UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
                (Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended April 1, 2006

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 333-126389

NTK Holdings, Inc.
(exact name of registrant as specified in its charter)
   
 
Delaware
20-1934298
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
   
50 Kennedy Plaza
Providence, Rhode Island
 
02903-2360
(Address of principal executive offices)
(zip code)
   
Registrant’s Telephone Number, Including Area Code:
(401) 751-1600
 
Securities registered pursuant to Section 12(b) of the Act: None



Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. 
Yes [_] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated file” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer [_]
Accelerated Filer [_]
Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]

The aggregate market value of voting stock held by non-affiliates is zero.

The number of shares of Common Stock outstanding as of May 5, 2006 was 3,000.


 
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)

   
April 1,
 
December 31,
 
 
 
2006
 
2005
  
Assets
          
Current Assets:
          
Cash and cash equivalents
  
$
70,158
  
$
77,175
  
Accounts receivable, less allowances of $6,694 and $6,582
    
302,931
   
272,191
 
Inventories:
              
    Raw materials
   
77,762
   
75,159
 
    Work in process
   
24,309
   
21,400
 
    Finished goods
   
153,748
   
145,753
 
     
255,819
   
242,312
 
               
Prepaid expenses
   
11,167
   
10,510
 
Other current assets
   
26,610
   
26,329
 
Prepaid income taxes
   
15,890
   
20,955
 
    Total current assets
   
682,575
   
649,472
 
               
Property and Equipment, at Cost:
              
Land
   
10,536
   
8,784
 
Buildings and improvements
   
88,780
   
84,310
 
Machinery and equipment
   
148,758
   
141,112
 
     
248,074
   
234,206
 
Less accumulated depreciation
   
36,680
   
28,717
 
    Total property and equipment, net
   
211,394
   
205,489
 
               
Other Assets:
              
Goodwill
   
1,379,115
   
1,381,350
 
Intangible assets, less accumulated amortization of $31,581 and $27,328
    
114,593
   
114,474
 
Deferred debt expense
   
40,699
   
42,098
 
Restricted investments and marketable securities
    
4,018
   
4,015
 
Other assets
    
7,564
   
7,711
 
     
1,545,989
   
1,549,648
 
   
$
2,439,958
  
$
2,404,609
  
Liabilities and Stockholder’s Investment
              
               
Current Liabilities:
              
Notes payable and other short-term obligations
 
$
5,714
  
$
4,915
  
Current maturities of long-term debt
   
18,246
   
14,786
 
Accounts payable
   
180,533
   
159,015
 
Accrued expenses and taxes, net
   
168,712
   
187,183
 
    Total current liabilities
   
373,205
   
365,899
 
               
Other Liabilities:
              
Deferred income taxes
   
2,661
   
4,119
 
Other
   
218,426
   
215,388
 
     
221,087
   
219,507
 
               
Notes, Mortgage Notes and Obligations Payable, Less Current Maturities 
    
1,636,714
   
1,628,677
 
               
Stockholder’s Investment:
              
Common stock, $0.01 par value, authorized 3,000 shares;
              
    3,000 issued and outstanding at April 1, 2006 and December 31, 2005
    
---
   
---
 
Additional paid-in capital
   
130,264
   
130,181
 
Retained earnings
    
70,600
   
52,800
 
Accumulated other comprehensive income
    
8,088
   
7,545
 
     Total stockholder's investment
   
208,952
   
190,526
 
Total Liabilities and Stockholder's Investment:
  
$
2,439,958
  
$
2,404,609
  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 
 
 
For the three months ended
 
 
 
April 1, 2006
 
April 2, 2005
 
 
 
(Dollar amounts in thousands)
  
           
Net Sales 
  
$
534,542
  
$
434,118
  
               
Costs and Expenses:
              
    Cost of products sold
   
370,468
   
309,459
 
    Selling, general and administrative expense
   
95,337
   
79,588
 
    Amortization of intangible assets
   
4,221
   
4,333
 
     
470,026
   
393,380
 
Operating earnings
    
64,516
   
40,738
 
Interest expense
   
(36,124
)
  
(37,184
)
Investment income
   
708
   
446
 
Earnings before provision for income taxes
    
29,100
   
4,000
 
Provision for income taxes
   
11,300
   
1,700
 
Net earnings
  
$
17,800
  
$
2,300
  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

   
For the three months ended
 
 
 
April 1, 2006
 
April 2, 2005
 
 
 
(Dollar amounts in thousands)
 
Cash Flows from operating activities:
          
Net earnings
  
$
17,800
  
$
2,300
  
               
Adjustments to reconcile net earnings to net cash used in operating activities:
              
Depreciation and amortization expense, including amortization of purchase price allocated to inventory
   
12,250
   
11,615
 
Non-cash interest expense, net
   
8,705
   
6,064
 
Non-cash stock-based compensation expense
    
83
   
79
 
Loss (gain) on sale of fixed assets
    
134
   
(280
)
Deferred federal income tax provision
   
3,500
   
1,100
 
Changes in certain assets and liabilities, net of effects from acquisitions and dispositions:
              
Accounts receivable, net
   
(23,400
)
  
(17,313
)
Inventories
   
(10,183
)
  
(17,036
)
Prepaids and other current assets
   
775
   
612
 
Accounts payable
   
16,934
   
21,793
 
Accrued expenses and taxes
   
(16,617
)
  
(31,520
)
Long-term deferred compensation
    
755
   
(57,737
)
Long-term assets, liabilities and other, net
   
(696
)
  
4,395
 
    Total adjustments to net earnings
    
(7,760
)
  
(78,228
)
    Net cash provided by (used in) operating activities
   
10,040
   
(75,928
)
Cash Flows from investing activities:
              
Capital expenditures
   
(12,106
)
  
(3,683
)
Net cash paid for businesses acquired
   
(7,900
)
  
---
 
Proceeds from the sale of property and equipment
    
129
   
5,830
 
Change in restricted cash and marketable securities
    
(3
)
  
---
 
Other, net
   
(1,455
)
  
(399
)
    Net cash (used in) provided by investing activities
   
(21,335
)
  
1,748
 
Cash Flows from financing activities:
              
Increase in borrowings
    
9,362
   
3,501
 
Payment of borrowings
    
(5,030
)
  
(6,595
)
Sale of 10 3/4% Senior Discount Notes
    
---
   
244,708
 
Dividend to THL-Nortek Investors, LLC
    
---
   
(186,971
)
Other, net
   
(54
)
  
(207
)
    Net cash provided by financing activities
   
4,278
   
54,436
 
Net decrease in unrestricted cash and cash equivalents
    
(7,017
)
  
(19,744
)
Unrestricted cash and cash equivalents at the beginning of the period
   
77,175
   
94,955
 
Unrestricted cash and cash equivalents at the end of the period
  
$
70,158
  
$
75,211
  
               
Supplemental disclosure of cash flow information:
              
               
Interest paid
 
$
39,791
  
$
44,630
  
               
Income taxes paid, net
 
$
2,390
  
$
6,106
  
               
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT
FOR THE THREE MONTHS ENDED APRIL 2, 2005
(Dollar amounts in thousands)

 
 
 
 
(Accumulated
 
Accumulated
 
 
 
 
 
Additional
 
Deficit)
 
Other
 
 
 
 
 
Paid in
 
Retained
 
Comprehensive
 
Comprehensive
 
 
 
Capital
 
Earnings
 
Income (Loss)
 
Income (Loss)
  
                   
Balance, December 31, 2004
  
$
316,823
  
$
(4,100
)
$
9,065
  
$
---
  
Net earnings
    
---
   
2,300
   
---
   
2,300
 
Other comprehensive income (loss):
                          
    Currency translation adjustment
    
---
   
---
   
(2,243
)
  
(2,243
)
    Unrealized decline in the fair value of marketable securities
    
---
   
---
   
(6
)
  
(6
)
Comprehensive income
                    
$
51
  
Dividend to THL-Nortek Investors, LLC
    
(186,971
)
  
---
   
---
       
Stock-based compensation
    
79
   
---
   
---
       
Balance, April 2, 2005
  
$
129,931
  
$
(1,800
)
$
6,816
        
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT
FOR THE THREE MONTHS ENDED APRIL 1, 2006
(Dollar amounts in thousands)

   
 
 
 
 
Accumulated
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
 
Paid in
 
Retained
 
Comprehensive
 
Comprehensive
 
 
 
Capital
 
Earnings
 
Income
 
Income
  
                   
Balance, December 31, 2005
  
$
130,181
  
$
52,800
  
$
7,545
  
$
---
  
Net earnings
    
---
   
17,800
   
---
   
17,800
 
Other comprehensive income:
                          
    Currency translation adjustment
    
---
   
---
   
543
   
543
 
Comprehensive income
                    
$
18,343
  
Stock-based compensation
    
83
   
---
   
---
       
Balance, April 1, 2006
  
$
130,264
  
$
70,600
  
$
8,088
        
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
NTK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2006 AND APRIL 2, 2005
(A)        NTK Holdings, Inc. (the “Company” or “NTK Holdings”) is a Delaware corporation that was formed to hold the capital stock of Nortek Holdings, Inc. (“Nortek Holdings”). NTK Holdings became the parent company of Nortek Holdings on February 10, 2005. The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”), for periods prior to February 10, 2005, reflect the financial position, results of operations and cash flows of Nortek Holdings and all of its wholly-owned subsidiaries and from February 10, 2005, reflect the financial position, results of operations and cash flows of NTK Holdings.

The Unaudited Financial Statements include the accounts of Nortek Holdings and NTK Holdings, as appropriate, and all of their wholly-owned subsidiaries, after elimination of intercompany accounts and transactions, without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted, the Company believes that the disclosures included are adequate to make the information presented not misleading. Certain amounts in the prior year’s Unaudited Financial Statements have been reclassified to conform to the current year presentation. It is suggested that these Unaudited Financial Statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s latest annual report on Form 10-K and its latest Current Reports on Form 8-K as filed with the Securities and Exchange Commission (“SEC”).

On May 5, 2006, the Company filed a registration statement on Form S-1 with the SEC for an initial public offering of shares of its common stock (the “Offering”) (see Note J).

Stock-Based Compensation of Employees, Officers and Directors

In connection with the acquisition of Nortek, Inc. by affiliates of Thomas H. Lee Partners, L.P. (the “THL Transaction”) on August 27, 2004, certain employees and consultants received approximately 21,184 C-1 units and approximately 42,368 C-2 units, which represent equity interests in THL-Nortek Investors, LLC (“Investors LLC”) that function similar to stock awards. Since the initial distribution of the C-1 and C-2 Units on August 27, 2004, approximately 1,994 and 3,949 additional C-1 Units and C-2 Units, respectively, have been granted to certain of the Company’s officers and employees, net of forfeitures. The C-1 units vest pro rata on a quarterly basis over a three-year period and approximately 10,959 and 9,065 were vested at April 1, 2006 and December 31, 2005, respectively. The total fair value of the C-1 units is approximately $1,100,000. Approximately $544,000 remains to be amortized at April 1, 2006. The C-2 units only vest in the event that certain performance-based criteria, as defined, are met. As of April 1, 2006 and December 31, 2005, there was approximately $1,600,000 of unamortized stock-based employee compensation with respect to the C-2 units, which will be amortized in the event that it becomes probable that the C-2 units or any portion thereof will vest. The C-1 and C-2 units were valued using the Black-Scholes option pricing model to determine the freely-traded call option value based upon information from comparable public companies, which was then adjusted to reflect the discount period, the minority interest factor and the lack of marketability factor to arrive at the final valuations.

Prior to January 1, 2006, the Company used the fair value method of accounting for stock-based employee compensation in accordance with Statement of Financial Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”).

Under SFAS No. 123R, the Company adopted the modified-prospective transition method of accounting for stock-based compensation. Under the modified-prospective transition method, the Company is required to recognize compensation cost for share-based payments to employees based on their grant-date fair value beginning January 1, 2006. Measurement and attribution of compensation cost for awards that were granted prior to, but not vested as of the date SFAS No. 123R was adopted are based on the same estimate of the grant-date fair value and the same attribution method used previously under SFAS No. 123.

The adoption of SFAS No. 123R did not have a material impact on the Company’s financial position or results of operations.

The Company recorded stock-based compensation charges in selling, general and administrative expense of approximately $100,000 for each of the three months ended April 1, 2006 and April 2, 2005, respectively, in accordance with SFAS No. 123 and SFAS No. 123R. A portion of this expense has been allocated to the Company’s reporting segments for all periods presented (see Note E) and a portion has been recorded in Unallocated.

Deferred Compensation

In connection with the THL Transaction on August 27, 2004, certain members of Nortek’s management, including certain of the Company’s executive officers, became participants in a newly adopted deferred compensation plan of Nortek Holdings. These management participants, who would have been entitled to receive cash payments upon consummation of the THL Transaction in respect of all options previously granted to them under the former Nortek Holdings, Inc. 2002 Stock Option Plan, instead sold a portion of those options to THL Buildco and surrendered the remainder of the options held by them for cancellation without immediate payment. In consideration for option cancellations without immediate payment, Nortek Holdings established this deferred compensation plan and credited for the account of each of these management participants under the plan a notional amount equal to the value of the old stock options so cancelled. For purposes of the plan, the value of the stock options cancelled equaled the excess of the value of the stock underlying the options at the time of the THL Transaction over the aggregate exercise price of the options. The plan is a non-qualified, unfunded obligation of Nortek Holdings. Distributions to participants under the plan will track proportionate distributions to those made to the Class A units of Investors LLC. The maximum aggregate amount of distributions that are payable to any participant under the plan equals the total value of the stock options surrendered by the participant for cancellation without payment, or an aggregate amount of approximately $111,800,000 for all participants. On February 18, 2005, Nortek Holdings made a distribution to the participants of its deferred compensation plan in the amount of approximately $57,700,000 (see Notes B and J).

At April 1, 2006 and December 31, 2005, other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet include approximately $49,774,000 and $49,019,000 related to this deferred compensation plan and is net of unamortized discount of approximately $4,300,000 and $5,000,000, respectively (see Note B).

In connection with accounting for the purchase price for the Acquisition, the Company recorded a deferred tax benefit of approximately $32,550,000 representing the tax benefit related to the deferred compensation plan of Nortek Holdings. At April 1, 2006 and December 31, 2005, the remaining deferred tax benefit was approximately $17,724,000 and $17,460,000, which is included in deferred income taxes in the accompanying unaudited condensed consolidated balance sheet.
 
Goodwill

The following table presents a summary of the activity in goodwill for the three months ended April 1, 2006 and for the year ended December 31, 2005:

   
    (Dollar amounts in thousands)
  
       
Balance as of December 31, 2004
$
1,295,105
  
Acquisitions during the year ended December 31, 2005
  
91,881
  
Purchase accounting adjustments
  
(4,831
)
Impact of foreign currency translation
  
(805
)
Balance as of December 31, 2005
  
1,381,350
  
Acquisitions during the three months ended April 1, 2006
  
861
  
Purchase accounting adjustments
  
(3,118
)
Impact of foreign currency translation
  
22
  
Balance as of April 1, 2006
$
1,379,115
  

 
The Company has classified as goodwill the cost in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions (see Note C). Approximately $100,000 and $56,100,000 of goodwill associated with certain companies acquired during the three months ended April 1, 2006 and the year ended December 31, 2005, respectively, will be deductible for income tax purposes. Purchase accounting adjustments relate principally to final revisions resulting from the completion of fair value adjustments and adjustments to deferred income taxes that impact goodwill.

(B)
On February 15, 2005, the Company completed the sale of $403,000,000 aggregate principal amount at maturity ($250,408,080 gross proceeds) of its 10 3/4% Senior Discount Notes due March 1, 2014 (the “10 3/4% Senior Discount Notes”). The 10 3/4% Senior Discount Notes are structurally subordinate to all debt and liabilities of the Company’s subsidiaries, including Nortek Holdings and Nortek.

The accreted value of the 10 3/4% Senior Discount Notes will increase from the date of issuance at a rate of 10 3/4% per annum compounded semi-annually such that the accreted value would, if no prior redemptions are made, equal the principal amount of $403,000,000 in September 2009. The carrying value of the 10 3/4% Senior Discount Notes was approximately $281,849,000 and $274,597,000 at April 1, 2006 and December 31, 2005, respectively.

No cash interest will accrue on the 10 3/4% Senior Discount Notes prior to September 1, 2009 and, thereafter, cash interest will accrue at 10 3/4% per annum payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2010, until maturity. The 10 3/4% Senior Discount Notes are unsecured obligations of the Company, which mature on March 1, 2014, and may be redeemed in whole or in part at the redemption prices as defined in the indenture governing the 10 3/4% Senior Discount Notes (the “Indenture”). The Indenture contains covenants that limit the Company’s ability to engage in certain transactions, including incurring additional indebtedness and paying dividends or distributions.

The sale of the 10 3/4% Senior Discount Notes was used to pay a dividend of approximately $187,000,000 to its sole stockholder, Investors LLC. In turn, Investors LLC authorized a distribution of approximately $187,000,000 to the holders of its Class A membership interests, including affiliates of Thomas H. Lee Partners, L.P. and certain members of the Company’s management. In addition, on February 18, 2005, NTK Holdings contributed approximately $57,700,000 to Nortek Holdings for the purpose of making payments under the Nortek Holdings, Inc. Deferred Compensation Plan, which resulted in additional expense of approximately $8,200,000, which the Company has included in interest expense in the accompanying unaudited condensed consolidated statement of operations for the three months ended April 2, 2005. All payments related to this contribution were made by Nortek Holdings, Inc.

As of April 1, 2006, there was approximately $205,000,000 available for the payment of cash dividends, stock purchases or other restricted payments (“Restricted Payments”) by the Company as defined under the terms of the Company’s 10 3/4% Senior Discount Notes’ indenture. Subsequent to the transaction discussed below, there will be approximately $2,000,000 available for Restricted Payments by the Company as defined under the terms of the Company’s 10 3/4% Senior Discount Notes’ indenture. Restricted Payments to NTK Holdings and Nortek Holdings from Nortek are limited by the terms of Nortek’s most restrictive loan agreement, Nortek’s Senior Secured Credit Facility. The amount available for such payments under Nortek’s Senior Secured Credit Facility was approximately $150,700,000 at April 1, 2006 and subsequent to the transaction discussed below, the amount available for such payments under Nortek’s Senior Secured Credit Facility is expected to be approximately $122,700,000.

Prior to the completion of the Offering, NTK Holdings is planning on entering into a senior unsecured loan facility which will provide for borrowings in an aggregate principal amount of $205,000,000. The proceeds of these borrowings, which will only be available in one drawing, will be utilized to (1) make a cash dividend of approximately $174,900,000 to Investors LLC which, in turn, will make a distribution to the holders of its Class A and Class B membership interests, including affiliates of Thomas H. Lee Partners, L.P. and certain members of the Company’s management, (2) together with cash on hand at Nortek, make a distribution of approximately $54,000,000 to participants under the 2004 Nortek Holdings, Inc. Deferred Compensation Plan (including certain of the Company’s executive officers) and (3) pay related fees and expenses. Following these distributions, the holders of the Class A membership interests in Investors LLC and the participants in the 2004 Nortek Holdings, Inc. Deferred Compensation Plan will not be entitled to any further distributions (see Note J).

(C)       On February 22, 2006, the Company, through its wholly-owned subsidiary, Linear LLC (“Linear”), acquired the assets and certain liabilities of Furman Sound, Inc. (“Furman”) for approximately $3,300,000. Furman is located in Petaluma, CA and designs and sells audio and video signal processors, as well as, innovative AC power conditioning and distribution products.

On January 25, 2006, the Company, through its wholly-owned subsidiary, Mammoth China Ltd. (“Mammoth China”), increased its ownership interests in Mammoth (Zhejiang) EG Air Conditioning Ltd. (“MEG”) and Shanghai Mammoth Air Conditioning Co., Ltd. (“MSH”) to sixty-percent for approximately $2,400,000. The majority ownership transaction relating to MSH is still in the process of being finalized with the Chinese authorities. Prior to January 25, 2006, Mammoth China had a forty-percent minority interest in MEG and a fifty-percent interest in MSH.

On December 9, 2005, the Company, through Linear, acquired the stock of GTO, Inc. (“GTO”) for approximately $28,200,000 in cash, plus contingent consideration of approximately $100,000 which was paid in the first quarter of 2006. GTO is located in Tallahassee, FL and designs, manufactures and sells automatic electric gate openers and access control devices to enhance the security and convenience of both residential and commercial property fences.

On August 26, 2005, the Company, through its wholly-owned subsidiary, Elan Home Systems, LLC (“Elan”), acquired the assets and certain liabilities of Sunfire Corporation (“Sunfire”) for approximately $4,000,000 (utilizing approximately $3,500,000 of cash and issuing an unsecured subordinated promissory note in the amount of approximately $500,000) plus contingent consideration, which may be payable in future years. Sunfire is located in Snohomish, WA and sells and designs home audio and home cinema amplifiers, receivers and subwoofers.

On August 8, 2005, the Company, through its wholly-owned subsidiary, Nortek (UK) Limited, acquired the stock of Imerge Limited (“Imerge”) for approximately $6,100,000 in cash plus contingent consideration, which may be payable in future years. Imerge is located in Cambridge, United Kingdom and designs, manufactures and sells hard disk media players and multi-room audio servers.

On July 15, 2005, the Company, through Linear, acquired the assets and certain liabilities of Niles Audio Corporation (“Niles”) for approximately $77,700,000. In connection with the acquisition of Niles, the Company utilized approximately $67,700,000 of cash and issued an unsecured promissory note in the amount of approximately $10,000,000. Niles is located in Miami, FL and sells and designs products that provide customers with innovative solutions for whole-house distribution and integration of audio and video systems, including speakers, receivers, amplifiers, automation devices, controls and accessories.

On June 13, 2005, the Company, through its wholly-owned subsidiary Nordyne Inc. (“Nordyne”), acquired the assets and certain liabilities of International Marketing Supply, Inc. (“IMS”) for approximately $4,600,000, utilizing approximately $4,100,000 of cash and issuing an unsecured promissory note in the amount of approximately $500,000. IMS is located in Miami, FL and sells heating, ventilation and air conditioning equipment to customers in Latin America.

On April 26, 2005, the Company, through Linear, acquired the stock of Panamax for approximately $11,800,000 (utilizing approximately $9,550,000 of cash and issuing an unsecured promissory note in the amount of approximately $2,250,000) plus contingent consideration of approximately $4,500,000 which was paid in the first quarter of 2006. Panamax is located in Petaluma, CA and sells and designs innovative power conditioning and surge protection products that prevent loss or damage of home and small business equipment due to power disturbances.

Acquisitions contributed approximately $31,500,000, $700,000 and $1,200,000 to net sales, operating earnings and depreciation and amortization expense, respectively, for the three months ended April 1, 2006. With the exception of IMS, which is included in the Air Conditioning and Heating Products Segment, all acquisitions are included in the Home Technology Products Segment in the Company’s segment reporting (see Note E).

During each of the three months ended April 1, 2006 and April 2, 2005, the Company recorded approximately $100,000, respectively, of amortization of excess purchase price allocated to inventory related to the acquisitions noted above as a non-cash charge to cost of goods sold.

On April 14, 2006, the Company, through two newly formed subsidiaries of its Air Conditioning and Heating Products Segment, acquired the assets and certain liabilities of Huntair, Inc. (“Huntair”) and Cleanpak International, LLC (“Cleanpak”), for a combined initial purchase price of approximately $48,000,000 (utilizing approximately $40,000,000 of cash borrowed under Nortek’s revolving credit facility, including approximately $2,000,000 to fund Huntair and Cleanpak’s initial working capital needs, all of which remains outstanding at May 5, 2006, and issuing unsecured 6% subordinated notes totaling $10,000,000 due April 2008) plus contingent consideration. Both Huntair and Cleanpak are located near Portland, OR and manufacture, market and distribute custom air handlers and related products for commercial and cleanroom applications.

The estimated total potential amount of contingent consideration that may be paid in the future for these acquisitions is approximately $40,500,000.

Acquisitions are accounted for as purchases and accordingly have been included in the Company’s consolidated results of operations since the acquisition date. For recent acquisitions, the Company has made preliminary estimates of the fair value of the assets and liabilities of the acquired companies, including intangible assets and property and equipment, as of the date of acquisition, utilizing information available at the time that the Company’s Unaudited Financial Statements were prepared and these estimates are subject to refinement until all pertinent information has been obtained. The Company is in the process of obtaining appraisals of intangible assets and property and equipment and finalizing the integration plans for certain of the acquired companies, which are expected to be completed by the end of 2006.

Pro forma results related to these acquisitions have not been presented, as the effect is not significant to the Company’s consolidated operating results.

(D)        Operating results for the three months ended April 1, 2006 include a non-cash foreign exchange gain of approximately $100,000 and the operating results for the three months ended April 2, 2005 include a non-cash foreign exchange loss of approximately $500,000 related to intercompany debt not indefinitely invested in the Company’s subsidiaries.

Operating results for the three months ended April 2, 2005 includes a gain of approximately $1,400,000 from the settlement of certain obligations of former subsidiaries (see Note G).

During each of the three months ended April 1, 2006 and April 2, 2005 the Company recorded a pre-tax charge to operations of approximately $100,000, respectively, for compensation expense in accordance with SFAS No. 123R and SFAS No. 123, respectively, (see Note A).

The Company has a management agreement with an affiliate of Thomas H. Lee Partners, L.P. providing for certain financial and strategic advisory and consultancy services. Nortek expensed approximately $600,000 and $500,000 for the three months ended April 1, 2006 and April 2, 2005, respectively, related to this management agreement in the accompanying Unaudited Condensed Consolidated Statement of Operations.

(E)       The Company is a leading diversified manufacturer of innovative, branded residential and commercial products, which is organized within three reporting segments: the Residential Ventilation Products Segment, the Home Technology Products Segment and the Air Conditioning and Heating Products Segment. The Air Conditioning and Heating Products Segment combines the results of the Company’s residential and commercial heating, ventilating and air conditioning (“HVAC”) businesses. In the tables below, Unallocated includes corporate related items, intersegment eliminations and certain income and expense items not allocated to reportable segments.

The Company evaluates segment performance based on operating earnings before allocations of corporate overhead costs. Intersegment net sales and intersegment eliminations were not material for any of the periods presented. The financial statement impact of all purchase accounting adjustments, including intangible asset amortization and goodwill, is reflected in the applicable operating segment, which are the Company’s reporting units.

During 2005, the Company changed the composition of its reporting segments to reflect the Home Technology Products Segment separately. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company has restated prior period segment disclosures to conform to the new composition.
 
Unaudited net sales, operating earnings and pre-tax earnings for the Company’s segments for the three months ended April 1, 2006 and April 2, 2005 were as follows:

 
 
For the three months ended
 
 
 
April 1, 2006
 
April 2, 2005
 
 
 
(Dollar amounts in thousands)
  
           
Net sales:
          
Residential ventilation products
  
$
211,663
  
$
197,133
  
Home technology products
    
107,504
   
63,891
 
Air conditioning and heating products
    
215,375
   
173,094
 
    Consolidated net sales
  
$
534,542
  
$
434,118
  
               
Operating earnings:
              
Residential ventilation products (1)
  
$
36,056
  
$
26,853
  
Home technology products
    
17,307
   
10,840
 
Air conditioning and heating products
    
17,933
   
7,339
 
    Subtotal
    
71,296
   
45,032
 
Unallocated:
              
Stock-based compensation charges
    
(100
)
  
(100
)
Foreign exchange gain (loss) on intercompany debt
    
100
   
(100
)
Gain on legal settlement
    
---
   
1,400
 
Unallocated, net
    
(6,780
)
  
(5,494
)
    Consolidated operating earnings
    
64,516
   
40,738
 
Interest expense
    
(36,124
)
  
(37,184
)
Investment income
    
708
   
446
 
    Earnings before provision for income taxes
  
$
29,100
  
$
4,000
  
 
 
(1)
The operating results of the Residential Ventilation Products Segment for the three months ended April 2, 2005 include a non-cash foreign exchange loss of approximately $400,000 related to intercompany debt not indefinitely invested in the Company’s subsidiaries.

 
Unaudited depreciation expense, amortization of intangible assets and purchase price allocated to inventory and capital expenditures for the Company’s segments for the periods presented below were as follows:

   
For the three months ended
  
   
April 1, 2006
  
April 2, 2005
  
   
(Dollar amounts in thousands)
  
Depreciation Expense:
          
Residential ventilation products
  
$
3,180
  
$
2,934
  
Home technology products
    
890
   
494
 
Air conditioning and heating products
    
3,681
   
3,198
 
Other
    
172
   
225
 
    Consolidated depreciation expense
  
$
7,923
  
$
6,851
  
               
Amortization expense:
              
Residential ventilation products
  
$
1,507
  
$
1,940
  
Home technology products (1)
    
2,104
   
1,896
 
Air conditioning and heating products
    
591
   
803
 
Other
    
125
   
125
 
    Consolidated amortization expense
 
$
4,327
  
$
4,764
  
               
Capital Expenditures:
              
Residential ventilation products
  
$
4,635
  
$
1,934
  
Home technology products
    
1,892
   
513
 
Air conditioning and heating products
    
5,456
   
2,881
 
Other
    
123
   
237
 
    Consolidated capital expenditures
  
$
12,106
  
$
5,565
  
 
(1)  Includes amortization of approximately $100,000 and $400,000 for the three months ended April 1, 2006 and April 2, 2005, respectively, of excess purchase price allocated to inventory recorded as a non-cash charge to cost of products sold.

As noted above, during the fourth quarter of 2005 the Company changed the composition of its reporting segments. Segment information for the second and third quarter of 2005 have been restated and are presented below:
 
   
For the three months ended
  
 
  
July 2, 2005
  
October 1, 2005
  
Net sales:
  
(Dollar amounts in thousands)
  
Residential ventilation products
  
$
202,501
  
$
198,479
  
Home technology products
    
76,427
   
100,598
 
Air conditioning and heating products
    
219,932
   
223,789
 
    Consolidated net sales
  
$
498,860
  
$
522,866
  
               
Operating earnings:
              
Residential ventilation products
  
$
30,978
  
$
30,784
  
Home technology products
    
14,968
   
20,589
 
Air conditioning and heating products
    
20,434
   
22,154
 
    Subtotal
    
66,380
   
73,527
 
Unallocated:
              
Stock-based compensation charges
    
(100
)
  
(100
)
Foreign exchange loss on intercompany debt
    
(200
)
  
---
 
Unallocated, net
    
(7,101
)
  
(5,959
)
    Consolidated operating earnings
    
58,979
   
67,468
 
Interest expense
    
(32,741
)
  
(34,332
)
Investment income
    
362
   
264
 
    Earnings before provision for income taxes
  
$
26,600
  
$
33,400
  
               
Depreciation Expense:
              
Residential ventilation products
  
$
2,851
  
$
2,805
  
Home technology products
    
489
   
601
 
Air conditioning and heating products
    
3,168
   
3,239
 
Other
    
199
   
231
 
    Consolidated depreciation expense
  
$
6,707
  
$
6,876
  
               
Amortization expense:
              
Residential ventilation products
  
$
1,937
  
$
2,285
  
Home technology products
    
1,527
   
1,552
 
Air conditioning and heating products
    
797
   
797
 
Other
    
124
   
126
 
    Consolidated amortization expense
 
$
4,385
  
$
4,760
  
               
Capital Expenditures:
              
Residential ventilation products
  
$
1,861
  
$
1,841
  
Home technology products
    
473
   
549
 
Air conditioning and heating products
    
4,796
   
4,316
 
Other
    
19
   
225
 
    Consolidated capital expenditures
  
$
7,149
  
$
6,931
  

 
(F)
The Company provides income taxes on an interim basis based upon the estimated annual effective income tax rate. The following reconciles the federal statutory income tax rate to the estimated effective tax rate of approximately 38.8% and 42.5% for the periods presented:

   
For the three months ended
  
   
April 1, 2006
  
April 2, 2005
  
Income tax provision at the federal statutory rate
    
35.0
%
  
35.0
%
Net change from federal statutory rate:
              
State income tax provision, net of federal income tax effect
    
2.1
    
3.7
  
Tax effect resulting from foreign activities
    
1.0
    
(1.1
)
Non-deductible expenses
    
0.7
    
0.6
  
Other, net
    
---
    
4.3
  
Income tax provision at estimated effective rate
    
38.8
%
  
42.5
%

(G)       As of April 1, 2006, the Company’s former subsidiary, Ply Gem Industries, Inc. (“Ply Gem”), has guaranteed approximately $23,100,000 of third party obligations relating to rental payments through June 30, 2016 under a facility leased by a former subsidiary, which was sold on September 21, 2001. The Company has indemnified these guarantees in connection with the sale of Ply Gem on February 12, 2004 and has recorded an estimated liability related to this indemnified guarantee of approximately $900,000 at April 1, 2006 in accordance with Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). The buyer of the former subsidiary has provided certain indemnifications and other rights to Nortek for any payments that it might be required to make pursuant to this guarantee. Should the buyer of the former subsidiary cease making payments then the Company may be required to make payments on its indemnification.

The Company has indemnified third parties for certain matters in a number of transactions involving dispositions of former subsidiaries. The Company has recorded liabilities in relation to these indemnifications, including the indemnified guarantee noted above, of approximately $12,000,000 and $12,500,000 at April 1, 2006 and December 31, 2005, respectively. Approximately $5,400,000 of short-term liabilities and approximately $6,600,000 of long-term liabilities are recorded in accrued expenses and other long-term liabilities, respectively, in the accompanying unaudited condensed consolidated balance sheet at April 1, 2006 related to these indemnifications. In February 2005, the Company settled a portion of these obligations with a lump sum cash payment resulting in a reduction of approximately $1,400,000 in such liabilities, which was recorded as income in the Company’s unaudited condensed consolidated statement of operations for the three months ended April 2, 2005 (see Note D).

The Company sells a number of products and offers a number of warranties including in some instances, extended warranties for which the Company receives proceeds. The specific terms and conditions of these warranties vary depending on the product sold and country in which the product is sold. The Company estimates the costs that may be incurred under its warranties, with the exception of extended warranties, and records a liability for such costs at the time of sale. Proceeds received from extended warranties are amortized over the life of the warranty and reviewed to ensure that the liability recorded is equal to or greater than estimated future costs. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company periodically assesses the adequacy of its recorded warranty claims and adjusts the amounts as necessary.
 
Changes in the Company’s unaudited combined short-term and long-term warranty liabilities during the three months ended April 1, 2006 and April 2, 2005 are as follows:

   
For the three months ended
  
   
April 1, 2006
  
April 2, 2005
  
   
(Dollar amounts in thousands)
  
           
Balance, beginning of period
  
$
34,843
  
$
30,319
  
Warranties provided during period
    
7,349
    
4,424
  
Settlements made during period
    
(4,207
)
  
(4,171
)
Changes in liability estimate, including acquisitions
    
189
    
250
  
Balance, end of period
  
$
38,174
  
$
30,822
  

The Company is subject to other contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, product liability, warranty and modification and adjustment or replacement of component parts of units sold, which include product recalls. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned. The Company has used various substances in its products and manufacturing operations which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated.

While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in the Company’s assumptions or strategies related to these contingencies or changes out of the Company’s control.
 
(H)
The Company records restructuring costs primarily in connection with operations acquired or facility closings which management plans to eliminate in order to improve future operating results of the Company.
 
During August of 2004, the Company accrued approximately $3,400,000 related to severance benefits for certain of the Company’s employees at its corporate office. It is expected that these severance benefits will be paid through August 2006.

The following table sets forth restructuring activity in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”) in the accompanying unaudited condensed consolidated statement of operations for the periods presented. These costs are included in cost of goods sold and selling, general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations of the Company.

   
Employee Separation Expenses
  
 
 
Other
  
Total
Restructuring
Costs
  
   
(Dollar amounts in thousands)
  
               
Balance at December 31, 2004
  
$
3,150
  
$
30
  
$
3,180
  
Payments and asset write downs
    
(454
)
  
(30
)
  
(484
)
Other
    
(10
)
  
---
    
(10
)
Balance at April 2, 2005
  
$
2,686
  
$
---
  
$
2,686
  
                     
Balance at December 31, 2005
  
$
1,031
  
$
241
  
$
1,272
  
Payments and asset write downs
    
(418
)
  
(150
)
  
(568
)
Other
    
---
    
(91
)
  
(91
)
Balance at April 1, 2006
  
$
613