Form 10-Q for NTK Holdings, Inc. for 2Q 2006

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 July 1, 2006

[ ] 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: 333-133866

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 August 4, 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 millions, except share data)

	July 1,		December 31,
	2006		2005
Assets
Current Assets:
Cash and cash equivalents	$	54.9	$	77.2
Accounts receivable, less allowances of $6.8 and $6.6		330.2		272.2
Inventories:
Raw materials		87.1		75.2
Work in process		32.2		21.4
Finished goods		178.2		145.7
		297.5		242.3

Prepaid expenses		12.9		10.5
Other current assets		21.9		26.3
Prepaid income taxes		23.3		21.0
Total current assets		740.7		649.5

Property and Equipment, at Cost:
Land		11.1		8.8
Buildings and improvements		94.4		84.3
Machinery and equipment		159.2		141.1
		264.7		234.2
Less accumulated depreciation		43.3		28.7
Total property and equipment, net		221.4		205.5

Other Assets:
Goodwill		1,387.0		1,381.3
Intangible assets, less accumulated amortization of $37.5 and $27.3		144.9		114.5
Deferred debt expense		45.0		42.1
Restricted investments and marketable securities		4.0		4.0
Other assets		8.6		7.7
		1,589.5		1,549.6
	$	2,551.6	$	2,404.6

Liabilities and Stockholder’s Investment

Current Liabilities:
Notes payable and other short-term obligations	$	33.5	$	4.9
Current maturities of long-term debt		18.7		14.8
Accounts payable		205.5		159.0
Accrued expenses and taxes, net		198.7		187.2
Total current liabilities		456.4		365.9

Other Liabilities:
Deferred income taxes		31.3		4.1
Other		135.6		215.4
		166.9		219.5


Notes, Mortgage Notes and Obligations Payable, Less Current Maturities		1,858.8		1,628.7

Stockholder’s Investment:
Common stock, $0.01 par value, authorized 3,000 shares; 3,000 issued and
outstanding at July 1, 2006 and December 31, 2005		---		---
Additional paid-in capital		21.2		130.2
Retained earnings		33.9		52.8
Accumulated other comprehensive income		14.4		7.5
Total stockholder's investment		69.5		190.5
Total Liabilities and Stockholder's Investment:	$	2,551.6	$	2,404.6

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 three months ended
	July 1, 2006			July 2, 2005
	(Dollar amounts in millions)

Net Sales	$	563.8		$	498.9

Costs and Expenses:
Cost of products sold		393.7			350.4
Selling, general and administrative expense, net		102.9			85.1
Amortization of intangible assets		5.8			4.4
Gain from curtailment of post-retirement medical benefits		(35.6	)		---
		466.8			439.9
Operating earnings		97.0			59.0
Interest expense		(42.3	)		(32.7	)
Investment income		0.5			0.3
Earnings before provision for income taxes		55.2			26.6
Provision for income taxes		21.3			10.1
Net earnings	$	33.9		$	16.5

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 six months ended
	July 1, 2006			July 2, 2005
	(Dollar amounts in millions)

Net Sales	$	1,098.3		$	933.0

Costs and Expenses:
Cost of products sold		764.2			659.9
Selling, general and administrative expense, net		198.2			164.7
Amortization of intangible assets		10.0			8.7
Gain from curtailment of post-retirement medical benefits		(35.6	)		---
		936.8			833.3
Operating earnings		161.5			99.7
Interest expense		(78.4	)		(69.9	)
Investment income		1.2			0.8
Earnings before provision for income taxes		84.3			30.6
Provision for income taxes		32.6			11.8
Net earnings	$	51.7		$	18.8

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 six months ended
	July 1, 2006			July 2, 2005
	(Dollar amounts in millions)
Cash Flows from operating activities:
Net earnings	$	51.7		$	18.8

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization expense, including amortization of purchase price allocated to inventory		28.3			22.7
Non-cash interest expense, net		19.9			13.1
Non-cash stock-based compensation expense		0.2			0.2
Gain from curtailment of post-retirement medical benefits		(35.6	)		---
Loss (gain) on sale of fixed assets		1.8			(0.5	)
Deferred federal income tax provision		16.9			5.5

Changes in certain assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable, net		(28.5	)		(60.6	)
Inventories		(37.9	)		(24.0	)
Prepaids and other current assets		5.3			(7.8	)
Accounts payable		27.4			31.8
Accrued expenses and taxes		1.0			(0.9	)
Long-term deferred compensation		(54.0	)		(57.7	)
Long-term assets, liabilities and other, net		7.5			5.3
Total adjustments to net earnings		(47.7	)		(72.9	)
Net cash provided by (used in) operating activities		4.0			(54.1	)
Cash Flows from investing activities:
Capital expenditures		(22.7	)		(9.2	)
Net cash paid for businesses acquired		(56.9	)		(13.4	)
Proceeds from the sale of property and equipment		2.6			6.1
Change in restricted cash and marketable securities		---			(0.3	)
Other, net		(2.6	)		(0.9	)
Net cash used in investing activities		(79.6	)		(17.7	)
Cash Flows from financing activities:
Increase in borrowings		68.9			4.9
Payment of borrowings		(40.0	)		(10.9	)
Borrowing under the senior unsecured loan facility		200.8			---
Sale of 10 3/4% Senior Discount Notes		---			244.7
Dividends		(174.9	)		(187.0	)
Other, net		(1.5	)		(0.2	)
Net cash provided by financing activities		53.3			51.5
Net decrease in unrestricted cash and cash equivalents		(22.3	)		(20.3	)
Unrestricted cash and cash equivalents at the beginning of the period		77.2			95.0
Unrestricted cash and cash equivalents at the end of the period	$	54.9		$	74.7

Supplemental disclosure of cash flow information:

Interest paid	$	57.7		$	55.6

Income taxes paid, net	$	14.4		$	5.5

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 JULY 2, 2005

(Dollar amounts in millions)

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

Balance, April 2, 2005	$	129.9	$	(1.8	)	$	6.8		$	---
Net earnings		---		16.5			---			16.5
Other comprehensive income (loss):
Currency translation adjustment		---		---			(4.4	)		(4.4	)
Unrealized appreciation in the fair value of marketable securities		---		---			0.1			0.1
Comprehensive income									$	12.2
Stock-based compensation		0.1		---			---
Balance, July 2, 2005	$	130.0	$	14.7		$	2.5

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 SIX MONTHS ENDED JULY 2, 2005

(Dollar amounts in millions)

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

Balance, December 31, 2004	$	316.8		$	(4.1	)	$	9.1		$	---
Net earnings		---			18.8			---			18.8
Other comprehensive income (loss):
Currency translation adjustment		---			---			(6.6	)		(6.6	)
Comprehensive income										$	12.2
Dividends		(187.0	)		---			---
Stock-based compensation		0.2			---			---
Balance, July 2, 2005	$	130.0		$	14.7		$	2.5

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 JULY 1, 2006

(Dollar amounts in millions)

							Accumulated
	Additional						Other
	Paid in			Retained			Comprehensive		Comprehensive
	Capital			Earnings			Income		Income

Balance, April 1, 2006	$	130.3		$	70.6		$	8.1	$	---
Net earnings		---			33.9			---		33.9
Other comprehensive income:
Currency translation adjustment		---			---			6.3		6.3
Comprehensive income									$	40.2
Dividends		(104.3	)		(70.6	)		---
Adjustment of carryover basis of continuing
management investors in the THL Transaction		(4.9	)		---			---
Stock-based compensation		0.1			---			---
Balance, July 1, 2006	$	21.2		$	33.9		$	14.4

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 SIX MONTHS ENDED JULY 1, 2006

(Dollar amounts in millions)

							Accumulated
	Additional						Other
	Paid in			Retained			Comprehensive		Comprehensive
	Capital			Earnings			Income		Income

Balance, December 31, 2005	$	130.2		$	52.8		$	7.5	$	---
Net earnings		---			51.7			---		51.7
Other comprehensive income:
Currency translation adjustment		---			---			6.9		6.9
Comprehensive income									$	58.6
Dividends		(104.3	)		(70.6	)		---
Adjustment of carryover basis of continuing
management investors in the THL Transaction		(4.9	)		---			---
Stock-based compensation		0.2			---			---
Balance, July 1, 2006	$	21.2		$	33.9		$	14.4

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

JULY 1, 2006 AND JULY 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”).

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 1,935 and 3,666 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 12,889 and 9,065 were vested at July 1, 2006 and December 31, 2005, respectively. The total fair value of the C-1 units is approximately $1.1 million. Approximately $0.5 million remains to be amortized at July 1, 2006. The C-2 units only vest in the event that certain performance-based criteria, as defined, are met. As of July 1, 2006 and December 31, 2005, there was approximately $1.6 million 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”).

The Company adopted SFAS No. 123R and followed 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 $0.1 million for each of the second quarters ended July 1, 2006 and July 2, 2005, respectively and approximately $0.2 million for each of the first six months ended July 1, 2006 and July 2, 2005, respectively, in accordance with SFAS No. 123 and SFAS No. 123R.

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 $111.8 million 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 $57.7 million, which resulted in additional interest expense of approximately $8.2 million, and on May 10, 2006, made a second distribution to the participants in the amount of approximately $54.0 million, which resulted in additional interest expense of approximately $3.9 million (see Note B). As a result of this second distribution, the participants in the deferred compensation plan are not entitled to any further distributions.

At December 31, 2005, other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet include approximately $49.0 million related to this deferred compensation plan and is net of unamortized discount of approximately $5.0 million. The balance sheet at July 1, 2006 does not include any liabilities related to this deferred compensation plan as a result of the second distribution noted above.

In connection with accounting for the purchase price for the Acquisition, the Company recorded a deferred tax benefit of approximately $32.6 million representing the tax benefit related to the deferred compensation plan of Nortek Holdings. At December 31, 2005, the remaining deferred tax benefit was approximately $17.5 million, which is included in deferred income taxes in the accompanying unaudited condensed consolidated balance sheet. At July 1, 2006, there were no remaining deferred tax benefits as the second distribution noted above is deductible for income tax purposes upon payment.

Goodwill

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

	(Dollar amounts in millions)

Balance as of December 31, 2004		$	1,295.1
Acquisitions during the year ended December 31, 2005			91.9
Purchase accounting adjustments			(4.8	)
Impact of foreign currency translation			(0.9	)
Balance as of December 31, 2005			1,381.3
Acquisitions during the first six months ended July 1, 2006			18.3
Purchase accounting adjustments			(9.1	)
Adjustment of carryover basis of continuing management investors in the THL Transaction			(4.9	)
Impact of foreign currency translation			1.4
Balance as of July 1, 2006		$	1,387.0

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 $18.2 million and $56.1 million of goodwill associated with certain companies acquired during the first six months ended July 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.

The $4.9 million non-cash “Adjustment of carryover basis of continuing management investors in the THL Transaction” for the six months ended July 1, 2006 as noted in the table above, represents a correction to the original 2004 purchase accounting for the Acquisition resulting in a reduction of goodwill with a corresponding reduction in Stockholder’s Investment. The $4.9 million adjustment has not been reflected in the consolidated financial statements for prior periods as the Company has determined that the adjustment is not material to the prior period consolidated financial statements.

Intangible Assets

Intangible assets increased approximately $30.4 million from approximately $114.5 million at December 31, 2005 to approximately $144.9 million at July 1, 2006. This increase is primarily as a result of intangible assets acquired as a result of business acquisitions made during the second quarter of 2006 (see Note C).

New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109”), (“FIN 48”) which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. FIN 48 was issued to clarify the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with FASB Statement No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on financial reporting and classification of differences between tax positions taken in a tax return and amounts recognized in the financial statements. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

(B) On May 10, 2006, NTK Holdings borrowed an aggregate principal amount of $205.0 million under a senior unsecured loan facility. The proceeds of this borrowing were utilized to (1) make a cash dividend of approximately $174.9 million to Investors LLC which, in turn, made 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) make a capital contribution of approximately $25.9 million to Nortek Holdings, which was used by Nortek Holdings, together with existing cash of approximately $28.1 million to make a distribution of approximately $54.0 million 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. As a result of 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 are not entitled to any further distributions (see Note A).

The senior unsecured loan facility has a term of one year, although any loans not repaid on or prior to May 10, 2007 will be extended until March 1, 2014. The senior unsecured loan facility bears interest at LIBOR plus a spread, which spread increases over time, subject to a cap on the overall interest rate of 11% per annum. NTK Holdings has the option to pay interest in cash (“Cash Option”) or by adding interest to the principal amount of the loans under the senior unsecured loan facility (“PIK Option”). If the Company exercises the PIK Option with respect to any interest period, an amount equal to the unpaid interest accrued will be added to the principal amount of the senior unsecured loan facility and such accrued interest will be deemed to have been paid. Following an increase in the principal amount of the senior unsecured loan facility as a result of the payment through the PIK Option, the senior unsecured loan facility will bear interest on such increased principal amount. The Company must elect the form of interest payment for each interest period. On August 3, 2006, the Company elected the PIK option to increase the principal amount of the senior unsecured loan facility for the interest accrued during the period from May 10, 2006 to August 10, 2006. As a result of exercising this PIK Option, the Company recorded approximately $2.2 million of accrued interest as additional indebtedness relating to the senior unsecured loan facility and at July 1, 2006, the outstanding principal balance on the senior unsecured loan facility was approximately $207.2 million. The senior unsecured loan facility is not guaranteed by any of the NTK Holdings’ subsidiaries or by any assets of NTK Holdings or any of its subsidiaries.

On April 3, 2006, Nortek amended and restated the credit agreement for its senior secured credit facility, expanding its $100.0 million revolving credit facility to $200.0 million and modifying certain covenants. The amendment provides Nortek with additional liquidity and covenant flexibility. The revolving credit facility matures in August 2010 and includes both a letter of credit sub-facility and swing line loan sub-facility.

On February 15, 2005, the Company completed the sale of $403.0 million aggregate principal amount at maturity ($250.4 million 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 $403.0 million in September 2009. The carrying value of the 10 3/4% Senior Discount Notes was approximately $289.4 million and $274.6 million at July 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 $187.0 million to its sole stockholder, Investors LLC. In turn, Investors LLC authorized a distribution of approximately $187.0 million 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. In addition, on February 18, 2005, NTK Holdings contributed approximately $57.7 million to Nortek Holdings for the purpose of making payments under the Nortek Holdings, Inc. Deferred Compensation Plan, which resulted in additional expense of approximately $8.2 million, which the Company has included in interest expense in the accompanying unaudited condensed consolidated statement of operations for the first six months ended July 2, 2005. All payments related to this contribution were made by Nortek Holdings, Inc.

As of July 1, 2006, there was approximately $25.8 million available for the payment of cash dividends, stock purchases or other restricted payments (“Restricted Payments”) by the Company as defined under the terms of both the Company’s 10 3/4% Senior Discount Notes’ and senior unsecured loan facility's indentures. 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 $136.7 million at July 1, 2006.

(C) On June 26, 2006, the Company, through its wholly-owned subsidiary, Linear LLC (“Linear”), acquired the stock of Secure Wireless, Inc. (“Secure Wireless”) and Advanced Bridging Technologies, Inc. (“ABT”) through two mergers, for a combined initial purchase price of approximately $10.1 million, of which approximately $10.0 million was borrowed under Nortek’s revolving credit facility, plus contingent consideration. Secure Wireless designs and sells wireless security products for the residential and commercial markets while ABT designs and sells innovative radio frequency control products and accessories. Both Secure Wireless and ABT are located in Carlsbad, CA.

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 approximately $49.4 million (utilizing approximately $40.0 million of cash which was borrowed under Nortek’s revolving credit facility, including approximately $0.6 million to fund a portion of Huntair and Cleanpak’s initial working capital needs, and issuing unsecured 6% subordinated notes totaling $10.0 million 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.

On February 22, 2006, the Company, through Linear, acquired the assets and certain liabilities of Furman Sound, Inc. (“Furman”) for approximately $3.3 million. Furman is located in Petaluma, CA and designs and sells audio and video signal processors and innovative power conditioning and surge protection 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 $2.4 million. The majority ownership transaction relating to MSH was finalized with the Chinese authorities in May 2006. 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”) through a merger for approximately $28.2 million in cash, plus contingent consideration of approximately $0.2 million 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 $4.0 million (utilizing approximately $3.5 million of cash and issuing an unsecured subordinated promissory note in the amount of approximately $0.5 million) plus contingent consideration, which may be payable in future years. Sunfire is located in Snohomish, WA and manufactures, 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 $6.1 million in cash plus contingent consideration, which may be payable in future years. Imerge is located in Cambridge, United Kingdom and designs 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 $77.7 million. In connection with the acquisition of Niles, the Company utilized approximately $67.7 million of cash and issued an unsecured promissory note in the amount of approximately $10.0 million. Niles is located in Miami, FL and manufactures, 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 $4.6 million, utilizing approximately $4.1 million of cash and issuing an unsecured promissory note in the amount of approximately $0.5 million. IMS is located in Miami, FL and sells heating, ventilation and air conditioning equipment to customers in Latin America and the Caribbean.

On April 26, 2005, the Company, through Linear, acquired the stock of Panamax for approximately $11.8 million (utilizing approximately $9.5 million of cash and issuing an unsecured promissory note in the amount of approximately $2.3 million) plus contingent consideration of approximately $4.5 million 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 $51.1 million, $2.5 million and $2.6 million to net sales, operating earnings and depreciation and amortization expense, respectively, for the second quarter ended July 1, 2006 and contributed approximately $82.6 million, $3.2 million and $3.8 million to net sales, operating earnings and depreciation and amortization expense, respectively, for the first six months ended July 1, 2006. Huntair, Cleanpak, MEG, MSH and IMS are included in the Air Conditioning and Heating Products Segment in the Company’s segment reporting, while all remaining acquisitions are included in the Home Technology Products Segment in the Company’s segment reporting (see Note E).

During the second quarter and first six months ended July 1, 2006, the Company recorded approximately $2.1 million and $2.2 million, 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. During first six months ended July 2, 2005, the Company recorded approximately $0.1 million 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.

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 of the historical results of these acquisitions is not significant to the Company’s consolidated operating results.

On July 18, 2006, the Company, through Linear, acquired the stock of Magenta Research, Ltd. (“Magenta”) for an initial purchase price of approximately $13.1 million (utilizing approximately $10.6 million of cash, of which approximately $10.0 million was borrowed under Nortek’s revolving credit facility, and issuing unsecured 6% subordinated notes totaling $2.5 million due July 2008) plus contingent consideration. Magenta is located in New Milford, CT and designs and sells products that distribute audio and video signals over Category 5 and fiber optic cable to multiple displays for dynamic signage applications.

The estimated total potential amount of contingent consideration that may be paid in the future for these acquisitions is approximately $116.8 million.

(D) Operating results for the second quarter and first six months ended July 1, 2006 include a non-cash foreign exchange gain of approximately $0.2 million and $0.3 million, respectively, and the operating results for the second quarter and first six months ended July 2, 2005 include a non-cash foreign exchange loss of approximately $0.9 million and $1.4 million, respectively, related to intercompany debt not indefinitely invested in the Company’s subsidiaries. A portion of this expense has been allocated to the Company’s reporting segments for the second quarter and first six months ended July 2, 2005 (see Note E).

Operating results for the first six months ended July 2, 2005 includes a gain of approximately $1.4 million from the settlement of certain obligations of former subsidiaries (see Note G).

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 $0.6 million and $1.2 million for the second quarter and first six months ended July 1, 2006, respectively, and expensed approximately $0.5 million and $1.0 million for the second quarter and first six months ended July 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 second quarter ended July 1, 2006 and July 2, 2005 were as follows:

	For the second quarter ended
	July 1, 2006			July 2, 2005
	(Dollar amounts in millions)

Net sales:
Residential ventilation products	$	207.3		$	202.6
Home technology products		115.1			76.4
Air conditioning and heating products		241.4			219.9
Consolidated net sales	$	563.8		$	498.9

Operating earnings:
Residential ventilation products (1)	$	69.8		$	30.9
Home technology products (2)		14.4			15.0
Air conditioning and heating products (3)		19.3			20.5
Subtotal		103.5			66.4
Unallocated:
Stock-based compensation charges		(0.1	)		(0.1	)
Foreign exchange gain (loss) on intercompany debt		0.2			(0.2	)
Unallocated, net		(6.6	)		(7.1	)
Consolidated operating earnings		97.0			59.0
Interest expense		(42.3	)		(32.7	)
Investment income		0.5			0.3
Earnings before provision for income taxes	$	55.2		$	26.6

(1)

The operating results of the Residential Ventilation Products Segment for the second quarter ended July 1, 2006 include an approximate pre-tax $35.6 million curtailment gain related to post-retirement medical benefits and an approximate pre-tax $3.5 million charge related to the planned closure of the Company’s NuTone, Inc. Cincinnati, Ohio facility (see Note I). The operating results of the Residential Ventilation Products Segment for the second quarter ended July 2, 2005 include a non-cash foreign exchange loss of approximately $0.6 million related to intercompany debt not indefinitely invested in the Company’s subsidiaries.

(2) The operating results of the Home Technology Products Segment for the second quarter ended July 1, 2006 include an increase in warranty expense of approximately $4.0 million related to a product safety upgrade.

(3)

The operating results of the Air Conditioning and Heating Products Segment for the second quarter ended July 2, 2005 include a non-cash foreign exchange loss of approximately $0.1 million related to intercompany debt not indefinitely invested in the Company’s subsidiaries.

Unaudited net sales, operating earnings and pre-tax earnings for the Company’s segments for the first six months ended July 1, 2006 and July 2, 2005 were as follows:

	For the first six months ended
	July 1, 2006			July 2, 2005
	(Dollar amounts in millions)

Net sales:
Residential ventilation products	$	418.9		$	399.7
Home technology products		222.6			140.3
Air conditioning and heating products		456.8			393.0
Consolidated net sales	$	1,098.3		$	933.0

Operating earnings:
Residential ventilation products (1)	$	105.9		$	57.8
Home technology products (2)		31.7			25.8
Air conditioning and heating products (3)		37.2			27.8
Subtotal		174.8			111.4
Unallocated:
Stock-based compensation charges		(0.2	)		(0.2	)
Foreign exchange gain (loss) on intercompany debt		0.3			(0.3	)
Gain on legal settlement		---			1.4
Unallocated, net		(13.4	)		(12.6	)
Consolidated operating earnings		161.5			99.7
Interest expense		(78.4	)		(69.9	)
Investment income		1.2			0.8
Earnings before provision for income taxes	$	84.3		$	30.6

(1)

The operating results of the Residential Ventilation Products Segment for the first six months ended July 1, 2006 include an approximate pre-tax $35.6 million curtailment gain related to post-retirement medical benefits and an approximate pre-tax $3.5 million charge related to the planned closure of the Company’s NuTone, Inc. Cincinnati, Ohio facility (see Note I). The operating results of the Residential Ventilation Products Segment for the first six months ended July 2, 2005 include a non-cash foreign exchange loss of approximately $1.0 million related to intercompany debt not indefinitely invested in the Company’s subsidiaries.

(2)

The operating results of the Home Technology Products Segment for the first six months ended July 1, 2006 include an increase in warranty expense of approximately $4.0 million related to a product safety upgrade.

(3)

The operating results of the Air Conditioning and Heating Products Segment for the first six months ended July 2, 2005 include a non-cash foreign exchange loss of approximately $0.1 million 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 second quarter ended July 1, 2006 and July 2, 2005 were as follows:

	For the second quarter ended
	July 1, 2006		July 2, 2005
	(Dollar amounts in millions)

Depreciation Expense:
Residential ventilation products	$	3.3	$	2.9
Home technology products