january 1 2002 november 20 2002 year ended december 31 2001 approximately 37800000 41800000 respectively 5 included registrant’s condensed statement cash flows year ended december 31 2001 net transfers subsidiaries principally cash noncash dividends declared subsidiaries’ board directors subsidiaries approximately 280000000 nortek holdings inc subsidiaries schedule ii valuation qualifying accounts amounts written net recoveries b including acquisitions exhibit index exhibits marked asterisk filed herewith remainder exhibits heretofore filed commission incorporated herein reference exhibits marked double asterisk identify management contract compensatory plan arrangement 21 agreement plan recapitalization dated june 20 2002 among nortek inc nortek holdings inc k holdings inc exhibit 2 nortek inc’s form 8k filed june 24 2002 22 amendment 1 agreement plan recapitalization dated september 16 2002 among nortek inc nortek holdings inc k holdings inc exhibit 2 nortek inc’s form 8k filed september 16 2002 23 agreement plan merger among nortek inc nortek holdings inc nortek holdings merger sub inc dated november 20 2002 exhibit 21 form 8k filed november 20 2002 24 amendment 2 agreement plan recapitalization dated november 20 2002 among nortek inc nortek holdings inc k holdings inc exhibit d13 nortek inc’s amendment 3 schedule 13e3 filed november 27 2002 25 amendment 3 agreement plan recapitalization dated december 4 2002 among nortek inc nortek holdings inc k holdings inc exhibit d15 amendment 4 schedule 13e3 filed december 4 2002 31 amended restated certificate incorporation nortek holdings inc 32 amended restated bylaws nortek holdings inc effective december 8 2003 41 indenture dated november 24 2003 nortek holdings inc us bank national association relating 10 senior discount notes due 2011 42 indenture dated june 12 2001 nortek inc state street bank trust company trustee relating 9 78 senior subordinated notes due 2011 exhibit 41 nortek inc’s registration statement 33364130 filed july 11 2001 43 indenture dated march 1 2004 nortek inc us bank national association trustee relating senior floating rate notes due 2010 exhibit 43 nortek inc’s form 10k filed march 302004 44 registration rights agreement dated november 24 2003 among nortek holdings inc deutsche bank securities inc ubs securities llc credit suisse first boston llc bear stearns co inc 45 registration rights agreement dated march 1 2004 among nortek inc deutsche bank securities inc fleet securities inc ubs securities llc exhibit 45 nortek inc’s form 10k filed march 302004 46 registration rights agreement dated january 9 2003 among nortek holdings inc nortek inc kelso investment associates vi lp kelso nortek investors llc kep vi llc third party investors management stockholders exhibit 48 nortek inc’s form 10k filed march 27 2003 91 voting agreement dated june 20 2002 among nortek inc k holdings inc richard l bready exhibit 9 nortek inc’s form 8k filed june 24 2002 101 change control severance benefit plan key employees adopted february 10 1986 form agreement employees exhibit 1019 nortek inc’s form 10k filed march 31 1986 102 change control severance benefit plan key employees amended restated june 12 1997 form agreement employees exhibit 101 nortek inc’s form 10q filed august 8 1997 103 form indemnification agreement nortek inc directors certain officers appendix c nortek inc’s proxy statement dated march 23 1987 annual meeting nortek stockholders 104 split dollar agreement dated june 29 1999 nortek inc douglass n ellis jr trustee richard l bready cheryl bready 1998 irrevocable trust together appendix prepared nortek inc exhibit 107 nortek inc’s form 10q filed august 11 2000 105 split dollar agreement dated june 29 1999 nortek inc almon c hall together appendix prepared nortek inc exhibit 108 nortek inc’s form 10q filed august 11 2000 106 split dollar agreement dated june 29 1999 nortek inc mark richard harris pamela jean harris trustees richard j carole harris 1999 irrevocable trust together appendix prepared nortek inc exhibit 109 nortek inc’s form 10q filed august 11 2000 107 exchange agreement dated june 20 2002 among nortek inc nortek holdings inc k holdings inc richard l bready exhibit 5 schedule 13da filed richard l bready june 24 2002 108 200000000 loan security agreement dated july 25 2002 among nortek inc certain subsidiaries certain banks fleet capital corporation individually administrative agent fleet capital canada corporation individually canadian agent exhibit 101 nortek inc’s form 10q filed august 13 2002 109 amendment 1 exchange agreement dated september 16 2002 among nortek inc nortek holdings inc k holdings inc richard l bready exhibit 2 schedule 13da filed richard l bready september 18 2002 1010 nortek inc nortek holdings inc richard l bready employment agreement dated january 9 2003 exhibit 1013 nortek inc’s form 10k filed march 27 2003 1011 nortek inc nortek holdings inc kevin w donnelly employment agreement dated january 9 2003 exhibit 1014 nortek inc’s form 10k filed march 27 2003 1012 nortek inc nortek holdings inc almon c hall iii employment agreement dated january 9 2003 exhibit 1015 nortek inc’s form 10k filed march 27 2003 1013 amendment 2 exchange agreement dated january 9 2003 among nortek inc nortek holdings inc k holdings inc richard l bready exhibit 106 nortek inc’s form 10k filed march 27 2003 1014 equity subscription agreement dated january 9 2003 nortek holdings inc nortek inc rgip llc exhibit 1017 form 10k filed march 27 2003 1015 equity subscription agreement dated january 9 2003 nortek holdings inc nortek inc magnetitte asset investors iii llc exhibit 1018 nortek inc’s form 10k filed march 27 2003 1016 equity subscription agreement dated january 9 2003 nortek holdings inc nortek inc daroth investors llc exhibit 1019 nortek inc’s form 10k filed march 27 2003 1017 stockholders agreement dated january 9 2003 among nortek holdings inc nortek inc kelso investment associates vi lp kelso nortek investors llc kep vi llc third party investors management stockholders exhibit 1020 nortek inc’s form 10k filed march 27 2003 1018 nortek holdings inc 2002 stock option plan exhibit 109 nortek inc’s form 10q filed may 19 2003 1019 equity subscription agreement dated july 11 2003 nortek holdings inc jeremy burkhardt 1020 equity subscription agreement dated october 31 2003 among nortek holdings inc jeffery c bloomberg jeffrey c bloomberg trustee jeffrey c bloomberg family trust 1021 amendment no1 credit agreement dated february 12 2004 among nortek inc certain subsidiaries certain banks fleet capital corporate individually administrative agent fleet capital canada corporation individually canadian agent exhibit 1021 nortek inc’s form 10k filed march 30 2004 1022 amendment 2 credit agreement dated february 20 2004 among nortek inc certain subsidiaries certain banks fleet capital corporate individually administrative agent fleet capital canada corporation individually canadian agent exhibit 1022 nortek inc’s form 10k filed march 30 2004 1023 nortek inc supplement executive retirement plan c dated december 18 2003 exhibit 1023 nortek inc’s form 10k filed march 30 2004 141 code ethics 161 letter nortek inc’s former independent accountant regarding concurrence disagreement statements made nortek inc current report concerning resignation dismissal nortek inc’s principal accounts exhibit 16 nortek inc’s form 8k filed june 28 2002 211 list subsidiaries 311 certificate chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certificate chief financial officer pursuant section 302 sarbanesoxley act 2002nan