** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

----

**FORM 10-Q**

 

**(Mark One)**

 

| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|-------|------------|--------------------------------------------------------------------------------------------------------|------------|

 

**For thequarterly period ended:  December 30,2007**

 

**OR**

 

| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For the transition period from             **

 

**Commission file number 1-10233**

 

**MAGNETEK,INC.**

(Exact name ofRegistrant as specified in its charter)

 

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

** **

**N49 W13650 Campbell Drive**

**MenomoneeFalls, Wisconsin  53051**

(Address ofprincipal executive offices)

 

**(262)783-3500**

(Registrant’stelephone number, including area code)

 

 

| (Former name,  former address and former fiscal year, |
|-------------------------------------------------------|
| if changed since  last report)                        |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes  x  No o

 

                Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o                    Acceleratedfiler x                             Non-accelerated filer o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes o  No x

 

The number of shares outstanding ofRegistrant’s Common Stock, as of January 31, 2008, was 30,394,371 shares.

 

 

 

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2008 MAGNETEK FORM 10-Q

 

TABLE OF CONTENTSFOR THE QUARTERLY REPORT ON FORM 10Q

FOR THE FISCALQUARTER ENDED DECEMBER 30, 2007

 

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 1A.          | Risk Factors                                                                                |
| 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

----

 

**PART I.  FINANCIAL INFORMATION**

 

**Item 1 —Financial Statements**

 

MAGNETEK, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts inthousands, except per share data, unaudited)

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **(13 Weeks)**         | ** ** | **(13 Weeks)** | ** ** |
| ** **                                                                  | ** ** | **December 30,**  | ** ** | **December 31,** | ** ** |
| ** **                                                                  | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                                                                        |       |                   |       |   |   |
| Net sales                                                                   |       | $                      | 28,968     |   | $ | 27,578 |   |
| Cost of sales                                                               |       | 21,811                 |       | 20,519 |   |
| Gross profit                                                                |       | 7,157                  |       | 7,059 |   |
|                                                                        |       |                   |       |   |   |
| Operating expenses:                                                         |       |                   |       |   |   |
| Research and  development                                                   |       | 921                    |       | 1,588 |   |
| Selling, general  and administrative                                        |       | 4,795                  |       | 9,189 |   |
| Income (loss) from operations                                               |       | 1,441                  |       | (3,718 | ) |
|                                                                        |       |                   |       |   |   |
| Non operating expense (income):                                             |       |                   |       |   |   |
| Interest expense                                                            |       | 117                    |       | 1,057 |   |
| Interest income                                                             |       | (316                   | )          | (905 | ) |
| Other expense                                                               |       | —                 |       | 325 |   |
| Income (loss) from continuing operations before  provision for income taxes |       | 1,640                  |       | (4,195 | ) |
|                                                                        |       |                   |       |   |   |
| Provision for income taxes                                                  |       | 219                    |       | 373 |   |
| Income (loss) from continuing operations                                    |       | 1,421                  |       | (4,568 | ) |
|                                                                        |       |                   |       |   |   |
| Income (loss) from discontinued operations, net of  tax                     |       | 1,159                  |       | (1,647 | ) |
|                                                                        |       |                   |       |   |   |
| Net income (loss)                                                           |       | $                      | 2,580      |   | $ | (6,215 | ) |
|                                                                        |       |                   |       |   |   |
| Income (loss) per common share                                              |       |                   |       |   |   |
|                                                                        |       |                   |       |   |   |
| Income (loss)  from continuing operations - basic and diluted               |       | $                      | 0.05       |   | $ | (0.16 | ) |
|                                                                        |       |                   |       |   |   |
| Income (loss)  from discontinued operations - basic and diluted             |       | $                      | 0.04       |   | $ | (0.06 | ) |
|                                                                        |       |                   |       |   |   |
| Net income  (loss) - basic                                                  |       | $                      | 0.09       |   | $ | (0.21 | ) |
|                                                                        |       |                   |       |   |   |
| Net income  (loss) - diluted                                                |       | $                      | 0.08       |   | $ | (0.21 | ) |
|                                                                        |       |                   |       |   |   |
| Weighted average shares outstanding:                                        |       |                   |       |   |   |
| Basic                                                                       |       | 30,270                 |       | 29,264 |   |
| Diluted                                                                     |       | 30,474                 |       | 29,264 |   |

 

 

 

See accompanyingnotes

 

 

3

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MAGNETEK, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

 (Amounts in thousands, except per share data,unaudited)

 
| ** **                                                                  | ** ** | **Six Months Ended**  | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **(26 Weeks)**        | ** ** | **(26 Weeks)** | ** ** |
| ** **                                                                  | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                  | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                                        |       |                  |       |   |   |
| Net sales                                                                   |       | $                     | 55,078     |   | $ | 53,533 |   |
| Cost of sales                                                               |       | 40,638                |       | 39,054 |   |
| Gross profit                                                                |       | 14,440                |       | 14,479 |   |
|                                                                        |       |                  |       |   |   |
| Operating expenses:                                                         |       |                  |       |   |   |
| Research and  development                                                   |       | 1,764                 |       | 2,807 |   |
| Selling, general  and administrative                                        |       | 10,311                |       | 16,586 |   |
| Income (loss) from operations                                               |       | 2,365                 |       | (4,914 | ) |
|                                                                        |       |                  |       |   |   |
| Non operating expense (income):                                             |       |                  |       |   |   |
| Interest expense                                                            |       | 260                   |       | 2,133 |   |
| Interest income                                                             |       | (672                  | )          | (1,193 | ) |
| Other expense                                                               |       | —                |       | 325 |   |
| Income (loss) from continuing operations before  provision for income taxes |       | 2,777                 |       | (6,179 | ) |
|                                                                        |       |                  |       |   |   |
| Provision for income taxes                                                  |       | 523                   |       | 649 |   |
| Income (loss) from continuing operations                                    |       | 2,254                 |       | (6,828 | ) |
|                                                                        |       |                  |       |   |   |
| Income (loss) from discontinued operations, net of  tax                     |       | 825                   |       | (2,581 | ) |
|                                                                        |       |                  |       |   |   |
| Net income (loss)                                                           |       | $                     | 3,079      |   | $ | (9,409 | ) |
|                                                                        |       |                  |       |   |   |
| Earnings (loss) per common share                                            |       |                  |       |   |   |
|                                                                        |       |                  |       |   |   |
| Basic and diluted:                                                          |       |                  |       |   |   |
|                                                                        |       |                  |       |   |   |
| Income (loss)  from continuing operations                                   |       | $                     | 0.07       |   | $ | (0.23 | ) |
|                                                                        |       |                  |       |   |   |
| Income (loss)  from discontinued operations                                 |       | $                     | 0.03       |   | $ | (0.09 | ) |
|                                                                        |       |                  |       |   |   |
| Net income  (loss)                                                          |       | $                     | 0.10       |   | $ | (0.32 | ) |
|                                                                        |       |                  |       |   |   |
| Weighted average shares outstanding:                                        |       |                  |       |   |   |
| Basic                                                                       |       | 30,302                |       | 29,138 |   |
| Diluted                                                                     |       | 30,521                |       | 29,138 |   |

 

 

 

See accompanyingnotes

 

 

4

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MAGNETEK, INC.

CONDENSEDCONSOLIDATED BALANCE SHEETS

 (Amounts in thousands)

 
| ** **                                      | ** ** | **December 30,** | ** ** | **July 1,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|------------------|------------|
| ASSETS                                          | ** ** | **2007**              | ** ** | **2007**         | ** ** |
| ** **                                      | ** ** | **(Unaudited)**       | ** ** | ** **       | ** ** |
| Current assets:                                 |       |                  |       |             |       |
| Cash                                            |       | $                     | 5,270      |             | $          | 5,404 |   |
| Restricted cash                                 |       | 22,259                |       | 22,852           |       |
| Accounts  receivable, net                       |       | 18,227                |       | 18,104           |       |
| Inventories                                     |       | 17,424                |       | 16,201           |       |
| Prepaid expenses  and other current assets      |       | 4,132                 |       | 1,900            |       |
| Total current  assets                           |       | 67,312                |       | 64,461           |       |
|                                            |       |                  |       |             |       |
| Property, plant and equipment                   |       | 20,560                |       | 19,772           |       |
| Less-accumulated depreciation                   |       | 16,168                |       | 15,470           |       |
| Net property, plant and equipment               |       | 4,392                 |       | 4,302            |       |
|                                            |       |                  |       |             |       |
| Goodwill                                        |       | 28,254                |       | 28,187           |       |
| Other assets                                    |       | 6,822                 |       | 7,788            |       |
| Total Assets                                    |       | $                     | 106,780    |             | $          | 104,738 |   |
|                                            |       |                  |       |             |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |                  |       |             |       |
|                                            |       |                  |       |             |       |
| Current liabilities:                            |       |                  |       |             |       |
| Accounts payable                                |       | $                     | 11,088     |             | $          | 12,238 |   |
| Accrued  liabilities                            |       | 5,945                 |       | 7,639            |       |
| Accrued  arbitration award                      |       | 22,602                |       | 22,602           |       |
| Current portion  of long-term debt              |       | 11                    |       | 11               |       |
| Total current liabilities                       |       | 39,646                |       | 42,490           |       |
|                                            |       |                  |       |             |       |
| Long-term debt, net of current portion          |       | 15                    |       | 21               |       |
|                                            |       |                  |       |             |       |
| Pension benefit obligations, net                |       | 14,368                |       | 15,965           |       |
| Other long term obligations                     |       | 1,688                 |       | 1,709            |       |
| Deferred income taxes                           |       | 3,530                 |       | 3,080            |       |
|                                            |       |                  |       |             |       |
| Commitments and contingencies                   |       |                  |       |             |       |
|                                            |       |                  |       |             |       |
| Stockholders’ equity                       |       |                  |       |             |       |
| Common stock                                    |       | 304                   |       | 301              |       |
| Paid in capital  in excess of par value         |       | 135,504               |       | 134,449          |       |
| Accumulated  deficit                            |       | (11,744               | )          | (14,823          | )          |
| Accumulated  other comprehensive loss           |       | (76,531               | )          | (78,454          | )          |
| Total stockholders’ equity                 |       | 47,533                |       | 41,473           |       |
|                                            |       |                  |       |             |       |
| Total Liabilities and Stockholders’ Equity |       | $                     | 106,780    |             | $          | 104,738 |   |

 

See accompanying notes

 

 

5

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MAGNETEK, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOW

 (Amounts in thousands, unaudited)

 
| ** **                                                                                                                   | ** ** | **Six Months Ended**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                   | ** ** | **(26 Weeks)**        | ** ** | **(26 Weeks)** | ** ** |
| ** **                                                                                                                   | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                   | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Cash flows from continuing operating activities:                                                                             |       |                  |       |   |   |
| Income (loss) from continuing operations                                                                                     |       | $                     | 2,254      |   | $ | (6,828 | ) |
| Adjustments to  reconcile income (loss) from continuing operations   to net cash provided by (used in) operating activities: |       |                  |       |   |   |
| Depreciation and  amortization                                                                                               |       | 870                   |       | 1,056 |   |
| Stock based  compensation expense                                                                                            |       | 245                   |       | 1,314 |   |
| Pension expense                                                                                                              |       | 94                    |       | 1,662 |   |
| Write-off of  deferred financing                                                                                             |       | —                |       | 670 |   |
| Cash  contribution to pension fund                                                                                           |       | —                |       | (30,000 | ) |
| Changes in  operating assets and liabilities                                                                                 |       | (3,201                | )          | (1,602 | ) |
| Total adjustments                                                                                                            |       | (1,992                | )          | (26,900 | ) |
| Net cash provided by (used in) continuing operating  activities                                                              |       | 262                   |       | (33,728 | ) |
|                                                                                                                         |       |                  |       |   |   |
| Cash flows from investing activities:                                                                                        |       |                  |       |   |   |
| Proceeds from  sale of business, net of transaction costs                                                                    |       | —                |       | 65,823 |   |
| Proceeds from  escrow account                                                                                                |       | 593                   |       | — |   |
| Capital  expenditures                                                                                                        |       | (733                  | )          | (275 | ) |
| Net cash provided by (used in) investing activities                                                                          |       | (140                  | )          | 65,548 |   |
|                                                                                                                         |       |                  |       |   |   |
| Cash flows from financing activities:                                                                                        |       |                  |       |   |   |
| Proceeds from  issuance of common stock                                                                                      |       | 917                   |       | 1,561 |   |
| Repayment of long  term notes                                                                                                |       | —                |       | (18,000 | ) |
| Repayments under  line-of-credit agreements                                                                                  |       | —                |       | (9,412 | ) |
| Principal  payments under capital lease obligations                                                                          |       | (6                    | )          | (6 | ) |
| Increase in  deferred financing costs                                                                                        |       | —                |       | (207 | ) |
| Net cash provided by (used in) financing activities                                                                          |       | 911                   |       | (26,064 | ) |
|                                                                                                                         |       |                  |       |   |   |
| Cash flows from discontinued operations:                                                                                     |       |                  |       |   |   |
| Provided by  (used in) operating activities                                                                                  |       | (1,167                | )          | 7,516 |   |
| Used in  investing activities                                                                                                |       | —                |       | (930 | ) |
| Used in  financing activities                                                                                                |       | —                |       | (5,162 | ) |
| Cash provided by (used in) discontinued operations                                                                           |       | (1,167                | )          | 1,424 |   |
|                                                                                                                         |       |                  |       |   |   |
| Net increase (decrease) in cash                                                                                              |       | (134                  | )          | 7,180 |   |
| Cash at the beginning of the period                                                                                          |       | 5,404                 |       | 96 |   |
| Cash at the end of the period                                                                                                |       | $                     | 5,270      |   | $ | 7,276 |   |

 

See accompanyingnotes

 

6

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MAGNETEK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 30, 2007

(Amounts in thousands unless otherwise noted, except per share data,unaudited)

 

**1.****                                     ****Summaryof Significant Accounting Policies**

 

Profile

 

Magnetek, Inc. (together with itssubsidiaries, the “Company” or “Magnetek”) is a global provider of digitalpower control systems that are used to control motion and power primarily inmaterial handling, elevator, telecommunications (“telecom”) and energy deliveryapplications.  The Company’s productsconsist primarily of programmable motion control and power conditioning systemsused in the following applications: overhead cranes and hoists; elevators;wireless telecom; coal mining equipment; and fuel cells and wind turbines.

 

Basisof Presentation

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of the Company, and all significant intercompany accounts andtransactions have been eliminated.

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial reporting and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting 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 July 1, 2007 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 December 30, 2007, and the results of its operations forthe three- and six-month periods ended December 30, 2007 and December 31,2006 and its cash flows for the six-months ended December 30, 2007 and December 31,2006.  Results for the three- andsix-months ended December 30, 2007 are not necessarily indicative ofresults that may be experienced for the full fiscal year.

 

TheCompany uses a 52-, 53-week fiscal year ending on the Sunday nearest to June 30.  Fiscal quarters are the 13 or 14 week periodsending on the Sunday nearest September 30, December 31, March 31and June 30.  The three- andsix-month periods ended December 30, 2007 and December 31, 2006 eachcontained 13 and 26 weeks respectively.

 

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.

 

RecentAccounting Pronouncements — In July 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN48”) *Accounting for Uncertainty in Income Taxes - aninterpretation of FASB Statement No. 109* which prescribes arecognition threshold and measurement process for recording in the financialstatements uncertain tax positions taken or expected to be taken in a taxreturn.  Additionally, FIN 48 providesguidance on derecognition, classification, accounting in interim periods, anddisclosure requirements for uncertain tax positions. The Company adopted FIN 48on July 2, 2007.  The adoption ofthis interpretation did not have a material effect on the Company’s financialposition, results of operations, or liquidity.

 

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

 

 

7

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2.                                       **DiscontinuedOperations**

 

Thehistorical operating results of the power electronics business, which wasdivested in October 2006, as well as certain expenses incurred related tobusinesses the Company no longer owns, are classified as discontinuedoperations.  The results of discontinuedoperations are as follows:

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **December 30,**  | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                   | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                         |       |                   |       |                  |       |   |   |   |   |
| Net sales                                                                    |       | $                      | —     |                  | $          | 10,056 |   | $ | — |   | $ | 53,545 |   |
|                                                                         |       |                   |       |                  |       |   |   |   |   |
| Income (loss) from discontinued operations before interest and income  taxes |       | $                      | 1,159      |                  | $          | (1,294 | ) | $ | 825 |   | $ | (1,629 | ) |
| Interest expense, net                                                        |       | —                 |       | 247                   |       | — |   | 521 |   |
| Provision for income taxes                                                   |       | —                 |       | 106                   |       | — |   | 431 |   |
| Income (loss) from  discontinued operations                                  |       | $                      | 1,159      |                  | $          | (1,647 | ) | $ | 825 |   | $ | (2,581 | ) |

 

Incomefrom discontinued operations for the three-and six-month periods ended December 30,2007 includes a settlement gain of $1.4 million from a May 2007 agreementbetween the Company and Federal-Mogul Corporation (see Note 4 of Notes toCondensed Consolidated Financial Statements).

 

Income(loss) from discontinued operations includes expenses of $262 and $596 for thethree-and six-month periods ended December 30, 2007 respectively, and $280and $310 for the three- and six-month periods ended December 31, 2006respectively for legal fees and other costs related to businesses the Companyno longer owns (see Note 4 of Notes to Condensed Consolidated FinancialStatements).

 

InOctober, 2006, the Company completed the sale of its power electronics businessto Power-One, Inc. (“Power-One”). The transaction included payment by Power-One to the Company of $65.7million in cash, net of post closing adjustments, and the assumption byPower-One of approximately $16.0 million of the Company’s debt, representingthe total debt balances outstanding of the Company’s subsidiary Magnetek,S.p.A.  The Company used approximately$29.0 million of the proceeds to repay all of its remaining outstanding debtand in December 2006 made a contribution of $30.0 million to its definedbenefit pension plan.

 

Theagreement provides for indemnification by the Company for breaches ofrepresentations and warranties and other customary matters that the Companybelieves are typical for this type of transaction, including indemnificationfor certain tax, legal, environmental and warranty issues.  The condensed consolidated balance sheet asof December 30, 2007 includes certain accrued liabilities which representthe Company’s best estimate of remaining contingent liabilities related to theindemnification provisions of the purchase and sale agreement.  While management has used its best judgmentin assessing the potential liability for these items, given the uncertaintyregarding future events, it is difficult to estimate the possible timing ormagnitude of any payments that may be required for liabilities subject toindemnification.  Any future adjustmentto currently recorded contingencies related to indemnification claims orpayments based upon changes in circumstances would also be recorded as a gainor loss on the sale of the business in discontinued operations.

 

3.                                       **Inventories**

 

Inventoriesat December 30, 2007 and July 1, 2007 consist of the following:

 
| ** **                     | ** ** | **December 30,** | ** ** | **July 1,** | ** ** |
|--------------------------------|------------|-----------------------|------------|------------------|------------|
| ** **                     | ** ** | **2007**              | ** ** | **2007**         | ** ** |
| Raw materials and stock  parts |       | $                     | 11,975     |             | $          | 11,046 |   |
| Work-in-process                |       | 1,405                 |       | 1,544            |       |
| Finished goods                 |       | 4,044                 |       | 3,611            |       |
|                           |       | $                     | 17,424     |             | $          | 16,201 |   |

 

 

8

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4.                                       **Commitmentsand Contingencies**

 

**Litigation—Product Liability**

 

TheCompany has settled or otherwise resolved all of the product liability lawsuitsassociated with its discontinued business operations except for any potentialfuture product claims which may arise in connection with the recent sale of theCompany’s power electronics business (see Note 2 of Notes to CondensedConsolidated Financial Statements). The Company is also a named party in oneproduct liability lawsuit related to the Telemotive Industrial Controlsbusiness acquired in December 2002 through the purchase of the stock ofMXT Holdings, Inc.   The claim pre-dated the acquisition and wastendered to the insurance companies that provided coverage for MXT Holdings, Inc.,against such claims and the defense and indemnification has been accepted bythe carriers, subject to a reservation of rights.  Management believesthat the insurers will bear all liability, if any, with respect to suchcase and that the proceedings will not have a material adverse effect onthe Company’s results of operations or financial position.

 

InAugust 2006, Pamela L. Carney, Administrator of the Estate of Michael J. Carney,filed a lawsuit in the Court of Common Pleas of Westmoreland County,Pennsylvania, against the Company and other defendants, alleging that a productmanufactured by the Telemotive Industrial Controls business acquired by theCompany in December 2002 contributed to an accident that resulted in thedeath of Michael J. Carney in August 2004. The claim has been tendered to the Company’s insurance carrier and legalcounsel has been retained to represent the Company.  Plaintiff’s claim for damages is unknown atthis time, but management believes that its insurers will bear all liability inexcess of deductible amounts for the claim, if any.

 

**Litigation—Other**

 

InNovember 2007, the Company learned that a lawsuit had been filed by AntonioCanova in Italy, in the Court of Arezzo, Labour Law Section, against theCompany and Power-One Italy, S.p.A.  Mr.Canova is a former Executive Vice President of the Company and was DeputyChairman and Managing Director of the Company’s former Italian subsidiary,Magnetek S.p.A.  The Company has not yetbeen served with process in the U.S. with regard to the lawsuit.  Mr. Canova asserted claims for damages in theamount of € 3,493,076 allegedly incurred in connection with the termination ofhis employment at the time of the sale of the Company’s power electronics groupbusiness to Power-One, Inc. in October 2006. The Company believes the claim is without merit and intends tovigorously defend against it.

 

TheCompany has been named, along with multiple other defendants, inasbestos-related lawsuits associated with business operations previouslyacquired by the Company, but which are no longer owned. During the Company’sownership, none of the businesses produced or sold asbestos-containingproducts. With respect to these claims, the Company is either contractuallyindemnified against liability for asbestos-related claims or believes that ithas no liability for such claims. The Company aggressively seeks dismissal fromthese proceedings, and has also tendered the defense of these cases to theinsurers of the previously acquired businesses. The Company has also filed late claims in the Federal-Mogul bankruptcyproceedings to recover attorney’s fees for defense of these claims.  The Company and Federal-Mogul entered into asettlement agreement under which the Company is entitled to receive amountsfrom a settlement trust established under Federal-Mogul’s reorganization planand funded by insurance proceeds.  TheCompany is entitled to receive 15% of the first $20 million and 10% of the next$25 million of insurance proceeds, up to a maximum of $5.5 million, in exchangefor withdrawing its bankruptcy claims and objections to the reorganization planand execution of certain releases.  Federal-Mogul and the settlement trusthave control over the collection process. The settlement was subject to final approval of Federal-Mogul’sReorganization Plan, which was confirmed and approved by the Bankruptcy Courton December 27, 2007.  In January,2008, the Company received a payment of $1.4 million from the settlement trust,which is included in prepaid and other current assets at December 30, 2007and in income from discontinued operations in the three- and six-month periodsended December 30, 2007.  The amountrepresents primarily the recovery of previously incurred legal fees for thedefense of these asbestos-related lawsuits. As the Federal-Mogul settlement trust receives additional funds based onany settlements with other insurers, Magnetek will be entitled to receive apercentage of those funds based on the terms described above.  Several insurance carriers filed adeclaratory judgment action relating to insurance coverage for such previouslyacquired businesses, seeking a determination that no coverage is availableunder the policies.  Federal-Mogul, theCompany and other defendants filed responsive pleadings and motions to dismissthe case, and the court recently granted the motions to dismiss the declaratoryjudgment action.  Some of these insurershave appealed the dismissal.  Managementdoes not believe the asbestos proceedings, individually or in the aggregate,will have a material adverse effect on its financial position or results ofoperations.

 

**Litigation—Patent Infringement**

 

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 deniedthat its products infringed any valid patent and filed a response assertingaffirmative defenses, as well as a counterclaim for a judicial declaration thatits products do not infringe the patents asserted by Mr. Nilssen and alsothat the asserted patents are invalid. In June 2001, the Company sold itslighting business to Universal Lighting Technologies, Inc. (“ULT”), andagreed to provide a limited indemnification against certain claims ofinfringement that Nilssen might allege against ULT. In April 2003, Nilssen’slawsuit and the counterclaims were dismissed with prejudice and both partiesagreed to submit limited issues in dispute to binding arbitration before anarbitrator with a relevant technical background. The arbitration occurred inNovember, 2004 and a decision awarding Nilssen $23.4 million was issued on May 3,2005, to be paid within ten days of the award. Nilssen’s counsel filed a motionto enter the award in U.S. District Court for the Northern District ofIllinois, and Magnetek filed a counter-motion to vacate the award for a numberof reasons, including that the award was fraudulently obtained.  Magnetek’srequest for oral argument was granted and the hearing took place on October 19,2005.  A decision has not beenannounced.  An unfavorable decision bythe Court would likely result in payment of the award to Nilssen.

 

 

9

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InFebruary 2003, Nilssen filed a second lawsuit in the U.S. District Courtfor the Northern District of Illinois alleging infringement by ULT oftwenty-nine of his patents pertaining to electronic ballast technology, andseeking unspecified damages and injunctive relief to preclude ULT from making,using or selling products allegedly infringing his patents. ULT made a claimfor indemnification, which the Company accepted, subject to the limitations setforth in the sale agreement.  The case isnow pending in the Middle District of Tennessee.  Nilssen voluntarily dismissed all but four ofthe patents from the lawsuit.  The Company denies that the products forwhich it has an indemnification obligation to ULT infringe any valid patent andresponded on behalf of ULT asserting affirmative defenses, as well as acounterclaim for a judicial declaration that the patents are unenforceable andinvalid and that the products do not infringe Nilssen’spatents.   The case against ULT has been stayed pending Nilssen’sappeal of an unfavorable decision against him in another case that couldinfluence the outcome of his lawsuits against ULT.  The decision in such other case was affirmedby the appellate court in October 2007, and Nilssen’s petition forrehearing was denied on January 22, 2008. ULT requested a re-examination of the patents at issue by the Patent andTrademark Office (PTO) and the PTO recently rejected claims in all of thepatents at issue in the lawsuit against ULT. The Company will continue to aggressively defend the claims against ULTthat are subject to defense and indemnification; however, an unfavorabledecision could have a material adverse effect on the Company’s financialposition, cash flows and results of operations.

 

**Environmental Matters - General**

 

Fromtime to time, Magnetek has taken action to bring certain facilities associatedwith previously owned businesses into compliance with applicableenvironmental laws and regulations. Upon the subsequent sale of certainbusinesses, the Company agreed to indemnify the buyers against environmentalclaims associated with the divested operations, subject to certain conditionsand limitations. Remediation activities, including those related to the Company’sindemnification obligations, did not involve material expenditures during thethree- or six-month periods ended December 30, 2007 or December 31,2006.

 

TheCompany has also been identified by the United States Environmental ProtectionAgency and certain state agencies as a potentially responsible party forcleanup costs associated with alleged past waste disposal practices at severalpreviously owned facilities and offsite locations. Its remediation activitiesas a potentially responsible party were not material in the three- or six-monthperiods ended December 30, 2007 or December 31, 2006.  Although the materiality of futureexpenditures for environmental activities may be affected by the level and typeof contamination, the extent and nature of cleanup activities required bygovernmental authorities, the nature of the Company’s alleged connection to thecontaminated sites, the number and financial resources of other potentiallyresponsible parties, the availability of indemnification rights against thirdparties and the identification of additional contaminated sites, the Company’sestimated share of liability, if any, for environmental remediation, includingits indemnification obligations, is not expected to be material.

 

*Century Electric (McMinnville, Tennessee)*

 

Priorto the Company’s purchase of Century Electric, Inc. (“Century Electric”)in 1986, Century Electric acquired a business from Gould Inc. (“Gould”) inMay 1983 that included a leasehold interest in a fractional horsepowerelectric motor manufacturing facility located in McMinnville, Tennessee. Gouldagreed to indemnify Century Electric from and against liabilities and expensesarising out of the handling and cleanup of certain waste materials, includingbut not limited to cleaning up any polychlorinated biphenyls (“PCBs”) at theMcMinnville facility (the “1983 Indemnity”). The presence of PCBs and othersubstances, including solvents, in the soil and in the groundwater underlyingthe facility and in certain offsite soil, sediment and biota samples has beenidentified. The McMinnville plant is listed as a Tennessee Inactive HazardousWaste Substance Site and plant employees were notified of the presence ofcontaminants at the facility. Gould has completed an interim remedialexcavation and disposal of onsite soil containing PCBs and a preliminaryinvestigation and cleanup of certain onsite and offsite contamination. TheCompany believes the cost of further investigation and remediation (includingancillary costs) is covered by the 1983 Indemnity. The Company sold itsleasehold interest in the McMinnville plant in August 1999 and while theCompany believes that Gould will continue to perform substantially under itsindemnity obligations, Gould’s substantial failure to perform such obligationscould have a material adverse effect on the Company’s financial position, cashflows and results of operations.

 

*Environmental - Effect of Fruit of the Loom Bankruptcy(Bridgeport, Connecticut)*

 

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. Environmentalliabilities covered by the indemnification agreement include completion ofadditional cleanup activities, if any, at the Bridgeport facility and defenseand indemnification against liability for potential response costs related tooffsite disposal locations. The Company’s 

 

 

10

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leaseholdinterest in the Bridgeport facility was assigned to the buyer in connectionwith the sale of the Company’s transformer business in June 2001.  FOL, the successor to the indemnificationobligation, 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 FOL had substantially completed theclean-up obligations required by the indemnification agreement prior to thebankruptcy filing. In November 2001, the Company and FOL entered into anagreement involving the allocation of certain potential tax benefits andMagnetek withdrew its claims in the bankruptcy proceeding. FOL’s obligation tothe state of Connecticut was not discharged in the reorganization proceeding.

 

InOctober 2006, the owner of the Bridgeport facility filed a lawsuit inSuperior Court, J.D. of Fairfield, Connecticut alleging that the Company isobligated to remediate environmental contamination at the facility.  The Company filed a Motion to Stay and Remandthe matter to the Connecticut Department of Environmental Protection (“DEP”) onthe basis that DEP has primary jurisdiction to determine the need andresponsibility for any further remediation. Following the court’s denial of such motion, the Company filed itsanswer, affirmative defenses and counterclaims. The Bridgeport facility owner amended its complaint, alleging breach oflease obligations and violation of Connecticut environmental statutoryrequirements, which allegations were denied in the Company’s amendedanswer.  The case is in discovery.  DEP recently requested parties, including theCompany, to submit reports summarizing the investigations and remediationperformed to date at the site and the proposed additional investigations andremediation necessary to complete those actions at the site.  DEP requested additional information from theCompany relating to site investigations and remediation. DEP also conducted anon-site inspection at the Bridgeport facility. FOL’s inability to satisfy its remaining obligations related to theBridgeport facility and any offsite disposal locations, or an unfavorableruling in the lawsuit with the owner of the Bridgeport facility, or thediscovery of additional environmental contamination at the Bridgeport facilitycould have a material adverse effect on the Company’s financial position, cashflows or results of operations.

 

5.                                       **ComprehensiveIncome (Loss)**

 

Forthe fiscal periods ended December 30, 2007 and December 31, 2006,comprehensive income (loss) consisted of the following:

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **December 30,**  | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income (loss)                 |       | $                      | 2,580      |                  | $          | (6,215 | ) | $ | 3,079 |   | $ | (9,409 | ) |
| Unrecognized pension  liabilities |       | 846                    |       | —                |       | 1,687 |   | — |   |
| Currency translation  adjustment  |       | 48                     |       | (161                  | )          | 236 |   | (177 | ) |
| Comprehensive income  (loss)      |       | $                      | 3,474      |                  | $          | (6,376 | ) | $ | 5,002 |   | $ | (9,586 | ) |

 

 

11

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6.                                       **Earnings (Loss) Per Share**

 

The following table sets forth thecomputation of basic and diluted earnings (loss) per share for the three- andsix-months ended December 30, 2007 and December 31, 2006:

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **December 30,**  | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                              | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Numerator:                                              |       |                   |       |                  |       |   |   |   |   |
| Income (loss)  from continuing operations               |       | $                      | 1,421      |                  | $          | (4,568 | ) | $ | 2,254 |   | $ | (6,828 | ) |
| Income (loss)  from discontinued operations             |       | 1,159                  |       | (1,647                | )          | 825 |   | (2,581 | ) |
| Net income  (loss)                                      |       | $                      | 2,580      |                  | $          | (6,215 | ) | $ | 3,079 |   | $ | (9,409 | ) |
|                                                    |       |                   |       |                  |       |   |   |   |   |
| Denominator:                                            |       |                   |       |                  |       |   |   |   |   |
| Weighted average  shares for basic earnings per share   |       | 30,270                 |       | 29,264                |       | 30,302 |   | 29,138 |   |
| Add dilutive  effect of stock options outstanding       |       | 204                    |       | —                |       | 219 |   | — |   |
| Weighted average  shares for diluted earnings per share |       | 30,474                 |       | 29,264                |       | 30,521 |   | 29,138 |   |
|                                                    |       |                   |       |                  |       |   |   |   |   |
| Basic:                                                  |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) per share from continuing operations    |       | $                      | 0.05       |                  | $          | (0.16 | ) | $ | 0.07 |   | $ | (0.23 | ) |
| Earnings (loss) per share from discontinued  operations |       | $                      | 0.04       |                  | $          | (0.06 | ) | $ | 0.03 |   | $ | (0.09 | ) |
| Net income (loss) per share                             |       | $                      | 0.09       |                  | $          | (0.21 | ) | $ | 0.10 |   | $ | (0.32 | ) |
|                                                    |       |                   |       |                  |       |   |   |   |   |
| Diluted:                                                |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) per share from continuing operations    |       | $                      | 0.05       |                  | $          | (0.16 | ) | $ | 0.07 |   | $ | (0.23 | ) |
| Earnings (loss) per share from discontinued  operations |       | $                      | 0.04       |                  | $          | (0.06 | ) | $ | 0.03 |   | $ | (0.09 | ) |
| Net income (loss) per share                             |       | $                      | 0.08       |                  | $          | (0.21 | ) | $ | 0.10 |   | $ | (0.32 | ) |

 

In addition to theoptions included in the dilutive effect above, the Company had outstandingoptions to purchase 2.8 million and 5.1 million shares of common stock for thethree- and six-months ended December 30, 2007 and December 31, 2006,respectively.  These additionaloutstanding options have not been included in the Company’s computation ofweighted average shares for diluted earnings per share because the effect wouldhave been anti-dilutive.

 

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 six-month periods ended December 30, 2007 and December 31,2006 were as follows:

 
| ** **                                           | ** ** | **Six Months Ended**  | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                           | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Balance, beginning of fiscal year                    |       | $                     | 315        |   | $ | 430 |   |
| Additions charged to earnings for product warranties |       | 384                   |       | 233 |   |
| Use of reserve for warranty obligations              |       | (316                  | )          | (253 | ) |
| Balance, end of period                               |       | $                     | 383        |   | $ | 410 |   |

 

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

 

8.                                       **Restructuring Costs**

 

As a result of thedivestiture of the Company’s power electronics business in October 2006,the Company downsized and relocated its corporate office to Menomonee Falls,Wisconsin from Chatsworth, California. The condensed consolidated statements of operations for the three- andsix-month periods ended December 31, 2006, include severance costs of $1.9million related to downsizing the corporate office, of which $0.6 million isincluded in research and development expense and $1.3 million is included inselling, general and administrative expense.

 

 

 

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9.                                       **Pension Expense**

 

For the three- andsix-month periods ended December 30, 2007 and December 31, 2006,pension expense related to the Company’s defined benefit pension plan consistedof the following:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **December 30,**  | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                      | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest Cost                   |       | $                      | 2,607      |                  | $          | 2,420 |   | $ | 5,215 |   | $ | 4,882 |   |
| Expected return on plan assets  |       | (3,406                 | )          | (2,186                | )          | (6,808 | ) | (4,864 | ) |
| Recognized net actuarial losses |       | 846                    |       | 658                   |       | 1,687 |   | 1,644 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| Total net pension expense       |       | $                      | 47         |                  | $          | 892 |   | $ | 94 |   | $ | 1,662 |   |

 

Pensionexpense is included in selling, general and administrative expense in theaccompanying condensed consolidated statements of operations.  Under current funding regulations, actuarialprojections indicate the Company will be required to make contributions to theplan of approximately $10.8 million within the next 12 months, beginning with acontribution of $2.6 million in April 2008.

 

10.                                 **Income Taxes**

 

Dueto historical taxable losses, the Company provides valuation reserves againstits U.S. deferred tax assets.  A portionof the Company’s deferred tax liability relates to tax-deductible amortizationof goodwill that is no longer amortized for financial reporting purposes. Thesedeferred tax liabilities are considered to have an indefinite life and aretherefore ineligible to be considered as a source of future taxable income inassessing the realization of deferred tax assets.

 

TheCompany’s provision for income taxes for each of the three- and six-monthperiods ended December 30, 2007 and December 31, 2006 includes $225and $450 of deferred income tax expense respectively, related to the increasein the Company’s deferred tax liability related to tax-deductible amortizationof goodwill.   The remaining taxprovision is comprised of income taxes of the Company’s foreign subsidiary inCanada.

 

11.                                 **Bank Borrowing Arrangements**

 

In September 2005,the Company entered into an agreement with Wells Fargo Foothill, Inc. (“WFF”)providing for a $13 million revolving credit facility.  On November 6, 2007, based upon mutualagreement between the Company and WFF, the revolving credit agreement wasterminated without penalty prior to its expiration date of December 31,2007, and the Company entered into an agreement with Associated Bank, N.A.providing for a $10 million revolving credit facility (the “Associated facility”).  Borrowings under the Associated facility bearinterest at the London Interbank Offering Rate (“LIBOR”) plus 1.5%, withborrowing levels determined by a borrowing base formula as defined in theagreement, which includes the level of eligible accounts receivable.  The Associated facility also supports theissuance of letters of credit, places certain restrictions on the Company’sability to pay dividends or make acquisitions, and includes covenants whichrequire minimum operating profit levels and limit annual capitalexpenditures.  Under the terms of theAssociated facility, the Company is required to maintain $22.0 million in anescrow account to fund the Nilssen arbitration award in the event that itsappeal of the award is not successful (see Note 4 of Notes to CondensedConsolidated Financial Statements). Borrowings under the Associated facility are secured by the Company’saccounts receivable and inventory.  TheAssociated facility expires in November 2009 unless extended by theparties prior to that time.

 

12.                                 **Subsequent Events**

 

On February 4, 2008,the Company purchased the net assets of Enrange LLC (“Enrange”), for a cash paymentat the closing date of approximately $1.75 million, a deferred payment of $0.75million due in February 2009 and contingent payments over a three yearperiod based on the future operating performance of the business under anegotiated earn-out schedule.  Theminimum contingent payments due under the earn-out schedule are $0.2 million,while achievement of 100% of target performance would result in additionalpayments of $0.4 million over the three year period.  Enrange is a wireless control manufacturerproviding radio remote controls for material handling and other industrialapplications.  The operatingresults of Enrange will be included in the Company’s consolidated resultseffective as of the acquisition date.

 

 

 

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**Item 2 — Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Overview**

 

Magnetek, Inc. (“Magnetek”or “the Company”) is a global provider of digital power control systems thatare used to control motion and power primarily in material handling, elevator,telecommunications (“telecom”) and energy delivery applications.  Our systems consist primarily of programmablemotion control and power conditioning systems used in the followingapplications:  overhead cranes andhoists; elevators; wireless telecom; coal mining equipment; and fuel cells andwind turbines.  We believe that with ourtechnical and productive resources we are well positioned to respond toincreasing demand in our served markets. Our operations are located in North America, predominantly in MenomoneeFalls, Wisconsin, our Company headquarters.

 

Ourmaterial handling offerings include drives, radio remote controls, and braking,collision-avoidance, and electrification subsystems, sold primarily to originalequipment manufacturers (“OEMs”) of overhead cranes and hoists.  We have a significant market share in NorthAmerica in alternating current (“AC”) drives and believe we have sales growthopportunities in direct current (“DC”) drives for retrofit applications and inwireless remote controls.

 

Ourelevator product offerings are comprised of highly integrated subsystems anddrives used to control motion primarily in high-rise, high speed elevatorapplications.  Our products are soldmainly to elevator OEMs and we have a significant share of the available marketfor DC drives and subsystems used in high-rise elevators for both new andretrofit projects.  We believe we haveopportunities for sales growth in available elevator markets by introducing newenergy-saving product offerings for both DC and AC applications, expanding thebreadth of our product offering to include competitive low-end products forlower performance applications, and using our new product offerings to expandgeographically, primarily into Asia.

 

Ourtelecom product offerings are focused on providing back-up power for wirelessapplications.  During fiscal year 2007,we initiated restructuring actions and completed the relocation of the telecommanufacturing operations from Dallas, Texas to Menomonee Falls, Wisconsin.  We are now focused on increasing sales byexpanding our customer base and thereby reducing our dependence on severalsignificant customers, as well as improving operating results through materialand other cost reduction actions.

 

Ourenergy delivery product offerings include power inverters for fuel cells andwind turbines, which deliver AC power from these energy sources to the utilitypower grid.  We believe we have salesgrowth opportunities in the wind market, which is growing rapidly in NorthAmerica as wind power becomes increasingly competitive from a cost standpointwith more traditional methods of power generation.  We believe our product offerings have us wellpositioned to take advantage of growth in the wind market and expect sales ofinverters for wind applications to be our fastest revenue growth product overthe next several years.  We also providedrives for underground coal mining equipment.

 

Duringfiscal year 2007, we completed the divestiture of our power electronicsbusiness, repaid all of our outstanding debt, and made a significantcontribution to our defined benefit pension plan.  We also restructured our management team,reduced our corporate overhead by over $6 million annually and relocated ourcorporate headquarters as well as our telecom operations to Wisconsin.  In addition, our continuing operationsreturned to profitability during the second half of fiscal 2007.

 

While we are a smallercompany following the divestiture of our power electronics business, we are aleader in several of our served markets, our operations are centralized inNorth America, and we believe we have several opportunities for sales growth infiscal 2008.  Our sales were $103.8million in fiscal 2007, and we expect moderate revenue growth in fiscal2008.  Our fiscal 2008 sales growth hasbeen dependent on successful introduction of new products for elevator and windmarkets.  These products are gainingacceptance with customers in the marketplace, however, the rate of growth isslower than we previously expected.  Inaddition, we may experience a cyclical slowdown in the material handling market,which comprised more than half of our sales in fiscal 2007.  Gross margins in our continuing operationshave historically been in the range of upper 20%’s to 30% and we are targetingthis level of gross margin going forward, however, gross margin for theremainder of fiscal 2008 may be negatively impacted by lower telecom salesvolume and start up expenses related to production of new products.  In addition, we intend to focus oncontrolling operating expenses and, through utilization of our net operatingloss carryforwards for tax purposes, we believe the majority of our reportedoperating profit can be realized as net income.

 

 

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**Continuing Operations**

 

Salesin the second quarter of fiscal 2008 were $29.0 million, an increase of nearly$2.9 million or 11% from sales of $26.1 million in the first quarter of fiscal2008.  Demand for material handlingproducts remained strong and second quarter fiscal 2008 sales of materialhandling products increased sequentially by nearly $1.0 million from the firstquarter of fiscal 2008.  In addition, weshipped 16 wind inverters during the second quarter of fiscal 2008 with a salesvalue in excess of $1.9 million.  Consolidatedsales in the second quarter of fiscal year 2007 were $27.6 million.

 

Grossprofit of $7.2 million in the second quarter of fiscal 2008 was slightly higherthan the same period in fiscal 2007, due mainly to higher sales of materialhandling products, partially offset by lower sales of telecom and elevatorproducts and expenses related to ramp up and initial shipments of our windinverter product.  Our research anddevelopment (“R&D”) expense increased slightly in the second quarter offiscal 2008 compared to the first quarter of fiscal 2008, and we intend tocontinue to invest in R&D going forward, mainly in new product offeringsfor alternative energy applications and design modifications to reduce costsand enhance competitiveness of our products. Second quarter fiscal 2008 selling, general and administrative (“SG&A”)expense decreased by $0.7 million compared to the first quarter of fiscal 2008,due mainly to a favorable bad debt recovery and the reversal of a non-cashstock compensation liability, as well as lower professional fees, partially offsetby higher volume-related selling expenses.  As a result, our continuing operations reported income from operationsof $1.4 million.

 

We intend to focus ourdevelopment and marketing capabilities on internal sales growth opportunitiesacross all product lines, with a near-term emphasis on energy efficient powerproducts for alternative energy and elevator markets.  We also intend to focus on improvingoperating results in our telecom products through a combination of priceincreases and cost reductions.  Lookingforward, gross margins in the second half of fiscal 2008 will likely continueto be impacted by lower sales volume in telecom products and manufacturingvariances related to adjustments in production capacity for wind inverterproducts.  In addition, we believe thatfuture increased profitability is dependent upon increased sales revenue andimprovement in gross margins. Improvement in gross margins is mainly dependent upon a continuingeconomic expansion, successful cost reduction actions related to recent newelevator and wind inverter product offerings, and improvement in operatingperformance in our telecom business.

 

##### **Discontinued Operations**

##### ** **

Certain expenses relatedto previously divested businesses, including the operating results of the powerelectronics business divested in fiscal 2007, have been classified asdiscontinued operations in the accompanying condensed consolidated financialstatements and footnotes for all periods presented.  These costs have historically includedcharges for an arbitration award in a patent infringement claim and relatedlegal fees, as well as certain expenses for product liability claims,environmental issues, and asbestos claims (see Note 4 of Notes to ConsolidatedFinancial Statements).   All of these issues relate to businesses weno longer own and most relate to indemnification agreements we provided when wedivested those businesses.

 

Going forward, ourdiscontinued operations will include additional costs we may incur related tobusinesses no longer owned and may include additional costs above thosecurrently estimated and accrued related to the divestiture of our powerelectronics business.

 

**CriticalAccounting Policies and Estimates**

 

There have been nomaterial changes to our critical accounting policies and estimates from theinformation provided in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”, included in our Annual Reporton Form 10-K for the fiscal year ended July 1, 2007.

 

 

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**Results of Operations - Three Months Ended December 30,2007 and December 31, 2006**

 

NetSales and Gross Profit

 

Netsales for the three months ended December 30, 2007 were $29.0 million, anincrease of 5.0% from the three months ended December 31, 2006 sales of$27.6 million.  The increase was mainlydue to higher sales of material handling products of $2.3 million and sales ofwind inverters of $1.9 million, partially offset by lower sales in our telecom,elevator and mining product lines.   Netsales by product line were as follows, in millions:

 
| ** **              | ** ** | **Three Months Ended**     | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **December 30, 2007** | ** ** | **December 31, 2006** | ** ** |
| Material handling       |       | $                          | 18.2       |   | 63 | % | $ | 15.9 |   | 58 | % |
| Elevator motion control |       | 4.3                        |       | 15 | % | 5.1 |   | 18 | % |
| Telecom power systems   |       | 3.6                        |       | 12 | % | 4.9 |   | 18 | % |
| Energy systems          |       | 2.9                        |       | 10 | % | 1.7 |   | 6 | % |
|                    |       |                       |       |   |   |   |   |   |   |
| Total net sales         |       | $                          | 29.0       |   | 100 | % | $ | 27.6 |   | 100 | % |
|                         |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

Grossprofit for the three months ended December 30, 2007 was $7.2 million, or24.9% of sales, versus $7.1 million, or 25.6% of sales, in the three monthsended December 31, 2006.  Thereduction in gross profit as a percentage of sales in the three months ended December 30,2007 as compared to the three months ended December 31, 2006 was due tolower sales volume in our telecom, elevator and mining product lines,unfavorable sales mix due to increased sales of lower margin wind inverters,and start-up costs and manufacturing variances related to ramp up of productionof our wind inverter products, partially offset by higher sales volume ofmaterial handling products and the absence of telecom restructuring costs forthe three months ended December 30, 2007. Gross profit for the three months ended December 31, 2006 includesrestructuring costs of $0.9 million related to the relocation of our telecommanufacturing operations.

 

Researchand Development, Selling, General and Administrative

 

R&Dexpense was $0.9 million, or 3.2% of sales, for the three months ended December 30,2007, compared to R&D expense of $1.6 million, or 5.8% of sales, for thethree months ended December 31, 2006. R&D expense for the three months ended December 31, 2006included $0.6 million in severance related to the elimination of our corporateR&D function.

 

SG&A expense was $4.8million, or 16.6% of sales, for the three month ended December 30, 2007versus $9.2 million, or 33.3% of sales, for the three months ended December 31,2006.  Selling expenses for the threemonths ended December 30, 2007 increased to $3.0 million compared to $2.7million for the three months ended December 31, 2006, due to higher volumerelated selling expenses. General and administrative (“G&A”) expense was$1.8 million for the three months ended December 30, 2007 compared to $6.5million for the three months ended December 31, 2006.  The decrease in G&A expense for the threemonths ended December 30, 2007 as compared to the three months ended December 31,2006 is due to lower pension expense of $0.8 million, lower professional fees,mainly legal and audit, lower insurance premiums, and reduced payroll costs.  In addition, G&A expense for the threemonths ended December 30, 2007 includes a bad debt recovery of $0.3million and the reversal of a non-cash stock compensation liability, whileG&A expense for the three months ended December 31, 2006 included astock-based compensation charge of $1.1 million and $1.3 million in severancecosts.

 

Income (Loss) fromOperations

 

Incomefrom operations for the three months ended December 30, 2007 was $1.4million compared to a loss from operations of $3.7 million for the three monthsended December 31, 2006.  Theincrease in income from operations for the three months ended December 30,2007 as compared to the three months ended December 31, 2006 was mainlydue to the absence of restructuring and relocation costs in the three monthsended December 30, 2007, while $3.9 million of restructuring andrelocation costs are included in our loss from operations for the three monthsended December 31, 2006.  Inaddition, pension expense and professional fees were also lower for the threemonth period ended December 30, 2007.

 

InterestIncome and Expense and Other Expense

 

Interestincome was $0.3 million and interest expense was $0.1 million for the threemonths ended December 30, 2007. Interest income was $0.9 million and interest expense was $1.1 millionfor the three months ended December 31, 2006.  The decrease in interest income for the threemonths ended December 30, 2007 was due to lower cash balances held inshort-term investments.  In addition,interest income for the three months ended December 31, 2006 includes $0.3million related to a previous tax settlement.

 

Thedecrease in interest expense for the three months ended December 30, 2007as compared to the three months ended December 31, 2006 was due to therepayment of all of our debt following the divestiture of the power electronicsbusiness.  Interest expense for the threemonths ended December 30, 2007 was comprised entirely of deferredfinancing amortization.  Interest expensefor the three months ended December 31, 2006 reflects interest expense onoutstanding borrowings, deferred financing amortization and the write-off ofdeferred financing assets of $0.7 million from the early retirement of debt.

 

 

16

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Provisionfor Income Taxes

 

Werecorded an income tax provision of $0.2 million for the three months ended December 30,2007.  Despite the pretax loss fromcontinuing operations of $4.2 million for the three months ended December 31,2006, we recorded a tax provision of $0.4 million for that period.  The provision in both periods was mainly dueto non-cash deferred tax provisions related to changes in deferred taxliabilities from goodwill amortization and, to a lesser extent, provisions forincome taxes on our pretax income in Canada (see Note 10 of Notes to CondensedConsolidated Financial Statements).

 

Income(Loss) from Continuing Operations

 

Werecorded income from continuing operations of $1.4 million for the three monthsended December 30, 2007, or $0.05 earnings per share on both a basic anddiluted basis, compared to a loss from continuing operations of $4.6 millionfor the three months ended December 31, 2006, or a $0.16 loss per share onboth a basic and diluted basis.

 

Income(Loss) from Discontinued Operations

 

Income from discontinuedoperations for the three months ended December 30, 2007 was $1.2 million,or $0.04 per share on both a basic and diluted basis, compared to a loss fromdiscontinued operations of $1.6 million, or a $0.06 loss per share on both abasic and diluted basis, for the three months ended December 31,2006.  Income from discontinuedoperations for the three months ended December 30, 2007 includes asettlement gain of $1.4 million from a previous agreement with Federal-Mogul (seeNote 4 of Notes to Condensed Consolidated Financial Statements), partiallyoffset by $0.2 million of expenses related to previously divestedbusinesses.  Loss from discontinuedoperations for the three months ended December 31, 2006 was comprisedmainly of losses in our discontinued power electronics business of $1.3 million(prior to its divestiture in October 2006) and expenses related topreviously divested businesses of $0.3 million, mainly legal fees and othercosts associated with the patent infringement claim and other claims.

 

NetIncome (Loss)

 

Ournet income was $2.6 million for the three months ended December 30, 2007,or $0.09 basic earnings per share and $0.08 diluted earnings per share,compared to a net loss of $6.2 million for the three months ended December 31,2006, or a $0.21 loss per share on both a basic and diluted basis.

 

**Results of Operations - Six Months Ended December 30,2007 and December 30, 2006**

 

NetSales and Gross Profit

 

Netsales for the six months ended December 30, 2007 were $55.1 million, anincrease of 2.9% from the six months ended December 31, 2006 sales of$53.5 million.  The increase was mainlydue to higher sales of material handling products of $3.9 million, partiallyoffset by lower sales of telecom power products and elevator products.  Net sales by product line were as follows, inmillions:

 
| ** **              | ** ** | **Six Months Ended**       | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **December 30, 2007** | ** ** | **December 31, 2006** | ** ** |
| Material handling       |       | $35.3                      |       | 64 | % | $31.4 |   | 58 | % |
| Elevator motion control |       | 8.8                        |       | 16 | % | 10.0 |   | 19 | % |
| Telecom power systems   |       | 6.9                        |       | 13 | % | 8.3 |   | 16 | % |
| Energy systems          |       | 4.1                        |       | 7 | % | 3.8 |   | 7 | % |
|                    |       |                       |       |   |   |   |   |   |   |
| Total net sales         |       | $55.1                      |       | 100 | % | $53.5 |   | 100 | % |
|                         |            |                            |            |  |  |  |  |  |  |  |

 

Grossprofit for the six months ended December 30, 2007 was $14.4 million, or26.2% of sales, versus $14.5 million, or 27.0% of sales, for the six monthsended December 31, 2006.  Thereduction in gross profit as a percentage of sales for the six months ended December 30,2007 as compared to the six months ended December 31, 2006 was due tolower sales volume in our telecom, elevator and mining product lines,unfavorable sales mix due to higher sales of lower margin wind inverters, andstart-up costs and manufacturing variances related to ramp up of production ofour wind inverter products, 

 

17

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partiallyoffset by higher sales volume of material handling products and the absence oftelecom restructuring costs for the 

sixmonths ended December 30, 2007. Gross profit for the six months ended December 31, 2006 includesrestructuring costs of $0.9 million related to the relocation of our telecommanufacturing operations.

 

Researchand Development, Selling, General and Administrative

 

R&Dexpense was $1.8 million, or 3.2% of sales, for the six months ended December 30,2007, compared to R&D expense of $2.8 million, or 5.2% of sales, for thesix months ended December 31, 2006. R&D expense for the six months ended December 30, 2007 reflectslower payroll costs, mainly due to the elimination of our corporate R&Dfunction.    R&D expense for the sixmonths ended December 31, 2006 includes $0.6 million in severance expense.

 

SG&A expense was$10.3 million (18.7% of sales) for the six months ended December 30, 2007versus $16.6 million (31.0% of sales) for the six months ended December 31,2006.  Selling expenses for the sixmonths ended December 30, 2007 were $5.8 million, an increase of $0.4million compared to $5.4 million for the six months ended December 31,2006, due to higher volume related commissions. G&A expense was $4.5 million for the six months ended December 30,2007 compared to $11.2 million for the six months ended December 31, 2006,due to lower pension expense of $1.6 million, lower payroll-related costs dueto corporate staff reductions of $1.2 million, and lower professional fees andtravel expenses.  In addition, G&Aexpense for the six months ended December 31, 2006 includes a stock-basedcompensation charge of $1.1 million and $1.3 million in severance costs (seeNote 8 of Notes to Condensed Consolidated Financial Statements).

 

Income (Loss) fromOperations

 

Ourincome from operations for the six months ended December 30, 2007 was $2.4million compared to a loss from operations of $4.9 million for the six monthsended December 31, 2006.  Theincrease in income from operations for the six months ended December 30,2007 as compared to the six months ended December 31, 2006 was mainly dueto reductions in operating expenses and the absence of restructuring andrelocation costs for the six months ended December 30, 2007.

 

InterestIncome and Expense and Other Expense

 

Interestincome was $0.7 million and interest expense was $0.3 million for the sixmonths ended December 30, 2007. Interest income was $1.2 million and interest expense was $2.1 millionfor the six months ended December 31, 2006.  The decrease in interest income for the sixmonths ended December 30, 2007 as compared to the six months ended December 31,2006 was due to higher cash balances held in short-term investments during November andDecember 2006 and $0.3 million in interest income related to a previoustax settlement in the six months ended December 30, 2006.

 

Thedecrease in interest expense for the six months ended December 30, 2007 ascompared to the six months ended December 31, 2006 was due to therepayment of all of our debt following the divestiture of the power electronicsbusiness in October 2006.  Interestexpense for the six months ended December 30, 2007 is comprised mainly ofdeferred financing amortization. Interest expense for the six months ended December 31, 2006includes the write-off of deferred financing assets of $0.7 million from theearly retirement of debt.

 

Provisionfor Income Taxes

 

Werecorded an income tax provision of $0.5 million for the six months ended December 30,2007.  Despite the pretax loss of $6.2million for the three months ended December 31, 2006, we recorded a taxprovision of $0.6 million for that period. The provision in both periods was mainly due to non-cash deferred taxprovisions related to changes in deferred tax liabilities from goodwillamortization and, to a lesser extent, provisions for income taxes on our pretaxincome in Canada (see Note 10 of Notes to Condensed Consolidated FinancialStatements).

 

Income(Loss) from Continuing Operations

 

Werecorded income from continuing operations of $2.3 million for the six monthsended December 30, 2007, or $0.07 earnings per share on both a basic anddiluted basis, compared to a loss from continuing operations of $6.8 millionfor the six months ended December 31, 2006, or a $0.23 loss per share onboth a basic and diluted basis.

 

 

 

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Income(Loss) from Discontinued Operations

 

Income from discontinuedoperations for the six months ended December 30, 2007 was $0.8 million, or$0.03 per share on both a basic and diluted basis, compared to a loss fromdiscontinued operations of $2.6 million, or a $0.09 loss per share on both abasic and diluted basis, for the six months ended December 31, 2006.  Income from discontinued operations for the 

three months ended December 30,2007 includes a settlement gain of $1.4 million from a previous agreement withFederal-Mogul (see Note 4 of Notes to Condensed Consolidated FinancialStatements), partially offset by $0.6 million of expenses related to previouslydivested businesses.  Loss fromdiscontinued operations for the six months ended December 31, 2006 wascomprised mainly of losses in our discontinued power electronics business of$2.3 million (prior to its divestiture in October 2006) and expensesrelated to previously divested businesses of $0.3 million.

 

NetIncome (Loss)

 

Ournet income was $3.1 million for the six months ended December 30, 2007, or$0.10 per share, basic and diluted, compared to a net loss of $9.4 million forthe six months ended December 31, 2006, or a $0.32 loss per share on botha basic and diluted basis.

 

**Liquidity and Capital Resources**

 

Our cash and cashequivalent balance, including restricted cash, decreased $0.8 million duringthe six months ended December 30, 2007, from $28.3 million at July 1,2007 to $27.5 million at December 30, 2007.  During the six months ended December 30,2007, our inventories increased $1.2 million, mainly related to increasedpurchases of inventory for wind inverters, and accounts payable and othercurrent liabilities decreased $2.8 million, mainly due to a decrease in ourunearned revenue balance, incentive compensation payments made in September 2007,and settlement of certain indemnifications related to the divestiture of ourpower electronics business.  Our capitalexpenditures for the six months ended December 30, 2007 were $0.7 millionand while we may make further investments to increase capacity for and improveefficiency in the production of wind inverters, we do not anticipate capitalexpenditures in fiscal 2008 will exceed $2.0 million.  The expected amount of capital expenditurescould change depending upon changes in revenue levels, our financial conditionand the general economy.

 

On November 6,2007, based upon mutual agreement between us and Wells Fargo Foothill, Inc.(“WFF”), our amended revolving credit agreement with WFF was terminated withoutpenalty prior to its expiration date of December 31, 2007, and we enteredinto an agreement with Associated Bank, N.A. providing for a $10 millionrevolving credit facility (the “Associated facility”).  Borrowings under the Associated facility bearinterest at the London Interbank Offering Rate (“LIBOR”) plus 1.5%, withborrowing levels determined by a borrowing base formula as defined in theagreement, based on the level of eligible accounts receivable.  The Associated facility also supports theissuance of letters of credit, places certain restrictions on our ability topay dividends or make acquisitions, and includes covenants which requireminimum operating profit levels and limit annual capital expenditures.  Borrowings under the Associated facility aresecured by our accounts receivable and inventory.  Under the terms of the Associated facility,we are required to retain $22.0 million in an escrow account to fund theNilssen arbitration award in the event that our appeal of the award is notsuccessful (see below and Note 4 of Notes to Condensed Consolidated FinancialStatements).  The Associated facilityexpires in November 2009 unless renewed by the parties prior to that time.

 

Primarily as a result ofthe decline in interest rates over the past several years, the accumulatedbenefit obligation of our defined benefit pension plan currently exceeds planassets.  We used a portion of theproceeds from the divestiture of our power electronics business to contribute$30.0 million to our pension plan in December 2006.  Under current funding regulations, actuarialprojections as of December 2007 indicate that we will be required to makequarterly contributions to the plan of approximately $10.8 million within thenext 12 months, beginning with a contribution of $2.6 million in April 2008.  We intend to fund the April 2008contribution using existing cash on hand. Required contributions beyond the next 12 months will depend on futureinterest rate levels, values in equity and fixed income markets, and the leveland timing of additional interim contributions we may make to the plan, andcould still be significant.

 

Weare subject to certain potential environmental and legal liabilities associatedprimarily with past divestitures (see Note 4 of Notes to Condensed ConsolidatedFinancial Statements).   In the fourthquarter of fiscal 2005, a decision was rendered in a patent infringement actionbrought against us by Ole K. Nilssen.  Insettlement of pending litigation, we agreed to submit the matter to bindingarbitration, and in May 2005, the arbitrator awarded damages to Mr. Nilssenof $23.4 million, to be paid within ten days of the award.  Mr. Nilssen’s counsel filed a motion toenter the award in U.S. District Court for the Northern District of Illinois,and we filed a counter-motion to vacate the award on grounds that it wasfraudulently obtained.  Our request for oral argument was granted and thehearing was held in October 2005. The judge is expected to render his decision by mail after furtherconsideration.  An unfavorable decisionby the Court could result in payment of the award of $22.6 million, net ofpreviously paid amounts, to Nilssen, which would have a material adverse effecton our cash flows during the period in which payment would be made.  We have adequate resources to support paymentof the award if such a payment is necessary, as we currently have $22.0 millionof restricted cash in an interest-earning escrow account.

 

 

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InJanuary, 2008, we received a payment of $1.4 million from a Federal-Mogulinsurance settlement trust under a previously negotiated agreement withFederal-Mogul.  The amount representsprimarily the recovery of previously incurred legal fees for the defense ofcertain asbestos-related lawsuits (see Note 4 of Notes to CondensedConsolidated Financial Statements).

 

OnFebruary 4, 2008, we purchased the net assets of Enrange LLC (“Enrange”), for a cash paymentat the closing date of approximately $1.75 million, a deferred payment of $0.75million due in February 2009, and contingent payments over a three yearperiod based on the future operating performance of the business under anegotiated earn-out schedule (see Note 12 of Notes to Condensed ConsolidatedFinancial Statements).

 

We did not have anyoff-balance sheet arrangements or variable interest entities as of December 30,2007.

 

Based upon current plansand business conditions, we believe that current cash balances, borrowingcapacity under our Associated facility and internally generated cash flows willbe sufficient to fund anticipated operational needs, capital expenditures andother commitments over the next 12 months.

 

**Caution Regarding Forward-Looking Statements andRisk Factors**

 

This document, includingdocuments 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 similarwords and phrases generally identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertaintieswhich in many cases are beyond our control and which cannot be predicted orquantified.  As a result, future events and actual results could differmaterially from those set forth in, contemplated by, or underlying forward-lookingstatements.  Forward-looking statements contained in this document speakonly as of the date of this document or, in the case of any documentincorporated by reference from another document, the date of thatdocument.  We do not have any obligation to publicly update or revise anyforward-looking statement contained or incorporated by reference in thesedocuments to reflect changed assumptions, the occurrence of unanticipatedevents or changes to future operating results over time.

 

Our future results ofoperations and the other forward-looking statements contained in this filing,including this section titled “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”, involve a number of risks anduncertainties.  In particular, the statements regarding future economicconditions, our goals and strategies, new product introductions, penetration ofnew markets, projections of sales revenues and sales growth, manufacturingcosts and operating costs, pricing of our products and raw materials requiredto manufacture our products, gross margin expectations, relocation andoutsourcing of production capacity, capital spending, research and developmentexpenses, the outcome of pending legal proceedings and environmental matters,payment of certain claims by insurance carriers, tax rates, sufficiency offunds to meet our needs including contributions to our defined benefit pensionplan, and our plans for future operations, as well as our assumptions relatingto the foregoing, are all subject to risks and uncertainties.

 

Anumber of factors could cause our actual results to differ materially from ourexpectations.  We are subject to all of the business risks facing publiccompanies, including business cycles and trends in the general economy,financial market conditions, changes in interest rates, demand variations andvolatility, potential loss of key personnel, supply chain disruptions,government legislation and regulation, and natural causes.  Additionalrisks and uncertainties include but are not limited to industry conditions,competitive factors such as technology and pricing pressures, businessconditions in our served markets, dependence on significant customers,increased material costs, risks and costs associated with acquisitions anddivestitures, environmental matters and the risk that our ultimate costs ofdoing business exceed present estimates. This list of risk factors is not all-inclusive, as other factors andunanticipated events could adversely affect our financial position or resultsof operations.  Further information onfactors that could affect our financial results can be found in our Form 10-Kfiling with the Securities and Exchange Commission for the year ended July 1,2007, under the heading “Risk Factors Affecting the Company’s Outlook”, as wellas below in Part II, Item 1A under the heading  “Risk Factors”.

 

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

 

Therehave been no material changes to the quantitative and qualitative disclosuresabout our market risk disclosed in our Annual Report on Form 10-K for theyear ended July 1, 2007.  We did nothave any outstanding hedge instruments or foreign currency contractsoutstanding at December 30, 2007 or December 31, 2006.

 

 

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**Item 4 — Controls and Procedures**

 

In connection with this Form 10-Q,under the direction of our Chief Executive Officer and Chief Financial Officer,we evaluated our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange 

Act of 1934, and internalcontrol over financial reporting and concluded that (i) our disclosurecontrols and procedures were effective as of December 30, 2007, and (ii) nochange in internal control over financial reporting occurred during the quarterended December 30, 2007, that has materially affected, or isreasonably likely to materially affect, such internal control over financialreporting.

 

Attached as exhibits tothis Form 10-Q are certifications of the Company’s Chief Executive Officerand Chief Financial Officer, which are required in accordance with Rule 13a-14of the Securities Exchange Act of 1934. This “Controls and Procedures” section includes information concerningthe controls and evaluation thereof referred to in the attached certifications,and it should be read in conjunction with the attached certifications for amore complete understanding of the topics presented.

 

 

**PART II - OTHER INFORMATION**

 

**Item 1 — Legal Proceedings**

 

Information aboutour legal proceedings is contained in Part II, Item 3, Legal Proceedings, Part I,Environmental Matters,and Note 11 in the Notes to Consolidated FinancialStatements in our Annual Report on Form 10-K for the fiscal year ended July 1,2007, which is incorporated herein by reference, and in Note 4 of the Notes toCondensed Consolidated Financial Statements contained in this Quarterly Reporton Form 10-Q.  We believe that therehave been no material developments with respect to these matters during thequarter ended December 30, 2007.

 

In November 2007,the Company learned that a lawsuit had been filed by Antonio Canova in Italy,in the Court of Arezzo, Labour Law Section, against the Company and Power-OneItaly, S.p.A.  Mr. Canova is a formerExecutive Vice President of the Company and was Deputy Chairman and ManagingDirector of the Company’s former Italian subsidiary, Magnetek S.p.A.  The Company has not yet been served withprocess in the U.S. with regard to the lawsuit. Mr. Canova asserted claims for damages in the amount of € 3,493,076allegedly incurred in connection with the termination of his employment at thetime of the sale of the Company’s Power Electronics Group business toPower-One, Inc. in October 2006.  TheCompany believes the claim is without merit and intends to vigorously defendagainst it.

 

**Item 1A — Risk Factors**

 

There have been nomaterial changes to the risk factors disclosed in our Annual Report on Form 10-Kfor the year ended July 1, 2007.

 

**Item 2 — Unregistered Sales of EquitySecurities and Use of Proceeds**

 

There were no unregistered sales of equity securities andthere were no repurchases of equity securities during our second fiscal quarterended December 30, 2007.

 

**Item3 — Defaults upon Senior Securities**

 

None.

 

**Item 4 — Submission of Matters toa Vote of Security Holders**

 

(a)                                     TheAnnual Meeting of Stockholders of the Company was held on November 2,2007.

 

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

                                                 DewainK. Cross

                                                 YonY. Jorden

                                                 MitchellI. Quain

                                                 DavidP. Reiland

 

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

 
| **Nominee**       | ** ** | **For**    | ** ** | **Withheld** |
|-------------------|------------|------------|------------|--------------|
|              |       |       |       |         |
| Dewain K. Cross   |       | 28,057,033 |       | 247,658      |
| Yon Y. Jorden     |       | 28,068,177 |       | 236,514      |
| Mitchell I. Quain |       | 28,071,977 |       | 232,714      |
| David P. Reiland  |       | 28,063,977 |       | 240,714      |

 

(d)                                    Theappointment of Ernst & Young LLP as the Company’s independentregistered public accounting firm for fiscal 2008 was ratified.  The votes cast for and against theappointment, and the votes that abstained were as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** |
|------------|------------|-------------|------------|-------------|
| 28,154,506 |       | 132,634     |       | 17,551      |

 

 

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**Item5 — Other Information**

 

Aspreviously reported, on December 14, 2007, the Board of Directors of theCompany adopted amendments to the Company’s Amended and Restated Director andOfficer Compensation and Deferral Investment Plan, 2004 Stock Incentive Plan,2000 Employee Stock Plan, 1999 Stock Incentive Plan and 1997 Non-EmployeeDirector Stock Option Plan, and amended the Company’s change of controlagreements with its named executive officers. The principal purpose of these amendments was to comply with therecently issued final regulations under Section 409A of the InternalRevenue Code of 1986, as amended, which govern the deferral of compensationwhere a director, officer or employee has a legally binding right tocompensation that is payable in a future year. On January 30, 2008 the Compensation Committee of the Board of Directorsadopted Standard Terms and Conditions for administration of non-qualified stockoptions under the 2004 Stock Incentive Plan. Copies of these amended plans, agreements and terms and conditions areattached as exhibits to this Quarterly Report on Form 10-Q.

 

**Item6 — Exhibits**

 

(a)                                  Index to Exhibits

 
| 4.1    |   | Amended  and Restated Director and Officer Compensation and Deferral Investment Plan,  as amended.*                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                    |
| 4.2    |   | 1997  Non-Employee Director Stock Option Plan, as amended.*                                                                                             |
|   |   |                                                                                                                                                    |
| 4.3    |   | 1999  Stock Incentive Plan, as amended.*                                                                                                                |
|   |   |                                                                                                                                                    |
| 4.4    |   | 2000  Employee Stock Plan, as amended.*                                                                                                                 |
|   |   |                                                                                                                                                    |
| 4.5    |   | 2004  Stock Incentive Plan, as amended.*                                                                                                                |
|   |   |                                                                                                                                                    |
| 4.6    |   | Standard  Terms and Conditions Relating to Non-Qualified Stock Options, effective as of  January 1, 2008, pertaining to the 2004 Stock Incentive Plan.* |
|   |   |                                                                                                                                                    |
| 10.1   |   | Revolving  Credit Agreement dated as of November 6, 2007, between the Company and  Associated Bank, N.A.**                                         |
|   |   |                                                                                                                                                    |
| 10.2   |   | Amended  form of Change of Control Agreement for named executive officers David P.  Reiland, Peter M. McCormick and Marty J. Schwenner.*                |
|   |   |                                                                                                                                                    |
| 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.*                    |

----

*     Filedwith this Report on Form 10-Q.

 

**    Previously filed under Form 8-K of theCompany on November 7, 2007 and incorporated herein by this reference.

 

 

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SIGNATURES

 

      Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                         |   | MAGNETEK, INC.                              |   |
|------------------------------|--------|---------------------------------------------|--------|
|                         |   | (Registrant)                                |   |
|                         |   |                                        |   |
|                         |   |                                        |   |
| Date:  February 8, 2008 |   | /s/ David P.  Reiland                       |   |
|                         |   | David P. Reiland                            |   |
|                         |   | President and  Chief Executive Officer      |   |
|                         |   | (Duly authorized  officer of the Registrant |   |
|                         |   | and principal  executive officer)           |   |
|                         |   |                                        |   |
|                         |   |                                        |   |
|                         |   |                                        |   |
|                         |   |                                        |   |
|                         |   |                                        |   |
| Date:  February 8, 2008 |   | /s/ Marty J.  Schwenner                     |   |
|                         |   | Marty J.  Schwenner                         |   |
|                         |   | Vice-President  and Chief Financial Officer |   |
|                         |   | (Duly authorized  officer of the Registrant |   |
|                         |   | and principal  financial officer)           |   |
|                         |   |                                        |   |
|                         |   |                                        |   |
|                         |   |                                        |   |
|                         |   |                                        |   |

 

 

 

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