July 3,			December 31,
		2004			2003
Assets		(Unaudited)
Current Assets:		(Amounts in thousands)
Unrestricted:
Cash and cash equivalents		$	127,693		$	194,120
Marketable securities available for sale			5,011			-
Restricted:
Cash, investments and marketable securities at cost,
which approximates market			8,523			1,223
Accounts receivable, less allowances
of $6,334 and $5,880			263,156			214,267
Inventories:
Raw materials			67,716			54,144
Work in process			22,239			19,229
Finished goods			112,033			86,042
			201,988			159,415
Prepaid expenses			11,463			6,765
Other current assets			16,742			14,868
Prepaid income taxes			20,700			17,826
Assets of discontinued operations			---			494,851
Total current assets			655,276			1,103,335
Property and Equipment, at Cost:
Land			12,475			12,578
Buildings and improvements			78,299			79,007
Machinery and equipment			127,711			120,589
			218,485			212,174
Less accumulated depreciation			28,291			17,719
Total property and equipment, net			190,194			194,455
Other Assets:
Goodwill			686,897			678,063
Intangible assets, less accumulated amortization
of $16,074 and $9,122			89,043			94,645
Deferred debt expense			16,015			12,589
Other			17,239			16,893
			809,194			802,190
Total Assets		$	1,654,664		$	2,099,980
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable and other short-term obligations		$	6,239		$	8,120
Current maturities of long-term debt			7,171			7,229
Accounts payable			159,678			112,772
Accrued expenses and taxes, net			168,019			151,048
Liabilities of discontinued operations			---			137,683
Total current liabilities			341,107			416,852
Other Liabilities:
Deferred income taxes			32,600			21,461
Other			150,313			136,833
			182,913			158,294
Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities			841,940			1,324,626
Stockholders' Investment:
Preference stock, $1.00 par value; authorized 7,000,000 shares;
none issued			---			---
Series B Preference Stock, $1.00 par value; authorized
19,000,000 shares; and 8,130,442 shares issued and outstanding			8,130			8,130
Class A Common Stock, $1.00 par value; authorized 19,000,000
shares; 397,380 shares issued and outstanding			397			397
Class B Common Stock, $1.00 par value; authorized 14,000,000
shares; none issued			---			---
Additional paid-in capital			177,486			172,244
Retained earnings			87,000			---
Accumulated other comprehensive income			15,691			19,437
Total stockholders' investment			288,704			200,208
Total liabilities and Stockholders' Investment:		$	1,654,664		$	2,099,980

 

 

 

		For the Three Months Ended
		July 3, 2004			July 5, 2003
		(Amounts in thousands)
		(Unaudited)
Net Sales		$	448,393		$	390,029
Costs and Expenses:
Cost of products sold			316,409			280,737
Selling, general and administrative expense			81,854			63,425
Amortization of intangible assets			3,538			2,020
			401,801			346,182
Operating earnings			46,592			43,847
Interest expense			(18,432	)		(12,636	)
Investment income			340			289
Earnings from continuing operations
before provision for income taxes			28,500			31,500
Provision for income taxes			11,800			13,000
Earnings from continuing operations			16,700			18,500
Earnings (loss) from discontinued operations			(800	)		7,400
Net earnings		$	15,900		$	25,900

 

 

 

		For the Periods
		Post-Recapitalization						Pre-Recapitalization
		Jan. 1, 2004			Jan. 10, 2003			Jan. 1, 2003 -
		July 3, 2004			July 5, 2003			Jan. 9, 2003
		(Amounts in thousands)
		(Unaudited)
Net Sales		$	855,836		$	726,106		$	24,951
Costs and Expenses:
Cost of products sold			605,081			520,394			18,635
Selling, general and administrative expense			155,839			123,498			5,014
Amortization of intangible assets			6,849			3,843			67
Expenses and charges arising from the Recapitalization			---			---			83,000
			767,769			647,735			106,716
Operating earnings (loss)			88,067			78,371			(81,765	)
Interest expense			(43,993	)		(29,427	)		(1,054	)
Loss from debt retirement			(11,958	)		---			---
Investment income			1,284			656			119
Earnings (loss) from continuing operations
before provision (benefit) for income taxes			33,400			49,600			(82,700	)
Provision (benefit) for income taxes			13,800			20,100			(21,800	)
Earnings (loss) from continuing operations			19,600			29,500			(60,900	)
Earnings (loss) from discontinued operations			67,400			1,900			(1,000	)
Net earnings (loss)		$	87,000		$	31,400		$	(61,900	)

 

		For the Periods
		Post-Recapitalization						Pre-Recapitalization
		Jan. 1, 2004			Jan. 10, 2003			Jan. 1, 2003 -
		July 3, 2004			July 5, 2003			Jan. 9, 2003
		(Amounts in thousands)
		(Unaudited)
Cash Flows from operating activities:
Net earnings (loss) from continuing operations		$	19,600		$	29,500		$	(60,900	)
Earnings (loss) from discontinued operations			67,400			1,900			(1,000	)
Net earnings (loss)			87,000			31,400			(61,900	)
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities:
Depreciation and amortization expense, including
amortization of purchase price allocated to inventory			19,908			16,521			653
Non-cash interest expense, net			18,340			3,438			125
Non-cash stock-based compensation			5,241			952			---
Loss from debt retirement			11,958			---			---
Gain on the sale of discontinued operations			(122,700	)		---			---
Deferred federal income tax provision (benefit) from
continuing operations			9,800			(12,000	)		5,900
Deferred federal income tax benefit from
discontinued operations			(18,500	)		---			---
Effect of the Recapitalization, net			---			---			62,397
Changes in certain assets and liabilities, net of
effects from acquisitions and dispositions:
Accounts receivable, net			(48,250	)		(33,784	)		4,298
Inventories			(38,165	)		(15,275	)		(4,457	)
Prepaids and other current assets			4,878			(726	)		268
Net assets of discontinued operations			(3,134	)		(28,769	)		1,717
Accounts payable			45,822			6,367			(777	)
Accrued expenses and taxes			(1,479	)		38,528			(19,766	)
Long-term assets, liabilities and other, net			(1,236	)		(12,284	)		5,837
Total adjustments to net earnings (loss)			(117,517	)		(37,032	)		56,195
Net cash used in operating activities		$	(30,517	)	$	(5,632	)	$	(5,705	)
Cash Flows from investing activities:
Capital expenditures		$	(9,648	)	$	(7,246	)	$	(207	)
Net cash paid for businesses acquired			(16,500	)		(17,237	)		---
Redemption of publicly held shares			---			(469,083	)		---
Purchase of investments and marketable securities			(5,000	)		(32,015	)		---
Payment of fees and Recapitalization expenses			---			(27,900	)		---
Proceeds from the sale of investments and
marketable securities			---			9,947
Proceeds from the sale of discontinued businesses			520,138			---			---
Change in restricted cash and investments			(111	)		(7	)		(49	)
Other, net			(141	)		(551	)		109
Net cash provided by (used in) investing activities			488,738			(544,092	)		(147	)
Cash Flows from financing activities:
Change in borrowings, net		$	(4,011	)	$	835		$	(1,313	)
Sale of Floating Rate Notes			196,000			---			---
Redemption of Senior Notes			(716,700	)		---			---
Issuance of stock in connection with Recapitalization			---			359,185			---
Other, net			63			(1	)		(4,039	)
Net cash (used in) provided by financing activities			(524,648	)		360,019			(5,352	)
Net decrease in unrestricted cash and
cash equivalents			(66,427	)		(189,705	)		(11,204	)
Unrestricted cash and cash equivalents at the
beginning of the period			194,120			283,600			294,804
Unrestricted cash and cash equivalents at the
end of the period		$	127,693		$	93,895		$	283,600
Supplemental disclosure of cash flow information:
Interest paid		$	47,816		$	46,130		$	---
Income taxes paid, net		$	41,634		$	4,557		$	281

 

 

 

 

															Accumulated
			Series B			Class A			Additional						Other
			Preference			Common			Paid in			Retained			Comprehensive			Comprehensive
			Stock			Stock			Capital			Earnings			Income			Income
	(Unaudited)
Balance, April 5, 2003		$	8,130		$	365		$	435,164		$	5,500		$	3,267		$	---
Net income			---			---			---			25,900			---			25,900
Other comprehensive income:
Currency translation adjustment			---			---			---			---			9,716			9,716
Comprehensive income																	$	35,616
Stock based compensation			---			---			262			---			---
Balance, July 5, 2003		$	8,130		$	365		$	435,426		$	31,400		$	12,983

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

 

														Accumulated
		Series B			Class A			Additional						Other
		Preference			Common			Paid in			Retained			Comprehensive			Comprehensive
		Stock			Stock			Capital			Earnings			Income			Income
		(Unaudited)
Balance, January 9, 2003		$	8,130		$	365		$	434,474		$	---		$	---		$	---
Net income			---			---			---			31,400			---			31,400
Other comprehensive income:
Currency translation adjustment			---			---			---			---			12,953			12,953
Unrealized appreciation in the fair value
of marketable securities			---			---			---			---			30			30
Comprehensive income																	$	44,383
Stock based compensation			---			---			952			---			---
Balance, July 5, 2003		$	8,130		$	365		$	435,426		$	31,400		$	12,983

 

 

 

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

 

														Accumulated
		Series B			Class A			Additional						Other
		Preference			Common			Paid in			Retained			Comprehensive			Comprehensive
		Stock			Stock			Capital			Earnings			Income			Income
	(Unaudited)
Balance, December 31, 2003		$	8,130		$	397		$	172,244		$	---		$	19,437		$	---
Net income			---			---			---			87,000			---			87,000
Other comprehensive income:
Currency translation adjustment			---			---			---			---			(3,761	)		(3,761	)
Unrealized appreciation in the fair value
of marketable securities			---			---			---			---			(3	)		(3	)
Minimum pension liability, net of tax of $10			---			---			---						18			18
Comprehensive income																	$	83,254
Stock based compensation			---			---			5,242			---			---
Balance, July 3, 2004		$	8,130		$	397		$	177,486		$	87,000		$	15,691

 

 

(A)    The unaudited condensed consolidated financial statements (the “Unaudited Financial Statements”) presented have been prepared by Nortek Holdings, Inc. and include the accounts of Nortek Holdings, Inc., and all of its wholly-owned subsidiaries (individually and collectively, the “Company” or “Holdings”) after elimination of intercompany accounts and transactions, without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted, the Company believes that the disclosures included are adequate to make the information presented not misleading. Certain amounts in the prior year’s Unaudited Financial Statements have been reclassified to conform to the current year presentation. It is suggested that these Unaudited Financial Statements be read in conjunction with the consolidated financial statements and the notes included in the Company's latest annual report on Form 10-K and its latest Current Reports on Form 8-K as filed with the Securities and Exchange Commission (“SEC”).

      On November 20, 2002, Nortek, Inc. (“Nortek”), the predecessor company and Holdings reorganized into a holding company structure and each outstanding share of capital stock of Nortek was converted into an identical share of capital stock of Holdings, a Delaware corporation formed in 2002, with Holdings becoming the successor public company and Nortek becoming a wholly-owned subsidiary of Holdings (the “Holdings Reorganization”). Subsequent to November 20, 2002, the consolidated financial statements reflect the financial position, results of operations and cash flows of Holdings (the successor company). On January 9, 2003, Holdings was acquired by certain affiliates and designees of Kelso & Company L.P. (“Kelso”) and certain mem bers of Nortek’s management (the “Management Investors”) in accordance with the Agreement and Plan of Recapitalization by and among Nortek, Inc., Nortek Holdings, Inc. and K Holdings, Inc. (“K Holdings”) dated as of June 20, 2002, as amended, (the “Recapitalization Agreement”) in a transaction valued at approximately $1.6 billion, including all of the Company’s indebtedness (the “Recapitalization”) (see Note B).

      Beginning on January 9, 2003, the Company accounted for the Recapitalization as a purchase in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS No. 141”), 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 Recapitalization. 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 January 9, 2003. 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 statemen ts beginning upon completion of the Recapitalization. The Company’s purchase price of approximately $586,266,000, including net dividends and distributions from Nortek of approximately $115,397,000 to fund the Recapitalization and fees and expenses of approximately $27,900,000 (see Note B), was allocated to the assets and liabilities based on their relative fair values and approximately $442,969,000 was reflected in Stockholders’ Investment as the value of the Company’s ownership upon completion of the Recapitalization. Immediately prior to the Recapitalization, Stockholders’ Investment was approximately $272,099,000.

      The Company completed the final allocation of purchase price as of October 5, 2003, which reflects the excess purchase price over the net assets acquired in the Recapitalization. The following table shows a comparison of the initial allocation of purchase price reflected in Nortek’s Form 10-Q for the quarter ended July 5, 2003 and the final allocation of purchase price included in the Company’s Consolidated Financial Statements for the year ended December 31, 2003, both of which include amounts allocated to discontinued operations which were sold subsequent to January 9, 2003 (see Note H):

		Initial Allocation			Final Allocation
Inventories		$	13,234,000		$	12,908,000
Property, plant and equipment			102,474,000			38,035,000
Intangible assets			72,953,000			21,686,000
Indebtedness			(33,777,000	)		(33,777,000	)
Pension and post retirement health care benefits			(32,195,000	)		(23,781,000	)
Prepaid and deferred income taxes			(38,325,000	)		(11,370,000	)
Goodwill			227,671,000			310,240,000
Other			---			226,000
Total		$	312,035,000		$	314,167,000

The following is a summary of the material adjustments made to the initial allocation of purchase price and the final allocation of purchase price:

 

The following table shows a comparison of the initial allocation of purchase price reflected in the quarter ended July 5, 2003 and the final allocation of purchase price as of October 5, 2003 allocated to discontinued operations which were discontinued subsequent to January 9, 2003 (see Note H):

		Initial Allocation			Final Allocation
Fair Value Adjustments:
Inventories		$	892,000		$	892,000
Property, plant and equipment			30,429,000			3,026,000
Intangible assets			(2,429,000	)		(18,429,000	)
Prepaid and deferred income taxes			(12,972,000	)		5,450,000
Goodwill			(11,513,000	)		(40,567,000	)
Other			90,000			542,000
Total		$	4,497,000		$	(49,086,000	)

 

    The following table presents a summary of the activity in goodwill for continuing operations and discontinued operations for the six months ended July 3, 2004, the period from January 10, 2003 to December 31, 2003 and the period from January 1, 2003 to January 9, 2003. Goodwill related to discontinued operations is included in assets of discontinued operations in the accompanying consolidated balance sheets as of December 31, 2003.

		Continuing			Discontinued
		Operations			Operations			Total
		(Amounts in thousands)
Balance as of December 31, 2002		$	287,164		$	263,998		$	551,162
Impact of foreign currency translation			269			74			343
Balance as of January 9, 2003			287,433			264,072			551,505
Effect of Recapitalization			350,807			(40,567	)		310,240
Acquisitions during the period from January 10, 2003 to December 31, 2003			46,248			---			46,248
Purchase accounting adjustments			(11,979	)		(4,195	)		(16,174	)
Impact of foreign currency translation			5,554			667			6,221
Balance December 31, 2003			678,063			219,977			898,040
Acquisitions during the period from January 1, 2004 to July 3, 2004 (Note E)			8,623			---			8,623
Sale of Ply Gem (Note H)			---			(219,977	)		(219,977	)
Impact of foreign currency translation			211			---			211
Balance July 3, 2004		$	686,897		$	---		$	686,897

     Goodwill associated with the Recapitalization and acquisitions above will not be deductible for income tax purposes, with the exception of approximately $7,300,000 of the goodwill associated with acquisitions during the period from January 10, 2003 to December 31, 2003 which will be deductible for income tax purposes. Purchase accounting adjustments relate principally to final revisions resulting from the completion of fair value adjustments and adjustments to deferred income taxes that impact goodwill.

  During the three months ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, the Company reflected amortization of purchase price allocated to inventory of approximately $800,000 and $4,600,000, respectively, in continuing operations in cost of sales related to inventory acquired as part of the Recapitalization.

  In the fourth quarter of 2003, the Company adopted the fair value method of accounting for stock-based employee compensation in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and recorded pre-tax charges of approximately $1,400,000 in selling, general and administrative expense and $100,000 in earnings from discontinued operations in the Company’s consolidated statement of operations for the period January 10, 2003 to December 31, 2003 related to stock options issued during the period. No stock options were issued during the period from January 1, 2003 to January 9, 2003. The Company had previously accounted for stock-based employee compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25 , “Accounting for Stock Issued to Employees” (“APB 25”), including related interpretations, and followed the disclosure only provisions of SFAS No. 123. The Company adopted SFAS No. 123 using the prospective method of transition in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”). The prospective method under SFAS No. 148 required the Company to adopt SFAS No. 123 effective January 1, 2003 for all employee awards granted, modified, or settled after January 1, 2003.

      The Company recorded stock-based compensation charges in continuing operations of approximately $3,100,000 and $3,300,000 for the second quarter and six months ended July 3, 2004, respectively, in accordance with SFAS No. 123. Included in these amounts are stock-based employee compensation charges of approximately $2,800,000 recorded in the second quarter of 2004 related to the accelerated vesting and achievement of the performance criteria for a portion of the Company’s outstanding Class B stock options due to the probable change of control of the Company in the third quarter of 2004 (see Note N). In addition, the Company recorded stock-based employee compensation charges in discontinued operations of approximately $1,200,000 and $1,900,000 in the second quarter and the first six months of 2004, respectively, including the achievement of the performan ce criteria for a portion of the Company’s outstanding Class B stock options, which were retained by employees of the discontinued operations (see Note H) due to the probable change of control of the Company in the third quarter of 2004 (see Note N).  The Company recorded stock-based employee compensation charges of approximately $300,000 and $1,000,000 for the second quarter ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, respectively, in accordance with SFAS No. 123. Of the $300,000 and $1,000,000 of stock-based employee compensation charges recorded during the second quarter ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, respectively, approximately $100,000 was recorded in earnings from discontinued operations. No compensation expense was required to be recorded under SFAS No. 123 for the period from January 1, 2003 to January 9, 2003.

     SFAS No. 148 did not require the Company to restate its historical quarterly reports on Form 10-Q for the 2003 quarterly periods but did require restatement of all quarterly reports subsequent to adoption, including this quarterly report. Accordingly, the amounts for the second quarter ended July 5, 2003 and the periods from January 1, 2003 to January 9, 2003 and from January 10, 2003 to July 5, 2003 included in the accompanying unaudited condensed consolidated statement of operations have been restated to reflect the adoption of SFAS No. 123 as of January 1, 2003. The following table provides a reconciliation of net income (loss) as reported in the Company’s Form 10-Q for the quarterly period ended July 5, 2003 to the corresponding amounts included in the accompanying unaudited condensed consolidated statement of operations for the indicated periods:

 

		Post-Recapitalization						Pre-Recapitalization
		Three Months Ended			Jan. 10, 2003 -			Jan. 1, 2003 -
		July 5, 2003			July 5, 2003			Jan. 9, 2003
		(Amounts in thousands)
		(Unaudited)
Net income (loss) as reported in the Company’s Form 10-Q for the quarterly period ended July 5, 2003		$	26,200		$	32,400		$	(64,900	)
Impact of the adoption of SFAS No. 123			(300	)		(1,000	)		3,000
Net income (loss) as reported in the accompanying unaudited condensed consolidated statement of operations		$	25,900		$	31,400		$	31,400	)

   The impact of the adoption of SFAS No. 123 for the period from January 10, 2003 to July 5, 2003 reflects the impact of recording stock-based employee compensation for all stock options issued after January 1, 2003. The impact of the adoption of SFAS No. 123 for the period from January 1, 2003 to January 9, 2003 relates to the fact that the Company had previously recorded a pre-tax stock-based employee compensation charge of approximately $4,710,000 (approximately $3,000,000 net of tax) related to the cash settlement and cancellation of outstanding stock options that were tendered in connection with the Recapitalization in accordance with the provisions of APB 25. In connection with the adoption of SFAS No. 123, the compensation charge, net of tax, of approximately $3,000,000 was reclassified in accordance with the provisions of SFAS No. 123 to be reflected as an equity adjustment to additional paid-in capital in the accompanying unaudited condensed consolidated statement of stockholders' investment for the period from January 1, 2003 to January 9, 2003.

  The Company has historically used the Black-Scholes option pricing model to determine the fair value of stock options at the date of grant. There were no stock options granted during the first six months ended July 3, 2004, the second quarter ended July 5, 2003 or during the period from January 1, 2003 to January 9, 2003. The following table summarizes the weighted-average assumptions for stock options issued during the period from January 10, 2003 to July 5, 2003. As Nortek Holdings was no longer a public company during this period, the weighted-average assumptions reflect the use of the minimum value calculations permitted under SFAS No. 123 for non-public companies, whereby a volatility assumption is excluded from the calculation. The weighted-average assumptions for options granted prior to January 1, 2003 included in the pro forma information for the period from January 1, 2003 to January 9, 2003 presented below include a volatility assumption as Nortek Holdings was a public company during this period. The weighted average assumptions related to earnings (loss) from continuing operations exclude options issued to employees of discontinued operations (see Note H).

 

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

   Pro forma information is not required under SFAS No. 148 for the first six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003 as the unaudited condensed consolidated statement of operations for those periods include the actual stock-based employee compensation for stock options required under SFAS No. 123 for those periods.

Pro forma information for the period from January 1, 2003 to January 9, 2003 has been determined as if the Company had been accounting for its employee stock options under the fair value method of SFAS No. 123 for all stock options issued prior to January 1, 2003 and subsequent to the initial effective date of SFAS No. 123. The pro forma stock-based employee compensation charge for the period from January 1, 2003 to January 9, 2003 reflects the pro forma impact of the accelerated vesting associated with the immediate vesting of all unvested stock options in connection with the Recapitalization. No historical stock-based employee compensation is reflected for the period from January 1, 2003 to January 9, 2003 as no stock options were issued during the period. The pro forma amounts with respect to earnings (loss) from continuing operations exclude the pro forma impact of stock options issued to e mployees of Ply Gem Industries, Inc. (“Ply Gem”), which has been treated as a discontinued operation for the period from January 1, 2003 to January 9, 2003.

 

		Pre-Recapitalization
		Jan. 1, 2003 -
		Jan. 9, 2003
		(Amounts in thousands)
Loss from continuing operations, as reported		$	(60,900	)
Less:  Total stock-based employee compensation expense determined under the fair value method for awards issued prior to January 1, 2003, net of related tax effects			(500	)
Pro forma loss from continuing operations		$	(61,400	)
Net loss, as reported		$	(61,900	)
Less: Total stock-based employee compensation expense determined under the fair value method for awards issued prior to January 1, 2003, net of related tax effects			(600	)
Pro forma net loss		$	(62,500	)

(B)    On January 8, 2003, at a special meeting of stockholders of the Company, the stockholders approved the following amendments to the certificate of incorporation (the “Stockholder Approval”), which were required in order to complete the Recapitalization:

Following the Stockholder Approval, common stock and special common stock held by the Management Investors were exchanged for an equal number of newly created shares of Series B Preference Stock. In addition, certain options to purchase shares of common and special common stock held by the Management Investors were exchanged for fully vested options to purchase an equal number of shares of the newly created Class A Common Stock. The remaining outstanding options, including some held by Management Investors, were cancelled in exchange for the right to receive a single lump sum cash payment equal to the product of the number of shares of common stock or special common stock underlying the option and the amount by which the redemption price of $46 per share exceeded the per share exercise price of the option.

On January 9, 2003, in connection with the Recapitalization, Kelso purchased newly issued shares of Series B Preference Stock for approximately $355,923,000 and purchased shares of Series B Preference Stock held by the Management Investors for approximately $18,077,000. Newly issued Class A Common Stock of approximately $3,262,000 was purchased by designated third parties. Shares of Series B Preference Stock held by the Management Investors that were not purchased by Kelso were converted into an equal number of shares of Class A Common Stock. In addition, Nortek declared and distributed to the Company a dividend of approximately $120,000,000 and distributed approximately $27,900,000 for reimbursement of fees and expenses of Kelso, which were paid out of the Company’s unrestricted cash and cash equivalents on hand and were permissible under the most restrictive covenants with respect to the indentures of Nortek’s 8 7/8% Senior Notes due 2008, 9 1/4% Senior Notes due 2007, 9 1/8% Senior Notes due 2007 and 9 7/8% Senior Subordinated Notes due 2011 (the “Existing Notes”).

The Company used the proceeds from the purchase by Kelso and designated third parties of the newly issued Series B Preference Stock and Class A Common Stock and the dividend from Nortek to redeem the Company’s Class B Common Stock and to cash out options to purchase common and special common stock totaling approximately $479,185,000. Kelso also purchased from certain Management Investors 392,978 shares of Series B Preference Stock for approximately $18,077,000.

In connection with the Recapitalization, K Holdings received a bridge financing letter from a lender for a senior unsecured term loan facility not to exceed $955,000,000 (the “Bridge Facility”). The Bridge Facility was intended to be used to fund, if necessary, any change in control offers Nortek might have made in connection with the Recapitalization. Nortek did not use this Bridge Facility because the structure of the Recapitalization did not require Nortek to make any change of control offers. The commitment letter expired on January 31, 2003. As a result, the Company’s consolidated interest expense for the period from January 10, 2003 to April 5, 2003 includes approximately $4,100,000 of interest expense from the amortization of the Bridge Facility commitment fees and related expenses.

In January 2003, the Company filed for the deregistration of its shares of common and special common stock under the Securities Exchange Act of 1934. The Company’s shares of common and special common stock are no longer publicly traded. The Company will continue to file periodic reports with the SEC as required by the respective indentures of Nortek’s Existing Notes.

Under the terms of one of Nortek’s supplemental executive retirement plans (“SERP”), Nortek was required to make one-time cash payments to participants in such plan in satisfaction of obligations under that plan when the Recapitalization was completed. Accordingly, Nortek made a distribution of approximately $75,100,000 to the participants in the plan from funds included in the Company’s Consolidated Balance Sheet at December 31, 2002 and classified in long-term assets in restricted investments and marketable securities held by pension trusts and transferred to one of the participants a life insurance policy with approximately $10,300,000 of cash surrender value to satisfy a portion of the SERP’s obligation to such participant’s obligation upon the Stockholder Approval. The termination and settlement of the obligation of this SERP resulted in a curtailment loss on January 9, 2003 (see Note F).

The total amount of transaction fees and related costs incurred by Nortek and Kelso associated with the Recapitalization was approximately $47,300,000, including the $27,900,000 noted above, of which approximately $10,500,000 of advisory fees and expenses was paid to Kelso & Company L.P. A portion of these fees and expenses was recorded by Nortek in selling, general and administrative expense, since they were obligations of Nortek prior to the Recapitalization. Approximately $12,800,000 was recorded as expense on January 9, 2003 since these fees and expenses became obligations of Nortek upon consummation of the Recapitalization (see Note F).

The following reflects the unaudited pro forma effect of the Recapitalization on continuing operations for the period from January 1, 2003 to January 9, 2003:

		Pro Forma
		For the Period
		Jan. 1, 2003 -
		Jan. 9, 2003
Net sales		$	25,000
Operating earnings		$	300
Net loss		$	(3,400	)

The unaudited pro forma condensed consolidated summary of operations for the period from January 1, 2003 to January 9, 2003 presented above has been prepared by adjusting historical amounts for the period to give effect to the Recapitalization as if it had occurred on January 1, 2003. The pro forma adjustments to the historical results of operations for the period from January 1, 2003 to January 9, 2003 include the pro forma impact of the purchase accounting for such period and the elimination of approximately $83,000,000 of expenses and charges of the Recapitalization recorded during such period as the unaudited pro forma condensed consolidated summary of operations assumes that the Recapitalization occurred on January 1, 2003 (see Note A).

 

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

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

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

In December 2003, the FASB reissued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“SFAS No. 132”) to require additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The revised SFAS No. 132 provides only for additional disclosures and does not change the accounting for pension and postretirement plans. The Company has previously adopted SFAS No. 132 and has provided the required new interim disclosures of the revised SFAS No. 132 in Note M.

(D)    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 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 afte r tax proceeds from the sale of Ply Gem of approximately $450,000,000, together with existing cash on hand, to fund the redemption of the 9 1/4% Notes and 9 1/8% Notes. On March 14, 2004, Nortek redeemed $60,000,000 of its outstanding 8 7/8% Senior Notes due 2008 (“8 7/8% Notes”). 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 Senior Floating Rate Notes due 2010 (the “Floating Rate Notes”). The Floating Rate Notes bear interest at a rate per annum equal to LIBOR, as defined, plus 3% (4.87% as of July 3, 2004). Interest on the Floating Rate Notes will be determined and payable semi-annually on June 30 and December 31 of each year commencing June 30, 2004. Nortek incurred fees and expenses, including the initial purchaser’s discount, of approximately $4,000,000 in connection with the sale, which will be amortized over the life of the Floating Rate Notes. The Floating Rate Notes are unsecured obligations of Nortek, which mature on December 31, 2010, and may be redeemed in whole or in part prior to December 31, 2010 at the redemption prices as defined in the indenture governing the Floating Rate Notes (the “Indenture”). The Indenture contains covenants that limit Nortek’s ability to engage in certain transactions, including incurring additional indebtedness and paying dividends or distributions. The terms of the Floating Rate Notes require Nortek to register notes having substantially identical terms (the “Nortek Exchange Notes”) with the SEC as part of an offer to exchange freely tradable Nortek Exchange Notes for the Floating Rate Notes (the “Nortek Exchange”) (see Note N). Approximately $60,000,000 principal amount of the 8 7/8% Notes ceased to accrue interest as of March 14, 2004 and approximately $150,000,000 principal amount of such Notes ceased to accrue interest as of March 31, 2004. 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 9 1/4% Notes, 9 1/8% Notes and 8 7/8% Notes noted above resulted in a pre-tax loss of approximately $11,958,000 in the first quarter of 2004, based upon the difference between the respective redemption prices indicated above and the estimated carrying values at the redemption dates.

 

Interest expense in the first six months ended July 3, 2004 includes duplicative interest arising during the waiting period from the call for redemption to the date of redemption of the 8 7/8% 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.

On November 24, 2003, the Company completed the sale of $515,000,000 aggregate principal amount at maturity ($349,400,000 gross proceeds) of its 10% Senior Discount Notes due May 15, 2011 (“Senior Discount Notes”). The Senior Discount Notes, which are structurally subordinate to all debt and liabilities of the Company’s subsidiaries, were issued and sold in a private Rule 144A offering to institutional investors. The net proceeds of the offering were used to pay a dividend of approximately $298,474,000 to holders of the Company’s capital stock and approximately $41,000,000 of these proceeds were used by the Company to purchase additional capital stock of Nortek. Nortek used these proceeds to fund the majority of a cash distribution of approximately $41,600,000 to option holders of the Rollover Options in the fourth quarter of 2003. The accreted value of the Senior Discount N otes will increase from the date of issuance at a rate of 10% per annum compounded semi-annually such that the accreted value will equal the principal amount of $515,000,000 on November 15, 2007. No cash interest will accrue on the Senior Discount Notes prior to November 15, 2007 and, thereafter, cash interest will accrue at 10% per annum payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Discount Notes are unsecured obligations of the Company, which mature on May 15, 2011, and may be redeemed in whole or in part at the redemption prices as defined in the indenture governing the Senior Discount Notes (the “Indenture”). The Indenture contains covenants that limit the Company’s ability to engage in certain transactions, including incurring additional indebtedness and paying dividends or distributions. The terms of the Senior Discount Notes require the Company to register notes having substantially identical terms (the “Holdings Exchange Notes”) with the SEC as part of an offer to exchange freely tradable Holdings Exchange Notes for the Senior Discount Notes (the “Holdings Exchange”) (see Note N). Under certain limited circumstances, Nortek may be required in the future to guarantee the Senior Discount Notes on a senior subordinated basis. This requirement will not apply if the terms of any of Nortek’s senior indebtedness restricts the issuance of such guarantee. Nortek’s Senior Secured Credit Facility does not permit such a guarantee. In addition the issuance of such a guarantee by Nortek would constitute a restricted payment under the terms of Nortek’s indentures.

The period from January 10, 2003 to July 5, 2003 includes approximately $4,100,000 of interest expense from the amortization of the Bridge Facility commitment entered into as part of the Recapitalization (see Note B).

(E)    On March 9, 2004, the Company acquired OmniMount Systems, Inc. (“OmniMount”) for approximately $16,500,000 in cash and contingent consideration 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 mountings and other products to maximize the home theater experience.

On December 15, 2003, the Company acquired Operator Specialty Company, Inc. (“OSCO”), located in Casnovia, MI for approximately $2,500,000. OSCO is a manufacturer and designer of gate operators and access controls.

On July 11, 2003, the Company acquired SpeakerCraft, Inc. (“SPC”) for approximately $58,100,000 in cash. SPC is a leading designer and supplier of architectural loudspeakers and audio products used in residential custom applications.

On January 17, 2003, the Company acquired Elan Home Systems L.L.C. (“Elan”) for an aggregate purchase price of approximately $18,900,000 including a $1,500,000 note payable to the sellers. Elan manufactures and sells consumer electronic equipment that controls whole-house entertainment, communication and automation systems for new residential construction and retrofit markets.

Acquisitions accounted for approximately $21,900,000 and $37,300,000 of the increase to net sales for the second quarter and six months ended July 3, 2004, respectively, and accounted for approximately $4,000,000 and $5,900,000 of the increase to operating earnings for the second quarter and six months ended July 3, 2004, respectively, as compared to 2003. OmniMount, OSCO, SPC and Elan 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 acquisitions is obtained.

(F)     The operating results of the Air Conditioning and Heating Products Segment for the second quarter and first six months ended July 3, 2004 include approximately $600,000 and $1,900,000, respectively, of costs associated with the closure of certain manufacturing facilities (see Note L). During the three months ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, approximately $1,400,000 of costs associated with the closure of certain manufacturing facilities was recorded within the Air Conditioning and Heating Products Segment. There were no costs recorded in the period from January 1, 2003 to January 9, 2003 related to the closure of certain manufacturing facilities within the Air Conditioning and Heating Products Segment.

Operating results for the second quarter ended July 3, 2004 include a non-cash foreign exchange gain of approximately $100,000 and operating results for the first six months ended July 3, 2004 include a non-cash foreign exchange loss of approximately $500,000 on intercompany debt not permanently invested between the Company’s subsidiaries. For the second quarter ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, operating results include a non-cash foreign exchange gain of approximately $600,000 and $700,000, respectively, on intercompany debt not permanently invested.

During the second quarter and first six months ended July 3, 2004, the Company recorded a pre-tax charge to continuing operations of approximately $3,100,000 and $3,300,000, respectively, for compensation expense related to stock options issued to employees, officers and directors in accordance with SFAS No. 123. During the second quarter ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, the Company recorded a pre-tax charge to continuing operations of approximately $200,000 and $900,000, respectively, for compensation expense related to stock options issued to employees, officers and Directors in accordance with SFAS No. 123 (see Note A). A portion of this expense has been allocated to the Company’s reporting segments for all periods presented (see Note I).

During the second quarter ended July 5, 2003 and the periods from January 10, 2003 to July 5, 2003 and from January 1, 2003 to January 9, 2003, the Company incurred approximately $300,000, $1,700,000 and $100,000, respectively, of direct expenses and fees associated with the Company’s strategic sourcing software and systems development, which were recorded in Unallocated in the Company’s segment reporting.

For the nine days ended January 9, 2003, the Company incurred certain charges in connection with the Recapitalization. These charges were as follows:

Curtailment loss upon termination of a SERP		$	70,142,000
Recapitalization fees, expenses and other			12,848,000
Other			10,000
		$	83,000,000

(G)    At July 30, 2004, approximately $51,500,000 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 indenture based on the redemption and refinancing of certain of Nortek’s existing notes (see Note D). Restricted payments to Holdings from Nortek are limited by the amount of cash available for payment under the terms of Nortek’s most restrictive indenture and approximately $110,100,000 were permitted at July 30, 2004.

(H)    On February 12, 2004, the Company sold the capital stock of its wholly-owned subsidiary 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, and recorded a net after-tax gain on the sale of approximately $72,300,000 in the first quarter of 2004. 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 were previously included in Unallocated other, net in the Company’s segment reporting (see Note I).

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 from debt which is settled with proceeds received from the disposition. For the six months ended July 3, 2004, 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 second quarter ended July 5, 2003 and the periods from January 10, 2003 to July 5, 2003 and from January 1, 2003 to January 9, 2003, interest allocated to discontinued operations, included in interest expense, net in the table below, was approximately $6,000,000 (net of taxes of approximately $3,600,000), $11,400,000 (net of taxes of approximately $6,700,000) and $800,000 (net of taxes of approximately $400,000), respectiv ely.

The sale of Ply Gem and the related operating results have been excluded from earnings (loss) 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 July 3, 2004 and July 5, 2003:

 

		Post-Recapitalization
		For the Three
		Months Ended
		July 3, 2004			July 5, 2003
		(Amounts in thousands)
		(Unaudited)
Net sales		$	---		$	154,500
Operating earnings (loss) of discontinued operations *		$	(1,200	)	$	21,581
Interest expense, net			---			(9,881	)
Earnings (loss) before income taxes			(1,200	)		11,700
Provision (benefit) for income taxes			(400	)		4,300
Earnings (loss) from discontinued operations		$	(800	)	$	7,400
Depreciation and amortization expense		$	---		$	3,731

 

 

The table that follows presents a summary of the results of discontinued operations for the periods presented:

 

		For the Periods
		Post-Recapitalization						Pre-Recapitalization
		Jan. 1, 2004 -			Jan. 10, 2003 -			Jan. 1, 2003 -
		July 3, 2004			July 5, 2003			Jan. 9, 2003
		(Amounts in thousands)
		(Unaudited)
Net sales		$	40,600		$	253,600		$	8,800
Operating earnings (loss) of discontinued operations *		$	(3,244	)	$	21,771		$	(368	)
Interest expense, net			(4,556	)		(18,671	)		(1,232	)
Earnings (loss) before provision (benefit) for income taxes			(7,800	)		3,100			(1,600	)
Provision (benefit) for income taxes			(2,900	)		1,200			(600	)
Earnings (loss) from discontinued operations			(4,900	)		1,900			(1,000	)
Gain on sale of discontinued operations			122,700			---			---
Income tax provision on sale of discontinued operations			50,400			---			---
			72,300			---			---
Earnings (loss) from discontinued operations		$	67,400		$	1,900		$	(1,000	)
Depreciation and amortization expense		$	1,359		$	8,478		$	315

 

 

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

		December 31, 2003
		(Amounts in thousands)
		(Unaudited)
Assets:
Accounts receivable, less allowances of $8,695,000		$	45,236
Inventories			44,136
Prepaid income taxes			8,392
Property and equipment, net			122,816
Goodwill			219,977
Intangible assets, less accumulated amortization of $3,849,000			44,363
Other assets			9,931
Total assets of discontinued operations		$	494,851
Liabilities:
Accounts payable		$	18,876
Accrued expenses			33,803
Notes, mortgage notes and obligations payable			29,562
Deferred income taxes			25,323
Other liabilities			30,119
Total liabilities of discontinued operations		$	137,683