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 3, 2004





OR





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


EXCHANGE ACT OF 1934





For the transition period from ______ to ______





333-25505


(Commission File Number)


__________








NORTEK, INC.


(Exact name of registrant as specified in its charter)


__________




**Delaware**
05-0314991(State or other jurisdiction of
(I.R.S. Employerincorporation 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 July 30, 2004 was 104.










PART I  FINANCIAL INFORMATION





ITEM 1. FINANCIAL STATEMENTS





NORTEK, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEET





July 3,
December 31,2004
2003Assets

(Unaudited)Current Assets:

(Amounts in thousands)Unrestricted:Cash and cash equivalents

$
123,295

$
182,349Marketable securities available for sale


5,011


-Restricted:Cash, investments and marketable securities at cost,which approximates market


8,523


1,223Accounts receivable, less allowancesof $6,334 and $5,880


263,156


214,267Inventories:Raw materials


67,716


54,144Work in process


22,239


19,229Finished goods


112,033


86,042201,988


159,415Prepaid expenses


11,463


6,765Other current assets


16,750


14,868Prepaid income taxes


20,700


17,826Assets of discontinued operations


---


494,851Total current assets


650,886


1,091,564Property and Equipment, at Cost:Land


12,475


12,578Buildings and improvements


78,299


79,007Machinery and equipment


127,711


120,589218,485


212,174Less accumulated depreciation


28,291


17,719Total property and equipment, net


190,194


194,455Other Assets:Goodwill


686,897


678,063Intangible assets, less accumulated amortizationof $16,074 and $9,122


89,043


94,645Deferred debt expense


6,221


2,788Other


17,239


16,893799,400


792,389Total Assets

$
1,640,480

$
2,078,408Liabilities and Stockholders InvestmentCurrent Liabilities:Notes payable and other short-term obligations

$
6,239

$
8,120Current maturities of long-term debt


7,171


7,229Accounts payable


159,678


112,764Accrued expenses and taxes, net


172,397


142,135Liabilities of discontinued operations


---


137,683Total current liabilities


345,485


407,931Other Liabilities:Deferred income taxes


32,600


21,449Other


150,313


136,833182,913


158,282Notes, Mortgage Notes and ObligationsPayable, Less Current Maturities


471,402


971,710Stockholders Investment:Common stock, $.01 par value; authorized 1,000 shares,104 shares issued and outstanding


---


---Additional paid-in capital


449,789


444,548Retained earnings


175,200


76,500Accumulated other comprehensive income


15,691


19,437Total stockholders investment


640,680


540,485Total Liabilities and Stockholders Investment

$
1,640,480

$
2,078,408




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




NORTEK, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS




For the Three Months EndedJuly 3, 2004
July 5, 2003(Amounts in thousands)(Unaudited)Net Sales

$
448,393

$
390,029Costs and Expenses:Cost of products sold


316,409


280,737Selling, general and administrative expense


81,884


63,425Amortization of intangible assets


3,538


2,020401,831


346,182Operating earnings


46,562


43,847Interest expense


(9,293
)

(12,636
)Investment income


331


289Earnings from continuing operationsbefore provision for income taxes


37,600


31,500Provision for income taxes


14,700


13,000Earnings from continuing operations


22,900


18,500Earnings (loss) from discontinued operations


(800
)

7,400Net earnings

$
22,100

$
25,900





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






NORTEK, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS










For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004
Jan. 10, 2003
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Net Sales

$
855,836

$
726,106

$
24,951Costs and Expenses:Cost of products sold


605,081


520,394


18,635Selling, general and administrative expense


155,831


123,498


5,014Amortization of intangible assets


6,849


3,843


67Expenses and charges arising from the Recapitalization


---


---


83,000767,761


647,735


106,716Operating earnings (loss)


88,075


78,371


(81,765
)Interest expense


(25,870
)

(29,427
)

(1,054
)Loss from debt retirement


(11,958
)

---


---Investment income


1,253


656


119Earnings (loss) from continuing operationsbefore provision (benefit) for income taxes


51,500


49,600


(82,700
)Provision (benefit) for income taxes


20,200


20,100


(21,800
)Earnings (loss) from continuing operations


31,300


29,500


(60,900
)Earnings (loss) from discontinued operations


67,400


1,900


(1,000
)Net earnings (loss)

$
98,700

$
31,400

$
(61,900
)


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




NORTEK, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS





For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004
Jan. 10, 2003
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Cash Flows from operating activities:Net earnings (loss) from continuing operations

$
31,300

$
29,500

$
(60,900
)Earnings (loss) from discontinued operations


67,400


1,900


(1,000
)Net earnings (loss)


98,700


31,400


(61,900
)Adjustments to reconcile net earnings (loss)to net cash used in operating activities:Depreciation and amortization expense, includingamortization of purchase price allocated to inventory


19,908


16,521


653Non-cash interest expense, net


217


3,438


125Non-cash stock-based compensation


5,241


952


---Loss from debt retirement


11,958


---


---Gain on the sale of discontinued operations


(122,700
)

---


---Deferred federal income tax provision (benefit) fromcontinuing operations


9,800


(12,000
)

5,900Deferred federal income tax benefit fromdiscontinued operations


(18,500
)

---


---Effect of the Recapitalization, net


---


---


62,397Changes in certain assets and liabilities, net ofeffects from acquisitions and dispositions:Accounts receivable, net


(48,250
)

(33,784
)

4,298Inventories


(38,165
)

(15,275
)

(4,457
)Prepaids and other current assets


4,878


(726
)

268Net assets of discontinued operations


(3,134
)

(28,769
)

1,717Accounts payable


45,830


6,367


(777
)Accrued expenses and taxes


13,016


37,903


(19,766
)Long-term assets, liabilities and other, net


(1,936
)

(12,284
)

5,837Total adjustments to net earnings (loss)


(121,837
)

(37,657
)

56,195Net cash used in operating activities

$
(23,137
)
$
(6,257
)
$
(5,705
)Cash Flows from investing activities:Capital expenditures

$
(9,648
)
$
(7,246
)
$
(207
)Net cash paid for businesses acquired


(16,500
)

(17,237
)

---Purchase of investments and marketable securities


(5,000
)

(30,015
)

---Proceeds from the sale of investments andmarketable securities


---


9,947Proceeds from the sale of discontinued businesses


520,138


---


---Change in restricted cash and investments


(111
)

(7
)

(49
)Other, net


(141
)

(548
)

109Net cash provided by (used in) investing activities


488,738


(45,106
)

(147
)Cash Flows from financing activities:Change in borrowings, net

$
(4,011
)
$
835

$
(1,313
)Sale of Floating Rate Notes


196,000


---


---Redemption of Senior Notes


(716,700
)

---


---Dividend and distributions paid to Nortek Holdings, Inc.


---


---


(147,900
)Contribution of capital from Nortek Holdings, Inc.


---


---


4,603Other, net


56


(5
)

(4,039
)Net cash (used in) provided by financing activities


(524,655
)

830


(148,649
)Net decrease in unrestricted cash andcash equivalents


(59,054
)

(50,533
)

(154,501
)Unrestricted cash and cash equivalents at thebeginning of the period


182,349


140,303


294,804Unrestricted cash and cash equivalents at theend of the period

$
123,295

$
89,770

$
140,303Supplemental disclosure of cash flow information:Interest paid

$
47,816

$
46,130

$
---Income taxes paid, net

$
41,634

$
4,557

$
281




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







NORTEK, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS INVESTMENT


FOR THE PERIOD FROM JANUARY 1, 2003 TO JANUARY 9, 2003


(Dollar amounts in thousands)





AccumulatedAdditional

OtherCommon
Paid in
Retained
Comprehensive
ComprehensiveStock
Capital
Earnings
Income (Loss)
Income (Loss)(Unaudited)Balance, December 31, 2002

$
---

$
119,621

$
255,366

$
(57,482
)
$
---Net loss


---


---


(61,900
)

---


(61,900
)Other comprehensive income:Currency translation adjustment


---


---


---


1,096


1,096Minimum pension liability, net of tax of $9,906


---


---


---


18,398


18,398Comprehensive loss













$
(42,406
)Settlement of stock options held by employees,net of taxes of $1,710


---


(3,000
)

---


---Dividend to Nortek Holdings, Inc.


---


---


(120,000
)

---Contribution of capital from Nortek Holdings, Inc.


---


4,603


---


---Subtotal

$
---

$
121,224

$
73,466

$
(37,988
)Effect of the Recapitalization


---


321,745


(73,466
)

37,988Balance, January 9, 2003

$
---

$
442,969

$
---

$
---





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







NORTEK, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS INVESTMENT


FOR THE THREE MONTHS ENDED JULY 5, 2003


(Dollar amounts in thousands)





AccumulatedAdditional


OtherCommon
Paid in
Retained
Treasury
Comprehensive
ComprehensiveStock
Capital
Earnings
Stock
Income
Income(Unaudited)Balance, April 5, 2003

$
---

$
443,659

$
5,500

$
---

$
3,267

$
---Net earnings


---


---


25,900


---


---


25,900Other comprehensive income:Currency translation adjustment


---


---


---


---


9,716


9,716Comprehensive income
















$
35,616Stock based compensation


---


262


---


---


---Balance, July 5, 2003

$
---

$
443,921

$
31,400

$
---

$
12,983





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









NORTEK, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS INVESTMENT


FOR THE PERIOD JANUARY 10, 2003 - JULY 5, 2003


(Dollar amounts in thousands)





AccumulatedAdditional


OtherCommon
Paid in
Retained
Treasury
Comprehensive
ComprehensiveStock
Capital
Earnings
Stock
Income
Income(Unaudited)Balance, January 9, 2003

$
---

$
442,969

$
---

$
---

$
---

$
---Net earnings


---


---


31,400


---


---


31,400Other comprehensive income:Currency translation adjustment


---


---


---


---


12,953


12,953Unrealized appreciation in the fair valueof marketable securities


---


---


---


---


30


30Comprehensive income
















$
44,383Stock based compensation


---


952


---


---


---Balance, July 5, 2003

$
---

$
443,921

$
31,400

$
---

$
12,983





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









NORTEK, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS INVESTMENT


FOR THE THREE MONTHS ENDED JULY 3, 2004


(Dollar amounts in thousands)





AccumulatedAdditional

OtherCommon
Paid in
Retained
Comprehensive
ComprehensiveStock
Capital
Earnings
Income (Loss)
Income (Loss)(Unaudited)Balance, April 3, 2004

$
---

$
445,520

$
153,100

$
16,202

$
---Net earnings


---


---


22,100


---


22,100Other comprehensive income (loss):Currency translation adjustment


---


---


---


(511
)

(511
)Comprehensive income













$
21,589Stock based compensation


---


4,269


---


---Balance, July 3, 2004

$
---

$
449,789

$
175,200

$
15,691  The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.









NORTEK, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS INVESTMENT


FOR THE SIX MONTHS ENDED JULY 3, 2004


(Dollar amounts in thousands)





AccumulatedAdditional

OtherCommon
Paid in
Retained
Comprehensive
ComprehensiveStock
Capital
Earnings
Income (Loss)
Income (Loss)(Unaudited)Balance, December 31, 2003

$
---

$
444,548

$
76,500

$
19,437

$
---Net earnings


---


---


98,700


---


98,700Other comprehensive income (loss):Currency translation adjustment


---


---


---


(3,761
)

(3,761
)Unrealized decline in the fair value ofmarketable securities


---


---


---


(3
)

(3
)Minimum pension liability, net of tax of $10


---


---


---


18


18Comprehensive income













$
94,954Stock based compensation


---


5,241


---


---Balance, July 3, 2004

$
---

$
449,789

$
175,200

$
15,691





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







NORTEK, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED
 FINANCIAL STATEMENTS
 JULY 3, 2004 AND JULY 5, 2003
























Initial Allocation
Final AllocationInventories

$
13,234,000

$
12,908,000Property, plant and equipment


102,474,000


38,035,000Intangible assets


72,953,000


21,686,000Indebtedness


(33,777,000
)

(33,777,000
)Pension and post retirement health care benefits


(32,195,000
)

(23,781,000
)Prepaid and deferred income taxes


(38,325,000
)

(11,370,000
)Goodwill


227,671,000


310,240,000Other


---


226,000Total

$
312,035,000

$
314,167,000










- Purchase price increased by $2,132,000 from $468,737,000 to $470,869,000 due to refinements made to the fair value of the options to purchase common stock of the Management Investors that were included in the purchase price as they were exchanged for fully vested options to purchase common stock of the new entity (see Note B).

- The change in the allocations to property, plant and equipment and intangible assets reflect adjustments recorded based upon the finalization of the Companys asset appraisals for each of the Companys significant locations in the fourth quarter of 2003.

- The change in the allocations to pension and post retirement health benefits reflect adjustments recorded subsequent to July 5, 2003 based upon the finalization of the Companys actuarial studies for significant pension and post retirement health benefit liabilities.

- The change in the allocation to prepaid and deferred income taxes principally reflects the deferred tax consequences of the adjustments made to property, plant and equipment, intangible assets and pensions and post retirement health benefits discussed above

- The increase in the allocation to goodwill principally reflects the net impact of the changes to property, plant and equipment, intangible assets, pensions and post-retirement health benefits and prepaid and deferred income taxes and the $2,132,000 of additional purchase price discussed above. Goodwill associated with the Recapitalization will not be deductible for federal, state or foreign income tax purposes.










Initial Allocation
Final AllocationFair Value Adjustments:Inventories

$
892,000

$
892,000Property, plant and equipment


30,429,000


3,026,000Intangible assets


(2,429,000
)

(18,429,000
)Prepaid and deferred income taxes


(12,972,000
)

5,450,000Goodwill


(11,513,000
)

(40,567,000
)Other


90,000


542,000Total

$
4,497,000

$
(49,086,000
)









Continuing
DiscontinuedOperations
Operations
Total(Amounts in thousands)Balance as of December 31, 2002

$
287,164

$
263,998

$
551,162Impact of foreign currency translation


269


74


343Balance as of January 9, 2003


287,433


264,072


551,505Effect of Recapitalization


350,807


(40,567
)

310,240Acquisitions during the period from January 10, 2003 to December 31, 2003


46,248


---


46,248Purchase accounting adjustments


(11,979
)

(4,195
)

(16,174
)Impact of foreign currency translation


5,554


667


6,221Balance December 31, 2003


678,063


219,977


898,040Acquisitions during the period from January 1, 2004 to July 3, 2004 (Note E)


8,623


---


8,623Sale of Ply Gem (Note H)


---


(219,977
)

(219,977
)Impact of foreign currency translation


211


---


211Balance July 3, 2004

$
686,897

$
---

$
686,897

































Post-Recapitalization
Pre-RecapitalizationThree MonthsEnded
Jan. 10, 2003 -
Jan. 1, 2003 -July 5, 2003
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Net income (loss) as reported in the Companys Form 10-Q for the quarterly period ended July 5, 2003


$ 26,200


$ 32,400


$(64,900
)Impact of the adoption of SFAS No. 123


(300
)

(1,000
)

3,000Net income (loss) as reported in the accompanying unaudited condensed consolidated statement of operations


$ 25,900


$ 31,400


$(61,900
)















Post-RecapitalizationJan. 10, 2003 -July 5, 2003Assumptions for Earnings (Loss) from Continuing Operations:Risk-free interest rate
Between 2.75% and 3.23%Expected life
5 yearsExpected volatility
N/AExpected dividend yield
0%Weighted average fair value at grant date of options granted
$7.26Assumptions for Net Earnings (Loss):Risk-free interest rate
Between 2.75% and 3.23%Expected life
5 yearsExpected volatility
N/AExpected dividend yield
0%Weighted average fair value at grant date of options granted
$7.22















Pre-RecapitalizationJan. 1, 2003 -Jan. 9, 2003(Amounts in thousands)Loss from continuing operations, as reported

$
(60,900
)Less:   Total stock-based employee compensation expense determined under the fair value method for awards issued prior to January 1, 2003, net of related tax effects


(500
)Pro forma loss from continuing operations

$
(61,400
)Net loss, as reported

$
(61,900
)Less:   Total stock-based employee compensation expense determined under the fair value method for awards issued prior to January 1, 2003, net of related tax effects


(600
)Pro forma net loss

$
(62,500
)











- A new class of common stock, Class A Common Stock, par value $1.00 per share, of Nortek Holdings was created consisting of 19,000,000 authorized shares.

- At the time that the amendment to the certificate of incorporation became effective, each share of common stock, par value $1.00 per share and special common stock, par value $1.00 per share outstanding, was reclassified into one share of a new class of mandatorily redeemable common stock, Class B Common Stock, par value $1.00 per share, of Nortek Holdings consisting of 14,000,000 authorized shares.

- Class B Common Stock was required to be immediately redeemed for $46 per share in cash upon completion of the Recapitalization.

- The authorized number of shares of Series B Preference Stock, par value $1.00 per share, was increased to 19,000,000 authorized shares.












































Pro FormaFor the PeriodJan. 1, 2003 -Jan. 9, 2003Net sales

$
25,000Operating earnings

$
300Net loss

$
(3,400
)














































































































Curtailment loss upon termination of a SERP

$
70,142,000Recapitalization fees, expenses and other


12,848,000Other


10,000$
83,000,000































Post-RecapitalizationFor the ThreeMonths EndedJuly 3, 2004
July 5, 2003(Amounts in thousands)(Unaudited)Net sales

$
---

$
154,500Operating earnings (loss) of discontinued operations *

$
(1,200
)
$
21,581Interest expense, net


---


(9,881
)Earnings (loss) before income taxes


(1,200
)

11,700Provision (benefit) for income taxes


(400
)

4,300Earnings (loss) from discontinued operations

$
(800
)
$
7,400Depreciation and amortization expense

$
---

$
3,731


*     Operating earnings of discontinued operations are net of Ply Gem corporate expenses previously included within Unallocated other, net in the Companys segment reporting.





Operating earnings of discontinued operations for the three months ended July 5, 2003 include approximately $100,000 of severance and other costs associated with the closure of certain manufacturing facilities.





Operating earnings for the three months ended July 3, 2004 reflect the pre-tax impact of stock-based employee compensation charges of approximately $1,200,000 related to Nortek Holdings stock options retained by employees of Ply Gem subsequent to the sale of Ply Gem (see Note A).









For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004 -
Jan. 10, 2003 -
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Net sales

$
40,600

$
253,600

$
8,800Operating earnings (loss) of discontinued operations *

$
(3,244
)
$
21,771

$
(368
)Interest expense, net


(4,556
)

(18,671
)

(1,232
)Earnings (loss) before provision (benefit) for income taxes


(7,800
)

3,100


(1,600
)Provision (benefit) for income taxes


(2,900
)

1,200


(600
)Earnings (loss) from discontinued operations


(4,900
)

1,900


(1,000
)Gain on sale of discontinued operations


122,700


---


---Income tax provision on sale of discontinued operations


50,400


---


---72,300


---


---Earnings (loss) from discontinued operations

$
67,400

$
1,900

$
(1,000
)Depreciation and amortization expense

$
1,359

$
8,478

$
315


*    Operating earnings (loss) of discontinued operations are net of Ply Gem corporate expenses previously included within Unallocated other, net in the Companys segment reporting.





Operating earnings (loss) of discontinued operations for the period from January 10, 2003 to July 5, 2003 include approximately $600,000 of severance and other costs associated with the closure of certain manufacturing facilities. Operating earnings (loss) of discontinued operations for the period from January 10, 2003 to July 5, 2003 also include approximately $1,300,000 of costs and expenses for expanded distribution including new customers.





Operating earnings for the six months ended July 3, 2004 reflect the pre-tax impact of stock-based employee compensation charges of approximately $1,900,000 related to Nortek Holdings stock options retained by employees of Ply Gem subsequent to the sale of Ply Gem (see Note A).




The table that follows presents a breakdown of the major components of assets and liabilities of discontinued operations as of December 31, 2003:





December 31, 2003(Amounts in thousands)(Unaudited)Assets:Accounts receivable, less allowances of $8,695,000

$
45,236Inventories


44,136Prepaid income taxes


8,392Property and equipment, net


122,816Goodwill


219,977Intangible assets, less accumulated amortization of $3,849,000


44,363Other assets


9,931Total assets of discontinued operations

$
494,851Liabilities:Accounts payable

$
18,876Accrued expenses


33,803Notes, mortgage notes and obligations payable


29,562Deferred income taxes


25,323Other liabilities


30,119Total liabilities of discontinued operations

$
137,683










The Company evaluates segment performance based on operating earnings before allocations of corporate overhead costs. Intersegment net sales and intersegment eliminations were not material for any of the periods presented. The income statement impact of all purchase accounting adjustments, including goodwill and intangible asset amortization, is reflected in the operating earnings of the applicable operating segment.




Net sales, operating earnings and pre-tax earnings from continuing operations for the Companys segments for the three months ended July 3, 2004 and July 5, 2003 were as follows:





**Three Months Ended******
****
**July 3, 2004**
**July 5, 2003******
****
*(Amounts in thousands)***
**
*(Unaudited)*Net sales:Residential building products

$
245,627

$
194,928Air conditioning and heating products


202,766


195,101Consolidated net sales

$
448,393

$
390,029Operating earnings:Residential building products *

$
41,706

$
31,551Air conditioning and heating products *


16,218


19,016Subtotal


57,924


50,567Unallocated:Strategic sourcing software andsystems development expense


---


(300
)Stock based compensation charges


(2,100
)

(200
)Other, net


(9,262
)

(6,220
)Consolidated operating earnings


46,562


43,847Interest expense


(9,293
)

(12,636
)Investment income


331


289Earnings before provision for income taxes

$
37,600

$
31,500


*     The operating results of the Air Conditioning and Heating Products Segment for the three months ended July 3, 2004 and July 5, 2003 include approximately $600,000 and $1,400,000, respectively, of costs associated with the closure of certain manufacturing facilities (see Note L). The operating results of the Residential Building Products Segment and the Air Conditioning and Heating Products Segment for the three months ended July 3, 2004 include approximately $600,000 and $400,000, respectively, of compensation expense related to stock options issued to employees of such segments in accordance with SFAS No. 123.







For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004 -
Jan. 10, 2003 -
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Net sales:Residential building products

$
482,148

$
379,461

$
16,338Air conditioning and heating products


373,688


346,645


8,613Consolidated net sales

$
855,836

$
726,106

$
24,951Operating earnings (loss):Residential building products *

$
81,714

$
58,547

$
2,731Air conditioning and heating products *


25,290


35,492


(1,258
)Subtotal


107,004


94,039


1,473Unallocated:Expenses and charges arising fromthe Recapitalization


---


---


(83,000
)Strategic sourcing software andsystems development expense


---


(1,700
)

(100
)Stock based compensation charges


(2,300
)

(800
)

---Other, net


(16,629
)

(13,168
)

(138
)Consolidated operating earnings (loss)


88,075


78,371


(81,765
)Interest expense


(25,870
)

(29,427
)

(1,054
)Loss from debt retirement


(11,958
)

---


---Investment income


1,253


656


119Earnings (loss) before provision (benefit)for income taxes

$
51,500

$
49,600

$
(82,700
)





*     The operating results of the Air Conditioning and Heating Products Segment for the first six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003 include approximately $1,900,000 and $1,400,000, respectively, of costs associated with the closure of certain manufacturing facilities (see Note L). There were no costs recorded in the period from January 1, 2003 to January 9, 2003 related to the closure of certain manufacturing facilities within the Air Conditioning and Heating Products Segment.  The operating results of the Residential Building Products Segment for the six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003 include approximately $600,000 and $100,000, respectively, of compensation expense related to stock options issued to employees of this segment in accordance with SFAS No. 123 and the operating results of he Air Conditioning and Heating Products Segment for the six months ended July 3, 2004 include approximately $400,000 of compensation expense related to stock options issued to employees of this segment in accordance with SFAS No. 123.










Three Months EndedJuly 3, 2004
July 5, 2003(Amounts in thousands)(Unaudited)Depreciation Expense:Residential building products

$
3,679

$
1,888Air conditioning and heating products


3,126


1,968Other


223


83Consolidated depreciation expense

$
7,028

$
3,939Amortization of intangible assets andpurchase price allocated to inventory *:Residential building products

$
2,728

$
2,277Air conditioning and heating products


870


687Consolidated amortization expense andpurchase price allocated to inventory

$
3,598

$
2,964Capital Expenditures:Residential building products

$
2,402

$
2,303Air conditioning and heating products


2,318


1,962Other


24


11Consolidated capital expenditures

$
4,744

$
4,276


*     During the three months ended July 3, 2004 and July 5, 2003, the Company reflected approximately $200,000 and $900,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of products sold in the Residential Building Products Segment.









For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004 -
Jan. 10, 2003 -
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Depreciation Expense:Residential building products

$
6,503

$
3,731

$
295Air conditioning and heating products


6,028


3,779


276Other


305


193


15Consolidated depreciation expense

$
12,836

$
7,703

$
586Amortization of intangible assets andpurchase price allocated to inventory *:Residential building products

$
5,378

$
6,852

$
53Air conditioning and heating products


1,694


1,966


14Consolidated amortization expense andpurchase price allocated to inventory

$
7,072

$
8,818

$
67Capital Expenditures:Residential building products

$
4,831

$
4,227

$
91Air conditioning and heating products


4,475


2,764


116Other


342


255


---Consolidated capital expenditures

$
9,648

$
7,246

$
207


*     During the six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003, the Company reflected approximately $200,000 and $4,900,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of products sold. In the first six months ended July 3, 2004, all $200,000 was allocated to the Residential Buildings Products Segment and for the period from January 10, 2003 to July 5, 2003, approximately $4,300,000 was allocated to the Residential Building Products Segment and approximately $600,000 was allocated to the Air Conditioning and Heating Products Segment.










For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004 -
Jan. 10, 2003 -
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003Income tax provision (benefit) at the federal statutory rate
35.0%
35.0%
(35.0)%Net change from federal statutory rate:State income tax provision, net of federal income tax effect
1.8
1.1
---Change in tax reserves, net
0.3
0.5
---Tax effect resulting from foreign activities
1.7
1.7
---Tax effect of the Recapitalization
---
---
8.3Non-deductible expenses
0.3
0.5
---Other, net
0.1
1.7
0.3Income tax provision (benefit) at estimated effective rate
39.2%
40.5%
(26.4)%



























For the Three Months EndedJuly 3, 2004
July 5, 2003(Amounts in thousands)(Unaudited)Balance, beginning of period

$
29,378

$
26,743Warranties provided during period


5,067


4,535Settlements made during period


(4,240
)

(3,639
)Changes in liability estimates, including expirations


211


167Balance, end of period

$
30,416

$
27,806







For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004 -
Jan. 10, 2003 -
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Balance, beginning of period

$
29,087

$
25,983

$
26,007Warranties provided during period


9,262


8,762


234Settlements made during period


(7,828
)

(7,025
)

(274
)Changes in liability estimate, including acquisitions


(105
)

86


16Balance, end of period

$
30,416

$
27,806

$
25,983






























Employee SeparationExpenses
Other
Total
Restructuring
Costs(Amounts in thousands)(Unaudited)Balance at December 31, 2002

$
820

$
645

$
1,465Other adjustments


(90
)

(110
)

(200
)Balance at January 9, 2003


730


535


1,265Payments and asset write downs


(45
)

(205
)

(250
)Balance at April 5, 2003


685


330


1,015Provision


1,251


133


1,384Payments and asset write downs


(143
)

(23
)

(166
)Balance at July 5, 2003

$
1,793

$
440

$
2,233Balance at December 31, 2003

$
1,638

$
205

$
1,843Provision


71


1,219


1,290Payments and asset write downs


(1,139
)

(1,420
)

(2,559
)Balance at April 3, 2004


570


4


574Provision


125


458


583Payments and asset write downs


(202
)

(462
)

(664
)Balance at July 3, 2004

$
493

$
---

$
493

























For the Three Months EndedJuly 3, 2004
July 5, 2003(Amounts in thousands)(Unaudited)Service cost

$
293

$
500Interest cost


2,316


2,370Expected return on plan assets


(1,999
)

(1,901
)Amortization of prior service cost


47


54Recognized actuarial loss


4


7Curtailment loss


---


31Net periodic benefit cost

$
661

$
1,061









For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004 -
Jan. 10, 2003 -
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Service cost

$
595

$
972

$
80Interest cost


4,708


4,609


385Expected return on plan assets


(4,064
)

(3,698
)

(184
)Amortization of prior service cost


96


104


70Recognized actuarial loss


8


14


210Curtailment loss


---


61


65,766Net periodic benefit cost

$
1,343

$
2,062

$
66,327










For the Three Months EndedJuly 3, 2004
July 5, 2003(Amounts in thousands)(Unaudited)Service cost

$
247

$
251Interest cost


608


556Amortization of prior service cost


---


2Recognized actuarial gain


(5
)

(2
)Net periodic post retirement health benefit cost


$ 850


$ 807









For the periodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004 -
Jan. 10, 2003 -
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Service cost

$
501

$
488

$
13Interest cost


1,237


1,081


62Amortization of prior service cost


---


4


2Recognized actuarial (gain) loss


(11
)

(4
)

35Curtailment gain


---


---


(355
)Net periodic post retirement health benefit cost (income)

$
1,727

$
1,569

$
(243
)


























Sources:Cash equity from the Buyer and its affiliates (1)

$
361,300,000Senior secured term loan


700,000,000Senior subordinated notes


625,000,000Estimated cash of the Company


160,400,000$
1,846,700,000Uses:Purchase price paid to sellers

$
803,200,000Repayment of existing debt, including interest and redemption premiums


937,700,000Transaction fees, expenses and other


105,800,000$
1,846,700,000





(1)It is expected that management will reinvest up to $109,700,000 of their equity interest in Nortek Holdings into THL Buildco Holdings, Inc.










NORTEK, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS
 OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SECOND QUARTER AND FIRST SIX MONTHS ENDED JULY 3, 2004
 AND THE SECOND QUARTER AND FIRST SIX MONTHS ENDED JULY 5, 2003







ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS















- kitchen range hoods
- built-in exhaust fans (such as bath fans and fan, heater and light combination units)
- indoor air quality products
- bath cabinets
- door chimes
- radio intercoms
- central vacuum systems
- surround sound systems and,
- multi-room audio and video distribution equipment

The Air Conditioning and Heating Products Segment manufactures and sells heating, ventilating and air conditioning systems (HVAC) for site-built residential and manufactured housing structures, custom-designed commercial applications and standard light commercial products.

























- Revenue Recognition and Related Expenses
- Inventory Valuation
- Prepaid Income Tax Assets and Deferred Tax Liabilities
- Goodwill
- Pensions and Post Retirement Health Benefits
- Insurance Liabilities
- Contingencies










Results of Operations







Change in Earnings in theSecond Quarter Ended
Second Quarter 2004July 3,
July 5,
as Compared to 20032004
2003
**$**
%(Dollar amounts in thousands)Net sales:Residential Building Products

$
245,627

$
194,928

$
50,699


26.0
%Air Conditioning and Heating Products


202,766


195,101


7,665


3.9Consolidated net sales

$
448,393

$
390,029

$
58,364


15.0
%Operating earnings:Residential Building Products*

$
41,706

$
31,551

$
10,155


32.2
%Air Conditioning and Heating Products*


16,218


19,016


(2,798
)

(14.7
)Subtotal


57,924


50,567


7,357


14.5Unallocated:Strategic sourcing software andsystems development expense


---


(300
)

300


100.0Stock based compensation charges


(2,100
)

(200
)

(1,900
)

(950.0
)Other, net


(9,262
)

(6,220
)

(3,042
)

(48.9
)Consolidated operating earnings

$
46,562

$
43,847

$
2,715


6.2
%Depreciation and amortization expense **:Residential Building Products

$
6,407

$
4,165

$
2,242


53.8
%Air Conditioning and Heating Products


3,996


2,655


1,341


50.5Other


223


83


140


168.7$
10,626

$
6,903

$
3,723


53.9
%Operating earnings margin:Residential Building Products


17.0
%

16.2
%Air Conditioning and Heating Products


8.0


9.7Consolidated


10.4
%

11.2
%Depreciation and amortizationexpense as a % of net sales:Residential Building Products


2.6
%

2.1
%Air Conditioning and Heating Products


2.0


1.4Consolidated


2.4
%

1.8
%


*      The operating results of the Air Conditioning and Heating Products Segment for the three months ended July 3, 2004 and July 5, 2003 include approximately $600,000 and $1,400,000, respectively, of costs associated with the closure of certain manufacturing facilities. The operating results of the Air Conditioning and Heating Products Segment for the three months ended July 3, 2004 and July 5, 2003 also include approximately $1,800,000 and approximately $550,000, respectively, of estimated inefficient production costs and expenses associated with the start-up of a new manufacturing facility. The operating results of the Residential Building Products Segment for the three months ended July 3, 2004 and July 5, 2003 include approximately $600,000 and $100,000, respectively, and operating results of the Air Conditioning and Heating Products Segment include for the three months ended July 3, 2004 approximately $400,000 of compensation expense related to stock options issued to employees of such segments in accordance with SFAS No. 123.





**     During the three months ended July 3, 2004 and July 5, 2003, the Company reflected approximately $200,000 and $900,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of products sold in the Residential Building Products Segment.








Pre-Recapitalization
Post-Recapitalization
Combined SixJanuary 1, 2003 -
January 10, 2003
Months EndedJanuary 9, 2003
July 5, 2003
July 5, 2003(Dollar amounts in thousands)Net sales:

(Unaudited)Residential Building Products

$
16,338

$
379,461

$
395,799Air Conditioning and Heating Products


8,613


346,645


355,258Consolidated net sales

$
24,951

$
726,106

$
751,057Operating earnings (loss):Residential Building Products

$
2,731

$
58,547

$
61,278Air Conditioning and Heating Products


(1,258
)

35,492


34,234Subtotal


1,473


94,039


95,512Unallocated:Expenses and charges arisingfrom the Recapitalization


(83,000
)

---


(83,000
)Strategic sourcing software andsystems development expense


(100
)

(1,700
)

(1,800
)Stock based compensation charges


---


(800
)

(800
)Other, net


(138
)

(13,168
)

(13,306
)Consolidated operating earnings (loss)

$
(81,765
)
$
78,371

$
(3,394
)Depreciation and amortization expense:Residential Building Products

$
348

$
10,583

$
10,931Air Conditioning and Heating Products


290


5,745


6,035Other


15


193


208$
653

$
16,521

$
17,174Operating earnings (loss) margin:Residential Building Products


16.7
%

15.4
%

15.5
%Air Conditioning and Heating Products


(14.6
)

10.2


9.6Consolidated


(327.7)
%

10.8
%

(0.5)
%Depreciation and amortizationexpense as a % of net sales:Residential Building Products


2.1
%

2.8
%

2.8
%Air Conditioning and Heating Products


3.4


1.7


1.7Consolidated


2.6
%

2.3
%

2.3
%









Change in Earnings in theSix Months Ended
First Six Months 2004July 3,
July 5,
as Compared to 20032004
2003 (1)
**$**
%(Dollar amounts in thousands)Net sales:Residential Building Products

$
482,148

$
395,799

$
86,349


21.8
%Air Conditioning and Heating Products


373,688


355,258


18,430


5.2Consolidated net sales

$
855,836

$
751,057

$
104,779


14.0
%Operating earnings (loss):Residential Building Products*

$
81,714

$
61,278

$
20,436


33.3
%Air Conditioning and Heating Products*


25,290


34,234


(8,944
)

(26.1
)Subtotal


107,004


95,512


11,492


12.0Unallocated:Expenses and charges arisingfrom the Recapitalization


---


(83,000
)

83,000


100.0Strategic sourcing software andsystems development expense


---


(1,800
)

1,800


100.0Stock based compensation charges


(2,300
)

(800
)

(1,500
)

(187.5
)Other, net


(16,629
)

(13,306
)

(3,323
)

(25.0
)Consolidated operating earnings (loss)

$
88,075

$
(3,394
)
$
91,469


2,695.0
%Depreciation and amortization expense **:Residential Building Products

$
11,881

$
10,931

$
950


8.7
%Air Conditioning and Heating Products


7,722


6,035


1,687


28.0Other


305


208


97


46.6$
19,908

$
17,174

$
2,734


15.9
%Operating earnings margin:Residential Building Products


16.9
%

15.5
%Air Conditioning and Heating Products


6.8


9.6Consolidated


10.3
%

(0.5)
%Depreciation and amortizationexpense as a % of net sales:Residential Building Products


2.5
%

2.8
%Air Conditioning and Heating Products


2.1


1.7Consolidated


2.3
%

2.3
%




(1)  The six months ended July 5, 2003 represents the combined pre- and post-Recapitalization periods of January 1, 2003 through January 9, 2003 and January 10, 2003 through July 5, 2003, respectively.





*     The operating results of the Air Conditioning and Heating Products Segment for the first six months ended July 3, 2004 include approximately $1,900,000 of costs associated with the closure of certain manufacturing facilities and approximately $5,900,000 of estimated inefficient production costs and expenses associated with the start-up of a new manufacturing facility. The operating results of the Air Conditioning and Heating Products Segment for the period from January 10, 2003 to July 5, 2003 include approximately $1,400,000 of costs associated with the closure of certain manufacturing facilities and approximately $550,000 of costs and expenses associated with the startup of a new manufacturing facility. There were no costs recorded in the period from January 1, 2003 to January 9, 2003 related to the closure of certain manufacturing facilities within the Air Conditioning and Heating Products Segment. The operating results of the Residential Building Products Segment for the six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003 include approximately $600,000 and $100,000, respectively, of compensation expense related to stock options issued to employees of this segment in accordance with SFAS No. 123 and the operating results of the Air Conditioning and Heating Products Segment for the six months ended July 3, 2004 include approximately $400,000 of compensation expense related to stock options issued to employees of this segment in accordance with SFAS No. 123.





**   During the six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003, the Company reflected approximately $200,000 and $4,900,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of products sold. In the first six months ended July 3, 2004, all $200,000 was allocated to the Residential Buildings Products Segment and for the period from January 10, 2003 to July 5, 2003, approximately $4,300,000 was allocated to the Residential Building Products Segment and approximately $600,000 was allocated to the Air Conditioning and Heating Products Segment.









Change in Earnings inSecond Quarter Ended
the Second Quarter 2004July 3,
July 5,
as Compared to 20032004
2003
**$**
%(Dollar amounts in millions)Net sales

$
448.4

$
390.0

$
58.4


15.0
%Cost of products sold


316.4


280.7


(35.7
)

(12.7
)Selling, general and administrative expenses, net


81.9


63.4


(18.5
)

(29.2
)Amortization of intangible assets


3.5


2.0


(1.5
)

(75.0
)Operating earnings


46.6


43.9


2.7


(6.2
)Interest expense


(9.3
)

(12.7
)

3.4


26.8Investment income


0.3


0.3


-


-Earnings from continuing operationsbefore provision for income taxes


37.6


31.5


6.1


(19.4
)Provision for income taxes


14.7


13.0


1.7


(13.1
)Earnings from continuing operations


22.9


18.5


4.4


(23.8
)Earnings (loss) from discontinued operations


(0.8
)

7.4


(8.2
)

*Net earnings

$
22.1

$
25.9

$
(3.8
)

(14.7)
%




Percentage of Net Sales
Change in PercentageSecond Quarter Ended
for the SecondJuly 3,
July 5,
Quarter 20042004
2003 (1)
as Compared to 2003Net sales


100.0
%

100.0
%




---
%Cost of products sold


70.6


72.0





1.4Selling, general and administrative expenses, net


18.2


16.3





(1.9
)Amortization of intangible assets


0.8


0.5





(0.3
)Operating earnings


10.4


11.2





(0.8
)Interest expense


(2.1
)

(3.3
)




1.2Investment income


0.1


0.1





-Earnings from continuing operationsbefore provision for income taxes


8.4


8.0





0.4Provision for income taxes


3.3


3.3





-Earnings from continuing operations


5.1


4.7





0.4Earnings (loss) from discontinued operations


(0.2
)

1.9





(2.1
)Net earnings


4.9
%

6.6
%




(1.7)
%







Pre-Recapitalization
Post-Recapitalization
Combined SixJan. 1, 2003 -
Jan. 10, 2003 -
Months EndedJan. 9, 2003
July 5, 2003
July 5, 2003(Dollar amounts in millions)(Unaudited)Net sales

$
24.9

$
726.1

$
751.0Cost of products sold


18.6


520.4


539.0Selling, general and administrative expenses, net


5.0


123.5


128.5Amortization of intangible assets


0.1


3.8


3.9Expenses and charges arising from theRecapitalization


83.0


---


83.0Operating earnings (loss)


(81.8
)

78.4


(3.4
)Interest expense


(1.0
)

(29.5
)

(30.5
)Investment income


0.1


0.7


0.8Earnings (loss) before provision (benefit) forincome taxes


(82.7
)

49.6


(33.1
)Provision (benefit) for income taxes


(21.8
)

20.1


(1.7
)Earnings (loss) from continuing operations


(60.9
)

29.5


(31.4
)Earnings (loss) from discontinued operations


(1.0
)

1.9


0.9Net earnings (loss)

$
(61.9
)
$
31.4

$
(30.5
)Percentage of Net SalesPre-Recapitalization


Post-Recapitalization


Combined SixJan. 1, 2003 -


Jan. 10, 2003 -


Months EndedJan. 9, 2003


July 5, 2003


July 5, 2003Net sales


100.0
%

100.0
%

100.0
%Cost of products sold


74.7


71.7


71.8Selling, general and administrative expenses, net


20.1


17.0


17.1Amortization of intangible assets


0.4


0.5


0.5Expenses and charges arising from theRecapitalization


333.3


-


11.1Operating earnings (loss)


(328.5
)

10.8


(0.5
)Interest expense


(4.0
)

(4.1
)

(4.0
)Investment income


0.4


0.1


0.1Earnings (loss) before provision (benefit) forincome taxes


(332.1
)

6.8


(4.4
)Provision (benefit) for income taxes


(87.5
)

2.8


(0.2
)Earnings (loss) from continuing operations


(244.6
)

4.0


(4.2
)Earnings (loss) from discontinued operations


(4.0
)

0.3


0.1Net earnings (loss)


(248.6)
%

4.3
%

(4.1)
%









Change in Earnings in theFirst Six Months Ended
First Six Months 2004July 3,
July 5,
as Compared to 20032004
2003 (1)
**$**
%(Dollar amounts in millions)Net sales

$
855.8

$
751.0

$
104.8


14.0
%Cost of products sold


605.1


539.0


(66.1
)

(12.3
)Selling, general and administrative expenses, net


155.8


128.5


(27.3
)

(21.2
)Amortization of intangible assets


6.8


3.9


(2.9
)

(74.4
)Expenses and charges arising from theRecapitalization


---


83.0


83.0


100.0Operating earnings (loss)


88.1


(3.4
)

91.5


*Interest expense


(25.9
)

(30.5
)

4.6


15.1Loss from debt retirement


(11.9
)

---


(11.9
)

*Investment income


1.2


0.8


0.4


50.0Earnings (loss) from continuing operationsbefore provision (benefit) for income taxes


51.5


(33.1
)

84.6


255.6Provision (benefit) for income taxes


20.2


(1.7
)

21.9


*Earnings (loss) from continuing operations


31.3


(31.4
)

62.7


199.7Earnings (loss) from discontinued operations


67.4


0.9


66.5


*Net earnings (loss)

$
98.7

$
(30.5
)
$
129.2


423.6
%




Percentage of Net Sales
Change in PercentageFirst Six Months Ended
for the FirstJuly 3,
July 5,
Six Months 20042004
2003 (1)
as Compared to 2003Net sales


100.0
%

100.0
%




---
%Cost of products sold


70.7


71.8





1.1Selling, general and administrative expenses, net


18.2


17.1





(1.1
)Amortization of intangible assets


0.8


0.5





(0.3
)Expense and charges arising from theRecapitalization


---


11.1





11.1Operating earnings (loss)


10.3


(0.5
)




10.8Interest expense


(3.0
)

(4.0
)




1.0Loss from debt retirement


(1.4
)

---





(1.4
)Investment income


0.1


0.1





-Earnings (loss) from continuing operationsbefore provision (benefit) for income taxes


6.0


(4.4
)




10.4Provision (benefit) for income taxes


2.3


(0.2
)




2.5Earnings (loss) from continuing operations


3.7


(4.2
)




7.9Earnings (loss) from discontinued operations


7.9


0.1





7.8Net earnings (loss)


11.6
%

(4.1)
%




15.7
%




(1)   The six months ended July 5, 2003 represents the combined pre- and post-Recapitalization periods of January 1, 2003 through January 9, 2003 and January 10, 2003 through July 5, 2003, respectively.





*  not meaningful



























































































































Post-RecapitalizationFor the ThreeMonths EndedJuly 3, 2004
July 5, 2003(Amounts in thousands)(Unaudited)Net sales

$
---

$
154,500Operating earnings (loss) of discontinued operations *

$
(1,200
)
$
21,581Interest expense, net


---


(9,881
)Earnings (loss) before income taxes


(1,200
)

11,700Provision (benefit) for income taxes


(400
)

4,300Earnings (loss) from discontinued operations

$
(800
)
$
7,400Depreciation and amortization expense

$
---

$
3,731


*  Operating earnings of discontinued operations are net of Ply Gem corporate expenses previously included within Unallocated other, net in the Companys segment reporting.
 
 Operating earnings of discontinued operations for the three months ended July 5, 2003 include approximately $100,000 of severance and other costs associated with the closure of certain manufacturing facilities.
 
 Operating earnings for the three months ended July 3, 2004 reflect the pre-tax impact of stock-based employee compensation charges of approximately $1,200,000 related to Nortek Holdings stock options retained by employees of Ply Gem subsequent to the sale of Ply Gem (see Note A of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein).







For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004 -
Jan. 10, 2003 -
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)(Unaudited)Net sales

$
40,600

$
253,600

$
8,800Operating earnings (loss) of discontinued operations *

$
(3,244
)
$
21,771

$
(368
)Interest expense, net


(4,556
)

(18,671
)

(1,232
)Earnings (loss) before provision (benefit) for income taxes


(7,800
)

3,100


(1,600
)Provision (benefit) for income taxes


(2,900
)

1,200


(600
)Earnings (loss) from discontinued operations


(4,900
)

1,900


(1,000
)Gain on sale of discontinued operations


122,700


---


---Income tax provision on sale of discontinued operations


50,400


---


---72,300


---


---Earnings (loss) from discontinued operations

$
67,400

$
1,900

$
(1,000
)Depreciation and amortization expense

$
1,359

$
8,478

$
315


*   Operating earnings (loss) of discontinued operations are net of Ply Gem corporate expenses previously included within Unallocated other, net in the Companys segment reporting.





Operating earnings (loss) of discontinued operations for the period from January 10, 2003 to July 5, 2003 include approximately $600,000 of severance and other costs associated with the closure of certain manufacturing facilities. Operating earnings (loss) of discontinued operations for the period from January 10, 2003 to July 5, 2003 also include approximately $1,300,000 of costs and expenses for expanded distribution including new customers.





Operating earnings for the six months ended July 3, 2004 reflect the pre-tax impact of stock-based employee compensation charges of approximately $1,900,000 related to Nortek Holdings stock options retained by employees of Ply Gem subsequent to the sale of Ply Gem (see Note A of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein).




In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities  an Interpretation of ARB No. 51 (FIN 46). FIN 46 clarifies the application of ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements on FIN 46 apply to the Company immediately for all variable interest entities created after December 31, 2003 and begin on January 1, 2005 for all variable interest entities created prior to January 1, 2004. The adoption of FIN 46 on January 1, 2004 did not have any impact on the Companys consolidated financial statements and is not expected to have a material impact in the future.





In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149), which clarifies the financial accounting and reporting proscribed by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) for derivative instruments, including certain derivative instruments embedded in other contracts. Certain provisions of SFAS No. 149 related to implementation issues of SFAS No. 133 are already effective and other provisions related to forward purchases or sales are effective for both existing contracts and new contracts entered into after June 30, 2003. The Company has previously adopted SFAS No. 133, including the implementation issues addressed in SFAS No. 149, and the adoption of the new provisions of SFAS No. 149 on July 1, 2003 did not have an impact on the Companys consolidated financial Statements.





In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150), which addresses the accounting and reporting for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and for all existing financial instruments beginning in the first interim period after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities, which are subject to the provisions for the first fiscal period beginning after December 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. Adoption of this accounting standard did not have an impact on the Companys consolidated financial statements.





In December 2003, the FASB reissued SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132) to require additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The revised SFAS No. 132 provides only for additional disclosures and does not change the accounting for pension and postretirement plans. The Company has previously adopted SFAS No. 132 and has provided the required new disclosures of the revised SFAS No. 132 in Note M of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.





The Company uses EBITDA as both an operating performance and liquidity measure. Operating performance measure disclosures with respect to EBITDA are provided below. Refer to the Liquidity and Capital Resources section for liquidity measure disclosures with respect to EBITDA and a reconciliation from net cash flows from operating activities to EBITDA.





EBITDA is defined as net earnings (loss) before interest, taxes, depreciation and amortization expense. EBITDA is not a measure of operating performance under generally accepted accounting principles in the United States (GAAP) and should not be considered as an alternative or substitute for GAAP profitability measures such as operating earnings (loss) from continuing operations, discontinued operations, extraordinary items and net income (loss). EBITDA as an operating performance measure has material limitations since it excludes, among other things, the statement of operations impact of depreciation and amortization expense, interest expense and the provision (benefit) for income taxes  and therefore does not necessarily represent an accurate measure of profitability, particularly in situations where a company is highly leveraged or has a disadvantageous tax structure. The Company uses a significant amount of capital assets and depreciation and amortization expense is a necessary element of the Companys costs and ability to generate revenue and therefore its exclusion from EBITDA is a material limitation. The Company has a significant amount of debt and interest expense is a necessary element of the Companys costs and ability to generate revenue and therefore its exclusion from EBITDA is a material limitation. The Company generally incurs significant U.S federal, state and foreign income taxes each year and the provision (benefit) for income taxes is a necessary element of the Companys costs and therefore its exclusion from EBITDA is a material limitation. As a result, EBITDA should be evaluated in conjunction with net income (loss) for a more complete analysis of the Companys profitability, as net income (loss) includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to EBITDA. As EBITDA is not defined by GAAP, the Companys definition of EBITDA may differ from and therefore may not be comparable to similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of the Companys operating results as reported under GAAP.





Company management uses EBITDA as a supplementary non-GAAP operating performance measure to assist with its overall evaluation of Company and subsidiary operating performance (including the performance of subsidiary management) relative to outside peer group companies. In addition, the Company uses EBITDA as an operating performance measure in financial presentations to the Companys Board of Directors, shareholders, various banks participating in the Companys Credit Facility, note holders and Bond Rating agencies, among others, as a supplemental non-GAAP operating measure to assist them in their evaluation of the Companys performance. The Company is also active in mergers, acquisitions and divestitures and uses EBITDA as an additional operating performance measure to assess Company, subsidiary and potential acquisition target enterprise value and to assist in the overall evaluation of Company, subsidiary and potential acquisition target performance on an internal basis and relative to peer group companies. The Company uses EBITDA in conjunction with traditional GAAP operating performance measures as part of its overall assessment of potential valuation and relative performance and therefore does not place undue reliance on EBITDA as its only measure of operating performance. The Company believes EBITDA is useful for both the Company and investors as it is a commonly used analytical measurement for comparing company profitability, which eliminates the effects of financing, differing valuations of fixed and intangible assets and tax structure decisions. The Company believes that EBITDA is specifically relevant to the Company, due to the different degrees of leverage among its competitors, the impact of purchase accounting associated with the Recapitalization, which impacts comparability with its competitors who may or may not have recently revalued their fixed and intangible assets, and the differing tax structures and tax jurisdictions of certain of the Companys competitors. The Company has included EBITDA as a supplemental operating performance measure, which should be evaluated by investors in conjunction with the traditional GAAP performance measures discussed earlier in this Results of Operations section for a complete evaluation of the Companys operating performance.





The following table presents a reconciliation from net earnings, which is the most directly comparable GAAP operating performance measure, to EBITDA for the second quarter ended July 3, 2004 and July 5, 2003:





For the ThreeMonths EndedJuly 3, 2004
July 5, 2003(Amounts in thousands)Net earnings *

$
22,100

$
25,900Provision for income taxesfrom continuing operations


14,700


13,000Provision (benefit) for income taxesfrom discontinued operations


(400
)

4,300Interest expense from continuing operations


9,293


12,636Interest expense from discontinued operations


---


9,916Investment income from continuing operations


(331
)

(289
)Investment income from discontinued operations


---


(35
)Depreciation expense from continuing operations


7,028


3,939Depreciation expense from discontinued operations


---


2,646Amortization expense from continuing operations


3,598


2,964Amortization expense from discontinued operations


---


1,085EBITDA

$
55,988

$
76,062


*   Includes approximately $800,000 of loss and approximately $7,400,000 of earnings from discontinued operations for the three months ended July 3, 2004 and July 5, 2003, respectively. (See Note H of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)





EBITDA includes approximately $4,300,000 and $300,000 of stock based compensation from adopting SFAS No. 123 recorded in the three months ended July 3, 2004 and July 5, 2003, respectively. (See Notes A and I of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)









For the PeriodsPost-Recapitalization
Pre-RecapitalizationJan. 1, 2004
Jan. 10, 2003 -
Jan. 1, 2003 -July 3, 2004
July 5, 2003
Jan. 9, 2003(Amounts in thousands)Net earnings (loss) *

$
98,700

$
31,400

$
(61,900
)Provision (benefit) for income taxesfrom continuing operations


20,200


20,100


(21,800
)Provision (benefit) for income taxesfrom discontinued operations


47,500


1,200


(600
)Interest expense from continuing operations


25,870


29,427


1,054Interest expense from discontinued operations


4,585


18,774


1,234Investment income from continuing operations


(1,253
)

(656
)

(119
)Investment income from discontinued operations


(29
)

(103
)

(2
)Depreciation expense from continuing operations


12,836


7,703


586Depreciation expense from discontinued operations


1,158


5,033


245Amortization expense from continuing operations


7,072


8,818


67Amortization expense from discontinued operations


201


3,445


70EBITDA

$
216,840

$
125,141

$
(81,165
)


*     Includes approximately $67,400,000, $1,900,000 and $(1,000,000) of earnings (loss) from discontinued operations for the first six months ended July 3, 2004 and the periods from January 10, 2003 to July 5, 2003 and from January 1, 2003 to January 9, 2003, respectively. (See Note H of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)





EBITDA includes approximately $83,000,000 of expenses and charges arising from the Recapitalization recorded in the period from January 1, 2003 to January 9, 2003 and approximately $5,200,000 and $1,000,000 of stock based compensation from adopting SFAS No. 123 recorded in the first six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003, respectively. (See Notes A, F and I of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)




Liquidity and Capital Resources





On July 15, 2004, THL Buildco Holdings, Inc. and THL Buildco, Inc. (THL Buildco), newly formed Delaware corporations affiliated with Thomas H. Lee Partners, L.P., together with certain members of Nortek Holdings management, entered into a stock purchase agreement with affiliates of Kelso and Company, L.P. and certain other parties, pursuant to which THL Buildco agreed to purchase all of the outstanding capital stock of Nortek Holdings in a transaction valued at approximately $1.74 billion before fees and expenses (the THL Transaction).





The THL Transaction is subject to customary closing conditions and is expected to be consummated during the third quarter of 2004. Upon closing of the THL Transaction, certain members of management have agreed to settlement or modification of their compensation and benefit arrangements. Management has also agreed to reinvest a substantial portion of their equity interest in Nortek Holdings into THL Buildco Holdings, Inc. (see below). No significant costs related to the THL Transaction have been incurred through July 3, 2004. Nortek Holdings and the Company expect to account for the THL Transaction as a purchase in accordance with SFAS No. 141 and Push Down Accounting rules and regulations. (See Note N of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)





In connection with the THL Transaction, THL Buildco expects to partially finance the transaction, including the redemption of substantially all of the Companys and Nortek Holdings existing debt, via the issuance of a combination of a new senior secured term loan and new senior subordinated debt. It is expected that the new senior secured term loan will be secured by substantially all of the assets of the Company and its subsidiaries. The Company also expects to enter into a $100,000,000 revolving credit facility at the closing which will be available for seasonal working capital borrowing needs and other requirements. It is expected that no borrowings under the revolving credit facility will be necessary at the closing. A summary of the estimated cash sources and uses for the THL Transaction is as follows:





Sources:Cash equity from the Buyer and its affiliates (1)

$
361,300,000Senior secured term loan


700,000,000Senior subordinated notes


625,000,000Estimated cash of the Company


160,400,000$
1,846,700,000Uses:Purchase price paid to sellers

$
803,200,000Repayment of existing debt, including interest and redemption premiums


937,700,000Transaction fees, expenses and other


105,800,000$
1,846,700,000





(1)It is expected that management will reinvest up to $109,700,000 of their equity interest in Nortek Holdings into THL Buildco Holdings, Inc.





On July 20, 2004, the Company announced that it has offered to purchase for cash all of its outstanding 9.875% Senior Subordinated Notes due 2011 ($250 million in principal as of July 3, 2004) (the 9.875% Notes) and all of its outstanding Floating Rate Notes ($200 million in principal as of July 3, 2004) and Nortek Holdings announced that is has offered to purchase for cash all of its 10% Senior Discount Notes due 2011 (approximately $370.5 million of accreted principal as of July 3, 2004) (the Senior Discount Notes), which are both subject to the successful closing of the THL Transaction. Based upon current estimates, Nortek Holdings expects to incur a pre-tax loss from debt retirement of approximately $125,000,000 related to the repurchase of the 9.875% Notes, the Floating Rate Notes and the Senior Discount Notes in the third quarter of 2004, of which approximately $66,000,000 relates to Nortek Holdings Senior Discount Notes.





From January 1, 2004 through February 3, 2004, the Company 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, the Company redeemed all of the Companys 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, 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, the Company redeemed $60,000,000 of the Companys outstanding 8 7/8% Senior Notes due 2008 (8 7/8% Notes). On March 31, 2004, the Company 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, the Company completed the sale of $200,000,000 of Senior Floating Rate Notes due 2010 (the Floating Rate Notes). The Floating Rate Notes bear interest at a rate per annum equal to LIBOR, as defined, plus 3% (4.87% as of July 30, 2004). Interest on the Floating Rate Notes will be determined and payable semi-annually on June 30 and December 31 of each year commencing June 30, 2004. The Company incurred fees and expenses, including the initial purchasers discount, of approximately $4,000,000 in connection with the sale, which will be amortized over the life of the Floating Rate Notes. The Floating Rate Notes are unsecured obligations of the Company, which mature on December 31, 2010, and may be redeemed in whole or in part prior to December 31, 2010 at the redemption prices as defined in the indenture governing the Floating Rate 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 terms of the Floating Rate Notes require the Company to register notes having substantially identical terms (the Exchange Notes) with the SEC as part of an offer to exchange freely tradable Exchange Notes for the Floating Rate Notes (the Exchange) (see Note D and N of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein). Approximately $60,000,000 principal amount of the 8 7/8% Notes ceased to accrue interest as of March 14, 2004 and approximately $150,000,000 principal amount of such Notes ceased to accrue interest as of March 31, 2004. The Company 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 9 1/4% Notes, 9 1/8% Notes and 8 7/8% Notes noted above resulted in a pre-tax loss of approximately $11,958,000 in the first quarter of 2004, based upon the difference between the respective redemption prices indicated above and the estimated carrying values at the redemption dates.





The Company has a $175,000,000 Senior Secured Credit Facility, as amended, (the Senior Secured Credit Facility), which is syndicated among several banks. The Senior Secured Credit Facility is secured by substantially all of the Companys accounts receivable and inventory, as well as certain intellectual property rights, and, as amended, permits borrowings up to the lesser of $175,000,000 or the total of 85% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. The outstanding principal balances under the Senior Secured Credit Facility accrue interest at the Companys option at either LIBOR plus a margin ranging from 2.0% to 2.5% or the banks prime rate plus a margin ranging from 0.5% to 1.0% depending upon the excess available borrowing base, as defined, and the timing of the borrowing as the margin rates will be adjusted quarterly. In addition, the Company pays an unused line fee of between 0.375% and 0.5% on the excess available borrowing capacity, as defined. The Senior Secured Credit Facility includes customary limitations and covenants, but does not require the Company to maintain any financial covenant unless the excess available borrowing base, as defined, is less than $30,000,000 in which case the Company would be required to maintain, on a trailing four quarter basis, a minimum level of $155,000,000 of earnings before interest, taxes, depreciation and amortization, as defined. At July 3, 2004 there were no outstanding borrowings under the Senior Secured Credit Facility.





The Company had consolidated debt at July 3, 2004, of approximately $484,812,000 consisting of (i) $13,410,000 of short-term borrowings and current maturities of long-term debt, (ii) $20,853,000 of long-term notes, mortgage notes and other indebtedness, (iii) $250,549,000 of 9 7/8% Senior Subordinated Notes and (iv) $200,000,000 of Floating Rate Notes. During the first six months ended July 3, 2004, the Company had a net decrease in its consolidated debt of approximately $502,247,000 which represented $710,875,000 of principal payments including the Senior Note redemptions previously discussed net of additional borrowings of approximately $208,628,000 including the Floating Rate Notes.


The indentures and other agreements governing the Company and its subsidiaries indebtedness (including the indentures for the 9 7/8% Senor Subordinated Notes and the Floating Rate Notes, as well as, the credit agreement for the Senior Secured Credit Facility) contain certain restrictive financial and operating covenants including covenants that restrict the ability of the Company and its subsidiaries to complete acquisitions, pay dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions.





At July 30, 2004 approximately $110,100,000 was available for the payment of cash dividends, stock purchases or other restricted payments as defined under the terms of the Company's most restrictive indenture based on the redemption and refinancing of certain of the Companys Notes. (See Note G of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)





At July 3, 2004, the Company had consolidated unrestricted cash, cash equivalents and marketable securities of approximately $128,306,000 as compared to approximately $182,349,000 at December 31, 2003. It is expected that substantially all of available cash at the closing date will be utilized as part of the THL transaction. The Companys debt to equity ratio was approximately 0.8:1 at July 3, 2004 as compared to approximately 1.8:1 at December 31, 2003. The change in the ratio was primarily due to a net decrease in indebtedness and an increase in stockholders investment, primarily as a result of net earnings for the first six months of 2004.





The Companys ability to pay interest on or to refinance its indebtedness depends on the Companys future performance, working capital levels and capital structure, which are subject to general economic, financial, competitive, legislative, regulatory and other factors which may be beyond its control. There can be no assurance that the Company will generate sufficient cash flow from the operation of its subsidiaries or that future financings will be available on acceptable terms or in amounts sufficient to enable the Company to service or refinance its indebtedness, or to make necessary capital expenditures.





The Company has evaluated and expects to continue to evaluate possible acquisition transactions and possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions.





As of July 3, 2004, approximately $ 3,500,000 of letters of credit have been issued as additional security for approximately $13,400,000 of capital leases outstanding (included in notes, mortgage notes and obligations payable in the accompanying condensed consolidated balance sheet at July 3, 2004) relating to one of the Companys manufacturing facilities, approximately $11,000,000 of letters of credit have been issued as additional security for certain of the Company's insurance programs and approximately $1,200,000 of letters of credit have been issued as additional security for certain of the subsidiaries purchases and other requirements.





The Company and its subsidiaries have entered into a number of operating lease obligations, purchase obligations and have guaranteed certain obligations of various third parties. No significant changes in these obligations have occurred since December 31, 2003.





Unrestricted cash and cash equivalents and marketable securities decreased from approximately $182,349,000 at December 31, 2003 to approximately $128,306,000 at July 3, 2004. The Company has classified as restricted in the accompanying unaudited condensed consolidated balance sheet certain investments that are not fully available for use in its operations. At July 3, 2004, approximately $10,480,000 (of which $8,523,000 is included in current assets) of cash, investments and marketable securities is held primarily as collateral to fund construction costs of an addition to a facility within the Companys Air Conditioning and Heating Products Segment, as well as for insurance and letter of credit requirements.





Capital expenditures were approximately $9,648,000 in the first six months of 2004 as compared to approximately $7,453,000 in the first six months of 2003. Capital expenditures were approximately $17,400,000 for the year ended December 31, 2003 and are expected to be between $30,000,000 and $35,000,000 in 2004.





The Company's working capital and current ratio decreased from approximately $683,700,000 and 2.7:1, respectively, at December 31, 2003 to approximately $305,400,000 and 1.9:1, respectively, at July 3, 2004, principally as a result of the sale of Ply Gem on February 12, 2004 reducing the amount of assets and liabilities of discontinued operations.





Accounts receivable increased approximately $48,889,000 or approximately 22.8%, between December 31, 2003 and July 3, 2004, while net sales increased approximately $82,979,000 or approximately 22.7% in the second quarter of 2004 as compared to the fourth quarter of 2003. These increases are primarily a result of increased sales levels, timing of cash collections and acquisitions which contributed approximately $8,100,000 to net sales in the second quarter of 2004 and approximately $4,200,000 to accounts receivable at July 3, 2004. The rate of change in accounts receivable in certain periods may be different than the rate of change in sales in such periods principally due to the timing of net sales. Increases or decreases in net sales near the end of any period generally result in significant changes in the amount of accounts receivable on the date of the balance sheet at the end of such period, as was the situation on July 3, 2004 as compared to December 31, 2003. The Company did not experience any significant overall changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in the first six months of 2004.





Inventories increased approximately $42,573,000 or approximately 26.7%, between December 31, 2003 and July 3, 2004, primarily as a result of seasonality related to products sold to customers serving the residential site built market within the HVAC segment, increases in inventory levels in the Residential Building Products Segment, in part, due to strong demand and the acquisitions which contributed approximately $6,600,000 to the increase in inventories.





Accounts payable increased approximately $46,914,000 or approximately 41.6%, between December 31, 2003 and July 3, 2004 due primarily to increased inventory levels and timing of payments. The acquisitions contributed approximately $2,200,000 to this increase.





Changes in certain working capital accounts, as noted above, between December 31, 2003 and July 3, 2004, differ from the changes reflected in the Companys Unaudited Condensed Consolidated Statement of Cash Flows for such period as a result of the specific items mentioned in the three preceding paragraphs and from other non-cash items, including among others, the effect of changes in foreign currency exchange rates.




Unrestricted cash and cash equivalents decreased approximately $59,054,000 from December 31, 2003 to July 3, 2004, principally as a result of the following:





Condensed Consolidated Cash Flows (*)Operating Activities:Cash flow from operations, net

$
4,624,000Increase in accounts receivable, net


(48,250,000
)Increase in inventories


(38,165,000
)Decrease in prepaids and other current assets


4,878,000Increase in net assets of discontinued operations


(3,134,000
)Increase in accounts payable


45,830,000Increase in accrued expenses and taxes


13,016,000Investing Activities:Net cash paid for acquisitions


(16,500,000
)Purchase of investments and marketable securities


(5,000,000
)Proceeds from the sale of discontinued businesses


520,138,000Capital expenditures


(9,648,000
)Increase in restricted cash and investments


(111,000
)Financing Activities:Decrease in borrowings, net


(4,011,000
)Sale of Floating Rate Notes


196,000,000Redemption of Senior Notes


(716,700,000
)Other, net


(2,021,000
)$
(59,054,000
)


(*)   Summarized from the Companys Condensed Consolidated Statement of Cash Flows for the first half ended July 3, 2004. (See the Unaudited Financial Statements included elsewhere herein.)










The Company uses EBITDA as both a liquidity and operating performance measure. Liquidity measure disclosures with respect to EBITDA are provided below. Refer to the Results of Operations section for operating performance measure disclosures with respect to EBITDA and a reconciliation from net income (loss) to EBITDA.





EBITDA is defined as net earnings (loss) before interest, taxes, depreciation and amortization expense. EBITDA is not a measure of cash flow under generally accepted accounting principles in the United States (GAAP) and should not be considered as an alternative or substitute for GAAP cash flow measures such as cash flows from operating, investing and financing activities. EBITDA does not necessarily represent an accurate measure of cash flow performance because it excludes, among other things, capital expenditures, working capital requirements, significant debt service for principal and interest payments, income tax payments and other contractual obligations, which may have a significant adverse impact on a companys cash flow performance thereby limiting its usefulness when evaluating the Companys cash flow performance. The Company uses a significant amount of capital assets and capital expenditures are a significant component of the Companys annual cash expenditures and therefore their exclusion from EBITDA is a material limitation. The Company has significant working capital requirements during the year due to the seasonality of its business, which require significant cash expenditures and therefore its exclusion from EBITDA is a material limitation. The Company has a significant amount of debt and the Company has significant cash expenditures during the year related to principal and interest payments and therefore their exclusion from EBITDA is a material limitation. The Company generally pays significant U.S federal, state and foreign income taxes each year and therefore its exclusion from EBITDA is a material limitation. As a result, EBITDA should be evaluated in conjunction with net cash from operating, investing and financing activities for a more complete analysis of the Companys cash flow performance, as they include the financial statement impact of these items. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA does not reflect any cash requirements for replacements. As EBITDA is not defined by GAAP, the Companys definition of EBITDA may differ from and therefore may not be comparable to similarly titled measures used by other companies thereby limiting its usefulness as a comparative measure. Because of the limitations that EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of the Companys cash flows as reported under GAAP.





Company management uses EBITDA as a supplementary non-GAAP liquidity measure to allow the Company to evaluate its operating units cash-generating ability to fund income tax payments, corporate overhead, capital expenditures and increases in working capital. EBITDA is also used by management to allocate resources for growth among its businesses, to identify possible impairment charges, to evaluate the Companys ability to service its debt and to raise capital for growth opportunities, including acquisitions. In addition, the Company uses EBITDA as a liquidity measure in financial presentations to the Companys Board of Directors, shareholders, various banks participating in the Companys Credit Facility, note holders and Bond Rating agencies, among others, as a supplemental non-GAAP liquidity measure to assist them in their evaluation of the Companys cash flow performance. The Company uses EBITDA in conjunction with traditional GAAP liquidity measures as part of its overall assessment and therefore does not place undue reliance on EBITDA as its only measure of cash flow performance. The Company believes EBITDA is useful for both the Company and investors as it is a commonly used analytical measurement for assessing a companys cash flow ability to service and/or incur additional indebtedness, which eliminates the impact of certain non-cash items such as depreciation and amortization. The Company believes that EBITDA is specifically relevant to the Company due to the Companys leveraged position as well as the common use of EBITDA as a liquidity measure within the Companys industries by lenders, investors, others in the financial community and peer group companies. The Company has included EBITDA as a supplemental liquidity measure, which should be evaluated by investors in conjunction with the traditional GAAP liquidity measures discussed earlier in this Liquidity and Capital Resources section for a complete evaluation of the Companys cash flow performance.




The following table presents a reconciliation from net cash provided by (used in) operating activities, which is the most directly comparable GAAP liquidity measure, to EBITDA for the periods presented:





**For the Periods******

**Post-Recapitalization**
**Pre-Recapitalization******

**Jan. 1, 2004**
**Jan. 10, 2003 -**
**Jan. 1, 2003 -******

**July 3, 2004**
**July 5, 2003**
**Jan. 9, 2003***(Amounts in thousands)*Net cash used in operating activities *

$
(23,137
)
$
(6,257
)
$
(5,705
)Cash used by working capital andother long-term asset and liability changes


27,761


46,568


12,880Effect of the Recapitalization, net


---


---


(62,397
)Non-cash stock-based compensation


(5,241
)

(952
)

---Deferred federal income tax provisionfrom continuing operations


(9,800
)

12,000


(5,900
)Deferred federal income tax creditfrom discontinued operations


18,500


---


---Gain on sale of discontinued operations


122,700


---


---Non-cash interest expense, net


(217
)

(3,438
)

(125
)Loss from debt retirement


(11,958
)

---


---Provision (benefit) for income taxesfrom continuing operations


20,200


20,100


(21,800
)Provision (benefit) for income taxesfrom discontinued operations


47,500


1,200


(600
)Interest expense from continuing operations


25,870


29,427


1,054Interest expense from discontinued operations


4,585


18,774


1,234Investment income from continuing operations


(1,253
)

(656
)

(119
)Investment income from discontinued operations


(29
)

(103
)

(2
)Depreciation expense from discontinued operations


1,158


5,033


245Amortization expense from discontinued operations


201


3,445


70EBITDA

$
216,840

$
125,141

$
(81,165
)


*     Includes approximately $67,400,000, $1,900,000 and $(1,000,000) of earnings (loss) from discontinued operations for the first six months ended July 3, 2004 and the periods from January 10, 2003 to July 5, 2003 and from January 1, 2003 to January 9, 2003, respectively. (See Note H of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)





EBITDA includes approximately $83,000,000 of expenses and charges arising from the Recapitalization recorded in the period from January 1, 2003 to January 9, 2003 and approximately $5,200,000 and $1,000,000 of stock based compensation from adopting SFAS No. 123 recorded in the first six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003, respectively. (See Notes A, F and I of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)





Inflation, Trends and General Considerations





The Company has evaluated and expects to continue to evaluate possible acquisition transactions and the possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions.





The Company's performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation, consumer confidence and unemployment.





The demand for the Company's products is seasonal, particularly in the Northeast and Midwest regions of the United States where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction markets. The Company's lower sales levels usually occur during the first and fourth quarters. Since a high percentage of the Company's manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels. In addition, the demand for cash to fund the working capital of the Company's subsidiaries is greater from late in the first quarter until early in the fourth quarter.





The Department of Energy announced on April 2, 2004 that effective January 26, 2006, the minimum seasonal energy efficiency rating for residential central air conditioners (SEER) will be raised to 13 SEER. The current minimum is 10 SEER. Approximately 97% of the Companys residential central air conditioner sales are currently below the 13 SEER efficiency rating. The Companys Air Conditioning and Heating Products Segment currently produces residential central air conditioners with a 13 SEER efficiency rating and continues to focus on product improvements including energy efficiency as part of its engineering and manufacturing planning.





As of July 3, 2004, approximately 13.2% of the Companys workforce was subject to various collective bargaining agreements. Collective bargaining agreements covering approximately 2.5% of the Companys workforce will expire through the end of 2004 and those covering an additional 7.5% will expire through the end of 2005. As agreements expire, until negotiations are completed, it is not known whether the Company will be able to negotiate collective bargaining agreements on the same or more favorable terms as the current agreements or at all and without production interruptions, including labor stoppages.





Market Risk





As discussed more specifically below, the Company is exposed to market risks related to changes in interest rates, foreign currencies and commodity pricing. The Company does not use derivative financial instruments, except on a limited basis, to periodically mitigate certain economic exposures. The Company does not enter into derivative financial instruments or other financial instruments for trading purposes.





There have been no significant changes in market risk from the December 31, 2003 disclosures included in the Companys annual report on Form 10-K.





A.  Interest Rate Risk





The Company is exposed to market risk from changes in interest rates primarily through its investing and borrowing activities. In addition, the Companys ability to finance future acquisition transactions may be impacted if the Company is unable to obtain appropriate financing at acceptable interest rates.





The Companys investing strategy, to manage interest rate exposure, is to invest in short-term, highly liquid investments and marketable securities. Short-term investments primarily consist of federal agency discount notes, treasury bills and bank issued money market instruments with original maturities of 90 days or less.





The Company has historically managed its borrowing exposure to changes in interest rates by optimizing the use of fixed rate debt with extended maturities. During the first quarter of 2004, the Company sold $200,000,000 of Floating Rate Notes with a variable interest rate (4.87% at July 3, 2004) and redeemed $695,000,000 of Senior Notes which had fixed interest rates. Of the Companys total outstanding debt, approximately 41.7% have variable interest rates at July 3, 2004.





B.  Foreign Currency Risk





Sales and earnings derived from international markets and net assets within international markets are subject to, among others, the risks of currency fluctuations primarily related to changes in the Euro, the Canadian Dollar and the British Pound. In the first half of 2004, the net impact of foreign currency changes was not material to the Companys financial condition or results of operations, but may not be indicative of future results. The impact of foreign currency changes related to translation resulted in a decrease in stockholders investment of approximately $511,000 and $3,761,000 for the second quarter and first six months of 2004, respectively. The Company manages its exposure to foreign currency exchange risk principally by trying to minimize the Companys net investment in foreign assets through the use of strategic short and long-term borrowings at the foreign subsidiary level. The Company generally does not enter into derivative financial instruments to manage foreign currency exposure. At July 3, 2004, the Company did not have any significant outstanding foreign currency hedging contracts.





C.  Commodity Pricing Risk





The Company is subject to significant market risk with respect to the pricing of its principal raw materials, which include, among others, steel, copper, packaging material, plastics and aluminum. If prices of these raw materials were to increase dramatically, the Company may not be able to pass such increases on to its customers and, as a result, gross margins could decline significantly. The Company manages its exposure to commodity pricing risk by continuing to diversify its product mix, strategic buying programs and vendor partnering.





The Company generally does not enter into derivative financial instruments to manage commodity pricing exposure. At July 3, 2004, the Company did not have any material outstanding commodity forward contracts.




Forward-Looking Statements





This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this discussion and throughout this document, words, such as intends, plans, estimates, believes, anticipates and expects or similar expressions are intended to identify forward-looking statements. These statements are based on the Companys current plans and expectations and involve risks and uncertainties, over which the Company has no control, that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and operating results to differ include the availability and cost of certain raw materials, (including, among others, steel, copper, packaging materials, plastics, resins, glass, wood and aluminum) and purchased components, the level of domestic and foreign construction and remodeling activity affecting residential and commercial markets, interest rates, employment, inflation, foreign currency fluctuations, consumer spending levels, exposure to foreign economies, the rate of sales growth, price, and product and warranty liability claims. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Readers are also urged to carefully review and consider the various disclosures made by the Company, in this document, as well as the Company's periodic reports on Forms 10-K, 10-Q and 8-K, filed with the SEC.





Item 3.  Quantitative and Qualitative Disclosures about Market Risk





Quantitative and qualitative disclosure about market risk is set forth in Managements Discussion and Analysis of Financial Condition and Results of Operations  Market Risk.





Item 4.  Controls and Procedures





As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chairman and Chief Executive Officer along with the Companys Vice President and Chief Financial Officer and the Companys Corporate Disclosure and Controls Committee, of the effectiveness of the Companys disclosure controls and procedures as defined in Rule 13a15e and 15d-15e under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Companys Chairman and Chief Executive Officer along with the Companys Vice President and Chief Financial Officer concluded that as of the end of such period, the Companys disclosure controls and procedures are effective to ensure that information relating to the Company (including its consolidated subsidiaries) required to be disclosed in the Companys periodic SEC filings is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms. There have been no significant changes in the Companys internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to materially affect the Companys internal control over financial reporting.












PART II. OTHER INFORMATION





Item 6.  Exhibits and Reports on Form 8-K


(a) Exhibits





The items marked with an asterisk are filed herewith.




*  31.1 Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002




*  31.2 Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002













(b)  Reports on Form 8-K





May 18, 2004,  Item 7, Financial Statements and Exhibits





Item 12, Results of Operations and Financial Condition





July 16, 2004,  Item 5, Other Events





Item 7, Financial Statements and Exhibits




August 3, 2004, Item 5, Other Events
 
 Item 7, Financial Statements and Exhibits
 
 August 3, 2004, Item 5, Other Events
 
 Item 7, Financial Statements and Exhibits






SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








NORTEK, INC.


(Registrant)














/s/   Almon C. Hall


Almon C. Hall,  Vice President and Chief Financial Officer

















August 5, 2004