**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 April 2, 2005
 
 **OR**
 
 [ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
 For the
transition period from ______ to ______
 
 333-119902
 (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 May 6, 2005 was 3,000.
 
 
   **PART
I - FINANCIAL INFORMATION**
 
 **ITEM
1. FINANCIAL STATEMENTS**
 
 **NORTEK,
INC. AND SUBSIDIARIES**
 **UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEET**
 *(Dollar
amounts in thousands, except common stock data)*
 
 **April
      2,**
    
    **December
      31,****2005**
    
    **2004****Assets****Current
      Assets:**Cash
      and cash equivalents
    
    $
    74,749
    
    $
    94,955Accounts
      receivable, less allowancesof $5,802 and $5,467
    
    
    240,634
    
    
    225,706Inventories:Raw
      materials
    
    
    70,530
    
    
    72,166Work
      in process
    
    
    23,532
    
    
    24,249Finished
      goods
    
    
    127,491
    
    
    109,134221,553
    
    
    205,549Prepaid
      expenses
    
    
    7,656
    
    
    8,596Other
      current assets
    
    
    24,339
    
    
    26,126Prepaid
      income taxes
    
    
    17,145
    
    
    34,663Current
      portion of receivable from affiliate
    
    
    20,208
    
    
    17,220Total current assets
    
    
    606,284
    
    
    612,815**Property
      and Equipment, at Cost:**Land
    
    
    8,514
    
    
    8,683Buildings
      and improvements
    
    
    71,908
    
    
    75,476Machinery
      and equipment
    
    
    127,385
    
    
    124,644207,807
    
    
    208,803Less
      accumulated depreciation
    
    
    12,302
    
    
    7,713Total property and equipment, net
    
    
    195,505
    
    
    201,090**Other
      Assets:**Goodwill
    
    
    1,295,846
    
    
    1,295,105Intangible
      assets, less accumulated amortizationof $12,740 and $8,436
    
    
    105,927
    
    
    110,715Deferred
      debt expense
    
    
    40,637
    
    
    41,741Long-term
      portion of receivable from affiliate
    
    
    16,363
    
    
    16,088Restricted
      investments and marketable securities
    
    
    6,962
    
    
    8,605Other
      assets
    
    
    7,802
    
    
    11,1541,473,537
    
    
    1,483,408$
    2,275,326
    
    $
    2,297,313**Liabilities
      and Stockholder’s Investment****Current
      Liabilities:**Notes
      payable and other short-term obligations
    
    $
    8,028
    
    $
    5,364Current
      maturities of long-term debt
    
    
    10,728
    
    
    14,414Accounts
      payable
    
    
    157,341
    
    
    137,343Accrued
      expenses and taxes, net
    
    
    141,189
    
    
    171,591Total current liabilities
    
    
    317,286
    
    
    328,712**Other
      Liabilities:**Deferred
      income taxes
    
    
    17,184
    
    
    32,737Other
    
    
    164,338
    
    
    168,708181,522
    
    
    201,445**Notes,
      Mortgage Notes and Obligations****Payable, Less Current Maturities**
    
    
    1,347,779
    
    
    1,350,210**Stockholder’s
      Investment:**Common
      stock, $0.01 par value, authorized 3,000 shares;3,000 issued and outstanding at April 2, 2005 andDecember 31, 2004
    
    
    ---
    
    
    ---Additional
      paid-in capital
    
    
    413,923
    
    
    410,581Retained
      earnings (accumulated deficit)
    
    
    8,000
    
    
    (2,700
    )Accumulated
      other comprehensive income
    
    
    6,816
    
    
    9,065Total stockholder's investment
    
    
    428,739
    
    
    416,946**Total
      Liabilities and Stockholder's Investment:**
    
    $
    2,275,326
    
    $
    2,297,313
 *The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.*
 
  ****
 **NORTEK,
INC. AND SUBSIDIARIES**
 **UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS**
 
 **For
      the three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)***Net
      Sales**
    
    $
    434,118
    
    $
    405,012**Costs
      and Expenses:**Cost
      of products sold
    
    
    309,459
    
    
    286,882Selling,
      general and administrative expense
    
    
    79,441
    
    
    73,148Amortization
      of intangible assets
    
    
    4,333
    
    
    3,309393,233
    
    
    363,339Operating
      earnings
    
    
    40,885
    
    
    41,673Interest
      expense
    
    
    (24,285
    )
    
    (25,559
    )Loss
      from debt retirement
    
    
    ---
    
    
    (11,958
    )Investment
      income
    
    
    400
    
    
    944Earnings
      from continuing operationsbefore provision for income taxes
    
    
    17,000
    
    
    5,100Provision
      for income taxes
    
    
    6,300
    
    
    2,100**Earnings
      from continuing operations**
    
    
    10,700
    
    
    3,000**Earnings
      from discontinued operations**
    
    
    ---
    
    
    68,100**Net
      earnings**
    
    $
    10,700
    
    $
    71,100
 *The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.*
 
 
 **NORTEK,
INC. AND SUBSIDIARIES**
 **UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS**
 
 **For
      the three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)***Cash
      Flows from operating activities:**Net
      earnings from continuing operations
    
    $
    10,700
    
    $
    3,000Earnings
      from discontinued operations
    
    
    ---
    
    
    68,100Net
      earnings
    
    
    10,700
    
    
    71,100**Adjustments
      to reconcile net earnings****to net cash used in operating activities:**Depreciation
      and amortization expense, includingamortization of purchase price allocated to inventory
    
    
    11,615
    
    
    9,262Non-cash
      interest expense, net
    
    
    1,442
    
    
    8,596Loss
      from debt retirement
    
    
    ---
    
    
    11,958Gain
      on the sale of discontinued operations
    
    
    ---
    
    
    (122,700
    )Gain
      on sale of fixed assets
    
    
    (280
    )
    
    (10
    )Deferred
      federal income tax provision fromcontinuing operations
    
    
    5,700
    
    
    19,900Deferred
      federal income tax credit fromdiscontinued operations
    
    
    ---
    
    
    (18,100
    )**Changes
      in certain assets and liabilities, net of****effects from acquisitions and dispositions:**Accounts
      receivable, net
    
    
    (17,313
    )
    
    (29,778
    )Inventories
    
    
    (17,036
    )
    
    (17,334
    )Prepaids
      and other current assets
    
    
    612
    
    
    10,349Net
      assets of discontinued operations
    
    
    ---
    
    
    (3,162
    )Accounts
      payable
    
    
    21,753
    
    
    35,387Accrued
      expenses and taxes
    
    
    (31,664
    )
    
    11,553Long-term
      assets, liabilities and other, net
    
    
    (4,181
    )
    
    (514
    )Total adjustments to net earnings
    
    
    (29,352
    )
    
    (84,593
    )Net cash used in operating activities
    
    $
    (18,652
    )
    $
    (13,493
    )**Cash
      Flows from investing activities:**Capital
      expenditures
    
    $
    (3,683
    )
    $
    (4,904
    )Net
      cash paid for businesses acquired
    
    
    ---
    
    
    (16,500
    )Proceeds
      from the sale of discontinued businesses
    
    
    ---
    
    
    519,153Proceeds
      from the sale of property and equipment
    
    
    5,830
    
    
    151Other,
      net
    
    
    (399
    )
    
    44Net cash provided by investing activities
    
    
    1,748
    
    
    497,944**Cash
      Flows from financing activities:**Change
      in borrowings, net
    
    
    (3,094
    )
    
    (633
    )Sale
      of Floating Rate Notes
    
    
    ---
    
    
    196,000Redemption
      of Senior Notes
    
    
    ---
    
    
    (716,700
    )Other,
      net
    
    
    (208
    )
    
    (21
    )Net cash used in financing activities
    
    
    (3,302
    )
    
    (521,354
    )Net
      decrease in unrestricted cash andcash equivalents
    
    
    (20,206
    )
    
    (36,903
    )Unrestricted
      cash and cash equivalents at thebeginning of the period
    
    
    94,955
    
    
    194,120Unrestricted
      cash and cash equivalents at theend of the period
    
    $
    74,749
    
    $
    157,217**Supplemental
      disclosure of cash flow information:**Interest
      paid
    
    $
    36,432
    
    $
    31,867Income
      taxes paid, net
    
    $
    6,106
    
    $
    4,741
 *The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.*
 
 **NORTEK,
INC. AND SUBSIDIARIES**
 **UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S
INVESTMENT**
 **FOR
THE THREE MONTHS ENDED APRIL 3, 2004**
 *(Dollar
amounts in thousands)*
  **Accumulated****Series
      B**
    
    **Class
      A**
    
    **Additional**
    
    
    
    **Other****Preference**
    
    **Common**
    
    **Paid
      in**
    
    **Retained**
    
    **Comprehensive**
    
    **Comprehensive****Stock**
    
    **Stock**
    
    **Capital**
    
    **Earnings**
    
    **Income
      (Loss)**
    
    **Income
      (Loss)****Balance,
      December 31, 2003**
    
    $
    8,130
    
    $
    397
    
    $
    172,244
    
    $
    ---
    
    $
    19,437
    
    $
    ---Net
      earnings
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    71,100
    
    
    ---
    
    
    71,100Other
      comprehensive income (loss):Currency translation adjustment
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    (3,250
    )
    
    (3,250
    )Unrealized decline in the fair value ofmarketable securities
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    (3
    )
    
    (3
    )Minimum pension liability, net of tax of $10
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    18
    
    
    18Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    67,865Stock
      based compensation
    
    
    ---
    
    
    ---
    
    
    973
    
    
    ---
    
    
    ---**Balance,
      April 3, 2004**
    
    $
    8,130
    
    $
    397
    
    $
    173,217
    
    $
    71,100
    
    $
    16,202
 **
 *The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.*
 
 **NORTEK,
INC. AND SUBSIDIARIES**
 **UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S
INVESTMENT**
 **FOR
THE THREE MONTHS ENDED APRIL 2, 2005**
 *(Dollar
amounts in thousands)*
  **Accumulated****Additional**
    
    
    
    **Other****Paid
      in**
    
    **Retained**
    
    **Comprehensive**
    
    **Comprehensive****Capital**
    
    **Earnings**
    
    **Income
      (Loss)**
    
    **Income
      (Loss)****Balance,
      December 31, 2004**
    
    $
    410,581
    
    $
    (2,700
    )
    $
    9,065
    
    $
    ---Net
      earnings
    
    
    ---
    
    
    10,700
    
    
    ---
    
    
    10,700Other
      comprehensive income (loss):Currency translation adjustment
    
    
    ---
    
    
    ---
    
    
    (2,243
    )
    
    (2,243
    )Unrealized decline in the fair value ofmarketable securities
    
    
    ---
    
    
    ---
    
    
    (6
    )
    
    (6
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    $
    8,451Capital
      contribution from parent
    
    
    3,263
    
    
    ---
    
    
    ---Stock
      based compensation
    
    
    79
    
    
    ---
    
    
    ---**Balance,
      April 2, 2005**
    
    $
    413,923
    
    $
    8,000
    
    $
    6,816
 *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
 APRIL 2, 2005 AND APRIL 3, 2004
   (A)
    The
      unaudited condensed consolidated financial statements presented herein
      (the “Unaudited Financial Statements”), for periods prior to August 28,
      2004 reflect the financial position, results of operations and cash flows
      of the former Nortek Holdings, Inc. and all of its wholly-owned
      subsidiaries (the predecessor company) and subsequent to August 27, 2004,
      reflect the financial position, results of operations and cash flows of
      Nortek, Inc. (the successor company and survivor from the mergers noted
      below in connection with the THL Transaction). The Unaudited Financial
      Statements include the accounts of the former Nortek Holdings, Inc. and
      Nortek, Inc., as appropriate and all of their wholly-owned subsidiaries
      (individually and collectively, the “Company” or “Nortek”), after
      elimination of intercompany accounts and transactions, without audit and,
      in the opinion of management, reflect all adjustments of a normal
      recurring nature necessary for a fair statement of the interim periods
      presented. Although certain information and footnote disclosures normally
      included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States have been omitted, the
      Company believes that the disclosures included are adequate to make the
      information presented not misleading. Certain amounts in the prior year’s
      Unaudited Financial Statements have been reclassified to conform to the
      current year presentation. It is suggested that these Unaudited Financial
      Statements be read in conjunction with the consolidated financial
      statements and the notes included in the Company’s latest annual report on
      Form 10-K and its latest Current Reports on Form 8-K as filed with the
      Securities and Exchange Commission (“SEC”).
 **Stock-Based
Compensation of Employees, Officers and Directors**
 
 The
Company uses the fair value method of accounting for stock-based employee
compensation in accordance with Statement of Financial Standards (“SFAS”) No.
123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).
 
 The
Company recorded stock-based compensation charges in continuing operations of
approximately $100,000 and $250,000 for the three months ended April 2, 2005 and
April 3, 2004, respectively, in accordance with SFAS No. 123. A portion of this
expense has been allocated to the Company’s reporting segments for all periods
presented (see Note G) and a portion has been recorded in Unallocated. In
addition, the Company recorded stock-based employee compensation charges in
discontinued operations of approximately $700,000 for the three months ended
April 3, 2004 relating to the accelerated vesting and achievement of the
performance criteria for a portion of the Company’s outstanding Class A and B
stock options, which were retained by employees of the discontinued operations
(see Note F).
 
 In
connection with the THL Transaction, certain employees and consultants received
approximately 21,184 C-1 units and approximately 42,368 C-2 units, which
represent equity interests in Investors LLC that function similar to stock
options. The C-1 units vest pro rata on a quarterly basis over a three-year
period and approximately 3,524 and 1,765 were vested at April 2, 2005 and
December 31, 2004, respectively. The total stock-based employee compensation
charge associated with the C-1 units is approximately $930,000, which is being
amortized pro rata over the three-year vesting period. Approximately $750,000
remains to be amortized at April 2, 2005. The C-2 units only vest in the event
that certain performance-based criteria, as defined, are met. As of April 2,
2005 and December 31, 2004, there was approximately $1,500,000 of unamortized
stock-based employee compensation with respect to the C-2 units, which will be
amortized in the event that it becomes probable that the C-2 units or any
portion thereof will vest. The C-1 and C-2 units were valued using the
Black-Scholes option pricing model to determine the freely-traded call option
value based upon information from comparable public companies, which was then
adjusted to reflect the discount period, the minority interest factor and the
lack of marketability factor to arrive at the final valuations.
 
 On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 123 (revised 2004), “Share-Based Payment”, (“SFAS No. 123R”). SFAS
No. 123R is a revision of SFAS No. 123 and supersedes APB 25 and amends SFAS No.
95, “Statement of Cash Flows” (“SFAS No. 95”). The accounting for share-based
payments under SFAS No. 123R is similar to the approach described in SFAS No.
123, however, SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values and pro-forma disclosure is no longer an
alternative to financial statement recognition. The provisions of SFAS No. 123R
will be effective for nonpublic entities in fiscal years beginning after
December 15, 2005, subject to limitations, with earlier adoption encouraged. The
Company is currently evaluating the impact of adopting SFAS No. 123R on its
consolidated financial statements.
 
 (B)
    On
      July 15, 2004, THL Buildco Holdings, Inc. (“THL Buildco Holdings”) and THL
      Buildco, Inc. (“THL Buildco”), newly formed Delaware corporations
      affiliated with Thomas H. Lee Partners L.P., entered into a stock purchase
      agreement with the owners of Nortek Holdings, Inc., Nortek’s former parent
      company (referred to herein as “the former Nortek Holdings”), which
      included affiliates of Kelso & Company, L.P. (“Kelso”) and certain
      members of the Company’s management, pursuant to which THL Buildco agreed
      to purchase all the outstanding capital stock of the former Nortek
      Holdings. Prior to the completion of the THL Transaction described below,
      Nortek was a wholly owned direct subsidiary of the former Nortek Holdings
      and THL Buildco was a wholly owned direct subsidiary of THL Buildco
      Holdings.
 
 On August
27, 2004, THL Buildco purchased all of the outstanding capital stock of the
former Nortek Holdings pursuant to a stock purchase agreement in a transaction
valued at approximately $1,740,000,000 (the “Acquisition”). Immediately upon the
completion of the Acquisition, THL Buildco was merged with and into the former
Nortek Holdings with the former Nortek Holdings continuing as the surviving
corporation. The former Nortek Holdings was then merged with and into Nortek
with Nortek continuing as the surviving corporation and a wholly owned
subsidiary of THL Buildco Holdings. THL Buildco Holdings was then renamed Nortek
Holdings, Inc. (“Nortek Holdings”). Nortek Holdings is wholly owned by NTK
Holdings, Inc., which is wholly owned by THL-Nortek Investors, LLC, a Delaware
limited liability company (“Investors LLC”). In connection with the Acquisition,
members of Nortek management reinvested a portion of their equity interest in
the former Nortek Holdings for an equity interest in Investors LLC and interests
in a deferred compensation plan established by Nortek Holdings (the Acquisition
and the above events are collectively referred to herein as the “THL
Transaction”).
 
 **The
Acquisition**
 
 On August
27, 2004, the sole stockholder of the Company, the former Nortek Holdings
adopted and approved, by unanimous written consent in lieu of special meeting,
the Agreement and plan of Merger between the former Nortek Holdings and the
Company, which provided for the merger of the former Nortek Holdings with and
into the Company.
 
 Prior to
the Acquisition, certain members of Nortek management held stock options to
purchase shares of common stock of the former Nortek Holdings issued to them
under the former Nortek Holdings 2002 Stock Option Plan. These members of Nortek
management, who would have been entitled to receive cash payments upon
consummation of the Acquisition in respect to these options, instead sold a
portion of those options to THL Buildco for approximately $113,032,000 and
surrendered the remainder of these options held by them for cancellation without
immediate payment. In consideration for this cancellation of options without
immediate payment, these option holders received an equity interest in Investors
LLC and Nortek Holdings established a deferred compensation plan and credited
for the account of each of these management participants under the plan a number
of notional Class A units of Investors LLC equal in value to the value of the
old stock option so cancelled.
 
 In
connection with accounting for the purchase price for the Acquisition, Nortek
recorded a deferred tax benefit of approximately $32,550,000 representing the
tax benefit related to the deferred compensation plan of Nortek Holdings. At
April 2, 2005 the deferred tax benefit was approximately $36,571,000 (of which
approximately $20,208,000 and $16,363,000 is recorded as a current and long-term
asset, respectively) and at December 31, 2004 the deferred tax benefit was
approximately $33,308,000 (of which approximately $17,220,000 and $16,088,000 is
recorded as a current and long-term asset, respectively). The deferred tax
benefits are classified as current and long-term receivables from
affiliate on the Company’s accompanying unaudited condensed consolidated balance
sheet.
 
 Beginning
on August 28, 2004, the Company accounted for the Acquisition as a purchase in
accordance with the provisions of SFAS No. 141, “Business Combinations” (“SFAS
No. 141”), Emerging Issue Task Force (“EITF”) Issue No. 88-16, “Basis in
Leveraged Buyout Transactions”, (“EITF 88-16”) and SEC Staff Accounting Bulletin
No. 54, “Push Down Basis of Accounting Required in Certain Limited
Circumstances”, which resulted in a new valuation for the assets and liabilities
of the Company and its subsidiaries based upon fair values as of the date of the
Acquisition. SFAS No. 141 requires the Company to establish a new basis for its
assets and liabilities based on the amount paid for its ownership at August 27,
2004. In accordance with EITF 88-16, the acquired assets and liabilities have
been recorded at fair value for the interests acquired by new investors and at
carryover basis for continuing investors. As a result, the assets and
liabilities are assigned new values, which are part Pre-Acquisition cost and
part fair value, in the same proportions as the carryover basis of the residual
interests retained by the continuing management investors and the new interests
acquired by the affiliates of Thomas H. Lee Partners. Accordingly, the Company’s
ownership basis (including the fair value of options rolled over by the
Management Investors) is reflected in the Company’s consolidated financial
statements beginning upon completion of the Acquisition. The purchase price for
the equity of Nortek of approximately $743,154,000 was allocated to the assets
and liabilities based on their relative fair values and approximately
$409,716,000 was recorded in Stockholder’s Investment representing the ownership
interest of Nortek’s equity holders upon completion of the Acquisition, net of a
deemed dividend of approximately $63,879,000.
 
 During
the three months ended April 2, 2005, the Company recorded approximately
$300,000 of amortization of excess purchase price allocated to inventory related
to the Acquisition as a non-cash charge to cost of goods sold.
 
 The
following reflects the unaudited pro forma effect of the Acquisition on
continuing operations for the periods from January 1, 2004 to April 3, 2004 and
from January 1, 2004 to August 27, 2004:
 
 **Pro
      Forma for**
      **the
      period**
      **Jan.
      1, 2004 -**
      **April
      3, 2004**
    
    **Pro
      Forma for**
      **the
      period**
      **Jan.
      1, 2004 -**
      **Aug.
      27, 2004***(Amounts
      in thousands)*Net
      sales
    
    $
    405,012
    
    $
    1,117,860Operating
      earnings
    
    $
    36,057
    
    $
    108,852Earnings
      from continuing operations
    
    $
    8,344
    
    $
    27,450
 
 The
unaudited pro forma condensed consolidated amounts presented above has been
prepared by adjusting historical amounts for the period to give effect to the
Acquisition as if it had occurred on January 1, 2004. The pro forma adjustments
to the historical results of operations for the amounts presented include the
pro forma impact of the purchase accounting for such period, the elimination of
approximately $83,700,000 of expenses and charges arising from the Acquisition
in August of 2004, recorded during such period as the unaudited pro forma
condensed consolidated summary of operations assumes that the Acquisition
occurred on January 1, 2004.
  The
following table presents a summary of the activity in goodwill for continuing
operations and discontinued operations for the first quarter of 2005, the period
from August 28, 2004 to December 31, 2004 and the period from January 1, 2004 to
August 27, 2004.
 
 **Continuing**
    
    **Discontinued****Operations**
    
    **Operations**
    
    **Total***(Amounts
      in thousands)***Balance
      as of December 31, 2003**
    
    **$**
    **675,846**
    
    **$**
    **222,194**
    
    **$**
    **898,040**Acquisitions
      during the period from January 1, 2004 to August 27, 2004
    
    
    6,841
    
    
    ---
    
    
    6,841Dispositions
    
    
    ---
    
    
    (222,194
    )
    
    (222,194
    )Purchase
      accounting adjustments
    
    
    (3,229
    )
    
    ---
    
    
    (3,229
    )Impact
      of foreign currency translation
    
    
    1
    
    
    ---
    
    
    1**Balance
      as of August 27, 2004**
    
    
    **679,459**
    
    
    **---**
    
    
    **679,459**Effect
      of the Acquisition
    
    
    607,053
    
    
    ---
    
    
    607,053Acquisitions
      during the period from August 28, 2004 to December 31,
2004
    
    
    8,805
    
    
    ---
    
    
    8,805Purchase
      accounting adjustments
    
    
    (2,005
    )
    
    ---
    
    
    (2,005
    )Impact
      of foreign currency translation
    
    
    1,793
    
    
    ---
    
    
    1,793**Balance
      as of December 31, 2004**
    
    
    **1,295,105**
    
    
    **---**
    
    
    **1,295,105**Purchase
      accounting adjustments
    
    
    808
    
    
    ---
    
    
    808Impact
      of foreign currency translation
    
    
    (67
    )
    
    ---
    
    
    (67
    )**Balance
      as of April 2, 2005**
    
    **$**
    **1,295,846**
    
    **$**
    **---**
    
    **$**
    **1,295,846**
 
 Goodwill
associated with the Acquisition and Recapitalization transactions, as well as,
acquisitions (see Note D) above will not be deductible for income tax purposes. Purchase
accounting adjustments relate principally to final revisions resulting from the
completion of fair value adjustments and adjustments to deferred income taxes
that impact goodwill.
 
 (C)
    From
      January 1, 2004 through February 3, 2004, Nortek purchased approximately
      $14,800,000 of its 9 1/4% Senior Notes due 2007 (“9 1/4% Notes”) and
      approximately $10,700,000 of its 9 1/8% Senior Notes due 2007 (“9 1/8%
      Notes”) in open market transactions. On March 15, 2004, Nortek redeemed
      all of its outstanding 9 1/4% Notes (approximately $160,200,000 in
      principal amount) and on March 14, 2004 redeemed all of its outstanding 9
      1/8% Notes (approximately $299,300,000 in principal amount). The 9 1/4%
      Notes and 9 1/8% Notes were redeemed at a redemption price of 101.542% and
      103.042%, respectively, of the principal amount thereof plus accrued and
      unpaid interest. The 9 1/4% Notes and 9 1/8% Notes ceased to accrue
      interest as of the respective redemption dates indicated above. The
      Company used the net after tax proceeds from the sale of Ply Gem of
      approximately $450,000,000 (see Note F), together with existing cash on
      hand, to fund the redemption of the 9 1/4% Notes and 9 1/8% Notes.
 
 On March
14, 2004, Nortek redeemed $60,000,000 of its outstanding 8 7/8% Senior Notes due
2008 (“8 7/8% Notes”) and on March 31, 2004, Nortek redeemed the remaining
$150,000,000 of its outstanding 8 7/8% Notes (see below). The 8 7/8% Notes were
called at a redemption price of 104.438% of the principal amount thereof plus
accrued and unpaid interest.
 
 On March
1, 2004, Nortek completed the sale of $200,000,000 of Floating Rate Notes due
2010 (the “Floating Rate Notes”), which were subsequently redeemed on August 28,
2004 in connection with the Acquisition (see below). Nortek used the net
proceeds of approximately $196,000,000 from the sale of the Floating Rate Notes, together
with existing cash on hand, to fund the redemption of the 8 7/8% Notes.
 
 The open
market purchases and the redemption of the Floating Rate Notes, the 9 1/4%
Notes, the 9 1/8% Notes and the 8 7/8% Notes noted above resulted in a pre-tax
loss of approximately $11,958,000 which was recorded in the three months ended
April 3, 2004, based upon the difference between the respective redemption
prices indicated above and the estimated carrying values at redemption.
 
 Interest
expense in the first quarter of 2004 includes duplicative interest arising
during the waiting period from the call for redemption to the date of redemption
of the 8 7/8% Senior Notes, as during that period the Floating Rate Notes, whose
proceeds were used to refinance the 8 7/8% Senior Notes, were also outstanding.
 
 At May 6,
2005, approximately $32,800,000 was available for the payment of cash dividends,
stock purchases or other restricted payments by the Company as defined under the
terms of the Company’s most restrictive loan agreement, the Company’s Senior
Secured Credit Facility. Any restricted payments in excess of $10,000,000 would
require an equal prepayment of the Company’s Senior Secured Credit Facility.
 
 (D)
    On
      December 17, 2004, the Company acquired M&S Systems, LP (“M&S”),
      located in Dallas, Texas, for approximately $16,400,000. M&S is a
      manufacturer and designer of distributed audio and communication
      equipment, speakers and central vacuum systems.
 
 On March
9, 2004, the Company acquired OmniMount Systems, Inc. (“OmniMount”) for
approximately $16,500,000 in cash and contingent consideration. The contingent
consideration is payable 90 days after fiscal 2006 if certain fiscal 2006
financial results, as defined by the stock purchase agreement, are met.
OmniMount is a manufacturer and designer of speaker and video mountings and
other products to maximize the home theater experience.
 
 Acquisitions
contributed approximately $12,200,000, $500,000 and $100,000 to net sales,
operating earnings and depreciation and amortization expense, respectively, for
the three months ended April 2, 2005. M&S and OmniMount are included in the
Residential Building Products Segment in the Company’s segment reporting. Pro
forma results related to these acquisitions have not been presented, as the
effect is not significant to the Company’s consolidated operating
results.
 
 Acquisitions
are accounted for as purchases and, accordingly, have been included in the
Company’s consolidated results of operations since the acquisition date.
Purchase price allocations are subject to refinement until all pertinent
information regarding the acquisition is obtained.
 
 On April
26, 2005, the Company, through its indirect wholly-owned subsidiary, Linear LLC,
acquired Panamax (“Panamax”) for an initial purchase price of approximately
$11,250,000 plus an earn-out based upon the earnings of Panamax for 2005 which
is capped at approximately $4,250,000. Panamax is located in Petaluma, CA and
manufactures and designs innovative power conditioning and surge protection
products that prevent loss or damage of home and small business equipment due to
power disturbances.
  (E)
    The
      operating results of the Air Conditioning and Heating Products Segment for
      the three months ended April 3, 2004 include approximately $1,300,000 of
      costs associated with the closure of certain manufacturing facilities (see
      Note J).
 
 Operating
results for the three months ended April 2, 2005 and April 3, 2004 include a
non-cash foreign exchange loss of approximately $500,000 and $600,000,
respectively, on certain intercompany debt between the Company’s
subsidiaries.
 
 Operating
results for the three months ended April 2, 2005 includes a gain of
approximately $1,400,000 from the settlement of certain obligations of former
subsidiaries (see Note I).
 
 During
the three months ended April 2, 2005 and April 3, 2004 the Company recorded a
pre-tax charge to continuing operations of approximately $100,000 and $250,000,
respectively, for compensation expense related to stock options issued to
employees, officers and Directors in accordance with SFAS No. 123 (see Note A).
 
 (F)
    On
      July 31, 2004, the Company sold the capital stock of its wholly-owned
      subsidiary, La Cornue SAS (“La Cornue”) for net cash proceeds of
      approximately $5,800,000 and recorded a net after tax gain of
      approximately $900,000. La Cornue, situated outside of Paris, France
      manufactures and sells high-end custom made cooking ranges.
 
 On
February 12, 2004, the Company sold the capital stock of its wholly-owned
subsidiary Ply Gem Industries, Inc. (“Ply Gem”) for net cash proceeds of
approximately $506,700,000, after excluding approximately $21,400,000 of
proceeds provided to fund liabilities of Ply Gem indemnified by the Company (see
Note I), and recorded a net after-tax gain on the sale of approximately
$74,100,000. Ply Gem, through its operating subsidiaries, is a manufacturer and
distributor of a range of products for use in the residential new construction,
do-it-yourself and professional renovation markets, including vinyl siding,
windows, patio doors, fencing, railing, decking and accessories. The results of
operations of the operating subsidiaries of Ply Gem comprised the Company’s
entire Windows, Doors and Siding Products (“WDS”) reporting segment and the
corporate expenses of Ply Gem, which were previously included in Unallocated in
the Company’s segment reporting (see Note G).
 
 The
Company allocates interest to dispositions that qualify as a discontinued
operation for debt instruments which are entered into specifically and solely
with the entity disposed of and for debt which is settled with proceeds received
from the disposition. Interest allocated to discontinued operations, included in
interest expense, net in the table below, was approximately $2,800,000 (net of
taxes of approximately $1,600,000) for the three months ended April 3,
2004.
 
 The sale
of La Cornue and Ply Gem and the related operating results have been excluded
from earnings from continuing operations and are classified as discontinued
operations for all periods presented.
 
 The table
that follows presents a summary of the results of discontinued operations for
the three months ended April 3, 2004:
  **Pre-Acquisition****For
      the three****months
      ended****April
      3, 2004***(Amounts
      in thousands)*Net
      sales
    
    $
    43,000Operating
      loss of discontinued operations *
    
    $
    (2,242
    )Interest
      expense, net
    
    
    (4,558
    )Loss
      before income tax benefit
    
    
    (6,800
    )Income
      tax benefit
    
    
    (2,600
    )Loss
      from discontinued operations
    
    
    (4,200
    )Gain
      on sale of discontinued operations
    
    
    122,700Income
      tax provision on sale of discontinued operations
    
    
    50,40072,300Earnings
      from discontinued operations
    
    $
    68,100Depreciation
      and amortization expense
    
    $
    1,379
 *
    Operating
      loss of discontinued operations are net of Ply Gem corporate expenses,
      which were previously included within Unallocated in the Company’s segment
      reporting.
 
 (G)
    The
      Company has two reportable segments: the Residential Building Products
      Segment and the Air Conditioning and Heating Products Segment. In the
      tables below, Unallocated includes corporate related items, intersegment
      eliminations and certain income and expense items not allocated to
      reportable segments.
 
 The
Company evaluates segment performance based on operating earnings before
allocations of corporate overhead costs. Intersegment net sales and intersegment
eliminations were not material for any of the periods presented. The 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.
 
 Unaudited
net sales, operating earnings and pre-tax earnings from continuing operations
for the Company’s segments for the periods presented below were as follows:
 
 **For
      the three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)***Net
      sales:**Residential
      building products
    
    $
    261,024
    
    $
    234,090Air
      conditioning and heating products
    
    
    173,094
    
    
    170,922Consolidated net sales
    
    $
    434,118
    
    $
    405,012**Operating
      earnings:**Residential
      building products *
    
    $
    37,693
    
    $
    40,166Air
      conditioning and heating products *
    
    
    7,339
    
    
    9,072Subtotal
    
    
    45,032
    
    
    49,238**Unallocated:**Stock
      based compensation charges
    
    
    (100
    )
    
    (200
    )Foreign
      exchange loss on intercompany debt
    
    
    (100
    )
    
    (200
    )Gain
      on legal settlement
    
    
    1,400
    
    
    ---Other,
      net
    
    
    (5,347
    )
    
    (7,165
    )Consolidated
      operating earnings
    
    
    40,885
    
    
    41,673Interest
      expense
    
    
    (24,285
    )
    
    (25,559
    )Loss
      from debt retirement
    
    
    ---
    
    
    (11,958
    )Investment
      income
    
    
    400
    
    
    944Earnings
      before provisionfor income taxes
    
    $
    17,000
    
    $
    5,100
 *
    The
      operating results of the Air Conditioning and Heating Products Segment for
      the three months ended April 3, 2004 include approximately $1,300,000 of
      costs associated with the closure of certain manufacturing facilities (see
      Note J).
 
 The
operating results of the Residential Building Products Segment for the three
months ended April 2, 2005 and April 3, 2004 each include a non-cash foreign
exchange loss of approximately $400,000 on certain intercompany debt between the
Company’s subsidiaries. The operating results of the Residential Building
Products Segment for the three months ended April 3, 2004 also include
approximately $50,000 of stock based compensation charges.
 
 Unaudited
depreciation expense, amortization of intangible assets and purchase price
allocated to inventory and capital expenditures from continuing operations for
the Company’s segments for the periods presented below were as
follows:
 
 **For
      the three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)***Depreciation
      Expense:**Residential
      building products
    
    $
    3,428
    
    $
    2,806Air
      conditioning and heating products
    
    
    3,198
    
    
    2,902Other
    
    
    225
    
    
    82Consolidated
      depreciation expense
    
    $
    6,851
    
    $
    5,790**Amortization
      of intangible assets and****purchase price allocated to inventory *:**Residential
      building products
    
    $
    3,836
    
    $
    2,648Air
      conditioning and heating products
    
    
    803
    
    
    824Other
    
    
    125
    
    
    ---Consolidated
      amortization expense andpurchase price allocated to inventory
    
    $
    4,764
    
    $
    3,472**Capital
      Expenditures:**Residential
      building products
    
    $
    2,447
    
    $
    2,429Air
      conditioning and heating products
    
    
    2,881
    
    
    2,157Other
    
    
    237
    
    
    318Consolidated
      capital expenditures
    
    $
    5,565
    
    $
    4,904
 *
    During
      the three months ended April 2, 2005 and April 3, 2004 the Company
      reflected in the Residential Building Products Segment amortization of
      approximately $400,000 and $100,000, respectively, of excess purchase
      price allocated to inventory as a non-cash charge to cost of products
      sold.
   (H)
    The
      Company provides income taxes on an interim basis based upon the estimated
      annual effective income tax rate. The following reconciles the federal
      statutory income tax rate to the estimated effective tax rate of
      approximately 37.1% and 41.2% for the periods
presented:
   **For
      the three months ended****Post-**
    **Pre-****Acquisition**
    **Acquisition****April
      2, 2005**
    **April
      3, 2004**Income
      tax provision at the federal statutory rate
    
    
    35.0
    %
    
    35.0
    %Net
      change from federal statutory rate:State income tax provision, net of federalincome
      tax effect
    
    
    2.5
    
    
    1.8Tax effect resulting from foreign activities
    
    
    (0.7
    )
    
    1.6Change
      in tax reserves
    
    
    ---
    
    
    0.3Non-deductible
      expenses
    
    
    0.4
    
    
    0.3Other,
      net
    
    
    (0.1
    )
    
    2.2Income
      tax provision at estimated effective rate
    
    
    37.1
    %
    
    41.2
    %
   (I)
    As
      of April 2, 2005, the Company’s former subsidiary, Ply Gem, has guaranteed
      approximately $25,200,000 of third party obligations relating to rental
      payments through June 30, 2016 under a facility leased by a former
      subsidiary, which was sold on September 21, 2001. The Company has
      indemnified these guarantees in connection with the sale of Ply Gem on
      February 12, 2004 (see Note F) and has recorded an estimated liability
      related to this indemnified guarantee of approximately $1,000,000 at April
      2, 2005 in accordance with Interpretation No. 45, “Guarantor’s Accounting
      and Disclosure Requirements for Guarantees, Including Indirect Guarantees
      of Indebtedness of Others” (“FIN 45”). The buyer of the former subsidiary
      has provided certain indemnifications and other rights to Nortek for any
      payments that it might be required to make pursuant to this guarantee.
      Should the buyer of the former subsidiary cease making payments then the
      Company may be required to make payments on its
      indemnification.
 
 The
Company has indemnified third parties for certain matters in a number of
transactions involving dispositions of former subsidiaries. The Company has
recorded liabilities in relation to these indemnifications, including the
indemnified guarantee noted above, of approximately $13,500,000 at April 2, 2005
and $17,800,000 at December 31, 2004. In February 2005 the Company settled a
portion of these obligations with a lump sum cash payment resulting in a
reduction of approximately $1,400,000 in such liabilities which was
recorded as income in the Company’s unaudited condensed consolidated statement
of operations for the first quarter ended April 2, 2005 (see Note E).
Approximately $6,000,000 of short-term liabilities and approximately $7,500,000
of long-term liabilities are recorded in accrued expenses and other long-term
liabilities, respectively, in the accompanying unaudited condensed consolidated
balance sheet at April 2, 2005 related to these indemnifications. Approximately
$12,700,000 of these indemnifications at April 2, 2005 relate to
indemnifications provided to a buyer in connection with the sale of certain
former subsidiaries, including Ply Gem (see Note F). Accordingly, the Company
has included approximately $5,200,000 of short-term liabilities and
approximately $7,500,000 of long-term liabilities in accrued expenses and other
long-term liabilities, respectively, in the accompanying consolidated balance
sheet at April 2, 2005 related to these indemnifications.
 
 The
Company sells a number of products and offers a number of warranties including
in some instances, extended warranties for which the Company receives proceeds.
The specific terms and conditions of these warranties vary depending on the
product sold and country in which the product is sold. The Company estimates the
costs that may be incurred under its warranties, with the exception of extended
warranties, and records a liability for such costs at the time of sale. Proceeds
received from extended warranties are amortized over the life of the warranty
and reviewed to ensure that the liability recorded is equal to or greater than
estimated future costs. Factors that affect the Company’s warranty liability
include the number of units sold, historical and anticipated rates of warranty
claims, cost per claim and new product introduction. The Company periodically
assesses the adequacy of its recorded warranty claims and adjusts the amounts as
necessary. Changes in the Company’s unaudited combined short-term and long-term
warranty liabilities during the periods presented are as follows:
 
 **For
      the three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)*Balance,
      beginning of period
    
    $
    30,319
    
    $
    29,087Warranties
      provided during period
    
    
    4,424
    
    
    4,195Settlements
      made during period
    
    
    (4,171
    )
    
    (3,588
    )Changes
      in liability estimate, including acquisitions
    
    
    250
    
    
    (316
    )Balance,
      end of period
    
    $
    30,822
    
    $
    29,378
 
 The
Company is subject to other contingencies, including legal proceedings and
claims arising out of its businesses that cover a wide range of matters,
including, among others, environmental matters, contract and employment claims,
product liability, warranty and modification, adjustment or replacement of
component parts of units sold, which include product recalls. Product liability,
environmental and other legal proceedings also include matters with respect to
businesses previously owned. The Company has used various substances in its
products and manufacturing operations which have been or may be deemed to be
hazardous or dangerous, and the extent of its potential liability, if any, under
environmental, product liability and workers’ compensation statutes, rules,
regulations and case law is unclear. Further, due to the lack of adequate
information and the potential impact of present regulations and any future
regulations, there are certain circumstances in which no range of potential
exposure may be reasonably estimated.
 
 While it
is impossible to ascertain the ultimate legal and financial liability with
respect to contingent liabilities, including lawsuits, the Company believes that
the aggregate amount of such liabilities, if any, in excess of amounts provided
or covered by insurance, will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company. It is possible, however, that future results of operations for any
particular future period could be materially affected by changes in the
Company’s assumptions or strategies related to these contingencies or changes
out of the Company’s control.
 
 (J)
    The
      Company records restructuring costs primarily in connection with
      operations acquired or facility closings which management plans to
      eliminate in order to improve future operating results of the Company.
 
 Within
the Air Conditioning and Heating Products Segment, the Company, in the second
quarter of 2003, initiated restructuring activities related to the closure of
two facilities in St. Louis, Missouri, in order to relocate the operations to
other facilities. The facilities currently support warehousing and distribution
activities of the segment’s residential HVAC products. Since the initiation of
these restructuring activities in 2003, a total of approximately 403 employees
have been terminated and an additional 35 employees are expected to be
terminated during the second and third quarters of 2005. During the three months
ended April 3, 2004 the Company provided approximately $1,300,000 in cost of
goods sold related to liabilities incurred as a result of this restructuring.
Two of the facilities to be closed are owned by the Company, one of which was
sold during the three months ended April 2, 2005.
 
 During
August of 2004, the Company accrued approximately $3,400,000 related to
severance benefits for certain of the Company’s employees at its corporate
office. Approximately $1,400,000 was included as a charge in the Company’s
consolidated statement of operations on August 27, 2004 and the balance was
recorded as an intangible asset related to a non-compete agreement. No
additional amounts have been incurred or are expected to be incurred related to
these severance benefits. It is expected that these severance benefits will be
paid through August 2006.
 
 The
following table sets forth restructuring activity in accordance with SFAS No.
146, “Accounting for Costs Associated with Exit or Disposal Activities (“SFAS
No. 146”) in the accompanying unaudited condensed consolidated statement of
operations for the periods presented. These costs are included in cost of goods
sold and selling, general and administrative expenses in the accompanying
unaudited condensed consolidated statement of operations of the
Company.
 
 **Employee
      Separation****Expenses**
    
    **Other**
    
    **Total**
      **Restructuring**
      **Costs***(Amounts
      in thousands)**(Unaudited)***Balance
      at December 31, 2003**
    
    **$**
    **1,638**
    
    **$**
    **205**
    
    **$**
    **1,843**Provision
    
    
    71
    
    
    1,219
    
    
    1,290Payments
      and asset write downs
    
    
    (1,139
    )
    
    (1,420
    )
    
    (2,559
    )**Balance
      at April 3, 2004**
    
    **$**
    **570**
    
    **$**
    **4**
    
    **$**
    **574****Balance
      at December 31, 2004**
    
    **$**
    **3,150**
    
    **$**
    **30**
    
    **$**
    **3,180**Payments
      and asset write downs
    
    
    (454
    )
    
    (30
    )
    
    (484
    )Other
    
    
    (10
    )
    
    ---
    
    
    (10
    )**Balance
      at April 2, 2005**
    
    **$**
    **2,686**
    
    **$**
    **---**
    
    **$**
    **2,686**
 
 Employee
separation expenses are comprised of severance, vacation, outplacement and
retention bonus payments. Other restructuring costs include expenses associated
with terminating other contractual arrangements, costs to prepare facilities for
closure, costs to move equipment and products to other facilities and write-offs
related to equipment sales and disposals.
  (K)
    The
      Company and its subsidiaries have various pension, supplemental retirement
      plans for certain officers, profit sharing and other post retirement
      benefit plans requiring contributions to qualified trusts and union
      administered funds.
 
 Pension
and profit sharing expense charged to operations aggregated approximately
$3,600,000 and $4,200,000 for the three months ended April 2, 2005 and April 3,
2004, respectively. The Company’s policy is to generally fund currently at least
the minimum allowable annual contribution of its various qualified defined
benefit plans. As previously disclosed in the Company’s latest annual report on
Form 10-K as filed with the SEC, the Company expects to contribute approximately
$4,600,000 to its defined benefit pension plans in 2005. As of April 2, 2005,
approximately $320,000 of contributions has been made.
 
 The
Company’s unaudited net periodic benefit cost for its defined benefit plans for
the periods presented consist of the following components:
 
 **For
      the three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)*Service
      cost
    
    $
    340
    
    $
    297Interest
      cost
    
    
    2,259
    
    
    2,392Expected
      return on plan assets
    
    
    (2,147
    )
    
    (2,066
    )Amortization
      of prior service cost
    
    
    ---
    
    
    49Recognized
      actuarial loss
    
    
    5
    
    
    ---Net periodic benefit cost
    
    $
    457
    
    $
    672
 
 The
Company’s unaudited net periodic benefit cost for its subsidiary’s Post
Retirement Health Benefit Plan for the periods presented consists of the
following components:
 
 **For
      the three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)*Service
      cost
    
    $
    112
    
    $
    255Interest
      cost
    
    
    619
    
    
    628Recognized
      actuarial gain
    
    
    ---
    
    
    (6
    )Net
      periodic post retirement health benefit cost
    
    $
    731
    
    $
    877
 
 On
December 8, 2003, President Bush signed into law the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (“the Act”). The Act expanded Medicare
to include, for the first time, coverage for prescription drugs. Based upon an
analysis of plan provisions and prescription drug claims experience, it has been
determined that the potential savings that the NuTone Retiree Medical Plan could
realize as a result of the Act would be immaterial and the Company has not
reflected any reduction in cost under FASB Staff Position No. FAS 106-2 as of
April 2, 2005.
 
 (L)
    The
      Company’s 8 1/2% Senior Subordinated Notes due 2014 (the “8 1/2% Notes”)
      require interest to be paid semi-annually in arrears on March 1 and
      September 1 of each year. The 8 1/2% Notes are guaranteed by all of the
      Company’s current and certain future domestic subsidiaries, as defined,
      with the exception of certain domestic subsidiaries, as defined, which are
      excluded from the 8 1/2% Note guarantee (the “Guarantors”). The Guarantors
      are wholly-owned either directly or indirectly by the Company and jointly
      and severally guarantee the Company’s obligations under the 8 1/2% Notes.
      None of the Company’s subsidiaries organized outside of the United States
      guarantee the 8 1/2% Notes.
 
 Consolidating
financial information related to the Company, its guarantor subsidiaries and
non-guarantor subsidiaries as of April 2, 2005 and April 3, 2004 are reflected
below in order to comply with the reporting requirements for guarantor
subsidiaries. The “Parent” columns include the accounts of the former Nortek
Holdings and Nortek for all applicable periods (see Note A).
 
 **Unaudited
Condensed Consolidating Statement of Operations**
 **For
the three months ended April 2, 2005**
 
 
 **Guarantor**
    
    **Non-Guarantor**
    
    ****
    
    **Nortek****Parent**
    
    **Subsidiaries**
    
    **Subsidiaries**
    
    **Eliminations**
    
    **Consolidated****Net
      Sales**
    
    $
    ---
    
    $
    354,309
    
    $
    103,160
    
    $
    (23,351
    )
    $
    434,118**Costs
      and expenses:**Costs
      of products sold
    
    
    ---
    
    
    248,599
    
    
    84,211
    
    
    (23,351
    )
    
    309,459Selling,
      general and administrative expenses
    
    
    3,931
    
    
    59,951
    
    
    15,559
    
    
    ---
    
    
    79,441Amortization
      of intangible assets
    
    
    125
    
    
    3,678
    
    
    530
    
    
    ---
    
    
    4,3334,056
    
    
    312,228
    
    
    100,300
    
    
    (23,351
    )
    
    393,233Operating
      earnings (loss)
    
    
    (4,056
    )
    
    42,081
    
    
    2,860
    
    
    ---
    
    
    40,885Interest
      expense
    
    
    (23,681
    )
    
    (423
    )
    
    (181
    )
    
    ---
    
    
    (24,285
    )Investment
      income
    
    
    356
    
    
    4
    
    
    40
    
    
    ---
    
    
    400Income
      (loss) before charges and allocationsto subsidiaries and equity (loss) in subsidiaries'earnings before income taxes
    
    
    (27,381
    )
    
    41,662
    
    
    2,719
    
    
    ---
    
    
    17,000Charges
      and allocations to subsidiaries andequity (loss) in subsidiaries' earningsbefore
      income taxes
    
    
    44,381
    
    
    (18,062
    )
    
    (519
    )
    
    (25,800
    )
    
    ---Earnings
      (loss) from continuing operations beforeprovision (benefit) for income taxes
    
    
    17,000
    
    
    23,600
    
    
    2,200
    
    
    (25,800
    )
    
    17,000Provision
      (benefit) for income taxes
    
    
    6,300
    
    
    8,700
    
    
    700
    
    
    (9,400
    )
    
    6,300Net earnings (loss)
    
    $
    10,700
    
    $
    14,900
    
    $
    1,500
    
    $
    (16,400
    )
    $
    10,700


**Unaudited
Condensed Consolidating Statement of Operations**
 **For
the three months ended April 3, 2004**
 
 
 **Guarantor**
    
    **Non-Guarantor**
    
    **Discontinued**
    
    ****
    
    **Nortek****Parent**
    
    **Subsidiaries**
    
    **Subsidiaries**
    
    **Operations**
    
    **Eliminations**
    
    **Consolidated****Net
      Sales**
    
    $
    ---
    
    $
    324,023
    
    $
    104,536
    
    $
    ---
    
    $
    (23,547
    )
    $
    405,012**Costs
      and expenses:**Costs
      of products sold
    
    
    ---
    
    
    225,899
    
    
    84,530
    
    
    ---
    
    
    (23,547
    )
    
    286,882Selling,
      general and administrative expenses
    
    
    7,344
    
    
    52,729
    
    
    13,075
    
    
    ---
    
    
    ---
    
    
    73,148Amortization
      of intangible assets
    
    
    ---
    
    
    2,887
    
    
    422
    
    
    ---
    
    
    ---
    
    
    3,3097,344
    
    
    281,515
    
    
    98,027
    
    
    ---
    
    
    (23,547
    )
    
    363,339Operating
      earnings (loss)
    
    
    (7,344
    )
    
    42,508
    
    
    6,509
    
    
    ---
    
    
    ---
    
    
    41,673Interest
      expense
    
    
    (25,072
    )
    
    (325
    )
    
    (162
    )
    
    ---
    
    
    ---
    
    
    (25,559
    )Loss
      from debt retirement
    
    
    (11,958
    )
    
    ---
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    (11,958
    )Investment
      income
    
    
    854
    
    
    7
    
    
    83
    
    
    ---
    
    
    ---
    
    
    944Income
      (loss) before charges and allocations tosubsidiaries and equity (loss) in subsidiaries'earnings before income taxes
    
    
    (43,520
    )
    
    42,190
    
    
    6,430
    
    
    ---
    
    
    ---
    
    
    5,100Charges
      and allocations to subsidiaries andequity (loss) in subsidiaries' earningsbefore income taxes
    
    
    48,620
    
    
    (8,890
    )
    
    (130
    )
    
    ---
    
    
    (39,600
    )
    
    ---Earnings
      (loss) from continuing operationsbefore provision (benefit) for income taxes
    
    
    5,100
    
    
    33,300
    
    
    6,300
    
    
    ---
    
    
    (39,600
    )
    
    5,100Provision
      (benefit) for income taxes
    
    
    2,100
    
    
    12,300
    
    
    2,900
    
    
    ---
    
    
    (15,200
    )
    
    2,100Earnings
      (loss) from continuing operations
    
    
    3,000
    
    
    21,000
    
    
    3,400
    
    
    ---
    
    
    (24,400
    )
    
    3,000Earnings
      from discontinued operations
    
    
    68,100
    
    
    ---
    
    
    ---
    
    
    68,100
    
    
    (68,100
    )
    
    68,100Net earnings (loss)
    
    $
    71,100
    
    $
    21,000
    
    $
    3,400
    
    $
    68,100
    
    $
    (92,500
    )
    $
    71,100


**Unaudited
Condensed Consolidating Balance Sheet**
 **As
of April 2, 2005**
 
 
 **Guarantor**
    
    **Non-Guarantor**
    
    ****
    
    **Nortek****Parent**
    
    **Subsidiaries**
    
    **Subsidiaries**
    
    **Eliminations**
    
    **Consolidated****ASSETS:****Current
      Assets:**Cash
      and cash equivalents
    
    $
    56,614
    
    $
    3,797
    
    $
    14,338
    
    $
    ---
    
    $
    74,749Accounts
      receivable, less allowances
    
    
    ---
    
    
    180,111
    
    
    60,523
    
    
    ---
    
    
    240,634Intercompany
      receivables (payables)
    
    
    ---
    
    
    2,379
    
    
    (2,379
    )
    
    ---
    
    
    ---Inventories
    
    
    ---
    
    
    180,864
    
    
    40,689
    
    
    ---
    
    
    221,553Prepaid
      expenses
    
    
    563
    
    
    4,819
    
    
    2,274
    
    
    ---
    
    
    7,656Other
      current assets
    
    
    3,642
    
    
    2,673
    
    
    18,024
    
    
    ---
    
    
    24,339Prepaid
      income taxes
    
    
    2,582
    
    
    14,163
    
    
    400
    
    
    ---
    
    
    17,145Current
      portion of receivable from affiliate
    
    
    20,208
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    20,208Total current assets
    
    
    83,609
    
    
    388,806
    
    
    133,869
    
    
    ---
    
    
    606,284**Property
      and Equipment, at Cost:**Total
      property and equipment, net
    
    
    1,936
    
    
    135,537
    
    
    58,032
    
    
    ---
    
    
    195,505**Other
      Long-term Assets:**Investment
      in subsidiaries and long-termreceivable from (to) subsidiaries
    
    
    1,666,628
    
    
    (35,069
    )
    
    (53,843
    )
    
    (1,577,716
    )
    
    ---Goodwill
    
    
    ---
    
    
    1,274,548
    
    
    21,298
    
    
    ---
    
    
    1,295,846Intangible
      assets, less accumulated amortization
    
    
    1,529
    
    
    81,872
    
    
    22,526
    
    
    ---
    
    
    105,927Long-term
      portion of receivable from affiliate
    
    
    16,363
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    16,363Other
      assets
    
    
    47,115
    
    
    7,679
    
    
    607
    
    
    ---
    
    
    55,401Total other long-term assets
    
    
    1,731,635
    
    
    1,329,030
    
    
    (9,412
    )
    
    (1,577,716
    )
    
    1,473,537Total assets
    
    $
    1,817,180
    
    $
    1,853,373
    
    $
    182,489
    
    $
    (1,577,716
    )
    $
    2,275,326**LIABILITIES
      AND STOCKHOLDER'S****INVESTMENT:****Current
      Liabilities:**Notes
      payable and other short-term obligations
    
    $
    ---
    
    $
    ---
    
    $
    8,028
    
    $
    ---
    
    $
    8,028Current
      maturities of long-term debt
    
    
    8,053
    
    
    1,883
    
    
    792
    
    
    ---
    
    
    10,728Accounts
      payable
    
    
    990
    
    
    97,599
    
    
    58,752
    
    
    ---
    
    
    157,341Accrued
      expenses and taxes, net
    
    
    12,107
    
    
    98,963
    
    
    30,119
    
    
    ---
    
    
    141,189Total current liabilities
    
    
    21,150
    
    
    198,445
    
    
    97,691
    
    
    ---
    
    
    317,286**Other
      Liabilities:**Deferred
      income taxes
    
    
    (26,153
    )
    
    27,437
    
    
    15,900
    
    
    ---
    
    
    17,184Other
      long-term liabilities
    
    
    68,959
    
    
    85,076
    
    
    10,303
    
    
    ---
    
    
    164,33842,806
    
    
    112,513
    
    
    26,203
    
    
    ---
    
    
    181,522**Notes,
      Mortgage Notes and Obligations****Payable, Less Current Maturities**
    
    
    1,324,485
    
    
    23,236
    
    
    58
    
    
    ---
    
    
    1,347,779Stockholder's
      investment
    
    
    428,739
    
    
    1,519,179
    
    
    58,537
    
    
    (1,577,716
    )
    
    428,739Total liabilities and stockholder's investment
    
    $
    1,817,180
    
    $
    1,853,373
    
    $
    182,489
    
    $
    (1,577,716
    )
    $
    2,275,326


**Unaudited
Condensed Consolidating Balance Sheet**
 **As
of December 31, 2004**
 
 
 **Guarantor**
    
    **Non-Guarantor**
    
    ****
    
    **Nortek****Parent**
    
    **Subsidiaries**
    
    **Subsidiaries**
    
    **Eliminations**
    
    **Consolidated****ASSETS:****Current
      Assets:**Cash
      and cash equivalents
    
    $
    76,562
    
    $
    2,313
    
    $
    16,080
    
    $
    ---
    
    $
    94,955Accounts
      receivable, less allowances
    
    
    ---
    
    
    158,688
    
    
    67,018
    
    
    ---
    
    
    225,706Intercompany
      receivables (payables)
    
    
    ---
    
    
    2,141
    
    
    (2,141
    )
    
    ---
    
    
    ---Inventories
    
    
    ---
    
    
    166,748
    
    
    38,801
    
    
    ---
    
    
    205,549Prepaid
      expenses
    
    
    (37
    )
    
    6,820
    
    
    1,813
    
    
    ---
    
    
    8,596Other
      current assets
    
    
    5,510
    
    
    4,515
    
    
    16,101
    
    
    ---
    
    
    26,126Prepaid
      income taxes
    
    
    20,100
    
    
    14,163
    
    
    400
    
    
    ---
    
    
    34,663Current
      portion of receivable from affiliate
    
    
    17,220
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    17,220Total current assets
    
    
    119,355
    
    
    355,388
    
    
    138,072
    
    
    ---
    
    
    612,815**Property
      and Equipment, at Cost:**Total
      property and equipment, net
    
    
    1,900
    
    
    139,382
    
    
    59,808
    
    
    ---
    
    
    201,090**Other
      Long-term Assets:**Investment
      in subsidiaries and long-termreceivable from (to) subsidiaries
    
    
    1,659,827
    
    
    (42,000
    )
    
    (52,332
    )
    
    (1,565,495
    )
    
    ---Goodwill
    
    
    ---
    
    
    1,273,321
    
    
    21,784
    
    
    ---
    
    
    1,295,105Intangible
      assets, less accumulated amortization
    
    
    1,654
    
    
    85,233
    
    
    23,828
    
    
    ---
    
    
    110,715Long-term
      portion of receivable from affiliate
    
    
    16,088
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    16,088Other
      assets
    
    
    48,183
    
    
    12,818
    
    
    499
    
    
    ---
    
    
    61,500Total other long-term assets
    
    
    1,725,752
    
    
    1,329,372
    
    
    (6,221
    )
    
    (1,565,495
    )
    
    1,483,408Total assets
    
    $
    1,847,007
    
    $
    1,824,142
    
    $
    191,659
    
    $
    (1,565,495
    )
    $
    2,297,313**LIABILITIES
      AND STOCKHOLDER'S****INVESTMENT:****Current
      Liabilities:**Notes
      payable and other short-term obligations
    
    $
    ---
    
    $
    ---
    
    $
    5,364
    
    $
    ---
    
    $
    5,364Current
      maturities of long-term debt
    
    
    11,550
    
    
    1,867
    
    
    997
    
    
    ---
    
    
    14,414Accounts
      payable
    
    
    1,229
    
    
    76,270
    
    
    59,844
    
    
    ---
    
    
    137,343Accrued
      expenses and taxes, net
    
    
    28,026
    
    
    104,606
    
    
    38,959
    
    
    ---
    
    
    171,591Total current liabilities
    
    
    40,805
    
    
    182,743
    
    
    105,164
    
    
    ---
    
    
    328,712**Other
      Liabilities:**Deferred
      income taxes
    
    
    (10,600
    )
    
    27,437
    
    
    15,900
    
    
    ---
    
    
    32,737Other
      long-term liabilities
    
    
    73,620
    
    
    84,590
    
    
    10,498
    
    
    ---
    
    
    168,70863,020
    
    
    112,027
    
    
    26,398
    
    
    ---
    
    
    201,445**Notes,
      Mortgage Notes and Obligations****Payable, Less Current Maturities**
    
    
    1,326,236
    
    
    23,738
    
    
    236
    
    
    ---
    
    
    1,350,210Stockholder's
      investment
    
    
    416,946
    
    
    1,505,634
    
    
    59,861
    
    
    (1,565,495
    )
    
    416,946Total liabilities and stockholder's investment
    
    $
    1,847,007
    
    $
    1,824,142
    
    $
    191,659
    
    $
    (1,565,495
    )
    $
    2,297,313


**Unaudited
Condensed Consolidating Cash Flow Statement**
 **For
the three months ended April 2, 2005**
 
 
 **Guarantor**
    
    **Non-Guarantor**
    
    **Nortek****Parent**
    
    **Subsidiaries**
    
    **Subsidiaries**
    
    **Consolidated****Cash
      Flows from operating activities:**Net
      cash used in operating activities
    
    $
    (14,287
    )
    $
    (1,448
    )
    $
    (2,917
    )
    $
    (18,652
    )**Cash
      Flows from investing activities:**Capital
      expenditures
    
    
    (237
    )
    
    (1,963
    )
    
    (1,483
    )
    
    (3,683
    )Proceeds
      from the sale of property and equipment
    
    
    31
    
    
    5,774
    
    
    25
    
    
    5,830Other,
      net
    
    
    ---
    
    
    (390
    )
    
    (9
    )
    
    (399
    )Net cash (used in) provided by investing activities
    
    
    (206
    )
    
    3,421
    
    
    (1,467
    )
    
    1,748**Cash
      Flows from financing activities:**Change
      in borrowings, net
    
    
    (5,247
    )
    
    (489
    )
    
    2,642
    
    
    (3,094
    )Other,
      net
    
    
    (208
    )
    
    ---
    
    
    ---
    
    
    (208
    )Net cash (used in) provided by financing activities
    
    
    (5,455
    )
    
    (489
    )
    
    2,642
    
    
    (3,302
    )Net
      (decrease) increase in unrestricted cash andcash equivalents
    
    
    (19,948
    )
    
    1,484
    
    
    (1,742
    )
    
    (20,206
    )Unrestricted
      cash and cash equivalents at the beginningof the period
    
    
    76,562
    
    
    2,313
    
    
    16,080
    
    
    94,955Unrestricted
      cash and cash equivalents at the endof the period
    
    $
    56,614
    
    $
    3,797
    
    $
    14,338
    
    $
    74,749


**Unaudited
Condensed Consolidating Cash Flow Statement**
 **For
the three months ended April 3, 2004**
 
 **Guarantor**
    
    **Non-Guarantor**
    
    **Discontinued**
    
    **Nortek****Parent**
    
    **Subsidiaries**
    
    **Subsidiaries**
    
    **Operations**
    
    **Consolidated****Cash
      Flows from operating activities:**Net
      cash provided by (used in) operating activities
    
    $
    502,349
    
    $
    8,652
    
    $
    (5,341
    )
    $
    (519,153
    )
    $
    (13,493
    )**Cash
      Flows from investing activities:**Capital
      expenditures
    
    
    (318
    )
    
    (3,897
    )
    
    (689
    )
    
    ---
    
    
    (4,904
    )Net
      cash paid for businesses acquired
    
    
    ---
    
    
    (16,500
    )
    
    ---
    
    
    ---
    
    
    (16,500
    )Proceeds
      from the sale of discontinued businesses
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    519,153
    
    
    519,153Proceeds
      from the sale of property and equipment
    
    
    ---
    
    
    26
    
    
    125
    
    
    ---
    
    
    151Other,
      net
    
    
    (18
    )
    
    71
    
    
    (9
    )
    
    ---
    
    
    44Net cash (used in) provided by investing activities
    
    
    (336
    )
    
    (20,300
    )
    
    (573
    )
    
    519,153
    
    
    497,944**Cash
      Flows from financing activities:**Change
      in borrowings, net
    
    
    (719
    )
    
    (250
    )
    
    336
    
    
    ---
    
    
    (633
    )Sale
      of Floating Rate Notes
    
    
    196,000
    
    
    ---
    
    
    ---
    
    
    ---
    
    
    196,000Redemption
      of Senior Notes
    
    
    (716,700
    )
    
    ---
    
    
    ---
    
    
    ---
    
    
    (716,700
    )Other,
      net
    
    
    (21
    )
    
    ---
    
    
    ---
    
    
    ---
    
    
    (21
    )Net cash (used in) provided by financing activities
    
    
    (521,440
    )
    
    (250
    )
    
    336
    
    
    ---
    
    
    (521,354
    )Net
      decrease in unrestricted cash andcash equivalents
    
    
    (19,427
    )
    
    (11,898
    )
    
    (5,578
    )
    
    ---
    
    
    (36,903
    )Unrestricted
      cash and cash equivalents at thebeginning of the period
    
    
    161,771
    
    
    13,744
    
    
    18,605
    
    
    ---
    
    
    194,120Unrestricted
      cash and cash equivalents at theend of the period
    
    $
    142,344
    
    $
    1,846
    
    $
    13,027
    
    $
    ---
    
    $
    157,217
 
 **ITEM
2.** **MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS**
 
 The
Company is a diversified manufacturer of residential and commercial building
products, operating within two principal segments: the Residential Building
Products Segment and the Air Conditioning and Heating Products Segment. In the
results of operations presented below, Unallocated includes corporate related
items, intersegment eliminations and certain income and expense not allocated to
reportable segments. Through its principal segments, the Company manufactures
and sells, primarily in the United States, Canada and Europe, a wide variety of
products for the residential and commercial construction, manufactured housing
and the do-it-yourself (“DIY”) and professional remodeling and renovation
markets. (As used in this report, the terms “Company” and “Nortek” refer to
Nortek, Inc., together with its subsidiaries, unless the context indicates
otherwise. Such terms as “Company” and “Nortek” are used for convenience only
and are not intended as a precise description of any of the separate
corporations, each of which manages its own affairs.)
 
 The
Residential Building Products Segment manufactures and distributes built-in
products primarily for the residential new construction and DIY and professional
remodeling and renovation markets. The principal products sold by the segment
include:
 
 ·
    kitchen
      range hoods,
 ·
    built-in
      exhaust fans (such as bath fans and fan, heater and light combination
      units),
 ·
    indoor
      air quality products,
 ·
    medicine
      cabinets,
 ·
    door
      chimes,
 ·
    musical
      intercoms,
 ·
    central
      vacuum systems,
 ·
    surround
      sound systems,
 ·
    multi-room
      audio and video distribution equipment, and
 ·
    architectural
      loudspeakers
 
 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.
 
 On July
15, 2004, THL Buildco Holdings, Inc. (“THL Buildco Holdings”) and THL Buildco,
Inc. (“THL Buildco”), newly formed Delaware corporations affiliated with Thomas
H. Lee Partners L.P., entered into a stock purchase agreement with the owners of
Nortek Holdings, Inc., Nortek’s former parent company (referred to herein as
“the former Nortek Holdings”), including affiliates of Kelso & Company, L.P.
(“Kelso”) and certain members of the Company’s management, pursuant to which THL
Buildco agreed to purchase all the outstanding capital stock of the former
Nortek Holdings. Prior to the completion of the THL Transaction described below,
Nortek was a wholly owned direct subsidiary of the former Nortek Holdings and
THL Buildco was a wholly owned direct subsidiary of THL Buildco Holdings.
 
 On August
27, 2004, THL Buildco purchased all of the outstanding capital stock of the
former Nortek Holdings pursuant to the stock purchase agreement in a transaction
valued at approximately $1,740,000,000 (the “Acquisition”). Immediately upon the
completion of the Acquisition, THL Buildco was merged with and into the former
Nortek Holdings with the former Nortek Holdings continuing as the surviving
corporation. The former Nortek Holdings was then merged with and into Nortek
with Nortek continuing as the surviving corporation and a wholly owned
subsidiary of THL Buildco Holdings. THL Buildco Holdings was then renamed Nortek
Holdings, Inc. (“Nortek Holdings”). Nortek Holdings is wholly owned by NTK
Holdings, Inc., which is wholly owned by THL-Nortek Investors, LLC, a Delaware
limited liability company (“Investors LLC”). In connection with the Acquisition,
members of Nortek management reinvested a portion of their equity interest in
the former Nortek Holdings for an equity interest in Investors LLC and interests
in a deferred compensation plan established by Nortek Holdings (the Acquisition
and the above events are collectively referred to herein as the “THL
Transaction”) (see Note B of the Notes to the Unaudited Condensed Consolidated
Financial Statements included elsewhere herein).
 
 The
consolidated financial statements presented elsewhere herein prior to August 28,
2004 reflect the financial position, results of operations and cash flows of the
former Nortek Holdings, the predecessor company. Subsequent to August 27, 2004,
the consolidated financial statements presented elsewhere herein reflect the
financial position, results of operations and cash flows of Nortek, Inc., the
successor company, which was the surviving company from the mergers noted above
in the THL Transaction.
 
 On July
31, 2004, the Company sold the capital stock of its wholly owned subsidiary, La
Cornue SAS (“La Cornue”) for net cash proceeds of approximately $5,800,000 and
recorded a net after tax gain of approximately $900,000. La Cornue, situated
outside of Paris, France, manufactures and sells high-end custom made cooking
ranges and was included in the Company’s Residential Building Products reporting
segment.
 
 On
February 12, 2004, the Company’s wholly-owned subsidiary, WDS, LLC, sold all of
the capital stock of Ply Gem Industries, Inc. (“Ply Gem”). The results of
operations of the operating subsidiaries of Ply Gem comprised the Company’s
entire Window, Doors and Siding Products (“WDS”) reporting segment and the
corporate expenses of Ply Gem were previously included in Unallocated in the
Company’s segment reporting.
 
 The
results of La Cornue and Ply Gem have been excluded from earnings from
continuing operations and are classified separately as discontinued operations
for all periods presented. Accordingly, for purposes of this presentation of
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, all discussion relates to the results from continuing operations
(see Notes F and G of the Notes to the Unaudited Condensed Consolidated
Financial Statements included elsewhere herein).
 
 On
December 17, 2004, the Company, through its indirect wholly-owned subsidiary,
Linear LLC (“Linear”), acquired M&S Systems, LP (“M&S”). M&S is
located in Dallas, TX and manufacturers and designs distributed audio and
communication equipment, speakers and central vacuum systems. On March 9, 2004,
the Company, through Linear, acquired OmniMount Systems, Inc. (“OmniMount”).
OmniMount is located in Phoenix, AZ and manufactures and designs speaker and
video mountings and other products to maximize the home theater experience.
These acquisitions have been accounted for under the purchase method of
accounting and are included in the Company’s Residential Building Products
Segment. Accordingly, the results of M&S and OmniMount are included in the
Company’s consolidated results since the date of their acquisition (see
“Liquidity and Capital Resources” and Note D of the Notes to the Unaudited
Condensed Consolidated Financial Statements included elsewhere
herein).
 
 The
Company’s discussion and analysis of its financial condition and results of
operations are based upon the Company’s Unaudited Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. Certain of the Company’s accounting policies require the
application of judgment in selecting the appropriate assumptions for calculating
financial estimates. By their nature, these judgments are subject to an inherent
degree of uncertainty. The Company periodically evaluates the judgments and
estimates used for its critical accounting policies to ensure that such
judgments and estimates are reasonable for its interim and year-end reporting
requirements. These judgments and estimates are based on the Company’s
historical experience, current trends and information available from other
sources, as appropriate. If different conditions result from those assumptions
used in the Company’s judgments, the results could be materially different from
the Company’s estimates. The Company’s critical accounting policies
include:
 
 ·
    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
 
 Further
detail regarding the Company’s critical accounting policies can be found in the
consolidated financial statements and the notes included in the Company’s latest
annual report on Form 10-K as filed with the Securities and Exchange Commission
(“SEC”).
 
 The
“Results of Operations” and “Liquidity and Capital Resources” sections which
follow contain various tables that are intended to assist the reader in
reconciling current results with the prior period.
 
 **Results
of Operations**
 
 The
tables that follow present the unaudited net sales from continuing operations,
operating earnings from continuing operations and depreciation and amortization
expense from continuing operations for the Company’s principal segments for the
three months ended April 2, 2005 and April 3, 2004, the dollar amount and
percentage change of such results as compared to the prior comparable period and
the percentage to net sales of operating earnings and depreciation and
amortization expense for the three months ended April 2, 2005 and April 3,
2004:
 
 **For
      the three months ended**
    
    **Change
      in Earnings in the****Post-**
    
    **Pre-**
    
    **First
      Quarter 2005****Acquisition**
    
    **Acquisition**
    
    **as
      Compared to 2004****April
      2, 2005**
    
    **April
      3, 2004**
    
    **$**
    
    **%***(Dollar
      amounts in thousands)***Net
      sales:**Residential
      Building Products
    
    $
    261,024
    
    $
    234,090
    
    $
    26,934
    
    
    11.5
    %Air
      Conditioning and Heating Products
    
    
    173,094
    
    
    170,922
    
    
    2,172
    
    
    1.3Consolidated
      net sales
    
    $
    434,118
    
    $
    405,012
    
    $
    29,106
    
    
    7.2
    %**Operating
      earnings:**Residential
      Building Products
    
    $
    37,693
    
    $
    40,166
    
    $
    (2,473
    )
    
    (6.2
    )%Air
      Conditioning and Heating Products
    
    
    7,339
    
    
    9,072
    
    
    (1,733
    )
    
    (19.1
    )Subtotal
    
    
    45,032
    
    
    49,238
    
    
    (4,206
    )
    
    (8.5
    )**Unallocated:**Stock
      based compensation charges
    
    
    (100
    )
    
    (200
    )
    
    100
    
    
    50.0Foreign
      exchange loss on intercompany debt
    
    
    (100
    )
    
    (200
    )
    
    100
    
    
    50.0Gain
      on legal settlement
    
    
    1,400
    
    
    ---
    
    
    1,400
    
    
    *Other,
      net
    
    
    (5,347
    )
    
    (7,165
    )
    
    1,818
    
    
    25.4Consolidated
      operating earnings
    
    $
    40,885
    
    $
    41,673
    
    $
    (788
    )
    
    (1.9
    )%**Depreciation
      and amortization expense:**Residential
      Building Products
    
    $
    7,264
    
    $
    5,454
    
    $
    1,810
    
    
    33.2
    %Air
      Conditioning and Heating Products
    
    
    4,001
    
    
    3,726
    
    
    275
    
    
    7.4Other
    
    
    350
    
    
    82
    
    
    268
    
    
    *$
    11,615
    
    $
    9,262
    
    $
    2,353
    
    
    25.4
    %**Operating
      earnings margin:**Residential
      Building Products
    
    
    14.4
    %
    
    17.2
    %Air
      Conditioning and Heating Products
    
    
    4.2
    
    
    5.3Consolidated
    
    
    9.4
    %
    
    10.3
    %**Depreciation
      and amortization****expense as a % of net sales:**Residential
      Building Products
    
    
    2.8
    %
    
    2.3
    %Air
      Conditioning and Heating Products
    
    
    2.3
    
    
    2.2Consolidated
    
    
    2.7
    %
    
    2.3
    %
 *  not
meaningful
 
 The
tables that follow set forth, for the periods presented, (a) certain unaudited
consolidated operating results, (b) the change in the amount and the percentage
change of such results as compared to the prior comparable period, (c) the
percentage which such results bear to net sales, and (d) the change of such
percentages as compared to the prior comparable period. The results of
operations for the first three months ended April 2, 2005 are not necessarily
indicative of the results of operations to be expected for any other interim
period or the full year.
 
 
 **Three
      Months Ended****Post-**
    
    **Pre-**
    
    **Change
      in Earnings in****Acquisition**
    
    **Acquisition**
    
    **the
      First Quarter 2005****April
      2,**
    
    **April
      3,**
    
    **as
      Compared to 2004****2005**
    
    **2004**
    
    **$**
    
    **%***(Dollar
      amounts in millions)*Net
      sales
    
    $
    434.1
    
    $
    405.0
    
    $
    29.1
    
    
    7.2
    %Cost
      of products sold
    
    
    309.5
    
    
    286.9
    
    
    (22.6
    )
    
    (7.9
    )Selling,
      general and administrative expenses, net
    
    
    79.4
    
    
    73.1
    
    
    (6.3
    )
    
    (8.6
    )Amortization
      of intangible assets
    
    
    4.3
    
    
    3.3
    
    
    (1.0
    )
    
    (30.3
    )Operating
      earnings
    
    
    40.9
    
    
    41.7
    
    
    (0.8
    )
    
    (1.9
    )Interest
      expense
    
    
    (24.3
    )
    
    (25.6
    )
    
    1.3
    
    
    5.1Loss
      from debt retirement
    
    
    ---
    
    
    (11.9
    )
    
    11.9
    
    
    *Investment
      income
    
    
    0.4
    
    
    0.9
    
    
    (0.5
    )
    
    (55.6
    )Earnings
      from continuing operationsbefore provision for income taxes
    
    
    17.0
    
    
    5.1
    
    
    11.9
    
    
    *Provision
      for income taxes
    
    
    6.3
    
    
    2.1
    
    
    4.2
    
    
    *Earnings
      from continuing operations
    
    
    10.7
    
    
    3.0
    
    
    7.7
    
    
    *Earnings
      from discontinued operations
    
    
    ---
    
    
    68.1
    
    
    (68.1
    )
    
    *Net
      earnings
    
    $
    10.7
    
    $
    71.1
    
    $
    (60.4
    )
    
    (85.0
    )%


*  not
meaningful
  **Percentage
      of Net Sales**
    
    **** 
      **Change
      in Percentage****First
      Quarter Ended**
    
    **** 
      **for
      the First****April
      2,**
    
    **April
      3,**
    
    **** 
      **Quarter
      2005****2005**
    
    **2004**
    
    **as
      Compared to 2004**Net
      sales
    
    
    100.0
    %
    
    100.0
    %
    
    
    ---
    %Cost
      of products sold
    
    
    71.3
    
    
    70.8
    
    
    
    (0.5
    )Selling,
      general and administrative expenses, net
    
    
    18.3
    
    
    18.1
    
    
    
    (0.2
    )Amortization
      of intangible assets
    
    
    1.0
    
    
    0.8
    
    
    
    (0.2
    )Operating
      earnings
    
    
    9.4
    
    
    10.3
    
    
    
    (0.9
    )Interest
      expense
    
    
    (5.6
    )
    
    (6.3
    )
    
    
    0.7Loss
      from debt retirement
    
    
    ---
    
    
    (2.9
    )
    
    
    2.9Investment
      income
    
    
    0.1
    
    
    0.2
    
    
    
    (0.1
    )Earnings
      from continuing operationsbefore provision for income taxes
    
    
    3.9
    
    
    1.3
    
    
    
    2.6Provision
      for income taxes
    
    
    1.4
    
    
    0.5
    
    
    
    0.9Earnings
      from continuing operations
    
    
    2.5
    
    
    0.8
    
    
    
    1.7Earnings
      from discontinued operations
    
    
    ---
    
    
    16.8
    
    
    
    (16.8
    )Net
      earnings
    
    
    2.5
    %
    
    17.6
    %
    
    
    (15.1
    )%
 The
Company’s segments have a significant number of different products across a wide
range of price points and numerous distribution channels that do not always
allow meaningful quantitative analysis to be performed with respect to the
effect on net sales of changes in units sold or the price per unit sold. The
Company however, does ensure that whenever the underlying causes of material
increases or decreases in consolidated net sales can be adequately analyzed and
quantified, that appropriate disclosure of such reasons, including changes in
price, volume and the mix of products sold is made.
 
 Consolidated
net sales from continuing operations increased approximately $29,100,000 or 7.2%
for the first quarter of 2005 as compared to the first quarter of 2004. Net
sales increased for the first quarter of 2005 as compared to the first quarter
of 2004 as a result of acquisitions in the Residential Building Products
Segment, price increases, higher net sales volume and the effect of changes in
foreign currency exchange rates.
 
 In the
Residential Building Products Segment, net sales increased approximately
$26,900,000 or 11.5% for the first quarter of 2005 as compared to the first
quarter of 2004. The first quarter of 2005 includes increases of approximately
$3,600,000 attributable to the effect of changes in foreign currency exchange
rates and approximately $12,200,000 attributable to acquisitions. The increase
in net sales volume in the Residential Building Products Segment in the first
quarter of 2005 as compared to the first quarter of 2004 was primarily due to
increased sales volume of the Company’s surround sound systems and multi-room
audio and video distribution equipment. To a lesser extent, net sales increased
due to sales price increases of bathroom exhaust fans and range hoods.
 
 In the
Air Conditioning and Heating Products Segment, net sales increased approximately
$2,200,000 or 1.3% for the first quarter of 2005 as compared to the first
quarter of 2004. The first quarter of 2005 includes increases of approximately
$1,300,000 attributable to the effect of changes in foreign currency exchange
rates in this Segment. Net sales in the Air Conditioning and Heating Products
Segment for HVAC products sold to residential site-built customers constituted
the largest category of product sold to a particular group of customers within
this segment in the first quarter of 2005 and increased approximately 2.4% over
the first quarter of 2004. The increase in net sales in this Segment in the
first quarter of 2005 as compared to the first quarter of 2004 was due
principally to increased sales prices of products sold to the residential
site-built customers. Sales of the Company’s commercial HVAC products, before
considering the effect of foreign exchange, were down slightly in the first
quarter of 2005 as compared to the same period in 2004. Although sales of
residential products sold to manufactured housing customers for the same period
were up slightly, the Company does not believe that it will see any meaningful
recovery in either the manufactured housing or commercial markets in
2005.
 
 For the
three months ended April 2, 2005 and April 3, 2004, the Company’s net sales to
customers serving the manufactured housing markets, principally consisting of
air conditioners and furnaces, constituted approximately 6.3% and 6.1%,
respectively, of the Company’s consolidated net sales.
 
 Consolidated
cost of products sold was approximately $309,500,000 for the first quarter of
2005 as compared to approximately $286,900,000 for the first quarter of 2004.
Cost of products sold, as a percentage of net sales, increased from
approximately 70.8% in the first quarter of 2004 to approximately 71.3% for the
first quarter of 2005. Cost of products sold for the first quarter of 2005
includes (1) approximately $8,600,000 of cost of products sold from
acquisitions, (2) approximately $1,000,000 of increased depreciation expense of
property and equipment in the first quarter of 2005 as compared to the first
quarter of 2004 arising primarily from capital expenditures subsequent to the
Acquisition partially offset by the impact of the fair value adjustments related
to the Acquisition that were finalized in the fourth quarter of 2004, (3) an
increase of approximately $3,800,000 related to the effect of changes in foreign
currency exchange rates, (4) a non-cash charge of approximately $400,000 in the
first quarter of 2005 related to the amortization of purchase price allocated to
inventory primarily as a result of the Acquisition. A more complete discussion
on depreciation and its impact on the first quarter of 2005 is available in the
paragraphs below. Cost of products sold for the first quarter of 2004 includes
(1) approximately $1,300,000 of severance and other costs associated with the
closure of certain manufacturing facilities, (2) approximately $4,100,000 of
estimated inefficient production costs and expenses associated with the start-up
of a new manufacturing facility and (3) a non-cash charge of approximately
$100,000 related to the amortization of purchase price allocated to inventory as
a result of the OmniMount acquisition.
 
 In the
Residential Building Products Segment, cost of products sold for the first
quarter of 2005 was approximately $170,200,000 as compared to approximately
$147,600,000 in the first quarter of 2004. Cost of products sold in this segment
for the first quarter of 2005 includes (1) approximately $8,600,000 of cost of
products sold from acquisitions, (2) approximately $700,000 of increased
depreciation expense of property and equipment in the first quarter of 2005 as
compared to the first quarter of 2004 arising primarily from capital
expenditures subsequent to the Acquisition partially offset by the impact of the
fair value adjustments related to the Acquisition that were finalized in the
fourth quarter of 2004, (3) an increase of approximately $2,700,000 related to
the effect of changes in foreign currency exchange rates and (4) a non-cash
charge of approximately $400,000 in the first quarter of 2005 related to the
amortization of purchase price allocated to inventory primarily as a result of
the Acquisition. Cost of products sold in this segment for the first quarter of
2004 includes a non-cash charge of approximately $100,000 related to the
amortization of purchase price allocated to inventory as a result of the
OmniMount acquisition.
 
 In the
Air Conditioning and Heating Products Segment cost of products sold for the
first quarter of 2005 and 2004 was approximately $139,300,000. Cost of products
sold in this segment in the first quarter of 2005 includes (1) an increase of
approximately $1,100,000 related to the effect of changes in foreign currency
exchange rates and (2) approximately $300,000 of increased depreciation expense
of property and equipment in the first quarter of 2005 as compared to the first
quarter of 2004 arising primarily from capital expenditures subsequent to the
Acquisition partially offset by the impact of the fair value adjustments related
to the Acquisition that were finalized in the fourth quarter of 2004. Cost of
products sold in this segment in the first quarter of 2004 includes (1)
approximately $1,300,000 of costs associated with the closure of certain
manufacturing facilities and (2) approximately $4,100,000 of estimated
inefficient production costs and expenses associated with the start-up of a new
manufacturing facility.
 
 Material
costs were approximately 45.0% and 43.3% of net sales for the first quarter of
2005 and 2004, respectively. Both of the Company’s segments experienced material
cost increases related primarily to purchases of steel, copper and aluminum in
the first quarter of 2005 as compared to the first quarter of 2004. These cost
increases were partially offset by the effect of increased sales prices of
certain of the Company’s products and material cost improvements due to the
Company’s strategic sourcing initiatives.
 
 Overall,
changes in the cost of products sold as a percentage of net sales for one period
as compared to another period may reflect a number of factors including changes
in the relative mix of products sold, the effect of changes in sales prices,
material costs and changes in productivity levels.
 
 Consolidated
selling, general and administrative expense (“SG&A”) was approximately
$79,400,000 for the first quarter of 2005 as compared to approximately
$73,100,000 for the first quarter of 2004. SG&A as a percentage of net sales
increased from approximately 18.1% for the first quarter of 2004 to
approximately 18.3% for the first quarter of 2005 and includes in the first
quarter of 2005 (1) approximately $3,000,000 of SG&A from acquisitions in
the Residential Building Products Segment, (2) an increase of approximately
$900,000 related to the effect of changes in foreign currency exchange rates, of
which approximately $600,000 is included in the Residential Building Products
Segment and approximately $300,000 is included in the Air Conditioning and
Heating Products Segment, (3) approximately $100,000 of stock based compensation
expense, (4) a non-cash foreign exchange loss of approximately $500,000 on
intercompany debt not permanently invested among the Company’s subsidiaries, of
which approximately $400,000 is included in the Residential Building Products
Segment and (5) a gain of
approximately $1,400,000 from the settlement of certain obligations of former
subsidiaries (see Note I of the Notes to the Unaudited Condensed Consolidated
Financial Statements included elsewhere herein) .
SG&A in the first quarter of 2004 includes (1) approximately $250,000, of
which approximately $200,000 is included in Unallocated, of stock based
compensation expense and (2) a non-cash foreign exchange loss of approximately
$600,000 on intercompany debt not permanently invested among the Company’s
subsidiaries, of which approximately $400,000 is included in the Residential
Building Products Segment. The increase in the percentage in the first quarter
of 2005 is principally due to lower
sales volume of HVAC products in the Air Conditioning and Heating Products
Segment to customers serving the commercial market without a proportionate
decrease in expense.
 
 Amortization
of intangible assets, as a percentage of net sales from continuing operations,
increased from approximately 0.8% in the first quarter of 2004 to approximately
1.0% for the first quarter of 2005. This increase is principally a result of
approximately $1,000,000 of increased amortization of intangible assets in the
Residential Building Products Segment in the first quarter of 2005 as compared
to the first quarter of 2004 arising from finalizing the fair value adjustments
to intangible assets in the fourth quarter of 2004 as a result of the
Acquisition (see Note B of the Notes to the Unaudited Condensed Consolidated
Financial Statements included elsewhere herein).
 
 Consolidated
operating earnings decreased by approximately $800,000 from approximately
$41,700,000, or 10.3% as a percentage of net sales, for the first quarter of
2004 to approximately $40,900,000, or 9.4% as a percentage of net sales, for the
first quarter of 2005 as a result of the factors discussed above.
 
 Consolidated
operating earnings have been reduced by depreciation and amortization expense
(other than amortization of deferred debt expense and debt premium and discount)
of approximately $11,600,000 and $9,300,000 for the first quarters of 2005 and
2004, respectively. Acquisitions accounted for approximately $100,000 of the
increase in depreciation and amortization expense in the first quarter of 2005.
Consolidated operating earnings in the first quarter of 2005 is net of
approximately $1,100,000 of increased depreciation expense of property and
equipment arising primarily from capital expenditures subsequent to the
Acquisition partially offset by the impact of the fair value adjustments related
to the Acquisition that were finalized in the fourth quarter of 2004 and
approximately $1,000,000 of increased amortization of intangible assets as
compared to 2004 arising primarily from finalizing the fair value adjustments
related to the Acquisition that were finalized in the fourth quarter of 2004.
Depreciation and amortization expense noted above for the first quarter of 2005
includes approximately $400,000 of amortization expense from purchase price
allocated to inventory primarily as a result of the Acquisition and for the
first quarter of 2004 includes approximately $100,000 of amortization expense
from purchase price allocated to inventory arising primarily from an acquisition
in the Residential Building Products Segment.
 
 Operating
earnings of the Residential Building Products Segment for the first quarter of
2005 were approximately $37,700,000 as compared to approximately $40,200,000 for
the first quarter of 2004. Operating earnings of this segment for the first
quarter of 2005 reflects (1) an increase in earnings of approximately $300,000
from the effect of foreign currency exchange rates, (2) approximately $500,000
of operating earnings contributed by acquisitions, (3) approximately $700,000 of
increased depreciation expense of property and equipment and approximately
$900,000 of increased amortization of intangible assets during the first quarter
of 2005 as compared to the same period in 2004, (4) a non-cash charge of
approximately $400,000 in the first quarter of 2005 related to the amortization
of purchase price allocated to inventory primarily as a result of the
Acquisition and (6) a non-cash foreign exchange loss of approximately $400,000
on intercompany debt not permanently invested among the Company’s subsidiaries.
Operating earnings of this segment for the first quarter of 2004 include (1)
approximately $50,000 of stock-based compensation charges, (2) a non-cash charge
of approximately $100,000 of amortization of purchase price allocated to
inventory primarily as a result of the acquisitions in this segment and (3) a
non-cash foreign exchange loss of approximately $400,000 on intercompany debt
not permanently invested among the Company’s subsidiaries. In addition to the
effect of the items noted above, the decrease in operating earnings in the
Residential Building Products Segment in the first quarter of 2005 was primarily
due to material cost increases related primarily to purchases of steel, copper
and aluminum, partially off by
increased sales volume of the Company’s surround sound systems and multi-room
audio and video distribution equipment and sales price increases of bathroom
exhaust fans and range hoods.
 
 Operating
earnings of the Air Conditioning and Heating Products Segment were approximately
$7,300,000 for the first quarter of 2005 as compared to approximately $9,100,000
for the first quarter of 2004. Operating earnings of this segment for the first
quarter of 2005 reflects (1) a decrease in earnings of approximately $100,000
from the effect of foreign currency exchange rates and (2) approximately
$300,000 of increased depreciation expense of property and equipment during the
first quarter of 2005 as compared to the same period in 2004. Operating earnings
of this segment for the first quarter of 2004 includes (1) approximately
$1,300,000 of costs associated with the closure of certain manufacturing
facilities and (2) approximately $4,100,000 of estimated inefficient production
costs and expenses associated with the start-up of a new manufacturing facility.
In addition to the items noted above, the decrease in operating earnings in the
Air Conditioning and Heating Products Segment in the first quarter of 2005 was
principally due to increased material costs within the entire segment and lower
sales volume of commercial product lines due to the general slow down in the
commercial market partially offset by sales price increases of products serving
residential markets.
 
 The
operating expense in Unallocated was approximately $4,100,000 for the first
quarter of 2005 as compared to approximately $7,600,000 for the first quarter of
2004 primarily due to the items noted below, as well as, lower compensation
and employee benefit expense. Operating expense in Unallocated for the first
quarter of 2005 includes (1) approximately $100,000 of stock-based compensation
charges, (2) a non-cash foreign exchange loss of approximately $100,000 on
intercompany debt not permanently invested among the Company’s subsidiaries and
(3) a gain of
approximately $1,400,000 from the settlement of certain obligations of former
subsidiaries (see Note I of the Notes to the Unaudited Condensed Consolidated
Financial Statements included elsewhere herein) .
Operating expense in Unallocated for the first quarter of 2004 includes
approximately $200,000 of stock-based compensation charges and a non-cash
foreign exchange loss of approximately $200,000 on intercompany debt not
permanently invested among the Company’s subsidiaries.
 
 Combined
operating earnings of foreign operations, consisting primarily of the results of
operations of the Company’s Canadian and European subsidiaries, were
approximately 6.0% and 11.2% of operating earnings (before unallocated and
corporate expense) in the first quarters of 2005 and 2004, respectively. Sales
and earnings derived from international markets are subject to, among others,
the risks of currency fluctuations.
 
 Interest
expense decreased approximately $1,300,000 or approximately 5.1% in the first
quarter of 2005 as compared to the first quarter of 2004. The decrease in
interest expense in 2005 is due to a reduction in interest expense of
approximately $24,900,000 relating to the redemption and open market purchases
of certain debt in 2004 as discussed in the paragraph below, partially offset by
approximately $23,600,000 of increased interest expense and amortization of
deferred financing costs from borrowings primarily in connection with the
Acquisition (see Notes B and C of the Notes to the Unaudited Condensed
Consolidated Financial Statements included elsewhere herein).
 
 During
the first quarter of 2004, Nortek called for redemption all of it’s outstanding
9 1/4% Senior Notes due 2007 (“9 1/4% Notes”), all of it’s outstanding 9 1/8%
Senior Notes due 2007 (“9 1/8% Notes”) and all of it’s outstanding 8 7/8% Senior
Notes due 2008 (“8 7/8% Notes”). The redemption of the 9 1/4% Notes, 9 1/8%
Notes and 8 7/8% Notes 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 and the estimated carrying values at the redemption dates of
the 9 1/4% Notes, 9 1/8% Notes and 8 7/8% Notes, which include the principal
amount redeemed and the estimated remaining unamortized premium recorded in
connection with the Recapitalization (see Note C of the Notes to the Unaudited
Condensed Consolidated Financial Statements included elsewhere
herein).
 
 Investment
income was approximately $400,000 and $900,000 for the first quarters of 2005
and 2004, respectively, and decreased approximately $500,000 or 55.6% in the
first quarter of 2005 as compared to the first quarter of 2004 primarily as a
result of lower average invested balances.
 
 The
provision for income taxes from continuing operations was approximately
$6,300,000 for the first quarter of 2005 as compared to approximately $2,100,000
for the first quarter of 2004. The income tax rates in both the first quarters
of 2005 and 2004 differed from the United States Federal statutory rate of 35%
principally as a result of the effect of non-deductible expenses, foreign income
tax on foreign source income and state income tax provisions (see Note H of the
Notes to the Unaudited Condensed Consolidated Financial Statements included
elsewhere herein).
 
 Discontinued
operations for the first quarter of 2004 includes earnings of approximately
$68,100,000 (net of a tax provision of approximately $47,800,000) (see Note F 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 Acquisition,
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 three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)*Net
      earnings *
    
    $
    10,700
    
    $
    71,100Provision
      for income taxesfrom continuing operations
    
    
    6,300
    
    
    2,100Provision
      for income taxesfrom discontinued operations
    
    
    ---
    
    
    47,800Interest
      expense from continuing operations
    
    
    24,285
    
    
    25,559Interest
      expense from discontinued operations
    
    
    ---
    
    
    4,587Investment
      income from continuing operations
    
    
    (400
    )
    
    (944
    )Investment
      income from discontinued operations
    
    
    ---
    
    
    (29
    )Depreciation
      expense from continuing operations
    
    
    6,851
    
    
    5,790Depreciation
      expense from discontinued operations
    
    
    ---
    
    
    1,176Amortization
      expense from continuing operations
    
    
    4,764
    
    
    3,472Amortization
      expense from discontinued operations
    
    
    ---
    
    
    203EBITDA
    
    $
    52,500
    
    $
    160,814
 *
    Includes
      approximately $68,100,000 of earnings from discontinued operations for the
      three months ended April 3, 2004 (see Note F of the Notes to the Unaudited
      Condensed Consolidated Financial Statements included elsewhere
      herein).
 
 EBITDA
includes approximately $100,000 and $250,000 of stock based compensation charges
recorded in the three months ended April 2, 2005 and April 3, 2004, respectively
(see Notes A and G of the Notes to the Unaudited Condensed Consolidated
Financial Statements included elsewhere herein) .
 
 **Liquidity
and Capital Resources**
 
 The
Company had consolidated debt at April 2, 2005, of approximately $1,366,535,000
consisting of (i) $18,756,000 of short-term borrowings and current maturities of
long-term debt, (ii) $23,294,000 of long-term notes, mortgage notes and other
indebtedness, (iii) $9,985,000 of 9 7/8% Senior Subordinated Notes due 2011,
(iv) $625,000,000 of 8 1/2% Senior Subordinated Notes due 2014, and (v)
$689,500,000 of long-term debt outstanding under its Senior Secured Credit
Facility. During the first three months ended April 2, 2005, the Company had a
net decrease in its consolidated debt of approximately $3,453,000 principally as
a result of principal payments made during the period. The Senior Secured Credit
Facility also provides the Company and its subsidiaries with a $100,000,000
revolving credit facility with a maturity in August 2010 that includes both a
letter of credit sub-facility and swing line loan sub-facility. At April 2,
2005, the Company had approximately $74,000,000 of borrowing availability under
the revolving credit facility and approximately $10,000,000 of borrowing
availability under the Canadian facility.
 
 The
indenture and other agreements governing the Company and its subsidiaries’
indebtedness (including 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 May 6,
2005, approximately $32,800,000 was available for the payment of cash dividends,
stock purchases or other restricted payments by the Company as defined under the
terms of the Company’s most restrictive loan agreement, the Company’s Senior
Secured Credit Facility. Any restricted payments in excess of $10,000,000 would
require an equal prepayment of the Company’s Senior Secured Credit
Facility.
 
 At April
2, 2005, the Company had consolidated unrestricted cash and cash equivalents of
approximately $74,700,000 as compared to approximately $95,000,000 at December
31, 2004. The Company’s debt to equity ratio was approximately 3.2:1 at April 2,
2005 as compared to approximately 3.3:1 at December 31, 2004. The reduction in
the ratio was primarily due to the net decrease in indebtedness discussed
above and an increase in stockholder’s investment, primarily as a result of
net earnings for the first quarter of 2005.
 
 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.
 
 The
Company expects to meet its cash flow requirements for fiscal 2005 from cash
from operations, existing cash and cash equivalents and the use of its Senior
Secured Credit Facility, as needed, to fund short-term requirements, if
any.
 
 As of
April 2, 2005, approximately $16,800,000 of letters of credit have been issued
as additional security for (1) approximately $4,100,000 relating to leases
outstanding for certain of the Company’s manufacturing facilities, (2)
approximately $11,000,000 of letters of credit have been issued as additional
security for certain of the Company’s insurance programs and (3) approximately
$1,700,000 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, 2004.
 
 Unrestricted
cash and cash equivalents decreased from approximately $95,000,000 at December
31, 2004 to approximately $74,700,000 at April 2, 2005, in part, to partially
fund increases in working capital at the Company’s subsidiaries. The Company has
classified as restricted in the accompanying consolidated balance sheet certain
investments that are not fully available for use in its operations. At April 2,
2005, approximately $6,962,000 (all of which is included in long-term assets) of
investments 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 $5,600,000 (of which approximately $1,900,000
was financed under a capital lease) in the first three months of 2005 as
compared to approximately $4,900,000 in the first three months of 2004. Capital
expenditures were approximately $25,300,000 for the year ended December 31, 2004
and are expected to be between $40,000,000 and $45,000,000 in 2005. Under the
Company’s Senior Secured Credit Facility, capital expenditures are limited to
approximately $48,500,000 in 2005.
 
 The
Company’s working capital increased from approximately $284,100,000 at December
31, 2004 to approximately $289,000,000 at April 2, 2005, while the Company’s
current ratio remained unchanged at 1.9:1 at April 2, 2005 as compared to
December 31, 2004. This increase in working capital was primarily as a result of
the first quarter 2005 cash flow from operating activities invested in seasonal
subsidiary needs for increased levels of accounts receivable and inventory as
discussed below.
 Accounts
receivable increased approximately $14,900,000 or approximately 6.6%, between
December 31, 2004 and April 2, 2005, while net sales increased approximately
$34,200,000 or approximately 8.5% in the first quarter of 2005 as compared to
the fourth quarter of 2004. These increases are primarily a result of increased
sales levels and timing of cash collections. 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 April 2, 2005
as compared to December 31, 2004. The Company did not experience any significant
overall changes in credit terms, collection efforts, credit utilization or
delinquency in accounts receivable in the first quarter of 2005.
 
 Inventories
increased approximately $16,000,000 or approximately 7.8%, between December 31,
2004 and April 2, 2005, primarily as a result of increases in products sold to
customers serving the residential site built market within the HVAC segment in
anticipation of increased seasonal customer demand in the second quarter and
increases in inventory levels in the Residential Building Products Segment, in
part, due to strong demand of certain product categories.
 
 Accounts
payable increased approximately $20,000,000 or approximately 14.6%, between
December 31, 2004 and April 2, 2005 due primarily to increased inventory levels
and timing of payments.
 
 Changes
in certain working capital accounts, as noted above, between April 2, 2005 and
December 31, 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 $20,206,000 and approximately
$36,903,000 from December 31, 2004 to April 2, 2005 and from December 31,
2003 to April 3, 2004, respectively, principally as a result of the
following:
 
 **Condensed
      Consolidated****Cash
      Flows (*)****For
      the three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)***Operating
      Activities:**Cash flow from operations, net
    
    $
    29,177
    
    $
    (19,994
    )Increase in accounts receivable, net
    
    
    (17,313
    )
    
    (29,778
    )Increase in inventories
    
    
    (17,036
    )
    
    (17,334
    )Decrease in prepaids and other current assets
    
    
    612
    
    
    10,349Increase in net assets of discontinued operations
    
    
    ---
    
    
    (3,162
    )Increase in accounts payable
    
    
    21,753
    
    
    35,387(Decrease) / Increase in accrued expenses and taxes
    
    
    (31,664
    )
    
    11,553**Investing
      Activities:**Capital expenditures
    
    
    (3,683
    )
    
    (4,904
    )Net cash paid for businesses acquired
    
    
    ---
    
    
    (16,500
    )Proceeds from the sale of discontinued businesses
    
    
    ---
    
    
    519,153Proceeds from the sale of property and equipment
    
    
    5,830
    
    
    151**Financing
      Activities:**Decrease in borrowings, net
    
    
    (3,094
    )
    
    (633
    )Sale of Floating Rate Notes
    
    
    ---
    
    
    196,000Redemption of Senior Notes
    
    
    ---
    
    
    (716,700
    )Other,
      net
    
    
    (4,788
    )
    
    (491
    )$
    (20,206
    )
    $
    (36,903
    )
 (*)
    Summarized
      from the Company’s Unaudited Condensed Consolidated Statement of Cash
      Flows for the first quarter ended April 2, 2005 and April 3, 2004 (see the
      Unaudited Financial Statements included elsewhere
  herein).
   The
impact of changes in foreign currency exchange rates on cash was not material
and has been included in Other, net.
 
 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 of cash flow ability
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 used in operating
activities, which is the most directly comparable GAAP liquidity measure, to
EBITDA:
 
 **For
      the three months ended****Post-**
    
    **Pre-****Acquisition**
    
    **Acquisition****April
      2, 2005**
    
    **April
      3, 2004***(Amounts
      in thousands)*Net
      cash used in operating activities *
    
    $
    (18,652
    )
    $
    (13,493
    )Cash
      used by (provided from) working capital andother long-term asset and liability changes
    
    
    47,829
    
    
    (6,501
    )Deferred
      federal income tax provisionfrom continuing operations
    
    
    (5,700
    )
    
    (19,900
    )Deferred
      federal income tax creditfrom discontinued operations
    
    
    ---
    
    
    18,100Gain
      on sale of discontinued operations
    
    
    ---
    
    
    122,700Gain
      on sale of fixed assets
    
    
    280
    
    
    10Non-cash
      interest expense, net
    
    
    (1,442
    )
    
    (8,596
    )Loss
      from debt retirement
    
    
    ---
    
    
    (11,958
    )Provision
      for income taxesfrom continuing operations
    
    
    6,300
    
    
    2,100Provision
      for income taxesfrom discontinued operations
    
    
    ---
    
    
    47,800Interest
      expense from continuing operations
    
    
    24,285
    
    
    25,559Interest
      expense from discontinued operations
    
    
    ---
    
    
    4,587Investment
      income from continuing operations
    
    
    (400
    )
    
    (944
    )Investment
      income from discontinued operations
    
    
    ---
    
    
    (29
    )Depreciation
      expense from discontinued operations
    
    
    ---
    
    
    1,176Amortization
      expense from discontinued operations
    
    
    ---
    
    
    203EBITDA
    
    $
    52,500
    
    $
    160,814
 *
    Includes
      approximately $68,100,000 of earnings from discontinued operations for the
      three months ended April 3, 2004 (see Note F of the Notes to the Unaudited
      Condensed Consolidated Financial Statements included elsewhere
      herein).
 
 EBITDA
includes approximately $100,000 and $250,000 of stock based compensation charges
recorded in the three months ended April 2, 2005 and April 3, 2004, respectively
(see Notes A and G 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 efforts.
 
 As of
April 2, 2005, approximately 11.6% of the Company’s workforce was subject to
various collective bargaining agreements. Collective bargaining agreements
covering approximately 2.5% of the Company’s workforce expired in 2004, which
are currently being renegotiated, and those covering an additional 6.8% will
expire beginning in June 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, 2004
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. At
April 2, 2005, approximately 48.6% of the carrying values of the Company’s
long-term debt was at fixed interest rates.
 
 **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 quarter of 2005, 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 $2,243,000 for the first quarter of 2005. 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 April 2, 2005, 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 April 2, 2005, 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
4.**  **Submission
of Matters to a Vote of Security Holders**
 
 None
 
 **Item
5.**  **Other
Information**
 
 None
 
 **Item
6.**  **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.*
    10.12
    Nortek,
      Inc. Supplemental Executive Retirement Plan C Trust Agreement dated as of
      July 19, 2004 and the First Amendment to the Supplemental Executive
      Retirement Plan Trust Agreement C dated as of April 18,
    2005.
 
  
 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. HallAlmon C. Hall,Vice
      President and ChiefFinancial
      OfficerMay 10, 2005