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 4, 2009

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]

Indicated by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_]No [_]

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

Large accelerated filer [_]
Accelerated filer [_]
Non-accelerated filer [X]
Smaller reporting company [_]

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

There is no established public trading market for any of the common stock of the Company.  The aggregate market value of voting stock held by non-affiliates is zero.

The number of shares of Common Stock outstanding as of May 15, 2009 was 3,000.

 
PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in millions, except share data)
 
   
April 4,
    
December 31,
  
   
2009
    
2008
  
Assets
            
Current Assets:
            
Unrestricted cash and cash equivalents
   $ 128.4     $ 182.2  
Restricted cash
     0.9       0.7  
 
                
Accounts receivable, less allowances of $15.7 and $14.5
     257.4       260.3  
Inventories:
                
   Raw materials
     85.9       86.0  
   Work in process
     26.4       26.9  
   Finished goods
     184.7       183.4  
      297.0       296.3  
                 
Prepaid expenses
     13.4       12.8  
Other current assets
     9.4       9.5  
Prepaid income taxes
     10.0       11.0  
   Total current assets
     716.5       772.8  
                 
Property and Equipment, at Cost:
                
Land
     11.8       12.1  
Buildings and improvements
     101.8       103.6  
Machinery and equipment
     223.1       222.6  
      336.7       338.3  
Less accumulated depreciation
     139.2       130.6  
   Total property and equipment, net
     197.5       207.7  
                 
Other Assets:
                
Goodwill
     810.8       810.8  
Intangible assets, less accumulated amortization of $113.1 and $107.4
     128.5       135.4  
Deferred debt expense
     44.7       47.1  
Restricted investments and marketable securities
     2.4       2.4  
Other assets
     7.5       7.4  
      993.9       1,003.1  
Total Assets
   $ 1,907.9     $ 1,983.6  
                 
Liabilities and Stockholder’s Deficit
                
                 
Current Liabilities:
                
Notes payable and other short-term obligations
   $ 24.3     $ 32.7  
Current maturities of long-term debt
     135.5       13.1  
Long-term debt (see Note B)
     6.6       8.1  
Accounts payable
     139.8       152.3  
Accrued expenses and taxes, net
     198.5       218.3  
   Total current liabilities
     504.7       424.5  
                 
Other Liabilities:
                
Deferred income taxes
     34.3       31.8  
Other
     161.8       160.7  
      196.1       192.5  
                 
Notes, Mortgage Notes and Obligations Payable, Less Current Maturities
     2,070.3       2,179.9  
                 
Commitments and Contingencies (see Note F)
          
                 
Stockholder’s Deficit:
                
Common stock, $0.01 par value, authorized 3,000 shares;
  
   3,000 issued and outstanding at April 4, 2009 and
          
   December 31, 2008
     ---       ---  
Additional paid-in capital
     25.9       25.9  
Accumulated deficit
     (863.1 )     (814.8 )
Accumulated other comprehensive loss
     (26.0 )     (24.4 )
   Total stockholder's deficit
     (863.2 )     (813.3 )
Total Liabilities and Stockholder's Deficit
   $ 1,907.9     $ 1,983.6  
 
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 first quarter ended
  
   
April 4, 2009
    
March 29, 2008
  
   
(Dollar amounts in millions)
  
             
Net Sales
   $ 439.0     $ 540.2  
                 
Costs and Expenses:
                
   Cost of products sold
     317.5       391.6  
   Selling, general and administrative expense, net (see Note C)
     101.0       118.5  
   Amortization of intangible assets
     5.9       6.7  
      424.4       516.8  
Operating earnings
     14.6       23.4  
Interest expense
     (55.0 )     (43.0 )
Investment income
     0.1       0.2  
Loss before provision (benefit) for income taxes
     (40.3 )     (19.4 )
Provision (benefit) for income taxes
     8.0       (5.4 )
Net loss
   $ (48.3 )   $ (14.0 )
 
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 first quarter ended
  
   
April 4, 2009
    
March 29, 2008
  
   
(Dollar amounts in millions)
  
Cash Flows from operating activities:
            
Net loss
   $ (48.3 )   $ (14.0 )
                 
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
                
Depreciation and amortization expense
     15.5       17.4  
Non-cash interest expense, net
     19.2       17.0  
Gain on sale of property and equipment
     (0.1 )     ---  
Deferred federal income tax provision (benefit)
     3.5       (8.9 )
Changes in certain assets and liabilities, net of effects from acquisitions and dispositions:
                
Accounts receivable, net
     3.0       (4.6 )
Inventories
     (1.3 )     (28.8 )
Prepaids and other current assets
     (0.3 )     (3.2 )
Accounts payable
     (11.6 )     43.4  
Accrued expenses and taxes
     (6.3 )     (19.7 )
Long-term assets, liabilities and other, net
     1.8       1.9  
   Total adjustments to net loss
     23.4       14.5  
   Net cash (used in) provided by operating activities
     (24.9 )     0.5  
Cash Flows from investing activities:
                
Capital expenditures
     (2.5 )     (7.3 )
Net cash paid for businesses acquired
     (14.1 )     ---  
Proceeds from the sale of property and equipment
     0.1       0.1  
Change in restricted cash and marketable securities
     (0.2 )     ---  
Other, net
     ---       (1.2 )
   Net cash used in investing activities
     (16.7 )     (8.4 )
Cash Flows from financing activities:
                
Increase in borrowings
     ---       33.2  
Payment of borrowings
     (12.3 )     (25.8 )
Other, net
     0.1       0.1  
   Net cash (used in) provided by financing activities
     (12.2 )     7.5  
Net change in unrestricted cash and cash equivalents
     (53.8 )     (0.4 )
Unrestricted cash and cash equivalents at the beginning of the period
     182.2       53.4  
Unrestricted cash and cash equivalents at the end of the period
   $ 128.4     $ 53.0  
                 
Supplemental disclosure of cash flow information:
                
                 
Interest paid
   $ 32.0     $ 35.7  
                 
Income taxes paid, net
   $ 5.7     $ 3.5  
 
The impact of changes in foreign currency exchange rates on cash was not material and has been included in Other, net.
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT
FOR THE FIRST QUARTER ENDED MARCH 29, 2008
(Dollar amounts in millions)

               
Accumulated
        
   
Additional
          
Other
        
   
Paid-in
    
Retained
    
Comprehensive
    
Comprehensive
  
   
Capital
    
Earnings
    
Income
    
(Loss) Income
  
                         
                         
Balance, December 31, 2007
   $ 21.6     $ 29.7     $ 37.7     $ ---  
Net loss
     ---       (14.0 )     ---       (14.0 )
Other comprehensive income:
                                
   Currency translation adjustment
     ---       ---       0.4       0.4  
Comprehensive loss
                           $ (13.6 )
Balance, March 29, 2008
   $ 21.6     $ 15.7     $ 38.1          
 
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 DEFICIT
FOR THE FIRST QUARTER ENDED APRIL 4, 2009
(Dollar amounts in millions)

               
Accumulated
        
   
Additional
          
Other
        
   
Paid-in
    
Accumulated
    
Comprehensive
    
Comprehensive
  
   
Capital
    
Deficit
    
(Loss) Income
    
(Loss) Income
  
                         
                         
Balance, December 31, 2008
   $ 25.9     $ (814.8 )   $ (24.4 )   $ ---  
Net loss
     ---       (48.3 )     ---       (48.3 )
Other comprehensive (loss) income:
                                
   Currency translation adjustment
     ---       ---       (1.7 )     (1.7 )
   Pension liability adjustment
     ---       ---       0.1       0.1  
Comprehensive loss
                           $ (49.9 )
Balance, April 4, 2009
   $ 25.9     $ (863.1 )   $ (26.0 )        

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 4, 2009 AND MARCH 29, 2008

 
(A)
The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”) reflect the financial position, results of operations and cash flows of NTK Holdings, Inc. (“NTK Holdings”) and all of its wholly-owned subsidiaries, including Nortek, Inc. (“Nortek”), collectively the “Company”, and have been prepared on the basis of a going concern.  However, the conditions noted below create uncertainty about the Company’s ability to meet its debt obligations as they come due on March 1, 2010 and beyond.  The Unaudited Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty.

The Unaudited Financial Statements include the accounts of NTK Holdings and all of its 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.  As used in this report, the term “Company” refers to NTK Holdings, Inc., together with its subsidiaries, unless the context indicates otherwise.  The term “Company” is used for convenience only and is not intended as a precise description of any of the separate corporations, each of which manages its own affairs.

Although certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted, the Company believes that the disclosures included are adequate to make the information presented not misleading.  Operating results for the first quarter ended April 4, 2009 are not necessarily indicative of the results that may be expected for other interim periods or for the year ending December 31, 2009.  Certain amounts in the prior year’s Unaudited Financial Statements have been reclassified to conform to the current period 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”).

NTK Holdings conducts no separate operations and acts only as a holding company.  NTK Holdings’ primary liquidity needs are to service its outstanding indebtedness.  No cash payments are due under NTK Holdings’ indebtedness during 2009; however, NTK Holdings has substantial debt service obligations beginning in the fiscal year ending December 31, 2010.  During 2010, the total of principal and interest payments on indebtedness owed by the Company, including payments owed by NTK Holdings is approximately $308.9 million.  In 2010, NTK Holdings alone has cash debt service obligations of approximately $162.3 million, including a payment of approximately $147.4 million due on March 1, 2010 under its 10 3/4% Senior Discount Notes.  Nortek has significant cash payments due on its indebtedness and certain other specified obligations in 2009 and thereafter.  For the year ending December 31, 2009, Nortek owes principal and interest payments on its indebtedness in the total amount of approximately $164.5 million.  In the fiscal year ending December 31, 2010, the total of principal and interest payments on Nortek’s indebtedness is approximately $146.6 million.  Nortek’s principal sources of liquidity include approximately $88.4 million of unrestricted cash and cash equivalents at April 4, 2009, cash flow from Nortek’s subsidiaries in 2009, Nortek’s ability to borrow under the terms of its ABL Facility and Nortek’s subsidiaries’ unrestricted cash and cash equivalent balances of approximately $40.0 million at April 4, 2009.

The ability of NTK Holdings to service its outstanding indebtedness depends on the likelihood of obtaining additional capital, restructuring the terms of such indebtedness or obtaining dividends or other payments from Nortek.  The ability of NTK Holdings to obtain additional capital is adversely affected by the substantial amount of the Company’s outstanding indebtedness, including indebtedness of Nortek, which is structurally senior in right of payment to any new debt or equity financing for NTK Holdings.  The ability of NTK Holdings to obtain dividends or other payments from Nortek is constrained by the financial condition and operating performance of Nortek and its subsidiaries and by the limitations on making such distributions and other payments contained in the terms of Nortek’s outstanding indebtedness.
 
Nortek is under no obligation to make any distribution or other payment to NTK Holdings even if Nortek has available cash and the making of such a payment is permitted by the terms of Nortek’s existing indebtedness.  In light of Nortek’s own substantial indebtedness and liquidity needs, NTK Holdings believes there is a substantial likelihood that Nortek will choose not to make a distribution or other payment to NTK Holdings sufficient to enable NTK Holdings to make the payments due in 2010 on its outstanding indebtedness, including the payment due on March 1, 2010 under its 10 3/4% Senior Discount Notes.  The failure by NTK Holdings to make such payments will constitute events of default under the documentation governing such indebtedness and will permit the holders of such indebtedness to accelerate the payment of such indebtedness in full.  Such defaults, including cross defaults under NTK Holdings’ senior unsecured loan facility, and any related acceleration will likely require additional equity or a restructuring of the indebtedness, whether pursuant to privately negotiated transactions or under supervision of an appropriate court proceeding.

A restructuring of the indebtedness of NTK Holdings could result in a change of control of Nortek.  A change of control may constitute an event of default under Nortek’s ABL Facility and would also require Nortek to offer to purchase its 10% Senior Secured Notes due 2013 and 8 1/2% Senior Subordinated Notes due 2014 at 101% of the principal amount thereof, together with accrued and unpaid interest.  The failure of Nortek to complete the purchase of any notes tendered pursuant to such offer, whether due to lack of funds or otherwise, would constitute an event of default under the indentures governing such notes.  Such defaults, including cross defaults under substantially all of Nortek’s outstanding indebtedness, and any related acceleration will likely require additional equity or a restructuring of the indebtedness, whether pursuant to privately negotiated transactions or under supervision of an appropriate court proceeding.

The Company is a diversified manufacturer of innovative, branded residential and commercial building products, operating within four reporting segments:

·  
the Residential Ventilation Products (“RVP”) segment,
·  
the Home Technology Products (“HTP”) segment,
·  
the Residential Air Conditioning and Heating Products (“R-HVAC“) segment and
·  
the Commercial Air Conditioning and Heating Products (“C-HVAC“) segment.

Through these segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the professional remodeling and replacement markets, the residential and commercial construction markets, the manufactured housing market and the do-it-yourself (“DIY”) market.

During the fourth quarter of 2008, the Company changed the composition of its reporting segments to report the R-HVAC segment separately.  In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company has restated prior period segment disclosures to reflect the new composition.

Goodwill and Other Long-Lived Assets

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, net of any subsequent impairment losses.  At April 4, 2009 and December 31, 2008, the Company had approximately $810.8 million of goodwill recorded on its unaudited condensed consolidated balance sheet.  Goodwill, by reporting segment, at April 4, 2009 and December 31, 2008 was as follows:

RVP segment
   $ 341.0  
HTP segment
     351.4  
R-HVAC segment
     43.0  
C-HVAC segment
     75.4  
   Consolidated
   $ 810.8  

The Company accounts for acquired goodwill and intangible assets in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”), SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) which requires considerable judgment in the valuation of acquired goodwill and other long-lived assets and the ongoing evaluation of goodwill and other long-lived assets impairment.  Under SFAS No. 142, goodwill and intangible assets determined to have indefinite useful lives are not amortized.  Instead, these assets are evaluated for impairment on an annual basis, or more frequently when an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value, including, among others, a significant adverse change in the business climate.  The Company has set the annual evaluation date as of the first day of its fiscal fourth quarter.  The reporting units evaluated for goodwill impairment by the Company have been determined to be the same as the Company’s operating segments in accordance with the criteria in SFAS No. 142 and SFAS No. 141(R) for determining reporting units and include RVP, HTP R-HVAC and C-HVAC.

During 2008, the Company recognized a goodwill impairment charge totaling approximately $710.0 million based upon an interim impairment test performed during the third quarter and finalized in the fourth quarter.  As of December 31, 2008, the Company completed another interim impairment test, but no additional charges were recognized.  As of April 4, 2009, the Company has concluded that there were no indictors that would suggest it was more likely than not that an impairment had occurred.  Therefore, no additional impairment tests have been performed.

Consistent with the impairment test performed as of December 31, 2008, based on the Company’s estimates at April 4, 2009, the impact of reducing the Company’s fair value estimates by 10% would have no impact on the Company’s goodwill assessment for any of its reporting units, with the exception of the Company’s HTP reporting unit.  Assuming a 10% reduction in the Company’s fair value estimates, the carrying value of HTP may exceed its fair value, which could require the Company to perform additional testing under SFAS No. 142 to determine if there was a goodwill impairment for HTP.

In accordance with SFAS No. 144, the Company evaluates the realizability of long-lived assets, which primarily consist of property and equipment and definite lived intangible assets (the “SFAS No. 144 Long-Lived Assets”), when events or business conditions warrant it, as well as whenever an interim goodwill impairment test is required under SAFS No. 142, based on expectations of non-discounted future cash flows for each subsidiary.  SFAS No. 142 requires that the SFAS No. 144 impairment test be completed and any SFAS No. 144 impairment be recorded prior to the goodwill impairment test.  As of April 4, 2009, the Company has concluded that no indicators of impairment existed.
 
The Company’s businesses are experiencing a difficult market environment due primarily to weak residential new construction, remodeling and residential air conditioning markets and increased commodity costs, and expect these trends to continue in 2009.  The Company has evaluated the carrying value of reporting unit goodwill and long-lived assets and has determined that despite the current difficult market environment, no impairment indicators existed at April 4, 2009 or at the time these financial statements were completed.

Fair Value

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No. 157 was effective for the Company beginning January 1, 2008, including interim periods within the year ending December 31, 2008.  SFAS No. 157 replaces multiple existing definitions of fair value with a single definition, establishes a consistent framework for measuring fair value and expands financial statement disclosures regarding fair value measurements.  SFAS No. 157 applies only to fair value measurements that already are required or permitted by other accounting standards and does not require any new fair value measurements.

In February 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions” (“FSP No. 157-1”), and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”).  FSP No. 157-1 removes leasing from the scope of SFAS No. 157.  FSP No. 157-2 delayed the effective date of SFAS No. 157 from 2008 to 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

The adoption of SFAS No. 157, FSP No. 157-1 and FSP No. 157-2 for the Company’s financial and non-financial assets and liabilities in the first quarter of 2008 and the first quarter of 2009, respectively, did not have a material impact on the Company’s financial position or results of operations.  As of April 4, 2009, the Company did not have any significant financial assets or liabilities carried at fair value other than cash which is valued based upon quoted prices for identical instruments in active markets at the measurement date (“Level 1 Input”).
 
In October 2008, the FASB issued FSP 157-3, “Determining Fair Value of a Financial Asset in a Market That Is Not Active” (“FSP 157-3”).  FSP 157-3 expands upon the implementation guidance in SFAS No. 157 for estimating the present value of future cash flows for some hard-to-value financial instruments, such as collateralized debt obligations.  FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued.  The adoption of FSP 157-3 did not have a material impact on the Company’s financial position or results of operations.
 
Stock-Based Compensation of Employees, Officers and Directors
 
The Company follows the modified-prospective transition method of accounting for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”).  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.  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, “Accounting for Stock-Based Compensation”.
 
At April 4, 2009, certain employees and consultants held approximately 23,269 C-1 units and approximately 40,745 C-2 units, which represent equity interests in THL-Nortek Investors, LLC (“Investors LLC”), the parent of NTK Holdings, that function similar to stock awards.  The C-1 units vest pro rata on a quarterly basis over a three-year period and approximately 23,169 and 23,116 were vested at April 4, 2009 and December 31, 2008, respectively.  The total grant date fair value of the C-1 units is approximately $1.2 million and approximately $0.1 million remains to be amortized at April 4, 2009.  The C-2 units only vest in the event that certain performance-based criteria, as defined, are met.  At April 4, 2009 and December 31, 2008, there was approximately $1.6 million of unamortized stock-based employee compensation with respect to the C-2 units, which will be recognized 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.

New Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (“SFAS No. 161”).  SFAS No. 161 requires additional disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting.  SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The adoption of SFAS No. 161 on January 1, 2009 did not have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 requires that noncontrolling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity.  SFAS No. 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement.  SFAS No. 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation.  SFAS No. 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years.  The Company adopted SFAS No. 160 effective January 1, 2009.  The adoption of SFAS No. 160 did not have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations”, but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations.  SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business.  SFAS No. 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses.  SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008.  The Company adopted SFAS No. 141(R) effective January 1, 2009.  Approximately $1.2 million of the Company’s unrecognized tax benefits as of December 31, 2008 was recognized and reduced the Company’s effective tax rate used in developing the income tax provision for the first quarter of 2009, rather than goodwill as stated under previous accounting principles.

(B)
At December 31, 2008, the Company’s Best subsidiary was not in compliance with a maintenance covenant with respect to two loan agreements with aggregate borrowings outstanding of approximately $6.8 million.  Non-compliance with these two long-term debt agreements would have resulted in non-compliance with two other long-term debt agreements totaling approximately $5.3 million at December 31, 2008.  The Company’s Best subsidiary obtained waivers from the bank, which indicated that the Company’s Best subsidiary was not required to comply with the maintenance covenant as of December 31, 2008.  The next measurement date for the maintenance covenant is for the year ended December 31, 2009 and the Company believes that it is probable that its Best subsidiary will not be in compliance with the maintenance covenant when their assessment of the required calculation is completed in the first quarter of 2010.  The Company and its Best subsidiary are currently in negotiations to refinance these two loan agreements; however as of April 4, 2009, a definitive agreement was not signed.  As a result, the Company has classified approximately $6.6 million and $8.1 million of outstanding borrowings under such “long-term debt” agreements as a current liability on its consolidated balance sheet at April 4, 2009 and December 31, 2008, respectively.  The Company and its Best subsidiary will continue to negotiate the refinancing of these debt obligations; however no assurance can be given that it will be successful in obtaining a refinancing, amendment or waiver on terms acceptable to the Company.  Accordingly, Nortek could be required to repay approximately $6.6 million at December 31, 2009 related to these loans in an event of non-compliance.

The agreements that govern the terms of the Company’s debt, including the indentures that govern NTK Holdings’ 10 3/4% Senior Discount Notes, Nortek’s 10% Senior Secured Notes and Nortek’s 8 1/2% senior subordinated notes and the credit agreements that govern NTK Holdings’ senior unsecured loan facility and Nortek’s ABL Facility, contain covenants that restrict the Company’s ability and the ability of its subsidiaries to incur additional indebtedness, pay dividends or make other distributions, make loans or investments, incur certain liens, enter into transactions with affiliates and consolidate, merge or sell assets.

The indentures that govern Nortek’s 10% Senior Secured Notes and Nortek’s 8 1/2% Senior Subordinated Notes limit Nortek’s ability to make certain payments, including dividends, loans or investments or the redemption or retirement of any equity interests and indebtedness subordinated to the notes.  These limitations are based on a calculation of net income, equity issuances, receipt of capital contributions and return on certain investments (as defined by the respective indentures) since August 27, 2004.  The amount of the permitted payments depends in part on baskets which are available only if Nortek meets certain financial tests.  No assurance can be given that Nortek will have sufficient capacity under these limitations to make payments to NTK Holdings to enable it to satisfy its debt service obligations.  As of April 4, 2009, Nortek had the capacity to make certain payments, including dividends, of up to approximately $145.9 million.  Nortek is under no obligation to make any distribution or other payment to NTK Holdings even if Nortek has available cash and the making of such a payment is permitted by the terms of its existing indebtedness (see Note A).

At April 4, 2009, NTK Holdings had approximately $6.9 million available for the payment of cash dividends, stock purchases or other restricted payments under the terms of the indenture governing its 10 3/4% Senior Discount Notes and the agreement governing its senior unsecured loan facility.

In May 2009, Moody’s affirmed its debt ratings for Nortek and NTK Holdings of “Caa2” and affirmed its negative outlook.  Moody’s rating affirmation reflected the Company’s high leverage, reduced financial flexibility and the anticipated continuing difficulties in the new home construction market and depressed home values on the Company’s 2009 financial performance.  The negative ratings outlook reflects Moody’s concern that the market for the Company’s products will remain under significant pressure so long as new housing starts do not rebound and that the repair and remodeling market could contract further in 2009.  Additionally, Moody’s was concerned whether the Company’s cost cutting initiatives would be successful enough to offset pressure on the Company’s sales.

In April 2009, Standard & Poor's (“S&P”) Ratings Services lowered its corporate credit rating on Nortek and issued a negative outlook.  Additionally S&P lowered the issue-level rating on Nortek's 10% senior secured notes due 2013 and on Nortek’s 8 1/2% senior subordinated notes due 2014.  In addition, S&P lowered the corporate credit rating on NTK Holdings and lowered the issue-level rating on NTK Holdings’ 10 3/4% senior discount notes due 2014. These rating actions reflect S&P’s expectations that NTK Holdings and Nortek's ability to service its current capital structure over the next year will be challenged as difficult operating conditions are likely to continue due to depressed new residential construction markets and an expected decline in remodeling and commercial construction activity.

(C)
During the first quarter ended April 4, 2009 and March 29, 2008, the Company’s results of operations include the following expense items recorded in selling, general and administrative expense, net in the accompanying unaudited condensed consolidated statement of operations:

       
For the first quarter ended
  
       
April 4, 2009
    
March 29, 2008
  
       
(Amounts in millions)
  
                 
  (1 )
A charge related to reserves for amounts due from customers in the RVP,
            
     
   HTP and C-HVAC segments
   $ 1.0     $ ---  
  (2 )
Foreign exchange losses related to transactions, including intercompany
                
     
   debt not indefinitely invested in Nortek's subsidiaries
     0.1       0.1  
 
Nortek and Nortek Holdings, Inc. have 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 $0.5 million for each of the first quarters ended April 4, 2009 and March 29, 2008, respectively, related to this management agreement in the accompanying unaudited condensed consolidated statement of operations.
 
(D)
The Company is a diversified manufacturer of innovative, branded residential and commercial building products, operating within four reporting segments:

·  
the Residential Ventilation Products (“RVP”) segment,
·  
the Home Technology Products (“HTP”) segment,
·  
the Residential Air Conditioning and Heating Products (“R-HVAC“) segment and
·  
the Commercial Air Conditioning and Heating Products (“C-HVAC“) segment.

Through these segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the professional remodeling and replacement markets, the residential and commercial construction markets, the manufactured housing market and the do-it-yourself (“DIY”) market.

During 2008, the Company changed the composition of its reporting segments to report the R-HVAC 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 reflect the new composition.

The RVP segment manufactures and sells room and whole house ventilation products and other products primarily for the professional remodeling and replacement markets, the residential new construction market and the DIY market.  The principal products sold by this segment include:

·  
kitchen range hoods,
·  
exhaust fans (such as bath fans and fan, heater and light combination units), and
·  
indoor air quality products.

The HTP segment manufactures and sells a broad array of products designed to provide convenience and security for residential and certain commercial applications.  The principal products sold by this segment are:

·  
audio / video distribution and control equipment,
·  
speakers and subwoofers,
·  
security and access control products,
·  
power conditioners and surge protectors,
·  
audio / video wall mounts and fixtures,
·  
lighting and home automation controls, and
·  
structured wiring.

The R-HVAC segment manufactures and sells heating, ventilating and air conditioning systems for site-built residential and manufactured housing structures and certain commercial markets.  The principal products sold by the segment are:

·  
split-system air conditioners,
·  
heat pumps,
·  
air handlers, and
·  
furnaces and related equipment.

The C-HVAC segment manufactures and sells heating, ventilating and air conditioning systems for custom-designed commercial applications to meet customer specifications.  The principal products sold by the segment are large custom roof top cooling and heating products.

The Company evaluates segment performance based on operating earnings before allocations of corporate overhead costs.  Intersegment net sales and intersegment eliminations are not material for any of the periods presented.  The financial statement impact of all purchase accounting adjustments, including intangible assets amortization and goodwill, are reflected in the applicable operating segment, which are the Company’s reporting units.  In the tables below, Unallocated includes corporate related items, intersegment eliminations and certain income and expense items not allocated to reportable segments.

Unaudited net sales, operating earnings (loss) and pre-tax loss for the Company’s reporting segments for the first quarter ended April 4, 2009 and March 29, 2008 were as follows:
 
   
For the first quarter ended
  
   
April 4, 2009
    
March 29, 2008
  
   
(Dollar amounts in millions)
  
Net sales:
            
Residential ventilation products
   $ 149.9     $ 188.2  
Home technology products
     98.4       124.1  
Residential air conditioning and heating products
     82.4       120.1  
Commercial air conditioning and heating products
     108.3       107.8  
   Consolidated net sales
   $ 439.0     $ 540.2  
                 
Operating earnings (loss):
                
Residential ventilation products (1)
   $ 9.0     $ 15.9  
Home technology products (2)
     1.1       10.3  
Residential air conditioning and heating products
     (5.3 )     1.0  
Commercial air conditioning and heating products (3)
     16.2       3.7  
   Subtotal
     21.0       30.9  
Unallocated:
                
Foreign exchange gains on transactions, including intercompany debt
     ---       0.1  
Unallocated, net
     (6.4 )     (7.6 )
   Consolidated operating earnings
     14.6       23.4  
Interest expense
     (55.0 )     (43.0 )
Investment income
     0.1       0.2  
   Loss before provision (benefit) for income taxes
   $ (40.3 )   $ (19.4 )
 
(1)  The operating results of the RVP segment for the first quarter ended April 4, 2009 include a charge related to reserves for amounts due from customers of approximately $0.1 million and foreign exchange losses of approximately $0.4 million related to transactions, including intercompany debt not indefinitely invested in Nortek’s subsidiaries.

The operating results of the RVP segment for the first quarter ended March 29, 2008 include net foreign exchange losses of approximately $0.5 million related to transactions, including intercompany debt not indefinitely invested in Nortek’s subsidiaries.

(2)  The operating results of the HTP segment for the first quarter ended April 4, 2009 include a charge related to reserves for amounts due from customers of approximately $0.6 million and foreign exchange losses of approximately $0.2 million related to transactions.

(3)  The operating results of the C-HVAC segment for the first quarter ended April 4, 2009 include a charge related to reserves for amounts due from customers of approximately $0.3 million and foreign exchange gains of approximately $0.5 million related to transactions, including intercompany debt not indefinitely invested in Nortek’s subsidiaries.

The operating results of the C-HVAC segment for the first quarter ended March 29, 2008 include net foreign exchange gains of approximately $0.3 million related to transactions, including intercompany debt not indefinitely invested in Nortek’s subsidiaries.
 
Unaudited depreciation expense, amortization expense and capital expenditures for the Company’s reporting segments for the first quarter ended April 4, 2009 and March 29, 2008 were as follows:
 
   
For the first quarter ended
  
   
April 4, 2009
    
March 29, 2008
  
   
(Dollar amounts in millions)
  
             
Depreciation Expense:
            
Residential ventilation products
   $ 3.4     $ 4.2  
Home technology products
     1.6       1.6  
Residential air conditioning and heating products
     2.8       3.0  
Commercial air conditioning and heating products
     1.7       1.7  
Other
     0.1       0.2  
   Consolidated depreciation expense
   $ 9.6     $ 10.7  
                 
Amortization expense:
                
Residential ventilation products
   $ 1.7     $ 1.9  
Home technology products
     2.8       3.3  
Residential air conditioning and heating products
     0.2       0.1  
Commercial air conditioning and heating products
     1.2