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 October 1, 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 [X] No [  ]

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

The number of shares of Common Stock outstanding as of November 2, 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 share data)
 

   
October 1,
 
December 31,
 
 
 
2005
 
2004
  
Assets
          
Current Assets:
          
Unrestricted cash and cash equivalents
  
$
47,281
  
$
94,955
  
Restricted cash and cash equivalents
    
2,271
   
---
 
Accounts receivable, less allowances of $6,941 and $5,467
   
296,617
   
225,706
 
Inventories:
              
Raw materials
   
77,067
   
72,166
 
Work in process
   
22,780
   
24,249
 
Finished goods
   
125,573
   
109,134
 
     
225,420
   
205,549
 
               
Prepaid expenses
   
11,201
   
8,596
 
Other current assets
   
27,283
   
26,126
 
Prepaid income taxes
   
32,765
   
32,745
 
    Total current assets
   
642,838
   
593,677
 
               
Property and Equipment, at Cost:
              
Land
   
8,780
   
8,683
 
Buildings and improvements
   
72,097
   
75,476
 
Machinery and equipment
   
140,522
   
124,644
 
     
221,399
   
208,803
 
Less accumulated depreciation
   
24,338
   
7,713
 
    Total property and equipment, net
   
197,061
   
201,090
 
               
Other Assets:
              
Goodwill
   
1,383,848
   
1,295,105
 
Intangible assets, less accumulated amortization of $21,507 and $8,436
    
99,312
   
110,715
 
Deferred tax benefit
    
---
   
2,488
 
Deferred debt expense
   
43,346
   
41,741
 
Restricted investments and marketable securities
    
3,808
   
8,605
 
Other assets
    
8,569
   
11,154
 
     
1,538,883
   
1,469,808
 
   
$
2,378,782
  
$
2,264,575
  
Liabilities and Stockholder’s Investment
              
               
Current Liabilities:
              
Notes payable and other short-term obligations
 
$
6,894
  
$
5,364
  
Current maturities of long-term debt
   
11,291
   
14,414
 
Accounts payable
   
171,342
   
137,343
 
Accrued expenses and taxes, net
   
169,451
   
220,784
 
    Total current liabilities
   
358,978
   
377,905
 
               
Other Liabilities:
              
Deferred income taxes
   
10,764
   
---
 
Other
   
211,644
   
214,672
 
     
222,408
   
214,672
 
               
Notes, Mortgage Notes and Obligations Payable, Less Current Maturities 
    
1,625,456
   
1,350,210
 
               
Stockholder’s Investment:
              
Common stock, $0.01 par value, authorized 3,000 shares; 3,000 issued and outstanding at October 1, 2005 and December 31, 2004
    
---
   
---
 
Additional paid-in capital
   
130,100
   
316,823
 
Retained earnings (accumulated deficit)
    
34,400
   
(4,100
)
Accumulated other comprehensive income
    
7,440
   
9,065
 
    Total stockholder's investment
   
171,940
   
321,788
 
Total Liabilities and Stockholder's Investment:
  
$
2,378,782
  
$
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 Periods
 
 
 
Post-Acquisition
 
Pre-Acquisition
 
 
 
July 3, 2005 -
 
Aug. 28, 2004 -
 
July 4, 2004 -
 
 
 
Oct. 1, 2005
 
Oct. 2, 2004
 
Aug. 27, 2004
  
   
(Amounts in thousands)
  
               
Net Sales 
  
$
522,866
  
$
161,028
  
$
266,836
  
                     
Costs and Expenses:
                    
Cost of products sold
   
361,268
   
115,892
   
191,073
 
Selling, general and administrative expense
   
89,739
   
28,266
   
46,014
 
Amortization of intangible assets
   
4,391
   
1,404
   
2,020
 
Expenses and charges arising from the Acquisition
    
---
   
---
   
83,700
 
     
455,398
   
145,562
   
322,807
 
Operating earnings (loss)
    
67,468
   
15,466
   
(55,971
)
Interest expense
   
(34,332
)
  
(16,798
)
  
(12,092
)
Loss from debt retirement
    
---
   
---
   
(118,778
)
Investment income
   
264
   
32
   
241
 
Earnings (loss) from continuing operations before provision (benefit) for income taxes
   
33,400
   
(1,300
)
  
(186,600
)
Provision (benefit) for income taxes
   
13,700
   
(500
)
  
(55,200
)
Earnings (loss) from continuing operations 
    
19,700
   
(800
)
  
(131,400
)
Earnings from discontinued operations 
    
---
   
---
   
500
 
Net earnings (loss)
  
$
19,700
  
$
(800
)
$
(130,900
)
 
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 Periods
 
 
 
Post - Acquisition
 
Pre-Acquisition
 
 
 
Jan. 1, 2005 -
 
Aug. 28, 2004 -
 
Jan. 1, 2004 -
 
 
 
Oct. 1, 2005
 
Oct. 2, 2004
 
Aug. 27, 2004
 
 
 
(Amounts in thousands)
  
               
Net Sales 
  
$
1,455,844
  
$
161,028
  
$
1,117,860
  
                     
Costs and Expenses:
                    
Cost of products sold
   
1,021,133
   
115,892
   
792,759
 
Selling, general and administrative expense
   
254,417
   
28,266
   
199,943
 
Amortization of intangible assets
   
13,109
   
1,404
   
8,869
 
Expenses and charges arising from the Acquisition
    
---
   
---
   
83,700
 
     
1,288,659
   
145,562
   
1,085,271
 
Operating earnings
    
167,185
   
15,466
   
32,589
 
Interest expense
   
(104,257
)
  
(16,798
)
  
(56,073
)
Loss from debt retirement
    
---
   
---
   
(130,736
)
Investment income
   
1,072
   
32
   
1,520
 
Earnings (loss) from continuing operations
                    
    before provision (benefit) for income taxes
   
64,000
   
(1,300
)
  
(152,700
)
Provision (benefit) for income taxes
   
25,500
   
(500
)
  
(41,400
)
Earnings (loss) from continuing operations 
    
38,500
   
(800
)
  
(111,300
)
Earnings from discontinued operations 
    
---
   
---
   
67,400
 
Net earnings (loss)
  
$
38,500
  
$
(800
)
$
(43,900
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
   
For the Periods
 
 
 
Post-Acquisition
 
Pre-Acquisition
 
 
 
Jan. 1, 2005 -
 
Aug. 28, 2004 -
 
Jan. 1, 2004 -
 
 
 
Oct. 1, 2005
 
Oct. 2, 2004
 
Aug. 27, 2004
 
 
 
(Amounts in thousands)
 
               
Cash Flows from operating activities:
              
Net earnings (loss) from continuing operations
 
$
38,500
  
$
(800
)
$
(111,300
)
Earnings from discontinued operations
   
---
   
---
   
67,400
 
Net earnings (loss)
    
38,500
   
(800
)
  
(43,900
)
                     
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
                    
Depreciation and amortization expense, including amortization of purchase price allocated to inventory
   
34,343
   
6,307
   
25,823
 
Non-cash interest expense, net
   
21,536
   
389
   
24,671
 
Effect of the Acquisition, net
    
---
   
---
   
38,423
 
Non-cash stock-based compensation
    
248
   
30
   
48,561
 
Loss from debt retirement
    
---
   
---
   
130,736
 
Gain on the sale of discontinued operations
   
---
   
---
   
(125,200
)
Gain on sale of fixed assets
    
(220
)
  
---
   
---
 
Deferred federal income tax provision from continuing operations
   
12,600
   
---
   
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
   
(64,462
)
  
(1,347
)
  
(26,921
)
Inventories
   
(11,633
)
  
(5,907
)
  
(34,337
)
Prepaids and other current assets
   
(8,197
)
  
17,853
   
(14,363
)
Net assets of discontinued operations
   
---
   
---
   
2,326
 
Accounts payable
   
32,962
   
(15,274
)
  
52,669
 
Accrued expenses and taxes
   
(2,943
)
  
14,566
   
(33,926
)
Long-term deferred compensation
    
(57,781
)
  
---
   
---
 
Long-term assets, liabilities and other, net
   
7,379
   
(1,070
)
  
835
 
    Total adjustments to net earnings (loss)
    
(36,168
)
  
15,547
   
80,597
 
    Net cash provided by operating activities
 
$
2,332
  
$
14,747
  
$
36,697
  
Cash Flows from investing activities:
                    
Capital expenditures
 
$
(15,020
)
$
(2,620
)
$
(11,848
)
Net cash paid for businesses acquired
   
(88,800
)
  
---
   
(16,500
)
Purchase of outstanding equity shares of the Company by Thomas H. Lee Partners, L.P. and affiliates
    
---
   
(706,189
)
  
---
 
Purchase of investments and marketable securities
    
---
   
---
   
(5,000
)
Proceeds from the sale of investments and marketable securities
    
---
   
---
   
5,000
 
Payment of Acquisition fees and expenses
    
---
   
(57,000
)
  
---
 
Proceeds from the sale of discontinued businesses
   
---
   
---
   
526,000
 
Proceeds from the sale of property and equipment
    
6,144
   
---
   
---
 
Change in restricted cash and investments
    
(2,070
)
  
1
   
(103
)
Other, net
   
(1,485
)
  
(53
)
  
(291
)
    Net cash (used in) provided by investing activities
   
(101,231
)
  
(765,861
)
  
497,258
 
Cash Flows from financing activities:
                    
Change in borrowings, net
   
(6,305
)
  
(484
)
  
(5,370
)
Sale of the 10 3/4% Senior Discount Notes
    
244,708
   
---
   
---
 
Dividend to THL-Nortek Investors, LLC
    
(186,970
)
  
---
   
---
 
Sale of Floating Rate Notes
    
---
   
---
   
196,000
 
Redemption of notes in connection with the Acquisition
    
---
   
(919,300
)
  
---
 
Redemption of Senior Notes
    
---
   
---
   
(716,700
)
Net proceeds from the sale of the 8 1/2% Notes
    
---
   
605,400
   
---
 
Net proceeds from borrowings under the Senior Secured Credit Facility
    
---
   
685,350
   
---
 
Equity investment by Thomas H. Lee Partners, L.P. and affiliates
    
---
   
361,841
   
---
 
Settlement of stock options
    
---
   
(113,032
)
  
---
 
Other, net
   
(208
)
  
76
   
(55
)
    Net cash provided by (used in) financing activities
   
51,225
   
619,851
   
(526,125
)
Net (decrease) increase in unrestricted cash and cash equivalents
    
(47,674
)
  
(131,263
)
  
7,830
 
Unrestricted cash and cash equivalents at the beginning of the period
   
94,955
   
201,950
   
194,120
 
Unrestricted cash and cash equivalents at the end of the period
  
$
47,281
  
$
70,687
  
$
201,950
  
                     
Supplemental disclosure of cash flow information:
                    
Interest paid
 
$
93,857
  
$
16,676
  
$
71,640
  
Income taxes paid (refunded), net
 
$
9,264
  
$
(35,437
)
$
43,517
  
 
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 PERIOD JULY 4, 2004 TO AUGUST 27, 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, July 3, 2004
  
$
8,130
  
$
397
  
$
177,486
  
$
87,000
  
$
15,691
  
$
---
  
Net loss
    
---
   
---
   
---
   
(130,900
)
  
---
   
(130,900
)
Other comprehensive income (loss):
                                      
   Currency translation adjustment
    
---
   
---
   
---
   
---
   
(197
)
  
(197
)
   Unrealized appreciation in the fair value
                                      
      of marketable securities
    
---
   
---
   
---
   
---
   
24
   
24
 
Comprehensive loss
                                
$
(131,073
)
Settlement and cancellation of stock options, net
    
---
   
---
   
(43,035
)
  
---
   
---
       
Subtotal
    
8,130
   
397
   
134,451
   
(43,900
)
  
15,518
       
Effect of the Acquisition
    
(8,130
)
  
(397
)
  
179,986
   
43,900
   
(15,518
)
      
Balance, August 27, 2004
  
$
---
  
$
---
  
$
314,437
  
$
---
  
$
---
        
 
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 PERIOD JANUARY 1, 2004 TO AUGUST 27, 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 loss
    
---
   
---
   
---
   
(43,900
)
  
---
   
(43,900
)
Other comprehensive income (loss):
                                      
   Currency translation adjustment
    
---
   
---
   
---
   
---
   
(3,958
)
  
(3,958
)
   Unrealized appreciation in the fair value of
                                      
      marketable securities
    
---
   
---
   
---
   
---
   
21
   
21
 
   Minimum pension liability, net of tax of $10
    
---
   
---
   
---
   
---
   
18
   
18
 
Comprehensive loss
                                
$
(47,819
)
Stock-based compensation
    
---
   
---
   
5,242
   
---
   
---
       
Settlement and cancellation of stock options, net
    
---
   
---
   
(43,035
)
  
---
   
---
       
Subtotal
    
8,130
   
397
   
134,451
   
(43,900
)
  
15,518
       
Effect of the Acquisition
    
(8,130
)
  
(397
)
  
179,986
   
43,900
   
(15,518
)
      
Balance, August 27, 2004
  
$
---
  
$
---
  
$
314,437
  
$
---
  
$
---
        
 
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 PERIOD AUGUST 28, 2004 TO OCTOBER 2, 2004
(Dollar amounts in thousands)


   
 
 
 
 
Accumulated
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
 
Paid in
 
Accumulated
 
Comprehensive
 
Comprehensive
 
 
 
Capital
 
Deficit
 
Income (Loss)
 
Income (Loss)
 
                   
Balance, August 28, 2004
  
$
314,437
  
$
---
  
$
---
  
$
---
  
Net loss
    
---
   
(800
)
  
---
   
(800
)
Other comprehensive income (loss):
                          
   Currency translation adjustment
    
---
   
---
   
3,989
   
3,989
 
   Unrealized decline in the fair value of marketable securities
    
---
   
---
   
(9
)
  
(9
)
Comprehensive income
                    
$
3,180
  
Stock-based compensation
    
30
   
---
   
---
       
Balance, October 2, 2004
  
$
314,467
  
$
(800
)
$
3,980
        
 
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 OCTOBER 1, 2005
(Dollar amounts in thousands)
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
 
Paid in
 
Retained
 
Comprehensive
 
Comprehensive
 
 
 
Capital
 
Earnings
 
Income (Loss)
 
Income (Loss)
  
                   
Balance, July 2, 2005
  
$
130,010
  
$
14,700
  
$
2,457
  
$
---
  
Net earnings
    
---
   
19,700
   
---
   
19,700
 
Other comprehensive income (loss):
                          
   Currency translation adjustment
    
---
   
---
   
4,996
   
4,996
 
   Unrealized decline in the fair value of marketable securities
    
---
   
---
   
(13
)
  
(13
)
Comprehensive income
                    
$
24,683
  
Stock-based compensation
    
90
   
---
   
---
       
Balance, October 1, 2005
  
$
130,100
  
$
34,400
  
$
7,440
        
 
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 NINE MONTHS ENDED OCTOBER 1, 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
    
---
   
38,500
   
---
   
38,500
 
Other comprehensive income (loss):
                          
    Currency translation adjustment
    
---
   
---
   
(1,619
)
  
(1,619
)
   Unrealized decline in the fair value of marketable securities
    
---
   
---
   
(6
)
  
(6
)
Comprehensive income
                    
$
36,875
  
Dividend to THL-Nortek Investors, LLC
    
(186,971
)
  
---
   
---
       
Stock-based compensation
    
248
   
---
   
---
       
Balance, October 1, 2005
  
$
130,100
  
$
34,400
  
$
7,440
        
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

NTK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 1, 2005 AND OCTOBER 2, 2004

 
(A)        The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”) for the “Pre-Acquisition” period from January 1, 2004 to August 27, 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” periods from August 28, 2004 to October 2, 2004 and the nine months ended October 1, 2005 reflect 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 $300,000 for the three months and nine months ended October 1, 2005, respectively, in accordance with SFAS No. 123. In the period from August 28, 2004 to October 2, 2004, the Company recorded stock-based compensation charges in continuing operations of approximately $30,000 related to the C-1 Units received by certain employees and consultants of the Company in connection with the THL Transaction (see Note B) and in the periods from July 4, 2004 to August 27, 2004 and from January 1, 2004 to August 27, 2004, recorded stock-based compensation charges in continuing operations of approximately $45,200,000 and $48,500,000, respectively, related to the accelerated vesting and achievement of the performance criteria for a portion of the Company’s outstanding stock options due to the change in control of the Company as a result of the Acquisition. 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 $4,500,000 and $6,400,000 for the periods from July 4, 2004 to August 27, 2004 and from January 1, 2004 to August 27, 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) due to the change of control of the Company as a result of the Acquisition.

In connection with 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 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 7,175 and 1,758 were vested at October 1, 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 $649,000 remains to be amortized at October 1, 2005. The C-2 units only vest in the event that certain performance-based criteria, as defined, are met. As of October 1, 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. The provisions of SFAS No. 123R will be effective for the Company beginning after January 1, 2006 with earlier adoption encouraged.

Under SFAS No. 123R, the Company plans on adopting the modified-prospective transition method of accounting for stock-based compensation. Under the modified-prospective transition method, the Company would be required to recognize compensation cost for share-based payments to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied. Measurement and attribution of compensation cost for awards that were granted prior to, but not vested as of the date SFAS No. 123R is adopted would be based on the same estimate of the grant-date fair value and the same attribution method used previously under SFAS No. 123. Under the modified-prospective transition method, prior periods would not be restated.

The Company does not believe that the adoption of SFAS No. 123R will have a material impact on its financial position or results of operations.

(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 cap