**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****                                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended:  September 30,2004**

** **

**OR**

** **

**o****                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from ___________________**

 

**Commission file number 1-10233**

 

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**MAGNETEK, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                     | **95-3917584**          |
|----------------------------------|-------------------------|
| (State  or other jurisdiction of | (I.R.S.  Employer       |
| incorporation  or organization)  | Identification  Number) |

 

**10900 Wilshire Blvd., Suite 850**

**LosAngeles, California 90024**

(Addressof principal executive offices)

(ZipCode)

** **

**(310)208-1980**

(Registrant’stelephone number, including area code)

 

 

 

(Formername, former address and former fiscal year,

ifchanged since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes ý  No o

 

                Indicateby check mark whether the registrant is an accelerated filer as defined in Rule12b-2 of the Exchange Act.   Yes ý  No o

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

Thenumber of shares outstanding of Registrant’s Common Stock, as of October 29,2004, was 28,528,239 shares.

 

 

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**2005MAGNETEK FORM 10-Q**

** **

**TABLEOF CONTENTS FOR THE QUARTERLY REPORT ON FORM 10Q**

**FOR THEFISCAL QUARTER ENDED SEPTEMBER 30, 2004**

** **

**MAGNETEK,INC.**

 
| **Part I.**  | **Financial Information**                                                                   | ** ** |
|--------------|---------------------------------------------------------------------------------------------|------------|
|         |                                                                                        |       |
| Item 1.      | Financial Statements                                                                        |       |
| Item  2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       |
| Item  3.     | Quantitative  and Qualitative Disclosures about Market Risk                                 |       |
| Item 4.      | Controls and  Procedures                                                                    |       |
|         |                                                                                        |       |
| **Part II.** | **Other Information**                                                                       | ** ** |
| ** **   | ** **                                                                                  | ** ** |
| Item 1.      | Legal Proceedings                                                                           |       |
| Item  2      | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       |
| Item 3       | Defaults Upon  Senior Securities                                                            |       |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                        |       |
| Item 5.      | Other Information                                                                           |       |
| Item  6.     | Exhibits                                                                                    |       |
|         |                                                                                        |       |
| Signatures   |                                                                                        |

 

 

2

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**PART I — FINANCIAL INFORMATION**

 

**Item 1 —Financial Statements**

 

**MAGNETEK, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE THREE MONTHS ENDED**

**September 30, 2004 and2003**

**(amounts in thousands,except per share data)**

**(unaudited)**

** **
| ** **                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Net sales                           |       | $        | 69,178     |     | $          | 50,435 |   |
| Cost of sales                       |       | 52,240   |       | 40,089   |       |
|                                |       |     |       |     |       |
| Gross profit                        |       | 16,938   |       | 10,346   |       |
| Research and development            |       | 3,694    |       | 2,843    |       |
| Selling, general and administrative |       | 11,705   |       | 10,470   |       |
|                                |       |     |       |     |       |
| Income (loss) from operations       |       | 1,539    |       | (2,967   | )          |
| Interest and other expense, net     |       | 364      |       | 672      |       |
|                                |       |     |       |     |       |
| Income (loss) before provision for  |       |     |       |     |       |
| income taxes                        |       | 1,175    |       | (3,639   | )          |
| Provision for income taxes          |       | 235      |       | —   |       |
| Net income (loss)                   |       | $        | 940        |     | $          | (3,639 | ) |
|                                |       |     |       |     |       |
| Earnings (loss) per common share    |       |     |       |     |       |
|                                |       |     |       |     |       |
| Basic and diluted:                  |       |     |       |     |       |
| Net income (loss)                   |       | $        | 0.03       |     | $          | (0.15 | ) |
|                                     |            |          |            |          |            |  |  |  |  |

 

Seeaccompanying notes

 

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**MAGNETEK, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**September30, 2004 and JUNE 30, 2004**

**(amountsin thousands)**

** **
| ** **                                      | ** ** | **September 30** | ** ** | **June 30** | ** ** |
|-------------------------------------------------|------------|------------------|------------|-------------|------------|
| ** **                                      | ** ** | **(unaudited)**  | ** ** | ** **  | ** ** |
| ASSETS                                          |       |             |       |        |       |
| Current assets:                                 |       |             |       |        |       |
| Cash                                            |       | $                | 3,481      |        | $          | 2,318 |   |
| Accounts receivable, net                        |       | 59,371           |       | 55,822      |       |
| Inventories                                     |       | 51,242           |       | 51,432      |       |
| Prepaid expenses and other                      |       | 4,761            |       | 9,027       |       |
| Total current assets                            |       | 118,855          |       | 118,599     |       |
|                                            |       |             |       |        |       |
| Property, plant and equipment                   |       | 127,006          |       | 123,036     |       |
|                                            |       |             |       |        |       |
| Less-accumulated depreciation and amortization  |       | 95,093           |       | 90,918      |       |
| Property, plant and equipment, net              |       | 31,913           |       | 32,118      |       |
|                                            |       |             |       |        |       |
| Goodwill                                        |       | 64,141           |       | 63,828      |       |
| Prepaid pension                                 |       | 57,202           |       | 57,523      |       |
| Other assets                                    |       | 13,322           |       | 14,293      |       |
| Total Assets                                    |       | $                | 285,433    |        | $          | 286,361 |   |
|                                            |       |             |       |        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |             |       |        |       |
|                                            |       |             |       |        |       |
| Current liabilities:                            |       |             |       |        |       |
| Accounts payable                                |       | $                | 39,017     |        | $          | 41,181 |   |
| Accrued liabilities                             |       | 9,404            |       | 11,551      |       |
| Current portion of long-term debt               |       | 703              |       | 211         |       |
| Total current liabilities                       |       | 49,124           |       | 52,943      |       |
|                                            |       |             |       |        |       |
| Long-term debt, net of current portion          |       | 15,732           |       | 16,129      |       |
|                                            |       |             |       |        |       |
| Other long-term obligations                     |       | 96,739           |       | 96,441      |       |
|                                            |       |             |       |        |       |
| Deferred income taxes                           |       | 8,403            |       | 8,326       |       |
|                                            |       |             |       |        |       |
| Stockholders’ equity                       |       |             |       |        |       |
| Common stock                                    |       | 285              |       | 285         |       |
| Paid in capital in excess of par value          |       | 127,790          |       | 127,692     |       |
| Retained earnings                               |       | 70,428           |       | 69,488      |       |
| Accumulated other comprehensive loss            |       | (83,068          | )          | (84,943     | )          |
| Total stockholders’ equity                 |       | 115,435          |       | 112,522     |       |
|                                            |       |             |       |        |       |
| Total Liabilities and Stockholders’ Equity |       | $                | 285,433    |        | $          | 286,361 |   |
|                                                 |            |                  |            |             |            |  |  |  |  |  |  |

 

Seeaccompanying notes

 

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**MAGNETEK, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOW**

**FOR THE THREE MONTHS ENDED**

**September 30, 2004 and2003**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                                                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from operating activities:                                                     |       |     |       |     |       |
| Net income (loss)                                                                         |       | $        | 940        |     | $          | (3,639 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |       |     |       |     |       |
| Depreciation and amortization                                                             |       | 2,490    |       | 2,481    |       |
| Tax refund proceeds, net                                                                  |       | 3,332    |       | —   |       |
| Changes in operating assets and liabilities                                               |       | (4,123   | )          | 1,539    |       |
| Total adjustments                                                                         |       | 1,699    |       | 4,020    |       |
| Net cash provided by operating activities                                                 |       | 2,639    |       | 381      |       |
|                                                                                      |       |     |       |     |       |
| Cash flows from investing activities:                                                     |       |     |       |     |       |
| Proceeds from sale of businesses                                                          |       | —   |       | 1,250    |       |
| Capital expenditures                                                                      |       | (1,649   | )          | (775     | )          |
| Net cash provided by (used in) investing activities                                       |       | (1,649   | )          | 475      |       |
|                                                                                      |       |     |       |     |       |
| Cash flow from financing activities:                                                      |       |     |       |     |       |
| Proceeds from issuance of common stock                                                    |       | 98       |       | 62       |       |
| Borrowings under (repayment of) bank and other long term obligations                      |       | 95       |       | (825     | )          |
| Increase in deferred financing costs                                                      |       | (20      | )          | (377     | )          |
| Net cash provided by (used in) financing activities                                       |       | 173      |       | (1,140   | )          |
|                                                                                      |       |     |       |     |       |
| Net increase (decrease) in cash                                                           |       | $        | 1,163      |     | $          | (284 | ) |
| Cash at the beginning of the period                                                       |       | 2,318    |       | 1,680    |       |
| Cash at the end of the period                                                             |       | $        | 3,481      |     | $          | 1,396 |   |

 

See accompanying notes

 

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**MAGNETEK, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**SEPTEMBER 30, 2004**

**(Amounts in thousands, except pershare data)**

**(unaudited)**

 

1.                                       Basis ofPresentation

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles for complete financial statements.  For further information, refer to thefinancial statements and footnotes thereto included in the Company’s Form 10-Kfor the year ended June 30, 2004 filed with the Securities and ExchangeCommission.  In the Company’s opinion,these unaudited statements contain all adjustments, consisting of normalrecurring adjustments, necessary to present fairly the financial position ofthe Company as of September 30, 2004, and the results of its operations and itscash flows for the three-month periods ended September 30, 2004 and 2003.  Results for the three-months ended September30, 2004 are not necessarily indicative of results that may be experienced forthe full fiscal year.

 

The Company uses afifty-two, fifty-three week fiscal year ending on the Sunday nearest to June30.  Fiscal quarters are the thirteen orfourteen week periods ending on the Sunday nearest September 30, December 31,March 31 and June 30.  For clarity ofpresentation, all periods are presented as if they ended on the last day of thecalendar period.  The three-month periodsended September 30, 2004 and 2003 contained fourteen and thirteen weeks,respectively.

 

2.             Summaryof Significant Accounting Policies

 

Principlesof Consolidation — The condensed consolidated financial statementsinclude the accounts of Magnetek, Inc. and its subsidiaries (the “Company”).  All significant inter-company accounts andtransactions have been eliminated.

 

Use of Estimates - Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.   Significant areas requiring managementestimates include the following key financial areas:

 

*AccountsReceivable*

 

Accounts receivable represent amounts due fromcustomers in the ordinary course of business. The Company is subject to losses from uncollectible receivables inexcess of its allowances.  The Companymaintains allowances for doubtful accounts for estimated losses from customers’inability to make required payments.  Inorder to estimate the appropriate level of this allowance, the Company analyzeshistorical bad debts, customer concentrations, current customercreditworthiness, current economic trends and changes in customer paymentpatterns.  If the financial conditions ofthe Company’s customers were to deteriorate and impair their ability to makepayments, additional allowances may be required in future periods.  The Company’s management believes that allappropriate allowances have been provided.

 

*Inventories*

 

TheCompany’s inventories are stated at the lower of cost or market.  Cost is determined by the first-in, first-out(“FIFO”) method, including material, labor and factory overhead.  Inventory on hand may exceed future demandeither because the product is obsolete, or the amount on hand is more than canbe used to meet future needs.  TheCompany identifies potentially obsolete and excess inventory by evaluatingoverall inventory levels.  In assessingthe ultimate realization of inventories, the Company is required to makejudgments as to future demand requirements and compare those with the currentor committed inventory levels.  If futuredemand requirements are less favorable than those projected by management,additional inventory write-downs may be required.

 

*Reserves for Contingencies*

 

TheCompany periodically records the estimated impacts of various conditions,situations or circumstances involving uncertain outcomes.  The accounting for such events is prescribedunder Statement of Financial Accounting Standard (“SFAS”) No. 5, “Accountingfor Contingencies.”  SFAS No. 5 defines acontingency as an existing condition, situation, 

 

6

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orset of circumstances involving uncertainty as to possible gain or loss to anenterprise that will ultimately be resolved when one or more future eventsoccur or fail to occur.

 

SFAS No. 5 does notpermit the accrual of gain contingencies under any circumstances.  For loss contingencies, the loss must beaccrued if (1) information is available that indicates it is probable that theloss has been incurred, given the likelihood of uncertain events; and (2) thatthe amount of the loss can be reasonably estimated.

 

Theaccrual of a contingency involves considerable judgment on the part ofmanagement.  The Company uses itsinternal expertise, and outside experts, as necessary, to help estimate theprobability that a loss has been incurred and the amount (or range) of theloss.

 

*Income Taxes*

 

TheCompany uses the liability method to account for income taxes.  The preparation of consolidated financialstatements involves estimating the Company’s current tax exposure together withassessing temporary differences resulting from differing treatment of items fortax and accounting purposes.  Thesedifferences result in deferred tax assets and liabilities, which are includedin the consolidated balance sheets.  Anassessment of the recoverability of the deferred tax assets is made, and avaluation allowance is established based upon this assessment.

 

TheCompany does not record deferred taxes on domestic pretax income or losses, dueto (1) the availability of net operating loss (NOL) carryforwards that havebeen fully reserved through valuation allowances for pretax income, and (2)uncertainty surrounding the timing of realizing NOL carryforwards generated inthe current period in future periods.

 

Federalincome taxes are not provided currently on undistributed earnings of foreignsubsidiaries since the Company presently intends to reinvest any earningsoverseas indefinitely.

* *

*Pension Benefits*

 

Thevaluation of the Company’s pension plan requires the use of assumptions andestimates to develop actuarial valuations of expenses andassets/liabilities.  These assumptionsinclude discount rates, investment returns and mortality rates.  Changes in assumptions and future investmentsreturns could potentially have a material impact on the Company’s expenses andrelated funding requirements.

 

RevenueRecognition — The Company’s policyis to record and recognize sales only upon shipment.  Amounts billed to customers for shippingcosts are reflected in net sales; shipping costs are reflected in cost ofsales.

 

Property,Plant and Equipment — Additions and improvement are capitalized atcost, whereas expenditures for maintenance and repair are charged to expense asincurred.  Depreciation is provided overthe estimated useful lives of the respective assets (ranging from three toforty years) principally using the straight-line method.

 

Goodwill— In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” theCompany reviews the carrying value of goodwill at least annually, and morefrequently if indicators of potential impairment arise, using discounted futurecash flow analyses as prescribed in SFAS No. 142.

 

DeferredFinancing Costs — Costs incurred toobtain financing are deferred and included in other assets in the condensedconsolidated balance sheets.  Deferredfinancing costs are amortized over the term of the financing facility, andrelated amortization expenses are included in interest and other expense in thecondensed consolidated statements of operations.

 

Earningsper Share — In accordance withSFAS No. 128, “Earnings per Share”, basic earnings per share are computed usingthe weighted average number of common shares outstanding during theperiod.  Diluted earnings per shareincorporate the incremental shares issuable upon the assumed exercise of stockoptions as if all exercises had occurred at the beginning of the fiscal period.

 

Stock-BasedCompensation — The Company has elected to continue to use theintrinsic-value method of accounting as prescribed by Accounting PrinciplesBoard (APB) No. 25 “Accounting for Stock Issued to Employees” in accounting forstock based awards to employees.  UnderAPB 25, the Company recognizes no compensation expense with respect to suchawards when the exercise price is equal to or greater than the market price atthe date of grant.  Accordingly, nostock-based employee compensation cost is reflected in reported results ofoperations for all periods presented. The Company adopted the interim disclosure provisions of SFAS No. 148, “Accountingfor Stock-Based Compensation — Transition and Disclosure — an Amendment of FASBStatement no. 123”.

 

The following tableillustrates the effect on net income (loss) and earnings (loss) per share forthe three months ended September 30, 2004 and 2003, if the Company had appliedthe fair value recognition provisions of SFAS No. 123, “Accounting forStock-Based Compensation”, to stock-based employee compensation:

 

 

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| ** **                                                                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **September 30,**      | ** ** |
| ** **                                                                                                       | ** ** | **2004**               | ** ** | **2003** | ** ** |
| Net income (loss)                                                                                                |       | $                      | 940        |   | $ | (3,639 | ) |
|                                                                                                             |       |                   |       |   |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards |       | (1,224                 | )          | (1,141 | ) |
| Pro forma net loss                                                                                               |       | $                      | (284       | ) | $ | (4,780 | ) |
|                                                                                                             |       |                   |       |   |   |
| Earnings (loss) per share as reported:                                                                           |       |                   |       |   |   |
| Basic and diluted                                                                                                |       | $                      | 0.03       |   | $ | (0.15 | ) |
|                                                                                                             |       |                   |       |   |   |
| Pro forma loss per share:                                                                                        |       |                   |       |   |   |
| Basic and diluted                                                                                                |       | $                      | (0.01      | ) | $ | (0.20 | ) |
|                                                                                                                  |            |                        |            |  |  |  |  |  |  |

 

Recent Accounting Pronouncement - In October 2004, theFinancial Accounting Standards Board (FASB) concluded that SFAS No. 123R, “Share-BasedPayment,” which would require all companies to measure compensation cost forall share-based payments (including employee stock options) at fair value,would be effective for interim or annual periods beginning after June 15,2005.  The Company could adopt the newstandard in one of two ways — the modified prospective transition method or themodified retrospective transition method. Assuming the new standard is implemented as scheduled, the Company willadopt this new standard at the beginning of fiscal year 2006 and is currentlyevaluating the effect that the adoption of this standard will have on its financialposition and results of operations.

 

Derivative Financial Instruments — The Company periodically uses derivative financial instruments to reducefinancial market risks. These instruments are used to hedge foreign currencyand interest rate market exposures. The Company does not use derivativefinancial instruments for speculative or trading purposes.  The Company accounts for derivative instrumentsin accordance with SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities”, and SFAS No. 149, “Amendment of Statement 133 onDerivatives and Hedging”.  Thesestatements require that an entity recognize all derivatives as either assets orliabilities in the statement of financial position, measured at fair value, andthat hedge accounting be applied when certain conditions are met.  The Company had no derivative financialinstruments at September 30, 2004.

 

Foreign Currency Translation -The Company’s foreign entities’ accounts are measured using localcurrency as the functional currency. Assets and liabilities are translated at the exchange rate in effect atyear-end.  Revenues and expenses aretranslated at the rates of exchange prevailing during the year.  Unrealized translation gains and lossesarising from differences in exchange rates from period to period are includedas a component of accumulated other comprehensive loss in stockholders’ equity.

 

Reclassifications— Certain prior year balances were reclassified to conform to the current yearpresentation.

 

3.                                       Inventories

 

Inventories at September 30,2004 and June 30, 2004 consist of the following:

 
| ** **                    | ** ** | **September 30** | ** ** | **June 30** | ** ** |
|-------------------------------|------------|------------------|------------|-------------|------------|
| Raw materials and stock parts |       | $                | 33,122     |        | $          | 29,237 |   |
| Work-in-process               |       | 10,264           |       | 13,498      |       |
| Finished goods                |       | 7,856            |       | 8,697       |       |
|                          |       | $                | 51,242     |        | $          | 51,432 |   |
|                               |            |                  |            |             |            |  |  |  |  |

 

 

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4.                                       Commitments andContingencies

 

TheCompany is a party to a number of product liability lawsuits associated withdiscontinued business operations that have been sold.  As part of the sales transactions, theCompany agreed for a limited time to defend and indemnify the purchasers of thediscontinued business operations against certain product liability claims.  The last remaining contractual indemnificationobligation of that type terminated on December 14, 2003; however, theCompany remains obligated to continue defending and indemnifying valid claimsmade prior to the applicable termination date for each such obligation.  The Company is also a named party in twoproduct liability lawsuits related to the Telemotive Industrial Controlsbusiness that was acquired in December 2002. The Company believes that liability for those lawsuits will be coveredby insurance policies in effect for the Telemotive Industrial Controls businessprior to the sale or will be indemnified by the selling shareholders.   All of the pending product liability casesare being aggressively defended by the Company, and management believes thatits insurers will bear all liability, if any, that exceeds applicabledeductibles, and that none of these proceedings individually or in theaggregate will have a material adverse effect on the Company’s results ofoperations or financial position.

 

TheCompany has been named, along with numerous other defendants, inasbestos-related lawsuits associated with business operations previouslyacquired by the Company, but which are no longer owned.  During the Company’s ownership, none of thebusinesses produced or sold asbestos-containing products.  With respect to these claims, the Company iseither contractually indemnified against liability for asbestos-related claimsor believes that it has no liability for such claims.  While the outcome of these cases cannot bepredicted with certainty, the Company is aggressively seeking dismissal fromthe proceedings and does not believe the proceedings, individually or in theaggregate, will have a material adverse effect on its financial position orresults of operations.

 

InApril 1998, Ole K. Nilssen filed a lawsuit in the U.S. District Court forthe Northern District of Illinois alleging infringement by the Company of sevenof his patents pertaining to electronic ballast technology, and seekingunspecified damages and injunctive relief to preclude the Company from making,using or selling products allegedly infringing his patents.  The Company denied that its productsinfringed any valid patent and filed a response asserting affirmative defenses,as well as a counterclaim for a judicial declaration that its products do notinfringe the patents asserted by Mr. Nilssen and also that the asserted patentsare invalid.  In June 2001, the Companysold its lighting business to Universal Lighting Technologies, Inc. (“ULT”),and agreed to provide a limited indemnification against certain claims ofinfringement that Mr. Nilssen might allege against ULT.  In April 2003, Mr. Nilssen’s lawsuit and thecounterclaims were dismissed with prejudice and both parties agreed to submit limitedissues in dispute to binding arbitration before an arbitrator with a relevanttechnical background.  Arbitrationcommenced on November 8, 2004, and proceedings are ongoing.  The Company will assert what it believes arestrong defenses at arbitration; however, an unfavorable decision could have amaterial adverse effect on the Company’s financial position and results ofoperations

 

InFebruary 2003, Mr. Nilssen filed a lawsuit in the U.S. District Court for theNorthern District of Illinois alleging infringement by ULT of twenty-nine ofhis patents pertaining to electronic ballast technology, and seekingunspecified damages and injunctive relief to preclude ULT from making, using orselling products allegedly infringing his patents.  ULT made a claim for indemnification, whichthe Company accepted, subject to the limitations set forth in the purchase andsale agreement.  The Company denies thatthe products for which it has an indemnification obligation to ULT infringe anyvalid patent and has filed a response on behalf of ULT asserting affirmativedefenses, as well as a counterclaim for a judicial declaration that theproducts do not infringe Mr. Nilssen’s patents and that the patents areinvalid.  The Company will aggressivelydefend the claims against ULT that are subject to defense and indemnification;however, an unfavorable decision could have a material adverse effect on theCompany’s financial position and results of operations.

 

Fromtime to time, the Company discovered the existence of hazardous substances atcertain facilities associated with previously owned businesses and responded asnecessary to bring the facilities into compliance with applicable laws andregulations. Upon sale of the businesses, the Company agreed, in some cases, toindemnify the buyers against environmental claims associated with the divestedoperations, subject to various conditions and limitations. Remediationactivities, including those related to the Company’s indemnificationobligations, did not involve material expenditures during the first quarter offiscal 2005, or during fiscal years 2004, 2003 and 2002.

 

The Company has also been identified by the UnitedStates Environmental Protection Agency and certain state agencies as apotentially responsible party for cleanup costs associated with alleged pastwaste disposal practices at several previously owned facilities and offsitelocations. Its remediation activities as a potentially responsible party werenot material in the first quarter of fiscal 2005, or in fiscal years 2004, 2003and 2002. Although the materiality of future expenditures for environmentalactivities may be affected by the level and type of contamination, the extentand nature of cleanup activities required by governmental authorities, thenature of the Company’s alleged connection to the contaminated sites, thenumber and financial resources of other potentially responsible parties, theavailability of 

 

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indemnification rights against third parties andthe identification of additional contaminated sites, the Company’s estimatedshare of liability, if any, for environmental remediation, including itsindemnification obligations, is not expected to be material.

 

Prior to the Company’s purchase of Century Electric, Inc.(“Century Electric”) in 1986, Century Electric acquired a business fromGould Inc. (“Gould”) in May 1983 that included a leasehold interestin a fractional horsepower electric motor manufacturing facility located inMcMinnville, Tennessee. Gould agreed to indemnify Century Electric from andagainst liabilities and expenses arising out of the handling and cleanup ofcertain waste materials, including but not limited to cleaning up anypolychlorinated biphenyls (“PCBs”) at the McMinnville facility (the “1983Indemnity”).  The presence of PCBs andother substances, including solvents, in the soil and in the groundwaterunderlying the facility and in certain offsite soil, sediment and biota sampleshas been identified. The McMinnville plant is listed as a Tennessee InactiveHazardous Waste Substance Site and plant employees were notified of thepresence of contaminants at the facility. Gould has completed an interimremedial excavation and disposal of onsite soil containing PCBs and apreliminary investigation and cleanup of certain onsite and offsitecontamination. The Company believes the cost of further investigation andremediation (including ancillary costs) are covered by the 1983 Indemnity. TheCompany sold its leasehold interest in the McMinnville plant in August 1999 andwhile the Company believes that Gould will continue to perform substantiallyunder its indemnity obligations, Gould’s substantial failure to perform suchobligations could have a material adverse effect on the Company’s financialposition, cash flows or results of operations.

 

In1986, the Company acquired the stock of Universal Manufacturing Company (“Universal”)from a predecessor of Fruit of the Loom (“FOL”), and the predecessor agreed toindemnify the Company against certain environmental liabilities arising frompre-acquisition activities at a facility in Bridgeport, Connecticut.  Environmental liabilities covered by theindemnification agreement include completion of additional cleanup activities,if any, at the Bridgeport facility (sold in connection with the sale of thetransformer business in June 2001) and defense and indemnification againstliability for potential response costs related to offsite disposallocations.  FOL, the successor toUniversal, filed a petition for Reorganization under Chapter 11 of theBankruptcy Code in 1999 and the Company filed a proof of claim in theproceeding for obligations related to the environmental indemnificationagreement.  The Company believes that FOLhad substantially completed the clean-up obligations required by theindemnification agreement prior to the bankruptcy filing.  In November 2001, the Company and FOL enteredinto an agreement involving the allocation of certain potential tax credits andMagnetek withdrew its claims in the bankruptcy proceeding.  FOL’s obligation to the state of Connecticutwas not discharged in the reorganization proceeding.  FOL’s inability to satisfy its remainingobligations related to the Bridgeport facility and any offsite disposallocations, or the discovery of additional environmental contamination at theBridgeport facility could have a material adverse effect on the Company’sfinancial position or results of operations.

 

5.             ComprehensiveIncome (Loss)

 

For the fiscal quartersended September 30, 2004 and 2003, comprehensive income (loss) consisted of thefollowing:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **September 30,**      | ** ** |
| ** **                      | ** ** | **2004**               | ** ** | **2003** | ** ** |
| Net income (loss)               |       | $                      | 940        |   | $ | (3,639 | ) |
| Currency translation adjustment |       | 1,875                  |       | 1,092 |   |
| Comprehensive income (loss)     |       | $                      | 2,815      |   | $ | (2,547 | ) |
|                            |       |                   |       |   |   |
|                                 |            |                        |            |  |  |  |  |  |

 

10

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6.             Earnings (Loss)Per Share

 

Thefollowing table sets forth the computation of basic and diluted earnings (loss)per share for the three months ended September 30, 2004 and 2003.  

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **September 30,**      | ** ** |
| ** **                                                                       | ** ** | **2004**               | ** ** | **2003** | ** ** |
| **Numerator:**                                                                   |       |                   |       |   |   |
| Net income (loss)                                                                |       | $                      | 940        |   | $ | (3,639 | ) |
| **Denominator:**                                                                 |       |                   |       |   |   |
| Weighted average shares used to compute basic  earnings  (loss) per share   |       | 28,501                 |       | 23,799 |   |
| Add dilutive effect of stock options outstanding                                 |       | 751                    |       | — |   |
| Weighted average shares used to compute diluted  earnings  (loss) per share |       | 29,252                 |       | 23,799 |   |
|                                                                             |       |                   |       |   |   |
| **Net income (loss) per share:**                                                 |       |                   |       |   |   |
| Basic                                                                            |       | $                      | 0.03       |   | $ | (0.15 | ) |
| Diluted                                                                          |       | $                      | 0.03       |   | $ | (0.15 | ) |
|                                                                                  |            |                        |            |  |  |  |  |  |  |

 

The dilutive effect of stockoptions outstanding at September 30, 2003 was not included in the calculationof dilutive loss per share for the three-month period ended September 30,2003.  The Company had a net loss forthat period, and as a result, inclusion of the dilutive effect of stock optionswould have had an anti-dilutive impact

 

7.             Warranties

TheCompany offers warranties for certain products that it manufactures, with thewarranty term generally ranging from one to two years.  Warranty reserves are established for costsexpected to be incurred after the sale and delivery of products under warranty,based mainly on known product failures and historical experience.  Actual repair costs incurred for productsunder warranty are charged against the established reserve balance asincurred.  Changes in the warrantyreserve for the three months ended September 30, 2004 and 2003 were as follows:

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **September 30,**      | ** ** |
| ** **                                           | ** ** | **2004**               | ** ** | **2003** | ** ** |
| Balance, beginning of period                         |       | $                      | 254        |   | $ | 503 |   |
| Additions charged to earnings for product warranties |       | 28                     |       | 23 |   |
| Use of reserve for warranty obligations              |       | —                 |       | (63 | ) |
| Decrease to pre-existing warranties                  |       | —                 |       | (50 | ) |
| Balance, end of period                               |       | $                      | 282        |   | $ | 413 |   |

 

Warrantyreserves are included in accrued liabilities in the condensed consolidatedbalance sheets.

 

8.             Restructuring Costs

 

During fiscal year 2004, theCompany began a series of restructuring activities that impact both itsdomestic and foreign operations.  TheCompany is accounting for these activities in accordance with SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities”, which requires thatliabilities associated with exit or disposal activities initiated afterDecember 31, 2002, be recognized when the liability is incurred, with theexception of termination of certain leases and contracts.

 

The Company beganrestructuring activities in its European operations during the second quarterof fiscal 2004, which include a workforce reduction of approximately 200positions in Western Europe and the relocation of those positions to lower costfacilities in Eastern Europe and China.  The total cost of allrestructuring activities is estimated at $1.6 million, related to employeeseverance and lease termination costs.  The Company expects to

 

 

11

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complete these restructuringactivities by the end of calendar 2004.  The Company incurred $0.1 millionof restructuring costs during the three-month period ended September 30, 2004,which are included in selling, general and administrative expense in theaccompanying condensed consolidated statements of operations, and has incurred$1.5 million in restructuring costs to date. The Company estimates an additional $0.1 million of costs will beincurred in the second quarter of fiscal 2005 to complete these restructuringactivities.

 

In the fourth quarter offiscal 2004, the Company began the consolidation of its Glendale Heights,Illinois operation into its Menomonee Falls, Wisconsin facility.  The total cost of the consolidationactivities is estimated at $0.8 million, related to employee severance,relocation and lease termination costs. The Company expects to complete these restructuring activities by theend of calendar 2004.  Costs incurred inthe three-month period ended September 30, 2004 were $0.4 million, of which$0.2 million are included in cost of goods sold and $0.2 million are includedin selling, general and administrative expense in the accompanying condensedconsolidated statements of operations. Cumulative costs incurred to date related to these restructuringactivities are $0.7 million.  The Companyestimates an additional $0.1 million of costs will be incurred in the secondquarter of fiscal 2005 to complete these restructuring activities.

 

9.             Pension Expense

 

For the three-month periodsended September 30, 2004 and 2003, pension expense related to the Company’sdefined benefit pension plan consisted of the following:

 
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **September 30,**      | ** ** |
| ** **                         | ** ** | **2004**               | ** ** | **2003** | ** ** |
| Service cost                       |       | $                      | —     |   | $ | — |   |
| Interest cost                      |       | 2,539                  |       | 2,712 |   |
| Expected return on plan assets     |       | (2,939                 | )          | (2,528 | ) |
| Amortization of prior service cost |       | —                 |       | — |   |
| Recognized net actuarial losses    |       | 721                    |       | 836 |   |
|                               |       |                   |       |   |   |
| Total net pension expense          |       | $                      | 321        |   | $ | 1,020 |   |
|                                    |            |                        |            |  |  |  |  |  |

 

The net pension expenseamounts above are included in selling, general and administrative expense inthe accompanying condensed consolidated statements of operations.

 

**Item 2 - Management’s Discussion and Analysis of Results ofOperations and Financial Condition**

 

Overview

 

We are a global provider ofdigital power-electronic products, including electronic converters, inverters,rectifiers and systems.  These productsare used primarily in industrial, telecommunications (telecom), dataprocessing, consumer, imaging, alternative energy, power generation and otherapplications requiring precise, efficient, reliable power.  We believe that with our technical andproductive resources we are well positioned to respond to increasing demand forsuch power.  We operate in a singlebusiness segment, Digital Power Products, which includes two broad productcategories, Systems and Components

 

Our power controlsystems consist primarily of programmable motion control and power conditioningsystems and include alternating current (AC) and direct current (DC)variable-frequency motor drives, power inverters for fuel cell, wind andphotovoltaic markets, and telecom power plants.  Our power systems alsoinclude complete DC power systems for telecom and networking applications.

 

Our embedded powercontrol products, which are sold primarily to original equipment manufacturersfor installation in their products, include: AC-to-DC switching power supplies,AC-to-DC rectifiers and battery chargers, DC to-DC power converters, DC-to-ACpower inverters and peripheral component interconnects.  These productsare used primarily in telecommunications, data processing and storage, digitalimaging, semiconductor processing and testing equipment, medicalinstrumentation and home appliances.

 

The past several yearshave been very challenging in the electronic power industry, as reflected inour operating results.  Beginning infiscal year 2001 and continuing through fiscal 2003, there was a significantdecrease in demand in many of our served markets and, as a result, we generatedoperating losses throughout fiscal 2003 and during the 

 

 

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first half of fiscal2004.  We began to see recovery andincreased demand in certain of our end markets in the second half of fiscalyear 2004, and that recovery continued throughout our first quarter of fiscal2005, ended September 30, 2004.

 

Fiscal 2005first-quarter sales were $69.2 million, a 37% increase over fiscal 2004first-quarter sales of $50.4 million, and down slightly from the previousquarter (fiscal 2004 fourth-quarter) sales of $69.5 million.  The first quarter of fiscal 2005 containedfourteen weeks, while the other periods contained thirteen weeks, however, thesales results are encouraging as our first fiscal quarter has historically beenour lowest sales volume quarter of the fiscal year, due to seasonal summerfactors, mainly in Europe.

 

Firstquarter fiscal 2005 bookings (i.e., orders received) were $70.1 million,slightly higher than our first quarter sales, and our backlog as of September30, 2004 was $77.3 million.  Bookings forthe first quarter of fiscal 2004 were $52.1 million and our backlog one yearago was $54.0 million.  While ourbook-to-bill ratio (orders received versus sales made in the quarter) hasdeclined from the prior two fiscal quarters, we remain somewhat optimistic thatthe industry recovery will continue for most of fiscal year 2005.  We anticipate moderating growth in ourtraditional embedded power products markets. We have focused on gaining share in systems markets and on new productintroductions in industrial, utility, and alternative energy markets, and ourfuture sales growth is somewhat dependent on the success of this strategy.  As a result, we expect that our productdevelopment costs and selling expenses could continue to exceed prior yearlevels during much of fiscal 2005.

 

Operating income was$1.5 million in the first quarter of fiscal 2005 compared to an operating lossof $3.0 million in the first quarter of fiscal 2004.  This was also our third consecutive fiscalquarter of positive operating income. Although we have returned to profitability, we will continue to look forcost reduction opportunities.  Wecontinued restructuring activities that we started in fiscal 2004, relatedmainly to plant consolidation in the U.S. and relocation of product lines fromEurope to our factory in China.  Ourfirst quarter fiscal 2005 results include the impact of $0.5 million inrestructuring costs, comprised mainly of asset write-downs and employeeseverance.  We expect to complete theseactivities by the end of calendar year 2004 and to continue expansion in China.

 

Our cash balancesincreased nearly $1.2 million during the first quarter of fiscal 2005,including the favorable impact of a net tax refund of $3.3 million, and ourtotal outstanding debt balances increased by $0.1 million.  Fiscal 2005 first quarter capitalexpenditures were $1.6 million, and we currently have no plans for majorcapital outlays.

 

Ourstrategy will continue to emphasize diversity in both our product offerings andour targeted markets, continued relocation of manufacturing operations toChina, outsourcing of certain products and processes, and increased sales ofhigher margin products with system applications.  We believe that future sustainedprofitability is highly dependent upon increasing sales and gross margins,penetration of higher margin markets (utilities, alternative energy) and ashift in our sales mix to proportionately higher sales of systems.

 

Critical AccountingPolicies

 

The following discussion andanalysis of our financial position and results of operations is based upon ourcondensed consolidated financial statements. In preparing financial statements in conformity with accountingprinciples generally accepted in the United States, we are required to makeestimates and assumptions that affect the reported amount of assets andliabilities, revenues and expenses, and related disclosures of contingentassets and liabilities at the date of our financial statements. Such estimatesare based upon historical experience and other assumptions believed to bereasonable given known circumstances. Actual results could differ from those estimates.  On an ongoing basis, we evaluate and updateour estimates, and we believe the following discussion addresses our policieswhich are most critical to understanding our financial position and results ofoperations, and which require our most complex judgments.

*** ***

*Accounts Receivable*

 

Accountsreceivable represent receivables from customers in the ordinary course ofbusiness.  We are subject to losses fromuncollectible receivables in excess of our allowances.  We maintain allowances for doubtful accountsfor estimated losses from customers’ inability to make required payments.  In order to estimate the appropriate level ofthis allowance, we analyze historical bad debts, customer concentrations,current customer creditworthiness, current economic trends and changes incustomer payment patterns.  If thefinancial conditions of any of our customers were to deteriorate and impairtheir ability to make payments, additional allowances may be required in futureperiods.  We believe that all appropriateallowances have been provided.

 

 

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*Inventories*

 

Ourinventories are stated at the lower of cost or market.  Cost is determined by the first-in, first-out(FIFO) method, including material, labor and factory overhead.  We identify potentially obsolete and excessinventory by evaluating overall inventory levels in relation to expected futurerequirements and market conditions, and provisions for excess and obsoleteinventory and inventory valuation are recorded accordingly.  In assessing the ultimate realization ofinventories, we are required to make judgments as to future demand requirementsand compare those with the current or committed inventory levels.  If future demand requirements are lessfavorable than those we project, additional provisions to increase inventoryreserves may be required.

 

*Long-Lived Assets and Goodwill*

 

Weperiodically evaluate the recoverability of our long-lived assets, includingproperty, plant and equipment. Impairment charges are recorded in operating results when theundiscounted future expected cash flows derived from an asset are less than thecarrying value of the asset.

 

Weare required to perform annual impairment tests of our goodwill, and may berequired to test more frequently in certain circumstances.  We have elected to perform our annualimpairment test in the fourth quarter of our fiscal year.  We have identified our Telecom Power, PowerComponents and Power Systems groups as reporting units under SFAS No. 142.  In assessing potential impairment, we makesignificant estimates and assumptions regarding the discounted future cashflows of our reporting units to determine the fair value of those reportingunits.    Such estimates include, but arenot limited to, projected future operating results, working capital ratios,cash flow, terminal values, market discount rates and tax rates.  If circumstances cause these estimates tochange in the future, or if actual circumstances vary significantly from theseassumptions, this could result in additional goodwill impairment charges.  We cannot predict the occurrence of futureevents that may adversely affect our reported goodwill balance.

* *

*Pension Benefits*

 

Wesponsor a defined benefit plan that covers a number of current and formeremployees in the U.S.  The valuation ofour pension plan requires the use of assumptions and estimates that attempt toanticipate future events to develop actuarial valuations of expenses, assetsand liabilities.  These assumptionsinclude discount rates, expected rates of return on plan assets and mortalityrates.  We consider market conditions,including changes in investment returns and interest rates, in making theseassumptions.  Our plan assets arecomprised mainly of common stock and bond funds.  The expected rate of return on plan assets isa long-term assumption and is generally not changed on an annual basis.  The discount rate reflects the market forhigh-quality fixed income debt instruments and is subject to change eachyear.  Changes in assumptions typicallyresult in actuarial gains or losses that are amortized in accordance with themethods specified in SFAS No. 87.

 

Significantdifferences between our assumptions and actual future investment return ordiscount rates could have a material impact on our financial position orresults of operations and related funding requirements.

* *

*Reserves for Contingencies*

 

Weperiodically record the estimated impact of various conditions, situations orcircumstances involving uncertain outcomes. The accounting for such events is prescribed under SFAS No. 5, “Accountingfor Contingencies.”  SFAS No. 5 defines acontingency as an existing condition, situation, or set of circumstancesinvolving uncertainty as to possible gain or loss to an enterprise that willultimately be resolved when one or more future events occur or fail to occur.

 

SFASNo. 5 does not permit the accrual of gain contingencies under anycircumstances.  For loss contingencies,the loss must be accrued if (1) information is available that indicates it isprobable that the loss has been incurred, given the likelihood of uncertainevents; and (2) the amount of the loss can be reasonably estimated.

 

Theaccrual of a contingency involves considerable judgment and we use our internalexpertise and outside experts, as necessary, to help estimate the probabilitythat a loss has been incurred and to assist in determining the amount or rangeof the loss.

* *

*Income Taxes*

 

Werecord deferred income tax assets in tax jurisdictions where we generate lossesfor income tax purposes.  We also recordvaluation allowances against these deferred tax assets in accordance with SFASNo. 109, “Accounting for Income Taxes”, when in our judgment, the deferredincome tax assets will likely not be realized in the foreseeable future.  In making this judgment, we use a “morelikely than not” criteria as described in SFAS No. 109.

 

 

14

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Resultsof Operations - Three Months Ended September 30, 2004 and 2003

 

NetSales and Gross Profit

 

Netsales for the first quarter of fiscal 2005 were $69.2 million, an increase of37.2% from the first quarter of fiscal 2004 sales of $50.4 million.  The increase is due to higher sales ofembedded power supplies and currency translation impact from the stronger Euro,partially offset by lower telecom service revenue. We divested our telecomservice business midway through the first quarter of fiscal 2004.  In addition, the first quarter of fiscal 2005contained fourteen weeks while the first quarter of fiscal 2004 contained thirteenweeks.

 

Ourfiscal 2005 first quarter gross profit was $16.9 million, or 24.5% of sales,versus $10.3 million, or 20.5% of sales in the first quarter of fiscal2004.  The improvement in gross profit isdue to higher sales volumes, the relocation of production to lower costfacilities, including our plant in China, and the sale of our low margintelecom service business (divested in the first quarter of fiscal 2004),partially offset by restructuring costs and lower efficiency related toproduction relocation and plant consolidation (see Note 8 of Notes to CondensedConsolidated Financial Statements).

 

Researchand Development, Selling, General and Administrative

 

Wecontinued to increase our investment in research and development (R&D)during the first quarter of fiscal 2005. R&D expense was $3.7 million, or 5.3% of sales, in the first quarterof fiscal 2005 compared to $2.8 million, or 5.6% of sales, in fiscal 2004.  We continue to invest in new power-electronicplatforms and applications and expand the breadth of existing product lines,and have increased spending on new product development for utility andalternative energy markets.

 

Selling, general andadministrative (SG&A) expense was $11.7 million (16.9% of sales) in thefirst three months of fiscal 2005 versus $10.5 million (20.8% of sales) in thefirst three months of fiscal 2004.  Thisincrease was mainly due to higher volume-related selling expense, partiallyoffset by the divestiture of our telecom service business midway through thefirst quarter of fiscal 2004 and selective cost reduction actions in ourremaining telecom business.  Our firstquarter fiscal 2005 selling expenses were $5.2 million, versus $4.0 million inthe first quarter of fiscal 2004, due mainly to increased commissionexpense.  Our first quarter fiscal 2005general and administrative (G&A) expense was $6.5 million, consistent withfiscal 2004 expense of $6.5 million for the same period.  G&A expense for the first quarter offiscal 2005 reflects the impact of fourteen weeks of expenses as compared tothirteen weeks of expenses in fiscal 2004, as well as higher legal fees relatedmainly to the patent infringement claim (see Note 4 of Notes to CondensedConsolidated Financial Statements), offset by lower pension expense (see Note 9of Notes to Condensed Consolidated Financial Statements).

 

Income(Loss) from Operations

 

Ourincome from operations for the first quarter of fiscal 2005 was $1.5 millioncompared to a loss from operations of $3.0 million for the first quarter offiscal 2004.  The improvement in incomefrom operations is due to higher sales volumes and the improvement in grossprofits.

 

Interestand Other Expense, Net

 

Interestexpense was $0.3 million in the first quarter of fiscal 2005, equal to interestexpense of $0.3 million in the first quarter of fiscal 2004.  Other expense for the first quarter of fiscal2005 was $0.1 million compared to $0.4 for the first quarter of fiscal 2004,comprised entirely of deferred financing amortization expense.

 

NetIncome (Loss)

 

Ournet income was $0.9 million in the first quarter of fiscal 2005, compared to anet loss of $3.6 million in the first quarter of fiscal 2004.  We did not record a tax benefit on our pretaxloss in the first quarter of fiscal 2004. The tax provision in the first quarter of fiscal 2005 was $0.2 millionassociated with our foreign operations.

 

Liquidityand Capital Resources

 

Ourcash balances increased $1.2 million in the first quarter of fiscal 2005, from$2.3 million at June 30, 2004 to $3.5 million at September 30, 2004.  Our primary source of cash in the first threemonths of fiscal 2005 was a $3.3 million 

 

 

15

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nettax refund received from the Internal Revenue Service, partially offset byincreased accounts receivables balances and lower accounts payable balancescompared to June 30, 2004.  Capitalexpenditures for the three months ended September 30, 2004 were $1.6million.  We anticipate that our capitalexpenditures for the fiscal year will be less than $8.0 million.

 

Asof September 30, 2004, long-term borrowings (including current portion) were$16.4 million, an increase of $0.1 million from borrowings of $16.3 million asof June 30, 2004.  The aggregate lendingcommitment under our North American credit agreement (“Credit Agreement”) is$19.0 million with available borrowings determined by a borrowing base asdefined in the agreement, supported by eligible domestic accounts receivableand inventory.  Borrowings under theCredit Agreement bear interest at the bank’s prime lending rate plus onepercent or, at our option, the London Interbank Offering Rate (LIBOR) plusthree and one-quarter percent. Borrowings under the Credit Agreement are secured by substantially allof our North American assets.  Thisfacility also supports the issuance of letters of credit.  As of September 30, 2004, we had $13.4million of available borrowing capacity, with $1.3 million of borrowingsoutstanding, under the facility.  We werein violation of certain covenants as of September 30, 2004, and subsequent tothe end of the fiscal quarter we received a waiver of all covenant violationsfrom our bank.

 

Additionally,our European subsidiary maintains revolving borrowing arrangements with localbanks, primarily to support working capital needs.  Available borrowings under these arrangementsaggregate approximately Euro 20.0 million depending in part upon levels ofaccounts receivable, and bear interest at various rates ranging from 2% to8%.  During the first quarter of fiscal2004, our European subsidiary entered into an agreement with a European bank toprovide borrowings secured by the subsidiary’s land and building over aten-year period.    Borrowings under thisagreement bear interest at EURIBOR plus one and one-half percent.  The initial commitment to lend under this agreementis Euro 7.0 million, with the commitment reduced ratably on a quarterly basisbeginning March 31, 2004 and ending September 30, 2013.  Amounts outstanding at September 30, 2004under all of our European lending agreements were $15.1 million.

 

Asa result of the decline in interest rates and stock market equity values overthe past two years, the accumulated benefit obligation of our defined benefitpension plan exceeds plan assets as of the end of September 30, 2004.  The amount and timing of future contributionsto the plan are dependent upon values in equity and fixed income markets, andto a lesser extent, the level of interest rates.  Actuarial projections indicate no mandatorycontributions to the plan would be required through fiscal year 2008, althoughwe may elect to make contributions prior to that time.  No contributions were made in the firstquarter of fiscal 2005

 

Basedupon current plans and business conditions, management believes that borrowingcapacity under our revolving loan facilities and internally generated cashflows will be sufficient to fund anticipated working capital needs, capitalexpenditures, and other near-term commitments during the next twelve months.

 

CautionRegarding Forward-Looking Statements and Risk Factors

 

Thisdocument, including documents incorporated herein by reference, contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  The words “believe”, “expect”, “estimate”,“anticipate”, “intend”, “may”, “might”, “will”, “would”, “could”, “project”, and“predict”, or similar words and phrases generally identify forward-lookingstatements.  Forward-looking statementsare inherently subject to risks and uncertainties which in many cases arebeyond our control and which cannot be predicted or quantified.  As a result, future events and actual resultscould differ materially from those set forth in, contemplated by, or underlyingforward-looking statements. Forward-looking statements contained in this document speak only as ofthe date of this document or, in the case of any document incorporated byreference, the date of that document.  Wedo not have any obligation to publicly update or revise any forward-lookingstatement contained or incorporated by reference in these documents to reflectchanged assumptions, the occurrence of unanticipated events or changes tofuture operating results over time.

 

Ourfuture results of operations and the other forward-looking statements containedin this filing, including this section titled “Management’s Discussion and Analysisof Financial Condition and Results of Operations”, involve a number of risksand uncertainties.  In particular, thestatements regarding future economic conditions, the recovery in the electronicpower industry, our goals and strategies, new product introductions,penetration of new markets, projections of sales revenues, manufacturing costsand operating costs, pricing of our products and raw materials required tomanufacture our products, gross margin expectations, relocation and outsourcingof production capacity, capital spending, research and development expenses,the outcome of pending legal proceedings and environmental matters, tax rates,sufficiency of funds to meet our needs including contributions to our definedbenefit pension plan, 

 

 

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andour plans for future operations, as well as our assumptions relating to theforegoing, are all subject to risks and uncertainties.

 

Inaddition to the risk factors discussed above, a number of other factors couldcause our actual results to differ materially from our expectations.  We are subject to all of the business risksfacing public companies, including business cycles and trends in the generaleconomy, financial market conditions, changes in interest rates, demandvariations and volatility, potential loss of key personnel, supply chaindisruptions, government legislation and regulation, and natural causes.  The following list of risk factors is notall-inclusive. Other factors and unanticipated events could adversely affectour financial position or results of operations.  We believe that the most significantpotential risk factors that could adversely impact us, not necessarily in orderof priority, are the following:

* *

*Economic Conditions and Demand for our Products*

 

Demandfor our products, which impacts our revenue and gross profit, is affected bygeneral business and economic conditions, and more specifically by conditionsin the electronic power industry.  A lowlevel of demand for power products in the telecommunications and informationtechnologies industries had an adverse effect on our operating results infiscal 2003 and to a lesser extent in fiscal 2004, and we incurred significantlosses in those years.  Demand for ourproducts is also impacted by changes in customer order patterns, such aschanges in inventory levels maintained by customers and the timing of customerpurchases.  If demand in certain of ourserved markets deteriorates in subsequent periods, our operating results couldbe adversely affected and losses could recur.

* *

*Competitive Industry*

 

Weoperate in an intensely competitive industry characterized by rapid changes intechnology, product demand, prices and lead times.  Our future profitability depends on ourability to successfully identify and react to these changing trends.  Specifically, achievement of our sales andprofit goals is dependent in part upon our ability to successfully anticipateproduct demand, to introduce new products to meet that demand in a timelymanner at competitive prices, to gain acceptance of our products in themarketplace, and to adapt our existing product platforms in the event ofchanges in technology.  Failure to do socould result in low returns on investment in new products and technologies, a lossof competitive position relative to our peers, obsolete products andtechnologies, and adverse impact on our operating results.  In addition, price erosion in our servedmarkets could have a material impact on our financial position or results ofoperations.

* *

*Dependence on Customers and Credit Risk*

 

Werely on several large customers for a significant portion of our sales.  While we have taken actions to diversify ourcustomer base, sales to our top five customers represented approximately 27% ofour net sales in fiscal 2004. The loss of any such customers or significantdecreases in any such customers’ levels of purchases could have an adverseeffect on our business.   In addition, weare exposed to the credit risk of our customers, including risk of bankruptcy,and are subject to losses from uncollectible accounts receivable.  If the financial conditions of any of ourcustomers deteriorates and impairs their ability to make payments, we couldincur future write-offs of accounts receivable that could have a materialimpact on our financial position, results of operations or cash flows.

* *

*Reliance on Suppliers*

 

Wepurchase raw materials and subassemblies used in our products from third-partysuppliers, and also purchase finished goods for resale to customers from thirdparty subcontractors.  If our suppliersor subcontractors cannot meet their commitments to us in terms of price,delivery, or quality, it may negatively impact our ability to meet ourcommitments to our customers.  This couldresult in disruption of production, delay in shipments to customers, highermaterial costs, quality issues with our products and damage to customerrelationships.  In addition, increases inthe cost of raw materials purchased from third party suppliers could negativelyimpact our gross profit and results of operations.

 

*Competitive Size*

 

Webelieve the power supplies industry includes more than 1,000 enterprises,according to various industry research organizations. Of these enterprises, wecompete directly only with manufacturers of complex, non-commodity powerproducts, which we estimate constitute less than 5% of the industry.  However, certain of our competitors aresignificantly larger and have substantially greater resources than us.   Further, given excess capacity and thedecline in valuations of companies within the industry since 2000, the risk ofconsolidation in the industry could result in larger competitors than thosethat exist today.

 

Inpower systems, we compete with crane and hoist drive manufacturers and drivesystem integrators, elevator drive manufactures and control system integrators,mining machinery drive builders, power inverter builders and telecom powersystems builders.  The total number ofsuch enterprises with whom we compete directly is considered to be 

 

 

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fewerthan 100.  However, certain of ourcompetitors are significantly larger and have substantially greater resourcesthan us, and some are global in scope, whereas we currently compete primarilyin the North American market.

* *

*International Business*

 

Ourinternational operations are subject to risks associated with changes in localeconomic and political conditions, laws, codes and standards, currency exchangerates and restrictions, regulatory requirements and taxes.

 

Sinceinternational sales currently account for approximately 55% of our revenue,currency exchange rates impact our results. This is partially a currencytranslation issue with no economic impact on actual results.  However, a fluctuation in exchange ratesbetween a foreign currency and the U.S. dollar can have an economic impact onrevenue and profit.**  **During fiscal 2004 and fiscal2003, we were impacted by such currency fluctuations, primarily the weakeningof the U.S. dollar against the Euro.  Additional weakening in the value of the dollar against othercurrencies, primarily the Euro, or changes in any of the other risks listedpreviously, could have an adverse effect on our financial position or resultsof operations.

* *

*Restructuring and Outsourcing*

 

Weare currently taking actions to relocate some of our production capacity tolower cost countries, primarily to China, and are consolidating twomanufacturing plants into one plant in the United States.  We may develop action plans regardingadditional relocation or consolidation activities in the future.  While we believe that these actions willresult in a more competitive position and should also increase our grossprofits and reduce our operating expenses, there is no guarantee that theseplans will succeed.  There is also noassurance that the expected cost savings and improvement in gross profits willbe realized, and in addition, these actions may result in quality issues ordelays in production or shipment to customers that could have an adverse impacton our results of operations.  Inaddition, there is no assurance that any future activities not yet plannedwould provide any benefits to our operating results, and any such future plansmay result in asset impairment charges.

* *

*Intellectual Property*

 

Webelieve that our intellectual property in the area of digital power-electronicsis equal or superior to our competitors’ and we do not know of any newtechnologies that could cause a shift away from digital power-electronic solutions.  However, as a technology-based company in anindustry characterized by short product life cycles, we are highly dependent onboth patented and proprietary intellectual property.  Therefore, major advancements in digitalpower-electronic technology by competitors or the advent of technologiesobviating digital power-electronic solutions could have an adverse effect onour financial position or results of operations.

 

Likewise,we could be adversely affected financially should we be judged to have infringedupon the intellectual property of others. We are currently defending againstone such claim alleging infringement of electronic ballast patents.

* *

*Legal and Environmental Issues*

 

Ourresults of operations could be adversely impacted by pending and futurelitigation, including claims related to, but not limited to, product liability,patent infringement, contracts, employment and labor issues, personal injury,and property damage, including damage to the environment.

 

Insome cases, we have agreed to provide indemnification against legal andenvironmental liabilities and potential liabilities associated with operationsthat we have divested, including certain motor, generator, lighting ballast,transformer and drive manufacturing operations. If we are required to make payments under such indemnificationobligations, such payments could have a material adverse impact on ourfinancial position or results of operations. Further, we have been indemnified against potential legal andenvironmental liabilities and potential liabilities associated with operationsthat we have acquired, including lighting ballast, transformer, capacitor andcrane brake manufacturing operations that were subsequently divested.  If not borne by the indemnifiers, suchliabilities, if any, could be borne by us and have an adverse effect on ourfinancial position or results of operations.

 

**Item 3 —Qualitative and Quantitative Disclosures About Market Risk**

 

We are exposed to marketrisks in the areas of foreign exchange and interest rates.  To mitigate the effect of such risks, weselectively use specific financial instruments. Hedging transactions can beentered into under Company policies and procedures and are monitored monthly.Our policy clearly prohibits the use of such financial instruments for tradingor speculative purposes.  There have beenno material changes in the reported market risks since that reported in theCompany’s Annual Report on Form 10-K dated June 30, 2004.

 

 

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Interest Rates

 

The fair value of our debt was $16.4 million atSeptember 30, 2004.  The fair value ofour debt is equal to the borrowings outstanding from domestic and foreign banksand small amounts owed under capital lease and note arrangements. Prospectively,we do not consider there to be material risk due to changes in the interestrate structure of borrowing rates applicable to such debt. For our debtoutstanding at September 30, 2004, a hypothetical 10% adverse change ininterest rates would not have had a material impact on the our pre-tax earningsand cash flow due to relatively low variable interest rates.

** **

Foreign CurrencyExchange Rates

 

We may selectively enter into foreign exchangecontracts to hedge certain exposures in Europe. A portion of our products are manufactured in Europe and sold in theU.S.  Many of these sales to U.S.customers are denominated in U.S. dollars. As a result, our financial results could be significantly impacted bychanges in exchange rates, particularly the exchange rate between the U.S.dollar and the Euro.  The exposure onsales by the our European subsidiaries consists of (1) the exposure related toa weakening U.S. dollar for U.S. dollar denominated sales, as most of the ourEuropean subsidiaries’ costs are in Euro; in the event of a weakening U.S.dollar, locally recorded sales in the functional currency (the Euro) aredecreased, (2) the exposure related to a weakening U.S. dollar when payment ofU.S. dollar receivables are received from customers, resulting in less localcurrency than was originally recorded at the date of sale, and (3) the exposurethat upon translation of our subsidiaries’ periodic financial statements, aweakening local currency would result in lower reported sales in U.S. dollarsthan if the local currency had been stable relative to the U.S. dollar.  In the latter case, operating expenses wouldalso be translated at the lower amount and accordingly, the effect on netincome would be mitigated.  We had noforeign currency contracts outstanding at September 30, 2004.

 

**Item 4 —Controlsand Procedures**

 

(a)           Evaluation of Disclosure Controlsand Procedures

 

We have evaluated, under thesupervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, the effectiveness of thedesign and operation of our disclosure controls and procedures (as that term isdefined under Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Actof 1934) as of the end of the period covered by this report.  The controlsand procedures are designed to ensure that material information relating to us,including our subsidiaries, is made known to us.  Based upon thisevaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of our first quarter ended September 30,2004, our disclosure controls and procedures have been designed and arefunctioning effectively to provide reasonable assurance that the informationrequired to be disclosed by us in reports filed under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms.

 

(b)           Changes in Internal Control Over Financial Reporting

 

There were no changes in theour internal control over financial reporting during the fiscal first quarterended September 30, 2004 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**PART II —OTHER INFORMATION**

 

**Item 1 —Legal Proceedings**

 

InApril 1998, Ole K. Nilssen filed a lawsuit in the U.S. District Court forthe Northern District of Illinois alleging infringement by us of seven of hispatents pertaining to electronic ballast technology, and seeking unspecifieddamages and injunctive relief to preclude us from making, using or sellingproducts allegedly infringing his patents. We denied that our products infringed any valid patent and filed aresponse asserting affirmative defenses, as well as a counterclaim for ajudicial declaration that our products do not infringe the patents asserted byMr. Nilssen and also that the asserted patents are invalid.  In June 2001, we sold our lighting businessto Universal Lighting Technologies, Inc. (“ULT”), and agreed to provide alimited indemnification against certain claims of infringement that Mr. Nilssenmight allege against ULT.  In April 2003,Mr. Nilssen’s lawsuit and the counterclaims were dismissed with prejudice andboth parties agreed to submit limited issues in dispute to binding arbitration beforean arbitrator with a relevant technical background.  Arbitration commenced on November 8, 2004,and proceedings are ongoing.  We willassert what we believe are strong defenses at arbitration; however, anunfavorable decision could have a material adverse effect on our financialposition and results of operations

 

InFebruary 2003, Mr. Nilssen filed a lawsuit in the U.S. District Court for theNorthern District of Illinois alleging infringement by ULT of twenty-nine ofhis patents pertaining to electronic ballast technology, and seeking 

 

 

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unspecifieddamages and injunctive relief to preclude ULT from making, using or sellingproducts allegedly infringing his patents. ULT made a claim for indemnification, which we accepted, subject to thelimitations set forth in the purchase and sale agreement.  We deny that the products for which we havean indemnification obligation to ULT infringe any valid patent and have filed aresponse on behalf of ULT asserting affirmative defenses, as well as acounterclaim for a judicial declaration that the products do not infringe Mr.Nilssen’s patents and that the patents are invalid.  We will aggressively defend the claimsagainst ULT that are subject to defense and indemnification; however, anunfavorable decision could have a material adverse effect on our financialposition and results of operations.

 

**Item 2 —Unregistered Sales of Equity Securities and Use of Proceeds**

 

Therewere no unregistered sales of equity securities and there were no repurchasesof equity securities during our first fiscal quarter ended September 30, 2005.

 

**Item 3 —Defaults Upon Senior Securities**

 

**               **None.

 

**Item 4- Submission of Matters to a Vote of Security Holders**

 

(a)                                     Weheld our Annual Meeting of Stockholders on October 27, 2004.

 

(b)                                    Thefollowing named persons were elected as directors at such meeting:

 
|   | Andrew G. Galef   |
|--------|-------------------|
|   | Thomas G. Boren   |
|   | Dewain K. Cross   |
|   | Yon Y. Jorden     |
|   | Paul J. Kofmehl   |
|   | Mitchell I. Quain |
|   | Robert E. Wycoff  |

 

(c)                                     Thevotes cast for and withheld with respect to each nominee for director are asfollows:

 
| **Nominee**       | ** ** | **For**    | ** ** | **Withheld** |
|-------------------|------------|------------|------------|--------------|
| Andrew G. Galef   |       | 22,668,251 |       | 2,281,350    |
| Thomas G. Boren   |       | 22,387,142 |       | 2,562,459    |
| Dewain K. Cross   |       | 21,323,959 |       | 3,625,642    |
| Yon Y. Jorden     |       | 22,717,741 |       | 2,231,860    |
| Paul J. Kofmehl   |       | 22,022,418 |       | 2,927,183    |
| Mitchell I. Quain |       | 21,975,172 |       | 2,974,429    |
| Robert E. Wycoff  |       | 22,037,293 |       | 2,912,308    |

 

(d)                                    Theresult of the vote to approve adoption of the 2004 Stock Incentive Plan forMagnetek employees was as follows:
| **For**    | ** ** | **Against** | ** ** | **Abstain** |
|------------|------------|-------------|------------|-------------|
| 11,520,185 |       | 6,965,842   |       | 284,187     |

 

(e)                                     Theresult of the vote to approve adoption of the Amendment to the 1997Non-Employee Director Stock Option Plan was as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** |
|------------|------------|-------------|------------|-------------|
| 13,955,207 |       | 4,530,844   |       | 284,162     |

 

**Item 5 — Other Information**

 

                None.

 

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**Item 6- Exhibits**

 

(a)                                  Indexto Exhibits

 
| 10.1   |   | 2004 Stock Incentive  Plan of Magnetek, Inc.(1)                                                                                                                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.2   |   | Second Amendment to  The 1997 Non-Employee Director Stock Option Plan of Magnetek, Inc.(1)                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.03  |   | Amendment No. 1 to  Credit Agreement dated as of November 25, 2003, among Magnetek, Inc.,  MagneTek ADS Power, Inc., Maxtec International Corp., MXT Holdings, Inc.,  Magnetek Mondel Holding, Inc., MagneTek Leasing Corporation, Magnetek  National Electric Coil, Inc., Mondel ULC, and Bank One, NA. * |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.04  |   | Amendment No. 2 to  Credit Agreement dated as of February 12, 2004, among Magnetek, Inc.,  MagneTek ADS Power, Inc., Maxtec International Corp., MXT Holdings, Inc.,  Magnetek Mondel Holding, Inc., MagneTek Leasing Corporation, Magnetek  National Electric Coil, Inc., Mondel ULC, and Bank One, NA. * |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.05  |   | Amendment No. 3 to  Credit Agreement dated as of September 9, 2004, among Magnetek, Inc.,  MagneTek ADS Power, Inc., Maxtec International Corp., MXT Holdings, Inc.,  Magnetek Mondel Holding, Inc., MagneTek Leasing Corporation, Magnetek  National Electric Coil, Inc., Mondel ULC, and Bank One, NA. * |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 31.1   |   | Certification of the  Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange  Act of 1934. *                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 31.2   |   | Certification of the  Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange  Act of 1934. *                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 32.1   |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                |

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*Filed with this Report on Form 10-Q.

(1)                                  Incorporated byreference to the registrant’s definitive proxy statement on Schedule 14A filedSeptember 22, 2004 (file number 001-10233).

 

SIGNATURES

 

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 theundersigned thereunto duly authorized.

 
|                   | MAGNETEK, INC.                  |
|------------------------|---------------------------------|
|                   | (Registrant)                    |
|                   |                            |
| Date: November 9, 2004 | /s/ David P. Reiland            |
|                   | David P. Reiland                |
|                   | Executive Vice President        |
|                   | and Chief Financial Officer     |
|                   | (Duly authorized officer of the |
|                   | registrant and principal        |
|                   | financial officer)              |

 

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