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 July 2, 2005

OR

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

For the transition period from ______ to ______

333-126389
(Commission File Number)
__________


NTK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
__________
 
 Delaware 
  
  20-1934298
 (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 [  ] No [X]

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 August 4, 2005 was 3,000.



PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

   
July 2,
 
December 31,
 
 
 
2005
 
2004
  
Assets
          
Current Assets:
          
Unrestricted cash and cash equivalents
  
$
74,615
  
$
94,955
  
Restricted cash and cash equivalents
    
468
   
---
 
Accounts receivable, less allowances
              
   of $5,684 and $5,467
   
284,233
   
225,706
 
Inventories:
              
Raw materials
   
70,677
   
72,166
 
Work in process
   
24,846
   
24,249
 
Finished goods
   
133,997
   
109,134
 
     
229,520
   
205,549
 
               
Prepaid expenses
   
11,349
   
8,596
 
Other current assets
   
29,179
   
26,126
 
Prepaid income taxes
   
30,208
   
32,745
 
Total current assets
   
659,572
   
593,677
 
               
Property and Equipment, at Cost:
              
Land
   
8,418
   
8,683
 
Buildings and improvements
   
71,004
   
75,476
 
Machinery and equipment
   
133,107
   
124,644
 
     
212,529
   
208,803
 
Less accumulated depreciation
   
18,561
   
7,713
 
Total property and equipment, net
   
193,968
   
201,090
 
               
Other Assets:
              
Goodwill
   
1,309,067
   
1,295,105
 
Intangible assets, less accumulated amortization
              
   of $17,041 and $8,436
    
100,776
   
110,715
 
Deferred tax benefit
    
---
   
2,488
 
Deferred debt expense
   
44,855
   
41,741
 
Restricted investments and marketable securities
    
4,973
   
8,605
 
Other assets
    
8,124
   
11,154
 
     
1,467,795
   
1,469,808
 
   
$
2,321,335
  
$
2,264,575
  
               
Liabilities and Stockholder’s Investment
              
               
Current Liabilities:
              
Notes payable and other short-term obligations
 
$
7,481
  
$
5,364
  
Current maturities of long-term debt
   
10,555
   
14,414
 
Accounts payable
   
167,886
   
137,343
 
Accrued expenses and taxes, net
   
168,803
   
220,784
 
Total current liabilities
   
354,725
   
377,905
 
               
Other Liabilities:
              
Deferred income taxes
   
113
   
---
 
Other
   
210,890
   
214,672
 
     
211,003
   
214,672
 
               
Notes, Mortgage Notes and Obligations
              
   Payable, Less Current Maturities 
    
1,608,440
   
1,350,210
 
               
Stockholder’s Investment:
              
Common stock, $0.01 par value, authorized 3,000 shares;
              
   3,000 issued and outstanding at July 2, 2005 and
              
   December 31, 2004
    
---
   
---
 
Additional paid-in capital
   
130,010
   
316,823
 
Retained earnings (accumulated deficit)
    
14,700
   
(4,100
)
Accumulated other comprehensive income
    
2,457
   
9,065
 
Total stockholder's investment
   
147,167
   
321,788
 
Total Liabilities and Stockholder's Investment:
  
$
2,321,335
  
$
2,264,575
  
 
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
  
   
Post-
 
Pre-
 
 
 
Acquisition
 
Acquisition
 
 
 
July 2, 2005
 
July 3, 2004
  
   
(Amounts in thousands)
  
           
Net Sales 
  
$
498,860
  
$
446,012
  
               
Costs and Expenses:
              
Cost of products sold
   
350,406
   
314,804
 
Selling, general and administrative expense
   
85,090
   
80,781
 
Amortization of intangible assets
   
4,385
   
3,540
 
     
439,881
   
399,125
 
Operating earnings
    
58,979
   
46,887
 
Interest expense
   
(32,741
)
  
(18,422
)
Investment income
   
362
   
335
 
Earnings from continuing operations
              
   before provision for income taxes
   
26,600
   
28,800
 
Provision for income taxes
   
10,100
   
11,700
 
Earnings from continuing operations 
    
16,500
   
17,100
 
Loss from discontinued operations 
    
---
   
(1,200
)
Net earnings
  
$
16,500
  
$
15,900
  

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 Six Months Ended
  
   
Post-
 
Pre-
 
 
 
Acquisition
 
Acquisition
 
 
 
July 2, 2005
 
July 3, 2004
  
   
(Amounts in thousands)
  
           
Net Sales 
  
$
932,978
  
$
851,024
  
               
Costs and Expenses:
              
Cost of products sold
   
659,865
   
601,686
 
Selling, general and administrative expense
   
164,678
   
153,929
 
Amortization of intangible assets
   
8,718
   
6,849
 
     
833,261
   
762,464
 
Operating earnings
    
99,717
   
88,560
 
Interest expense
   
(69,925
)
  
(43,981
)
Loss from debt retirement
    
---
   
(11,958
)
Investment income
   
808
   
1,279
 
Earnings from continuing operations before provision for income taxes
   
30,600
   
33,900
 
Provision for income taxes
   
11,800
   
13,800
 
Earnings from continuing operations 
    
18,800
   
20,100
 
Earnings from discontinued operations 
    
---
   
66,900
 
Net earnings
  
$
18,800
  
$
87,000
  
 
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 Six Months Ended
  
   
Post-
 
Pre-
 
 
 
Acquisition
 
Acquisition
 
 
 
July 2, 2005
 
July 3, 2004
  
   
(Amounts in thousands)
 
           
Cash Flows from operating activities:
          
Net earnings from continuing operations
 
$
18,800
  
$
20,100
  
Earnings from discontinued operations
   
---
   
66,900
 
Net earnings
    
18,800
   
87,000
 
               
Adjustments to reconcile net earnings to net cash used in operating activities:
              
Depreciation and amortization expense, including
             
   amortization of purchase price allocated to inventory
   
22,707
   
19,862
 
Non-cash interest expense, net
   
13,141
   
18,340
 
Non-cash stock based compensation
    
158
   
5,241
 
Loss from debt retirement
    
---
   
11,958
 
Gain on the sale of discontinued operations
   
---
   
(122,700
)
Gain on sale of fixed assets
    
(506
)
  
---
 
Deferred federal income tax provision from continuing operations
   
5,500
   
9,800
 
Deferred federal income tax credit from discontinued operations
   
---
   
(18,500
)
 
              
Changes in certain assets and liabilities, net of effects from acquisitions and dispositions:
              
Accounts receivable, net
   
(60,602
)
  
(48,357
)
Inventories
   
(23,964
)
  
(38,057
)
Prepaids and other current assets
   
(7,825
)
  
4,895
 
Net assets of discontinued operations
   
---
   
(3,496
)
Accounts payable
   
31,844
   
45,937
 
Accrued expenses and taxes
   
(923
)
  
(689
)
Long-term deferred compensation
    
(57,737
)
  
---
 
Long-term assets, liabilities and other, net
   
5,253
   
(1,892
)
   Total adjustments to net earnings
    
(72,954
)
  
(117,658
)
   Net cash used in operating activities
 
$
(54,154
)
$
(30,658
)
               
Cash Flows from investing activities:
              
Capital expenditures
 
$
(9,238
)
$
(9,616
)
Net cash paid for businesses acquired
   
(13,400
)
  
(16,500
)
Purchase of investments and marketable securities
    
---
   
(5,000
)
Proceeds from the sale of discontinued businesses
   
---
   
520,138
 
Proceeds from the sale of property and equipment
    
6,084
   
---
 
Change in restricted cash and investments
    
(275
)
  
(111
)
Other, net
   
(906
)
  
(163
)
   Net cash (used in) provided by investing activities
   
(17,735
)
  
488,748
 
Cash Flows from financing activities:
              
Change in borrowings, net
   
(5,983
)
  
(4,011
)
Sale of 10 3/4% Senior Discount Notes
    
244,708
   
---
 
Dividend to THL-Nortek Investors, LLC
    
(186,971
)
  
---
 
Sale of Floating Rate Notes
    
---
   
196,000
 
Redemption of Senior Notes
    
---
   
(716,700
)
Other, net
   
(205
)
  
63
 
   Net cash provided by (used in) financing activities
   
51,549
   
(524,648
)
Net decrease in unrestricted cash and cash equivalents
   
(20,340
)
  
(66,558
)
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
 
$
74,615
  
$
127,562
  
               
Supplemental disclosure of cash flow information:
              
               
Interest paid
 
$
55,568
  
$
47,816
  
               
Income taxes paid, net
 
$
5,483
  
$
41,634
  

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 3, 2004
(Dollar amounts in thousands)

   
Former Nortek
 
Former Nortek
 
 
 
 
 
 
 
 
 
 
 
Holdings
 
Holdings
 
 
 
 
 
Accumulated
 
 
 
 
 
Series B
 
Class A
 
Additional
 
 
 
Other
 
 
 
 
 
Preference
 
Common
 
Paid in
 
Retained
 
Comprehensive
 
Comprehensive
 
 
 
Stock
 
Stock
 
Capital
 
Earnings
 
Income (Loss)
 
Income (Loss)
  
                           
                           
Balance, April 3, 2004
  
$
8,130
  
$
397
  
$
173,217
  
$
71,100
  
$
16,202
  
$
---
  
Net earnings
    
---
   
---
   
---
   
15,900
   
---
   
15,900
 
Other comprehensive income (loss):
                                      
   Currency translation adjustment
    
---
   
---
   
---
   
---
   
(511
)
  
(511
)
Comprehensive income
                                
$
15,389
  
Stock based compensation
    
---
   
---
   
4,269
   
---
   
---
       
Balance, July 3, 2004
  
$
8,130
  
$
397
  
$
177,486
  
$
87,000
  
$
15,691
        

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 SIX MONTHS ENDED JULY 3, 2004
(Dollar amounts in thousands)

   
Former Nortek
 
Former Nortek
 
 
 
 
 
 
 
 
 
 
 
Holdings
 
Holdings
 
 
 
 
 
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
    
---
   
---
   
---
   
87,000
   
---
   
87,000
 
Other comprehensive income (loss):
                                      
   Currency translation adjustment
    
---
   
---
   
---
   
---
   
(3,761
)
  
(3,761
)
   Unrealized decline in the fair value of
                                      
      marketable securities
    
---
   
---
   
---
   
---
   
(3
)
  
(3
)
Minimum pension liability, net of tax of $10
    
---
   
---
   
---
   
---
   
18
   
18
 
Comprehensive income
                                
$
83,254
  
Stock based compensation
    
---
   
---
   
5,242
   
---
   
---
       
Balance, July 3, 2004
  
$
8,130
  
$
397
  
$
177,486
  
$
87,000
  
$
15,691
        

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 thousands)

   
 
 
Retained
 
Accumulated
 
 
 
 
 
Additional
 
Earnings
 
Other
 
 
 
 
 
Paid in
 
(Accumulated
 
Comprehensive
 
Comprehensive
 
 
 
Capital
 
Deficit)
 
Income (Loss)
 
Income (Loss)
  
                   
                   
Balance, April 2, 2005
  
$
129,931
  
$
(1,800
)
$
6,816
  
$
---
  
Net earnings
    
---
   
16,500
   
---
   
16,500
 
Other comprehensive income (loss):
                          
   Currency translation adjustment
    
---
   
---
   
(4,372
)
  
(4,372
)
   Unrealized appreciation in the fair value of
                          
      marketable securities
    
---
   
---
   
13
   
13
 
Comprehensive income
                    
$
12,141
  
Stock based compensation
    
79
   
---
   
---
       
Balance, July 2, 2005
  
$
130,010
  
$
14,700
  
$
2,457
        
 
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 SIX MONTHS ENDED JULY 2, 2005
(Dollar amounts in thousands)

 
 
 
 
Retained
 
Accumulated
 
 
 
 
 
Additional
 
Earnings
 
Other
 
 
 
 
 
Paid in
 
(Accumulated
 
Comprehensive
 
Comprehensive
 
 
 
Capital
 
Deficit)
 
Income (Loss)
 
Income (Loss)
 
                   
                   
Balance, December 31, 2004
  
$
316,823
  
$
(4,100
)
$
9,065
  
$
---
  
Net earnings
    
---
   
18,800
   
---
   
18,800
 
Other comprehensive income (loss):
                          
   Currency translation adjustment
    
---
   
---
   
(6,615
)
  
(6,615
)
   Unrealized appreciation in the fair value of
                          
      marketable securities
    
---
   
---
   
7
   
7
 
Comprehensive income
                    
$
12,192
  
Dividend to THL-Nortek Investors, LLC
    
(186,971
)
  
---
   
---
       
Stock based compensation
    
158
   
---
   
---
       
Balance, July 2, 2005
  
$
130,010
  
$
14,700
  
$
2,457
        
 
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 2, 2005 AND JULY 3, 2004

 
(A)        The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”) for the pre-acquisition period ended July 3, 2004 reflects the results of operations of the former Nortek Holdings, Inc. and all of its wholly-owned subsidiaries (the predecessor company) and for the post-acquisition period ended July 2, 2005 reflects the results of operations of NTK Holdings, Inc. and its wholly-owned subsidiary, Nortek Holdings, Inc. Nortek, Inc. (“Nortek”) is a wholly-owned subsidiary of Nortek Holdings, Inc. (“Nortek Holdings”) and is required under the terms of its indenture to file periodic reports with the Securities and Exchange Commission (“SEC”). The Unaudited Financial Statements include the accounts of the former Nortek Holdings and NTK Holdings, Inc., as appropriate and all of their wholly-owned subsidiaries (individually and collectively, the “Company” or “NTK Holdings”), 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 Nortek’s latest annual report on Form 10-K and the Company’s latest Current Reports on Form 8-K as filed with the 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 $200,000 for the second quarter and first six months ended July 2, 2005, respectively, and approximately $3,100,000 and $3,300,000 for the second quarter and first six months ended July 3, 2004, respectively, in accordance with SFAS No. 123. Included in these amounts are stock-based employee compensation charges of approximately $2,800,000 recorded in the second quarter of 2004 related to the accelerated vesting and achievement of the performance criteria for a portion of the Company’s outstanding Class B stock options. A portion of this expense has been allocated to the Company’s reporting segments for all periods presented and a portion has been recorded in Unallocated (see Note G). In addition, the Company recorded stock-based employee compensation charges in discontinued operations of approximately $1,200,000 and $1,900,000 in the second quarter and first six months ended July 3, 2004, respectively, 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 THL-Nortek Investors, LLC (“Investors LLC”) that function similar to stock options. During the second quarter of 2005, approximately 1,500 C-1 units and approximately 3,000 C-2 units were granted to one of the Company’s officers. The C-1 units vest pro rata on a quarterly basis over a three-year period and approximately 5,289 and 1,758 were vested at July 2, 2005 and December 31, 2004, respectively. The total stock-based employee compensation charge associated with the C-1 units is approximately $1,000,000, which is being amortized pro rata over the three-year vesting period. Approximately $737,000 remains to be amortized at July 2, 2005. The C-2 units only vest in the event that certain performance-based criteria, as defined, are met. As of July 2, 2005, there was approximately $1,600,000 of unamortized stock-based employee compensation with respect to the C-2 units, which will be amortized in the event that it becomes probable that the C-2 units or any portion thereof will vest. The C-1 and C-2 units were valued using the Black-Scholes option pricing model to determine the freely-traded call option value based upon information from comparable public companies, which was then adjusted to reflect the discount period, the minority interest factor and the lack of marketability factor to arrive at the final valuations.

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123 and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“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 Nortek’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 the Company, which is wholly-owned by Investors LLC, a Delaware limited liability company. 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 Nortek, 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 Nortek, which provided for the merger of the former Nortek Holdings with and into Nortek.

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 options so cancelled.

In connection with the THL Transaction, members of the Company’s management 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 this cancellation of options 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 equals 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 of approximately $111,800,000 for all participants.

Nortek Holdings recorded approximately $93,000,000 at August 27, 2004 in other long-term liabilities related to its deferred compensation plan. At July 2, 2005, other long-term liabilities include approximately $47,508,000 related to the deferred compensation plan and at December 31, 2004 approximately $95,164,000 (of which approximately $49,200,000 is recorded in accrued expenses and taxes, net and approximately $45,964,000 is recorded in other long-term liabilities) was recorded in the accompanying unaudited condensed consolidated balance sheet relating to the deferred compensation plan. On February 15, 2005, Nortek Holdings made a distribution to the participants of its deferred compensation plan in the amount of approximately $57,700,000 (see Note C).

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 July 2, 2005 the deferred tax benefit was approximately $16,628,000 and at December 31, 2004 the deferred tax benefit was approximately $33,308,000.

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 (“SAB”) No. 54, “Push Down Basis of Accounting Required in Certain Limited Circumstances” (“SAB No. 54”), 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 L.P. 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 the Company of approximately $743,154,000 was allocated to the assets and liabilities based on their relative fair values and approximately $316,715,000 was recorded in Stockholder’s Investment representing the ownership interest of the Company’s equity holders upon completion of the Acquisition, net of a deemed dividend of approximately $63,879,000.

During the first six months ended July 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 presented below:

   
Pro Forma for the Period
  
   
April 4, 2004 -
July 3, 2004
  
Jan. 1, 2004 -
July 3, 2004
  
Jan. 1, 2004 -
Aug. 27, 2004
  
   
(Amounts in thousands)
  
               
Net sales
  
$
446,012
  
$
851,024
  
$
1,117,860
  
Operating earnings
  
$
46,770
  
$
82,827
  
$
110,296
  
Earnings from continuing operations
  
$
13,013
  
$
20,859
  
$
27,041
  

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 six months ended July 2, 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
  
Acquisitions during the six months ended July 2, 2005
    
11,525
    
---
    
11,525
  
Purchase accounting adjustments
    
3,204
    
---
    
3,204
  
Impact of foreign currency translation
    
(767
)
  
---
    
(767
)
Balance as of July 2, 2005
  
$
1,309,067
  
$
---
  
$
1,309,067
  

Goodwill associated with the Acquisition, 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)
On February 15, 2005, the Company completed the sale of $403,000,000 aggregate principal amount at maturity ($250,408,080 gross proceeds) of its 10 3/4% Senior Discount Notes due March 1, 2014 (the “10 3/4% Senior Discount Notes”). The 10 3/4% Senior Discount Notes, which are structurally subordinate to all debt and liabilities of the Company’s subsidiaries, including Nortek Holdings, Inc. and Nortek, Inc., were issued and sold in a private Rule 144A offering to institutional investors. On July 5, 2005, the Company filed a registration statement with the SEC to exchange the 10 3/4% Senior Discount Notes for registered notes. The registration statement went effective on July 21, 2005 and the Company is currently in the exchange offer period for the 10 3/4% Senior Discount Notes. The exchange offer period expires on August 23, 2005. The Company will continue to file periodic reports with the SEC as required by the indenture governing the 10 3/4% Senior Discount Notes.

The accreted value of the 10 3/4% Senior Discount Notes will increase from the date of issuance at a rate of 10 3/4% per annum compounded semi-annually such that the accreted value would, if no prior redemptions are made, equal the principal amount of $403,000,000 in September 2009. 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 net proceeds of the offering were used to pay a dividend of approximately $187,000,000 to its sole stockholder, Investors LLC. In turn, Investors LLC authorized a distribution of approximately $187,000,000 to the equity holders of Investors LLC in accordance with the terms of the LLC agreement by and among Investors LLC and its members. In addition, on February 18, 2005, NTK Holdings contributed approximately $57,700,000 to Nortek Holdings for the purpose of making payments under the Nortek Holdings, Inc. Deferred Compensation Plan, which resulted in additional expense of approximately $8,200,000, which the Company has included in interest expense in the accompanying unaudited condensed consolidated statement of operations. All payments related to this contribution have been made by Nortek Holdings, Inc.

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 Note B). 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 first quarter of 2004, based upon the difference between the respective redemption prices indicated above and the estimated carrying values at redemption.

Interest expense in the first six months ended July 3, 2004 includes duplicative interest arising during the waiting period from the call for redemption to the date of redemption of the 8 7/8% Notes, as during that period the Floating Rate Notes, whose proceeds were used to refinance the 8 7/8% Notes, were also outstanding.

At July 2, 2005, there was approximately $63,700,000 available for the payment of cash dividends, stock purchases or other restricted payments (“Restricted Payments”) by the Company as defined under the terms of the Company’s 10 3/4% Senior Discount Notes’ indenture. 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 $49,400,000 at July 2, 2005. Any restricted payments made by Nortek in excess of $10,000,000 would require an equal prepayment of Nortek’s Senior Secured Credit Facility.

(D)
On June 13, 2005, the Company, through its wholly-owned subsidiary Nordyne Inc. (“Nordyne”), acquired International Marketing Supply, Inc. (“IMS”) for approximately $5,000,000, utilizing approximately $4,500,000 of cash on hand and issuing an unsecured promissory note in the amount of approximately $500,000. IMS is located in Miami, FL and sells heating, ventilation and air-conditioning equipment to Latin America.

On April 26, 2005, the Company, through its indirect wholly-owned subsidiary, Linear LLC (“Linear”), acquired Panamax for approximately $11,750,000 (utilizing approximately $9,500,000 of cash on hand and issuing an unsecured promissory note in the amount of approximately $2,250,000) 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.

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

On March 9, 2004, the Company, through Linear, 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 $11,200,000, $1,200,000 and $100,000 to net sales, operating earnings and depreciation and amortization expense, respectively, for the second quarter ended July 2, 2005 and contributed approximately $23,400,000, $1,700,000 and $200,000 to net sales, operating earnings and depreciation and amortization expense, respectively, for the first six months ended July 2, 2005. Panamax, M&S and OmniMount are included in the Residential Building Products Segment in the Company’s segment reporting, while IMS is included in the Air Conditioning and Heating Products Segment in the Company’s segment reporting.

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 of the acquired companies, which are expected to be completed in the second half of 2005.

On July 15, 2005, the Company acquired the assets and certain liabilities of Niles Audio Corporation (“Niles”) for an initial purchase price of approximately $75,400,000. In connection with the acquisition of Niles, the Company utilized approximately $40,400,000 of cash on hand, borrowed approximately $25,000,000 against Nortek’s U.S. portion of its revolving credit facility (which effectively reduced its borrowing availability by such amount) and issued an unsecured promissory note in the amount of approximately $10,000,000. As this transaction occurred on July 15, 2005, amounts prior to July 15, 2005 do not include the effect of the Niles acquisition. Niles is located in Miami, FL and manufactures 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. For the year ended December 31, 2004, Niles had net sales, operating earnings and depreciation and amortization expense of approximately $50,000,000, $8,500,000 and $500,000, respectively.

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

(E)         The operating results of the Air Conditioning and Heating Products Segment for the second quarter and first six months ended July 3, 2004 include approximately $600,000 and $1,900,000, respectively, of costs associated with the closure of certain manufacturing facilities (see Note J).

Operating results for the second quarter and first six months ended July 2, 2005 include a non-cash foreign exchange loss of approximately $900,000 and $1,400,000, respectively, on certain intercompany debt between the Company’s subsidiaries. Operating results for the second quarter ended July 3, 2004 include a non-cash foreign exchange gain of approximately $100,000 and operating results for the first six months ended July 3, 2004 include a non-cash foreign exchange loss of approximately $500,000 on certain intercompany debt between the Company’s subsidiaries. A portion of this expense has been allocated to the Company’s reporting segments for all periods presented (see Note G).

Operating results for the first six months ended July 2, 2005 include a gain of approximately $1,400,000 from the settlement of certain obligations of former subsidiaries (see Note I).

During the second quarter and first six months ended July 2, 2005 the Company recorded a pre-tax charge to continuing operations of approximately $100,000 and $200,000, respectively, for compensation expense related to stock options issued to employees, officers and directors in accordance with SFAS No. 123. During the second quarter and first six months ended July 3, 2004 the Company recorded a pre-tax charge to continuing operations of approximately $3,100,000 and $3,300,000, respectively, for compensation expense related to stock options issued to employees, officers and directors in accordance with SFAS No. 123 (see Note A). A portion of this expense has been allocated to the Company’s reporting segments for all periods presented (see Note G).

(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 first six months ended July 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 second quarter and first six months ended July 3, 2004:


   
Pre-Acquisition
  
   
For the Three
 
For the Six
 
 
 
Months Ended
 
Months Ended
 
 
 
July 3, 2004
 
July 3, 2004
  
   
(Amounts in thousands)
  
           
Net sales
  
$
2,400
  
$
45,400