Form 10-Q for 1st quarter of 2005 for Nortek, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 2, 2005

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

333-119902

(Commission File Number)

__________

NORTEK, INC.

(Exact name of registrant as specified in its charter)

__________

Delaware		05-0314991
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

50 Kennedy Plaza, Providence, RI		02903-2360
(Address of principal executive offices)		(Zip Code)

	(401) 751-1600
	(Registrant’s telephone number, including area code)

__________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The number of shares of Common Stock outstanding as of May 6, 2005 was 3,000.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except common stock data)

	April 2,		December 31,
	2005		2004
Assets
Current Assets:
Cash and cash equivalents	$	74,749	$	94,955
Accounts receivable, less allowances
of $5,802 and $5,467		240,634		225,706
Inventories:
Raw materials		70,530		72,166
Work in process		23,532		24,249
Finished goods		127,491		109,134
		221,553		205,549

Prepaid expenses		7,656		8,596
Other current assets		24,339		26,126
Prepaid income taxes		17,145		34,663
Current portion of receivable from affiliate		20,208		17,220
Total current assets		606,284		612,815

Property and Equipment, at Cost:
Land		8,514		8,683
Buildings and improvements		71,908		75,476
Machinery and equipment		127,385		124,644
		207,807		208,803
Less accumulated depreciation		12,302		7,713
Total property and equipment, net		195,505		201,090

Other Assets:
Goodwill		1,295,846		1,295,105
Intangible assets, less accumulated amortization
of $12,740 and $8,436		105,927		110,715
Deferred debt expense		40,637		41,741
Long-term portion of receivable from affiliate		16,363		16,088
Restricted investments and marketable securities		6,962		8,605
Other assets		7,802		11,154
		1,473,537		1,483,408
	$	2,275,326	$	2,297,313

Liabilities and Stockholder’s Investment

Current Liabilities:
Notes payable and other short-term obligations	$	8,028	$	5,364
Current maturities of long-term debt		10,728		14,414
Accounts payable		157,341		137,343
Accrued expenses and taxes, net		141,189		171,591
Total current liabilities		317,286		328,712

Other Liabilities:
Deferred income taxes		17,184		32,737
Other		164,338		168,708
		181,522		201,445

Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities		1,347,779		1,350,210

Stockholder’s Investment:
Common stock, $0.01 par value, authorized 3,000 shares;
3,000 issued and outstanding at April 2, 2005 and
December 31, 2004		---		---
Additional paid-in capital		413,923		410,581
Retained earnings (accumulated deficit)		8,000		(2,700	)
Accumulated other comprehensive income		6,816		9,065
Total stockholder's investment		428,739		416,946
Total Liabilities and Stockholder's Investment:	$	2,275,326	$	2,297,313

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

	For the three months ended
	Post-			Pre-
	Acquisition			Acquisition
	April 2, 2005			April 3, 2004
	(Amounts in thousands)

Net Sales	$	434,118		$	405,012

Costs and Expenses:
Cost of products sold		309,459			286,882
Selling, general and administrative expense		79,441			73,148
Amortization of intangible assets		4,333			3,309
		393,233			363,339
Operating earnings		40,885			41,673
Interest expense		(24,285	)		(25,559	)
Loss from debt retirement		---			(11,958	)
Investment income		400			944
Earnings from continuing operations
before provision for income taxes		17,000			5,100
Provision for income taxes		6,300			2,100
Earnings from continuing operations		10,700			3,000
Earnings from discontinued operations		---			68,100
Net earnings	$	10,700		$	71,100

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

	For the three months ended
	Post-			Pre-
	Acquisition			Acquisition
	April 2, 2005			April 3, 2004
	(Amounts in thousands)

Cash Flows from operating activities:
Net earnings from continuing operations	$	10,700		$	3,000
Earnings from discontinued operations		---			68,100
Net earnings		10,700			71,100

Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization expense, including
amortization of purchase price allocated to inventory		11,615			9,262
Non-cash interest expense, net		1,442			8,596
Loss from debt retirement		---			11,958
Gain on the sale of discontinued operations		---			(122,700	)
Gain on sale of fixed assets		(280	)		(10	)
Deferred federal income tax provision from
continuing operations		5,700			19,900
Deferred federal income tax credit from
discontinued operations		---			(18,100	)
Changes in certain assets and liabilities, net of
effects from acquisitions and dispositions:
Accounts receivable, net		(17,313	)		(29,778	)
Inventories		(17,036	)		(17,334	)
Prepaids and other current assets		612			10,349
Net assets of discontinued operations		---			(3,162	)
Accounts payable		21,753			35,387
Accrued expenses and taxes		(31,664	)		11,553
Long-term assets, liabilities and other, net		(4,181	)		(514	)
Total adjustments to net earnings		(29,352	)		(84,593	)
Net cash used in operating activities	$	(18,652	)	$	(13,493	)

Cash Flows from investing activities:
Capital expenditures	$	(3,683	)	$	(4,904	)
Net cash paid for businesses acquired		---			(16,500	)
Proceeds from the sale of discontinued businesses		---			519,153
Proceeds from the sale of property and equipment		5,830			151
Other, net		(399	)		44
Net cash provided by investing activities		1,748			497,944
Cash Flows from financing activities:
Change in borrowings, net		(3,094	)		(633	)
Sale of Floating Rate Notes		---			196,000
Redemption of Senior Notes		---			(716,700	)
Other, net		(208	)		(21	)
Net cash used in financing activities		(3,302	)		(521,354	)
Net decrease in unrestricted cash and
cash equivalents		(20,206	)		(36,903	)
Unrestricted cash and cash equivalents at the
beginning of the period		94,955			194,120
Unrestricted cash and cash equivalents at the
end of the period	$	74,749		$	157,217

Supplemental disclosure of cash flow information:

Interest paid	$	36,432		$	31,867

Income taxes paid, net	$	6,106		$	4,741

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT

FOR THE THREE MONTHS ENDED APRIL 3, 2004

(Dollar amounts in thousands)

									Accumulated
	Series B		Class A		Additional				Other
	Preference		Common		Paid in		Retained		Comprehensive			Comprehensive
	Stock		Stock		Capital		Earnings		Income (Loss)			Income (Loss)

Balance, December 31, 2003	$	8,130	$	397	$	172,244	$	---	$	19,437		$	---
Net earnings		---		---		---		71,100		---			71,100
Other comprehensive income (loss):
Currency translation adjustment		---		---		---		---		(3,250	)		(3,250	)
Unrealized decline in the fair value of
marketable securities		---		---		---		---		(3	)		(3	)
Minimum pension liability, net of tax of $10		---		---		---		---		18			18
Comprehensive income												$	67,865
Stock based compensation		---		---		973		---		---
Balance, April 3, 2004	$	8,130	$	397	$	173,217	$	71,100	$	16,202

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT

FOR THE THREE MONTHS ENDED APRIL 2, 2005

(Dollar amounts in thousands)

						Accumulated
	Additional					Other
	Paid in		Retained			Comprehensive			Comprehensive
	Capital		Earnings			Income (Loss)			Income (Loss)

Balance, December 31, 2004	$	410,581	$	(2,700	)	$	9,065		$	---
Net earnings		---		10,700			---			10,700
Other comprehensive income (loss):
Currency translation adjustment		---		---			(2,243	)		(2,243	)
Unrealized decline in the fair value of
marketable securities		---		---			(6	)		(6	)
Comprehensive income									$	8,451
Capital contribution from parent		3,263		---			---
Stock based compensation		79		---			---
Balance, April 2, 2005	$	413,923	$	8,000		$	6,816

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTEK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

APRIL 2, 2005 AND APRIL 3, 2004

(A)

The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”), for periods prior to August 28, 2004 reflect the financial position, results of operations and cash flows of the former Nortek Holdings, Inc. and all of its wholly-owned subsidiaries (the predecessor company) and subsequent to August 27, 2004, reflect the financial position, results of operations and cash flows of Nortek, Inc. (the successor company and survivor from the mergers noted below in connection with the THL Transaction). The Unaudited Financial Statements include the accounts of the former Nortek Holdings, Inc. and Nortek, Inc., as appropriate and all of their wholly-owned subsidiaries (individually and collectively, the “Company” or “Nortek”), 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 accounting principles generally accepted in the United States 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”).

Stock-Based Compensation of Employees, Officers and Directors

The Company uses 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”).

The Company recorded stock-based compensation charges in continuing operations of approximately $100,000 and $250,000 for the three months ended April 2, 2005 and April 3, 2004, respectively, in accordance with SFAS No. 123. A portion of this expense has been allocated to the Company’s reporting segments for all periods presented (see Note G) and a portion has been recorded in Unallocated. In addition, the Company recorded stock-based employee compensation charges in discontinued operations of approximately $700,000 for the three months ended April 3, 2004 relating to the accelerated vesting and achievement of the performance criteria for a portion of the Company’s outstanding Class A and B stock options, which were retained by employees of the discontinued operations (see Note F).

In connection with the THL Transaction, certain employees and consultants received approximately 21,184 C-1 units and approximately 42,368 C-2 units, which represent equity interests in Investors LLC that function similar to stock options. The C-1 units vest pro rata on a quarterly basis over a three-year period and approximately 3,524 and 1,765 were vested at April 2, 2005 and December 31, 2004, respectively. The total stock-based employee compensation charge associated with the C-1 units is approximately $930,000, which is being amortized pro rata over the three-year vesting period. Approximately $750,000 remains to be amortized at April 2, 2005. The C-2 units only vest in the event that certain performance-based criteria, as defined, are met. As of April 2, 2005 and December 31, 2004, there was approximately $1,500,000 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.

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (revised 2004), “Share-Based Payment”, (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123 and supersedes APB 25 and amends SFAS No. 95, “Statement of Cash Flows” (“SFAS No. 95”). The accounting for share-based payments under SFAS No. 123R is similar to the approach described in SFAS No. 123, however, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and pro-forma disclosure is no longer an alternative to financial statement recognition. The provisions of SFAS No. 123R will be effective for nonpublic entities in fiscal years beginning after December 15, 2005, subject to limitations, with earlier adoption encouraged. The Company is currently evaluating the impact of adopting SFAS No. 123R on its consolidated financial statements.

(B)

On July 15, 2004, THL Buildco Holdings, Inc. (“THL Buildco Holdings”) and THL Buildco, Inc. (“THL Buildco”), newly formed Delaware corporations affiliated with Thomas H. Lee Partners L.P., entered into a stock purchase agreement with the owners of Nortek Holdings, Inc., Nortek’s former parent company (referred to herein as “the former Nortek Holdings”), which included affiliates of Kelso & Company, L.P. (“Kelso”) and certain members of the Company’s management, pursuant to which THL Buildco agreed to purchase all the outstanding capital stock of the former Nortek Holdings. Prior to the completion of the THL Transaction described below, Nortek was a wholly owned direct subsidiary of the former Nortek Holdings and THL Buildco was a wholly owned direct subsidiary of THL Buildco Holdings.

On August 27, 2004, THL Buildco purchased all of the outstanding capital stock of the former Nortek Holdings pursuant to a stock purchase agreement in a transaction valued at approximately $1,740,000,000 (the “Acquisition”). Immediately upon the completion of the Acquisition, THL Buildco was merged with and into the former Nortek Holdings with the former Nortek Holdings continuing as the surviving corporation. The former Nortek Holdings was then merged with and into Nortek with Nortek continuing as the surviving corporation and a wholly owned subsidiary of THL Buildco Holdings. THL Buildco Holdings was then renamed Nortek Holdings, Inc. (“Nortek Holdings”). Nortek Holdings is wholly owned by NTK Holdings, Inc., which is wholly owned by THL-Nortek Investors, LLC, a Delaware limited liability company (“Investors LLC”). In connection with the Acquisition, members of Nortek management reinvested a portion of their equity interest in the former Nortek Holdings for an equity interest in Investors LLC and interests in a deferred compensation plan established by Nortek Holdings (the Acquisition and the above events are collectively referred to herein as the “THL Transaction”).

The Acquisition

On August 27, 2004, the sole stockholder of the Company, the former Nortek Holdings adopted and approved, by unanimous written consent in lieu of special meeting, the Agreement and plan of Merger between the former Nortek Holdings and the Company, which provided for the merger of the former Nortek Holdings with and into the Company.

Prior to the Acquisition, certain members of Nortek management held stock options to purchase shares of common stock of the former Nortek Holdings issued to them under the former Nortek Holdings 2002 Stock Option Plan. These members of Nortek management, who would have been entitled to receive cash payments upon consummation of the Acquisition in respect to these options, instead sold a portion of those options to THL Buildco for approximately $113,032,000 and surrendered the remainder of these options held by them for cancellation without immediate payment. In consideration for this cancellation of options without immediate payment, these option holders received an equity interest in Investors LLC and Nortek Holdings established a deferred compensation plan and credited for the account of each of these management participants under the plan a number of notional Class A units of Investors LLC equal in value to the value of the old stock option so cancelled.

In connection with accounting for the purchase price for the Acquisition, Nortek 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 2, 2005 the deferred tax benefit was approximately $36,571,000 (of which approximately $20,208,000 and $16,363,000 is recorded as a current and long-term asset, respectively) and at December 31, 2004 the deferred tax benefit was approximately $33,308,000 (of which approximately $17,220,000 and $16,088,000 is recorded as a current and long-term asset, respectively). The deferred tax benefits are classified as current and long-term receivables from affiliate on the Company’s accompanying unaudited condensed consolidated balance sheet.

Beginning on August 28, 2004, the Company accounted for the Acquisition as a purchase in accordance with the provisions of SFAS No. 141, “Business Combinations” (“SFAS No. 141”), Emerging Issue Task Force (“EITF”) Issue No. 88-16, “Basis in Leveraged Buyout Transactions”, (“EITF 88-16”) and SEC Staff Accounting Bulletin No. 54, “Push Down Basis of Accounting Required in Certain Limited Circumstances”, which resulted in a new valuation for the assets and liabilities of the Company and its subsidiaries based upon fair values as of the date of the Acquisition. SFAS No. 141 requires the Company to establish a new basis for its assets and liabilities based on the amount paid for its ownership at August 27, 2004. In accordance with EITF 88-16, the acquired assets and liabilities have been recorded at fair value for the interests acquired by new investors and at carryover basis for continuing investors. As a result, the assets and liabilities are assigned new values, which are part Pre-Acquisition cost and part fair value, in the same proportions as the carryover basis of the residual interests retained by the continuing management investors and the new interests acquired by the affiliates of Thomas H. Lee Partners. Accordingly, the Company’s ownership basis (including the fair value of options rolled over by the Management Investors) is reflected in the Company’s consolidated financial statements beginning upon completion of the Acquisition. The purchase price for the equity of Nortek of approximately $743,154,000 was allocated to the assets and liabilities based on their relative fair values and approximately $409,716,000 was recorded in Stockholder’s Investment representing the ownership interest of Nortek’s equity holders upon completion of the Acquisition, net of a deemed dividend of approximately $63,879,000.

During the three months ended April 2, 2005, the Company recorded approximately $300,000 of amortization of excess purchase price allocated to inventory related to the Acquisition as a non-cash charge to cost of goods sold.

The following reflects the unaudited pro forma effect of the Acquisition on continuing operations for the periods from January 1, 2004 to April 3, 2004 and from January 1, 2004 to August 27, 2004:

		Pro Forma for the period Jan. 1, 2004 - April 3, 2004		Pro Forma for the period Jan. 1, 2004 - Aug. 27, 2004
	(Amounts in thousands)

Net sales		$	405,012	$	1,117,860
Operating earnings		$	36,057	$	108,852
Earnings from continuing operations		$	8,344	$	27,450

The unaudited pro forma condensed consolidated amounts presented above has been prepared by adjusting historical amounts for the period to give effect to the Acquisition as if it had occurred on January 1, 2004. The pro forma adjustments to the historical results of operations for the amounts presented include the pro forma impact of the purchase accounting for such period, the elimination of approximately $83,700,000 of expenses and charges arising from the Acquisition in August of 2004, recorded during such period as the unaudited pro forma condensed consolidated summary of operations assumes that the Acquisition occurred on January 1, 2004.

The following table presents a summary of the activity in goodwill for continuing operations and discontinued operations for the first quarter of 2005, the period from August 28, 2004 to December 31, 2004 and the period from January 1, 2004 to August 27, 2004.

	Continuing			Discontinued
	Operations			Operations			Total
	(Amounts in thousands)

Balance as of December 31, 2003	$	675,846		$	222,194		$	898,040
Acquisitions during the period from January 1, 2004 to August 27, 2004		6,841			---			6,841
Dispositions		---			(222,194	)		(222,194	)
Purchase accounting adjustments		(3,229	)		---			(3,229	)
Impact of foreign currency translation		1			---			1
Balance as of August 27, 2004		679,459			---			679,459
Effect of the Acquisition		607,053			---			607,053
Acquisitions during the period from August 28, 2004 to December 31, 2004		8,805			---			8,805
Purchase accounting adjustments		(2,005	)		---			(2,005	)
Impact of foreign currency translation		1,793			---			1,793
Balance as of December 31, 2004		1,295,105			---			1,295,105
Purchase accounting adjustments		808			---			808
Impact of foreign currency translation		(67	)		---			(67	)
Balance as of April 2, 2005	$	1,295,846		$	---		$	1,295,846

Goodwill associated with the Acquisition and Recapitalization transactions, as well as, acquisitions (see Note D) above will not 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.

(C)

From January 1, 2004 through February 3, 2004, Nortek purchased approximately $14,800,000 of its 9 1/4% Senior Notes due 2007 (“9 1/4% Notes”) and approximately $10,700,000 of its 9 1/8% Senior Notes due 2007 (“9 1/8% Notes”) in open market transactions. On March 15, 2004, Nortek redeemed all of its outstanding 9 1/4% Notes (approximately $160,200,000 in principal amount) and on March 14, 2004 redeemed all of its outstanding 9 1/8% Notes (approximately $299,300,000 in principal amount). The 9 1/4% Notes and 9 1/8% Notes were redeemed at a redemption price of 101.542% and 103.042%, respectively, of the principal amount thereof plus accrued and unpaid interest. The 9 1/4% Notes and 9 1/8% Notes ceased to accrue interest as of the respective redemption dates indicated above. The Company used the net after tax proceeds from the sale of Ply Gem of approximately $450,000,000 (see Note F), together with existing cash on hand, to fund the redemption of the 9 1/4% Notes and 9 1/8% Notes.

On March 14, 2004, Nortek redeemed $60,000,000 of its outstanding 8 7/8% Senior Notes due 2008 (“8 7/8% Notes”) and on March 31, 2004, Nortek redeemed the remaining $150,000,000 of its outstanding 8 7/8% Notes (see below). The 8 7/8% Notes were called at a redemption price of 104.438% of the principal amount thereof plus accrued and unpaid interest.

On March 1, 2004, Nortek completed the sale of $200,000,000 of Floating Rate Notes due 2010 (the “Floating Rate Notes”), which were subsequently redeemed on August 28, 2004 in connection with the Acquisition (see below). Nortek used the net proceeds of approximately $196,000,000 from the sale of the Floating Rate Notes, together with existing cash on hand, to fund the redemption of the 8 7/8% Notes.

The open market purchases and the redemption of the Floating Rate Notes, the 9 1/4% Notes, the 9 1/8% Notes and the 8 7/8% Notes noted above resulted in a pre-tax loss of approximately $11,958,000 which was recorded in the three months ended April 3, 2004, based upon the difference between the respective redemption prices indicated above and the estimated carrying values at redemption.

Interest expense in the first quarter of 2004 includes duplicative interest arising during the waiting period from the call for redemption to the date of redemption of the 8 7/8% Senior Notes, as during that period the Floating Rate Notes, whose proceeds were used to refinance the 8 7/8% Senior Notes, were also outstanding.

At May 6, 2005, approximately $32,800,000 was available for the payment of cash dividends, stock purchases or other restricted payments by the Company as defined under the terms of the Company’s most restrictive loan agreement, the Company’s Senior Secured Credit Facility. Any restricted payments in excess of $10,000,000 would require an equal prepayment of the Company’s Senior Secured Credit Facility.

(D)	On December 17, 2004, the Company acquired M&S Systems, LP (“M&S”), located in Dallas, Texas, for approximately $16,400,000. M&S is a manufacturer and designer of distributed audio and communication equipment, speakers and central vacuum systems.

On March 9, 2004, the Company acquired OmniMount Systems, Inc. (“OmniMount”) for approximately $16,500,000 in cash and contingent consideration. The contingent consideration is payable 90 days after fiscal 2006 if certain fiscal 2006 financial results, as defined by the stock purchase agreement, are met. OmniMount is a manufacturer and designer of speaker and video mountings and other products to maximize the home theater experience.

Acquisitions contributed approximately $12,200,000, $500,000 and $100,000 to net sales, operating earnings and depreciation and amortization expense, respectively, for the three months ended April 2, 2005. M&S and OmniMount are included in the Residential Building Products Segment in the Company’s segment reporting. Pro forma results related to these acquisitions have not been presented, as the effect is not significant to the Company’s consolidated operating results.

Acquisitions are accounted for as purchases and, accordingly, have been included in the Company’s consolidated results of operations since the acquisition date. Purchase price allocations are subject to refinement until all pertinent information regarding the acquisition is obtained.

On April 26, 2005, the Company, through its indirect wholly-owned subsidiary, Linear LLC, acquired Panamax (“Panamax”) for an initial purchase price of approximately $11,250,000 plus an earn-out based upon the earnings of Panamax for 2005 which is capped at approximately $4,250,000. Panamax is located in Petaluma, CA and manufactures and designs innovative power conditioning and surge protection products that prevent loss or damage of home and small business equipment due to power disturbances.

(E)	The operating results of the Air Conditioning and Heating Products Segment for the three months ended April 3, 2004 include approximately $1,300,000 of costs associated with the closure of certain manufacturing facilities (see Note J).

Operating results for the three months ended April 2, 2005 and April 3, 2004 include a non-cash foreign exchange loss of approximately $500,000 and $600,000, respectively, on certain intercompany debt between 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 I).

During the three months ended April 2, 2005 and April 3, 2004 the Company recorded a pre-tax charge to continuing operations of approximately $100,000 and $250,000, respectively, for compensation expense related to stock options issued to employees, officers and Directors in accordance with SFAS No. 123 (see Note A).

(F)

On July 31, 2004, the Company sold the capital stock of its wholly-owned subsidiary, La Cornue SAS (“La Cornue”) for net cash proceeds of approximately $5,800,000 and recorded a net after tax gain of approximately $900,000. La Cornue, situated outside of Paris, France manufactures and sells high-end custom made cooking ranges.

On February 12, 2004, the Company sold the capital stock of its wholly-owned subsidiary Ply Gem Industries, Inc. (“Ply Gem”) for net cash proceeds of approximately $506,700,000, after excluding approximately $21,400,000 of proceeds provided to fund liabilities of Ply Gem indemnified by the Company (see Note I), and recorded a net after-tax gain on the sale of approximately $74,100,000. Ply Gem, through its operating subsidiaries, is a manufacturer and distributor of a range of products for use in the residential new construction, do-it-yourself and professional renovation markets, including vinyl siding, windows, patio doors, fencing, railing, decking and accessories. The results of operations of the operating subsidiaries of Ply Gem comprised the Company’s entire Windows, Doors and Siding Products (“WDS”) reporting segment and the corporate expenses of Ply Gem, which were previously included in Unallocated in the Company’s segment reporting (see Note G).

The Company allocates interest to dispositions that qualify as a discontinued operation for debt instruments which are entered into specifically and solely with the entity disposed of and for debt which is settled with proceeds received from the disposition. Interest allocated to discontinued operations, included in interest expense, net in the table below, was approximately $2,800,000 (net of taxes of approximately $1,600,000) for the three months ended April 3, 2004.

The sale of La Cornue and Ply Gem and the related operating results have been excluded from earnings from continuing operations and are classified as discontinued operations for all periods presented.

The table that follows presents a summary of the results of discontinued operations for the three months ended April 3, 2004:

		Pre-Acquisition
		For the three
		months ended
		April 3, 2004
	(Amounts in thousands)

Net sales		$	43,000

Operating loss of discontinued operations *		$	(2,242	)
Interest expense, net			(4,558	)
Loss before income tax benefit			(6,800	)
Income tax benefit			(2,600	)
Loss from discontinued operations			(4,200	)

Gain on sale of discontinued operations			122,700
Income tax provision on sale of discontinued operations			50,400
			72,300

Earnings from discontinued operations		$	68,100

Depreciation and amortization expense		$	1,379

Operating loss of discontinued operations are net of Ply Gem corporate expenses, which were previously included within Unallocated in the Company’s segment reporting.

(G)

The Company has two reportable segments: the Residential Building Products Segment and the Air Conditioning and Heating Products Segment. 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 income statement impact of all purchase accounting adjustments, including goodwill and intangible asset amortization, is reflected in the operating earnings of the applicable operating segment.

Unaudited net sales, operating earnings and pre-tax earnings from continuing operations for the Company’s segments for the periods presented below were as follows:

	For the three months ended
	Post-			Pre-
	Acquisition			Acquisition
	April 2, 2005			April 3, 2004
	(Amounts in thousands)

Net sales:
Residential building products	$	261,024		$	234,090
Air conditioning and heating products		173,094			170,922
Consolidated net sales	$	434,118		$	405,012

Operating earnings:
Residential building products *	$	37,693		$	40,166
Air conditioning and heating products *		7,339			9,072
Subtotal		45,032			49,238
Unallocated:
Stock based compensation charges		(100	)		(200	)
Foreign exchange loss on intercompany debt		(100	)		(200	)
Gain on legal settlement		1,400			---
Other, net		(5,347	)		(7,165	)
Consolidated operating earnings		40,885			41,673
Interest expense		(24,285	)		(25,559	)
Loss from debt retirement		---			(11,958	)
Investment income		400			944
Earnings before provision
for income taxes	$	17,000		$	5,100

The operating results of the Air Conditioning and Heating Products Segment for the three months ended April 3, 2004 include approximately $1,300,000 of costs associated with the closure of certain manufacturing facilities (see Note J).

The operating results of the Residential Building Products Segment for the three months ended April 2, 2005 and April 3, 2004 each include a non-cash foreign exchange loss of approximately $400,000 on certain intercompany debt between the Company’s subsidiaries. The operating results of the Residential Building Products Segment for the three months ended April 3, 2004 also include approximately $50,000 of stock based compensation charges.

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

	For the three months ended
	Post-		Pre-
	Acquisition		Acquisition
	April 2, 2005		April 3, 2004
	(Amounts in thousands)

Depreciation Expense:
Residential building products	$	3,428	$	2,806
Air conditioning and heating products		3,198		2,902
Other		225		82
Consolidated depreciation expense	$	6,851	$	5,790

Amortization of intangible assets and
*purchase price allocated to inventory :**
Residential building products	$	3,836	$	2,648
Air conditioning and heating products		803		824
Other		125		---
Consolidated amortization expense and
purchase price allocated to inventory	$	4,764	$	3,472

Capital Expenditures:
Residential building products	$	2,447	$	2,429
Air conditioning and heating products		2,881		2,157
Other		237		318
Consolidated capital expenditures	$	5,565	$	4,904

During the three months ended April 2, 2005 and April 3, 2004 the Company reflected in the Residential Building Products Segment amortization of approximately $400,000 and $100,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of products sold.

(H)	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 37.1% and 41.2% for the periods presented:

	For the three months ended
	Post-			Pre-
	Acquisition			Acquisition
	April 2, 2005			April 3, 2004
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		2.5			1.8
Tax effect resulting from foreign activities		(0.7	)		1.6
Change in tax reserves		---			0.3
Non-deductible expenses		0.4			0.3
Other, net		(0.1	)		2.2
Income tax provision at estimated effective rate		37.1	%		41.2	%

(I)

As of April 2, 2005, the Company’s former subsidiary, Ply Gem, has guaranteed approximately $25,200,000 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 (see Note F) and has recorded an estimated liability related to this indemnified guarantee of approximately $1,000,000 at April 2, 2005 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 $13,500,000 at April 2, 2005 and $17,800,000 at December 31, 2004. 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 first quarter ended April 2, 2005 (see Note E). Approximately $6,000,000 of short-term liabilities and approximately $7,500,000 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 2, 2005 related to these indemnifications. Approximately $12,700,000 of these indemnifications at April 2, 2005 relate to indemnifications provided to a buyer in connection with the sale of certain former subsidiaries, including Ply Gem (see Note F). Accordingly, the Company has included approximately $5,200,000 of short-term liabilities and approximately $7,500,000 of long-term liabilities in accrued expenses and other long-term liabilities, respectively, in the accompanying consolidated balance sheet at April 2, 2005 related to these indemnifications.

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 periods presented are as follows:

	For the three months ended
	Post-			Pre-
	Acquisition			Acquisition
	April 2, 2005			April 3, 2004
	(Amounts in thousands)

Balance, beginning of period	$	30,319		$	29,087
Warranties provided during period		4,424			4,195
Settlements made during period		(4,171	)		(3,588	)
Changes in liability estimate, including acquisitions		250			(316	)
Balance, end of period	$	30,822		$	29,378

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, 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.

(J)	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.

Within the Air Conditioning and Heating Products Segment, the Company, in the second quarter of 2003, initiated restructuring activities related to the closure of two facilities in St. Louis, Missouri, in order to relocate the operations to other facilities. The facilities currently support warehousing and distribution activities of the segment’s residential HVAC products. Since the initiation of these restructuring activities in 2003, a total of approximately 403 employees have been terminated and an additional 35 employees are expected to be terminated during the second and third quarters of 2005. During the three months ended April 3, 2004 the Company provided approximately $1,300,000 in cost of goods sold related to liabilities incurred as a result of this restructuring. Two of the facilities to be closed are owned by the Company, one of which was sold during the three months ended April 2, 2005.

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. Approximately $1,400,000 was included as a charge in the Company’s consolidated statement of operations on August 27, 2004 and the balance was recorded as an intangible asset related to a non-compete agreement. No additional amounts have been incurred or are expected to be incurred related to these severance benefits. 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
	(Amounts in thousands)
	(Unaudited)

Balance at December 31, 2003	$	1,638		$	205		$	1,843
Provision		71			1,219			1,290
Payments and asset write downs		(1,139	)		(1,420	)		(2,559	)
Balance at April 3, 2004	$	570		$	4		$	574

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

Employee separation expenses are comprised of severance, vacation, outplacement and retention bonus payments. Other restructuring costs include expenses associated with terminating other contractual arrangements, costs to prepare facilities for closure, costs to move equipment and products to other facilities and write-offs related to equipment sales and disposals.

(K)	The Company and its subsidiaries have various pension, supplemental retirement plans for certain officers, profit sharing and other post retirement benefit plans requiring contributions to qualified trusts and union administered funds.

Pension and profit sharing expense charged to operations aggregated approximately $3,600,000 and $4,200,000 for the three months ended April 2, 2005 and April 3, 2004, respectively. The Company’s policy is to generally fund currently at least the minimum allowable annual contribution of its various qualified defined benefit plans. As previously disclosed in the Company’s latest annual report on Form 10-K as filed with the SEC, the Company expects to contribute approximately $4,600,000 to its defined benefit pension plans in 2005. As of April 2, 2005, approximately $320,000 of contributions has been made.

The Company’s unaudited net periodic benefit cost for its defined benefit plans for the periods presented consist of the following components:

	For the three months ended
	Post-			Pre-
	Acquisition			Acquisition
	April 2, 2005			April 3, 2004
	(Amounts in thousands)

Service cost	$	340		$	297
Interest cost		2,259			2,392
Expected return on plan assets		(2,147	)		(2,066	)
Amortization of prior service cost		---			49
Recognized actuarial loss		5			---
Net periodic benefit cost	$	457		$	672

The Company’s unaudited net periodic benefit cost for its subsidiary’s Post Retirement Health Benefit Plan for the periods presented consists of the following components:

	For the three months ended
	Post-		Pre-
	Acquisition		Acquisition
	April 2, 2005		April 3, 2004
	(Amounts in thousands)

Service cost	$	112	$	255
Interest cost		619		628
Recognized actuarial gain		---		(6	)
Net periodic post retirement health benefit cost	$	731	$	877

On December 8, 2003, President Bush signed into law the Medicare Prescription