**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D. C. 20549**

 

**FORM 10-Q**

 
| **(Mark  One)**                                                                                                         |
|-------------------------------------------------------------------------------------------------------------------------|
| **ý****  QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                    |
| **For the  quarterly period ended: January 2, 2005**                                                               |
|                                                                                                                    |
| **OR**                                                                                                                  |
|                                                                                                                    |
| **o****  TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |

 

**For thetransition period from                   **

 

**Commission file****number 1-10233**

 

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**MAGNETEK, INC.**

(Exact name of registrant as specified in its charter)

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

 

**10900 Wilshire Blvd., Suite850**

**Los Angeles, California 90024**

(Address of principal executive offices)

(Zip Code)

 

**(310) 208-1980**

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý  No o

 

Indicateby check mark whether the registrant is an accelerated filer as defined in Rule12b-2 of the Exchange Act.

Yes ý  No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding ofRegistrant’s Common Stock, as of January 28, 2005, was 28,542,650 shares.

 

 

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2005 MAGNETEK FORM 10-Q

 

TABLE OF CONTENTS FOR THE QUARTERLY REPORT ON FORM 10Q

FOR THE FISCAL QUARTER ENDED JANUARY 2, 2005

 

MAGNETEK, INC.

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

 

2

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**PARTI – FINANCIAL INFORMATION**

 

**Item 1 –Financial Statements**

 

MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (amountsin thousands, except per share data)

(unaudited)

 
| ** **                                      | ** ** | **Three Months (13 Weeks) Ended** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **January 2,**               | ** ** | **December 28,** | ** ** |
| ** **                                      | ** ** | **2005**                          | ** ** | **2003** | ** ** |
|                                            |       |                              |       |   |   |
| Net sales                                       |       | $                                 | 64,026     |   | $ | 58,091 |   |
| Cost of sales                                   |       | 48,102                            |       | 45,188 |   |
|                                            |       |                              |       |   |   |
| Gross profit                                    |       | 15,924                            |       | 12,903 |   |
| Research and development                        |       | 3,877                             |       | 3,285 |   |
| Selling, general and administrative             |       | 12,311                            |       | 13,255 |   |
|                                            |       |                              |       |   |   |
| Loss from operations                            |       | (264                              | )          | (3,637 | ) |
| Interest expense                                |       | 334                               |       | 411 |   |
| Other income                                    |       | (1,300                            | )          | — |   |
|                                            |       |                              |       |   |   |
| Income (loss) before provision for income taxes |       | 702                               |       | (4,048 | ) |
| Provision for income taxes                      |       | 140                               |       | — |   |
| Net income (loss)                               |       | $                                 | 562        |   | $ | (4,048 | ) |
|                                            |       |                              |       |   |   |
| Earnings (loss) per common share                |       |                              |       |   |   |
|                                            |       |                              |       |   |   |
| Basic and diluted:                              |       |                              |       |   |   |
| Net income (loss)                               |       | $                                 | 0.02       |   | $ | (0.15 | ) |

 

See accompanying notes

 

3

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MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (amountsin thousands, except per share data)

(unaudited)

 
| ** **                                            | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|
| ** **                                            | ** ** | **(27 Weeks)**       | ** ** | **(26 Weeks)** | ** ** |
| ** **                                            | ** ** | **January 2,**  | ** ** | **December 28,** | ** ** |
| ** **                                            | ** ** | **2005**             | ** ** | **2003** | ** ** |
|                                                  |       |                 |       |   |   |
| Net sales                                             |       | $                    | 133,204    |   | $ | 108,526 |   |
| Cost of sales                                         |       | 100,342              |       | 85,277 |   |
|                                                  |       |                 |       |   |   |
| Gross profit                                          |       | 32,862               |       | 23,249 |   |
| Research and development                              |       | 7,571                |       | 6,128 |   |
| Selling, general and administrative                   |       | 24,016               |       | 23,725 |   |
|                                                  |       |                 |       |   |   |
| Income (loss) from operations                         |       | 1,275                |       | (6,604 | ) |
| Interest expense                                      |       | 698                  |       | 1,083 |   |
| Other income                                          |       | (1,300               | )          | — |   |
|                                                  |       |                 |       |   |   |
| Income (loss) before provision for  income taxes |       | 1,877                |       | (7,687 | ) |
| Provision for income taxes                            |       | 375                  |       | — |   |
| Net income (loss)                                     |       | $                    | 1,502      |   | $ | (7,687 | ) |
|                                                  |       |                 |       |   |   |
| Earnings (loss) per common share                      |       |                 |       |   |   |
|                                                  |       |                 |       |   |   |
| Basic and diluted:                                    |       |                 |       |   |   |
| Net income (loss)                                     |       | $                    | 0.05       |   | $ | (0.30 | ) |

 

See accompanying notes

 

4

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MAGNETEK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

 
| ** **                                      | ** ** | **January 2,** | ** ** | **June 27,** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2005**            | ** ** | **2004**          | ** ** |
| ** **                                      | ** ** | **(unaudited)**     | ** ** | **(audited)**     | ** ** |
| ASSETS                                          |       |                |       |              |       |
| Current assets:                                 |       |                |       |              |       |
| Cash                                            |       | $                   | 4,054      |              | $          | 2,318 |   |
| Accounts receivable, net                        |       | 62,965              |       | 57,608            |       |
| Inventories                                     |       | 54,414              |       | 51,432            |       |
| Prepaid expenses and other                      |       | 6,112               |       | 9,027             |       |
| Total current assets                            |       | 127,545             |       | 120,385           |       |
|                                            |       |                |       |              |       |
| Property, plant and equipment                   |       | 139,265             |       | 123,036           |       |
| Less-accumulated depreciation and amortization  |       | 105,176             |       | 90,918            |       |
| Property, plant and equipment, net              |       | 34,089              |       | 32,118            |       |
|                                            |       |                |       |              |       |
| Goodwill                                        |       | 65,362              |       | 63,828            |       |
| Prepaid pension                                 |       | 56,809              |       | 57,523            |       |
| Other assets                                    |       | 13,906              |       | 14,293            |       |
| Total Assets                                    |       | $                   | 297,711    |              | $          | 288,147 |   |
|                                            |       |                |       |              |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |                |       |              |       |
|                                            |       |                |       |              |       |
| Current liabilities:                            |       |                |       |              |       |
| Accounts payable                                |       | $                   | 36,102     |              | $          | 41,181 |   |
| Accrued liabilities                             |       | 9,861               |       | 11,551            |       |
| Current portion of long-term debt               |       | 2,123               |       | 1,997             |       |
| Total current liabilities                       |       | 48,086              |       | 54,729            |       |
|                                            |       |                |       |              |       |
| Long-term debt, net of current portion          |       | 21,082              |       | 16,129            |       |
|                                            |       |                |       |              |       |
| Pension benefit obligations                     |       | 88,889              |       | 88,889            |       |
| Other long-term obligations                     |       | 8,792               |       | 7,552             |       |
|                                            |       |                |       |              |       |
| Deferred income taxes                           |       | 8,911               |       | 8,326             |       |
|                                            |       |                |       |              |       |
| Stockholders’ equity                       |       |                |       |              |       |
| Common stock                                    |       | 285                 |       | 285               |       |
| Paid in capital in excess of par value          |       | 127,928             |       | 127,692           |       |
| Retained earnings                               |       | 70,990              |       | 69,488            |       |
| Accumulated other comprehensive loss            |       | (77,252             | )          | (84,943           | )          |
| Total stockholders’ equity                 |       | 121,951             |       | 112,522           |       |
|                                            |       |                |       |              |       |
| Total Liabilities and Stockholders’ Equity |       | $                   | 297,711    |              | $          | 288,147 |   |

 

See accompanying notes

 

5

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MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 
| ** **                                                                                                 | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                 | ** ** | **(27 Weeks)**       | ** ** | **(26 Weeks)** | ** ** |
| ** **                                                                                                 | ** ** | **January 2,**  | ** ** | **December 28,** | ** ** |
| ** **                                                                                                 | ** ** | **2005**             | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                                      |       |                 |       |   |   |
| Net income (loss)                                                                                          |       | $                    | 1,502      |   | $ | (7,687 | ) |
| Adjustments to reconcile net income (loss) to net  cash  provided by (used in) operating  activities: |       |                 |       |   |   |
| Depreciation and amortization                                                                              |       | 4,897                |       | 5,041 |   |
| Tax refund proceeds, net                                                                                   |       | 3,332                |       | — |   |
| Changes in operating assets and liabilities                                                                |       | (9,331               | )          | 607 |   |
| Total adjustments                                                                                          |       | (1,102               | )          | 5,648 |   |
| Net cash provided by (used in) operating activities                                                        |       | 400                  |       | (2,039 | ) |
|                                                                                                       |       |                 |       |   |   |
| Cash flows from investing activities:                                                                      |       |                 |       |   |   |
| Proceeds from sale of businesses                                                                           |       | —               |       | 1,250 |   |
| Capital expenditures                                                                                       |       | (3,938               | )          | (2,506 | ) |
| Net cash used in investing activities                                                                      |       | (3,938               | )          | (1,256 | ) |
|                                                                                                       |       |                 |       |   |   |
| Cash flow from financing activities:                                                                       |       |                 |       |   |   |
| Proceeds from issuance of common stock                                                                     |       | 236                  |       | 18,768 |   |
| Borrowings (repayments) under line-of-credit  agreements                                              |       | 6,391                |       | (14,428 | ) |
| Principal payments under capital  lease obligations                                                   |       | (40                  | )          | (207 | ) |
| Borrowings under (repayment of) long term notes                                                            |       | (1,272               | )          | 756 |   |
| Increase in deferred financing costs                                                                       |       | (41                  | )          | (516 | ) |
| Net cash provided by financing activities                                                                  |       | 5,274                |       | 4,373 |   |
|                                                                                                       |       |                 |       |   |   |
| Net increase in cash                                                                                       |       | $                    | 1,736      |   | $ | 1,078 |   |
| Cash at the beginning of the period                                                                        |       | 2,318                |       | 1,680 |   |
| Cash at the end of the period                                                                              |       | $                    | 4,054      |   | $ | 2,758 |   |

 

See accompanying notes

 

6

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MAGNETEK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 2, 2005

(Amounts in thousands, except per share data)

(unaudited)

 

1.                                       Basisof Presentation

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they do notinclude 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 June 27, 2004 filed with the Securities and ExchangeCommission.  In the Company’s opinion,these unaudited statements contain all adjustments, consisting of normalrecurring adjustments, necessary to present fairly the financial position ofthe Company as of January 2, 2005, and the results of its operations andits cash flows for the three-month and six-month periods ended January 2,2005 and December 28, 2003.  Resultsfor the three-months and six-months ended January 2, 2005 are not necessarilyindicative of results that may be experienced for the full fiscal year.

 

TheCompany uses a fifty-two, fifty-three week fiscal year ending on the Sundaynearest to June 30.  Fiscal quartersare the thirteen- or fourteen-week periods ending on the Sunday nearest September 30,December 31, March 31 and June 30.  The three-month periods ended January 2,2005 and December 28, 2003 (the Company’s second fiscal quarter) eachcontained thirteen weeks; the six-month periods ended January 2, 2005 and December 28,2003 contained twenty-seven and twenty-six weeks, respectively.

 

2.                                       Summaryof Significant Accounting Policies

 

Principlesof Consolidation – The condensed consolidated financialstatements include the accounts of Magnetek, Inc. and its subsidiaries (the “Company”).  All significant intercompany accounts andtransactions have been eliminated.

 

Useof Estimates - The preparation of financial statements inaccordance with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.  Significant areas requiring management estimates include the followingkey financial areas:

 

*AccountsReceivable*

 

Accountsreceivable represent receivables from customers in the ordinary course ofbusiness.  The Company is subject tolosses from uncollectible receivables in excess of its allowances.  The Company maintains allowances for doubtfulaccounts for estimated losses from customers’ inability to make requiredpayments.  In order to estimate theappropriate level of this allowance, the Company analyzes historical bad debts,customer concentrations, current customer creditworthiness, current economictrends and changes in customer payment patterns.  If the financial conditions of the Company’scustomers were to deteriorate and to impair their ability to make payments,additional allowances may be required in future periods.  The Company’s management believes that allappropriate allowances have been provided.

 

*Inventories*

 

The Company’s inventories are stated atthe lower of cost or market.  Cost isdetermined by the first-in, first-out (“FIFO”) method, including material,labor and factory overhead.  Inventory onhand may exceed future demand either because the product is obsolete, or theamount on hand is more than can be used to meet future needs.  The Company identifies potentially obsoleteand excess inventory by evaluating overall inventory levels.  In assessing the ultimate realization ofinventories, the Company is required to make judgments as to future demandrequirements and compare those with the current or committed inventory levels.  If future demand requirements are less favorablethan those projected by management, additional inventory write-downs may berequired.

 

7

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*Reserves for Contingencies*

 

TheCompany periodically records the estimated impacts of various conditions, situationsor circumstances involving uncertain outcomes. The accounting for such events is prescribed under Statement ofFinancial Accounting Standard (“SFAS”) No. 5, “Accounting for Contingencies.”  SFAS No. 5 defines a contingency as anexisting condition, situation, or set of circumstances involving uncertainty asto possible gain or loss to an enterprise that will ultimately be resolved whenone or more future events occur or fail to occur.

 

SFAS No. 5 does not permit the accrual ofgain contingencies under any circumstances. For loss contingencies, the loss must be accrued if (1) information isavailable that indicates it is probable that the loss has been incurred, giventhe likelihood of uncertain events; and (2) that the amount of the loss can bereasonably estimated.

 

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

 

*IncomeTaxes*

 

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

 

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

 

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

 

*Pension Benefits*

 

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

 

Revenue Recognition –The Company’s policy is to recognize revenue when the earnings process iscomplete.  The criteria used in makingthis determination are persuasive evidence of an arrangement, delivery hasoccurred, the sales price is fixed or determinable, and collectibility isreasonably assured.  Sales are recordednet of returns and allowances, which are estimated using historical data, atthe time of sale.

 

Revenue is recognized upon shipment, except in thosecases where product is shipped to customers with consignment stock agreements,wherein revenue is recognized when the customer removes the product fromconsignment stock.  With the exception ofconsignment stock, terms of shipment are FOB shipping point, and payment is notcontingent upon resale or any other matter other than passage of time.  As a result, title to goods passes uponshipment.  Amounts billed to customersfor shipping costs are reflected in net sales; shipping costs are reflected incost of sales.

 

Salesto distributors are recorded with appropriate reserves for future returns inaccordance with SFAS No. 48, “Revenue Recognition When Right of Return Exists”,and generally do not include future installation obligations or acceptancerequirements.

 

Property,Plant and Equipment – Additions and improvements arecapitalized at cost, whereas expenditures for maintenance and repair arecharged to expense as incurred. Depreciation is provided over the estimated useful lives of therespective assets (ranging from three to forty years) principally using thestraight-line method.

 

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

 

Deferred Financing Costs –Costs incurred to obtain financing are deferred and included in other assets inthe condensed consolidated balance sheets.  Deferred financing costs are amortized overthe term of the financing facility, and related amortization expenses areincluded in interest expense in the condensed consolidated statements ofoperations.

 

 

8

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Earnings per Share –In accordance with SFAS No. 128, “Earnings per Share”, basicearnings per share are computed using the weighted average number of commonshares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuableupon the assumed exercise of stock options as if all exercises had occurred atthe beginning of the fiscal period.

 

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

 

Thefollowing table illustrates the pro forma effect on net income (loss) andearnings (loss) per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, tostock-based employee compensation:

 
| ** **                                                                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **January 2,**    | ** ** | **December 28,** | ** ** | **January 2,** | ** ** | **December 28,** | ** ** |
| ** **                                                                                                        | ** ** | **2005**               | ** ** | **2003**              | ** ** | **2005** | ** ** | **2003** | ** ** |
| Net income (loss)                                                                                                 |       | $                      | 562        |                  | $          | (4,048 | ) | $ | 1,502 |   | $ | (7,687 | ) |
|                                                                                                              |       |                   |       |                  |       |   |   |   |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value based method for  all awards |       | (1,160                 | )          | (1,149                | )          | (2,384 | ) | (2,290 | ) |
| Pro forma net loss                                                                                                |       | $                      | (598       | )                     | $          | (5,197 | ) | $ | (882 | ) | $ | (9,977 | ) |
|                                                                                                              |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) per share  as reported:                                                                           |       |                   |       |                  |       |   |   |   |   |
| Basic and diluted                                                                                                 |       | $                      | 0.02       |                  | $          | (0.15 | ) | $ | 0.05 |   | $ | (0.30 | ) |
|                                                                                                              |       |                   |       |                  |       |   |   |   |   |
| Pro forma loss per share:                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Basic and diluted                                                                                                 |       | $                      | (0.02      | )                     | $          | (0.19 | ) | $ | (0.03 | ) | $ | (0.39 | ) |

 

RecentAccounting Pronouncement – On December 16, 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004),“Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting forStock-Based Compensation.”  SFAS No.123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”,and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach inSFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. Pro forma disclosure is no longer analternative.

 

Adoptionof SFAS No. 123(R) is required as of the first interim or annual reportingperiod that begins after June 15, 2005. The Company will adopt theprovisions of SFAS No. 123(R) as required in our first quarter of fiscal year2006.

 

SFASNo. 123(R) permits public companies to adopt its requirements using one of twomethods:

 

1.               A“modified prospective” method in which compensation cost is recognizedbeginning with the effective date (a) based on the requirements of SFAS No.123(R) for all share-based payments granted after the effective date and (b)based on the requirements of SFAS No. 123 for all awards granted to employeesprior to the effective date of SFAS No. 123(R) that remain unvested on theeffective date.

 

2.               A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS No. 123 for purposes of proforma disclosures either (a) all prior periods presented or (b) prior interimperiods of the year of adoption.

 

9

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TheCompany plans to adopt SFAS No. 123(R) using the modified-prospective method.

 

Aspermitted by SFAS No. 123, the Company currently accounts for share-basedpayments to employees using APB No. 25’s intrinsic value method and, as such,generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method willhave an impact on our result of operations, although it will have no impact onour overall financial position. The impact of adoption of SFAS No. 123(R)cannot be predicted at this time because it will depend on levels ofshare-based payments granted in the future.  However, had we adopted SFASNo. 123(R) in prior periods, the impact of that standard would haveapproximated the impact of SFAS No. 123 as described in the disclosure of proforma net income (loss) and earnings (loss) per share in the table above under “Stock-BasedCompensation.  SFAS No. 123(R) alsorequires the benefits of tax deductions in excess of recognized compensationcost to be reported as a financing cash flow, rather than as an operating cashflow as required under current literature.  To the extent these taxdeductions are recognized, this requirement will reduce net operating cashflows and increase net financing cash flows in periods after adoption.

 

DerivativeFinancial Instruments – The Company has occasionally usedderivative financial instruments to reduce financial market risks. Theseinstruments are used to hedge foreign currency and interest rate marketexposures. The Company does not use derivative financial instruments forspeculative or trading purposes.  TheCompany accounts for derivative instruments in accordance with SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities”, and SFAS No. 149, “Amendmentof Statement 133 on Derivatives and Hedging”. These statements require that an entity recognize all derivatives aseither assets or liabilities in the statement of financial position, measuredat fair value, and that hedge accounting be applied when certain conditions aremet.  The Company had no derivativefinancial instruments at January 2, 2005.

 

ForeignCurrency Translation - The Company’s foreign entities’accounts are measured using local currency as the functional currency.  Assets and liabilities are translated at theexchange rate in effect at year-end. Revenues and expenses are translated at the rates of exchange prevailingduring the year.  Unrealized translationgains and losses arising from differences in exchange rates from period toperiod are included as a component of accumulated other comprehensive loss instockholders’ equity.  The Company doesnot hold large cash balances in foreign currencies,therefore the effect of exchange rate changes on these balances is not materialto the consolidated statement of cash flows.

 

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

 

3.                                       Inventories

 

Inventoriesat January 2, 2005 and June 27, 2004 consist of the following:

 
| ** **                    | ** ** | **January 2,** | ** ** | **June 27,** | ** ** |
|-------------------------------|------------|---------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2005**            | ** ** | **2004**          | ** ** |
| Raw materials and stock parts |       | $                   | 32,476     |              | $          | 29,237 |   |
| Work-in-process               |       | 13,384              |       | 13,498            |       |
| Finished goods                |       | 8,554               |       | 8,697             |       |
|                          |       | $                   | 54,414     |              | $          | 51,432 |   |

 

4.                                       Commitmentsand Contingencies

 

The Company is a party to several productliability lawsuits associated with discontinued business operations that havebeen sold.  As part of the salestransactions, the Company agreed for a limited time to defend and indemnify thepurchasers of the discontinued business operations against certain productliability claims.  The last remainingcontractual indemnification obligation of that type terminated on December 14,2003; however, the Company remains obligated to continue defending andindemnifying valid claims made prior to the applicable termination date foreach such obligation.  The Company isalso a named party in two product liability lawsuits related to the TelemotiveIndustrial Controls business acquired in December 2002, although insurancehas accepted the Company’s tender of the defense of those claims and it isexpected that the policies in effect for the Telemotive Industrial Controlsbusiness prior to the sale will cover the losses, if any, and that the Companywill be indemnified by the selling shareholders for any uninsured losses.   The few remaining product liability casesrelated to discontinued business operations are being aggressively defended bythe Company, and management believes that its insurers will bear all liability,if any, that exceeds applicable deductibles, and that none of these proceedingsindividually or in the aggregate will have a material adverse effect on theCompany’s results of operations or financial position.

 

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The Company has been named, along with numerousother defendants, in asbestos-related lawsuits associated with businessoperations previously acquired by the Company, but which are no longerowned.  None of the businesses producedor sold asbestos-containing products during the Company’s ownership and theCompany believes it has no liability for such claims.  The Company is either contractuallyindemnified against liability for asbestos-related claims or believes that theclaims may be covered by policies of insurance in effect prior to the Company’spurchase of the businesses.  While theoutcome of these asbestos-related lawsuits and the availability of coveragecannot be predicted with certainty, claims against the Company have nothistorically been aggressively pursued by plaintiff’s counsel in the past andthe Company has routinely been dismissed from such cases prior to trial.  In certain jurisdictions, the Company hassuccessfully obtained dismissal early in the proceedings.  The Company does not believe theasbestos-related lawsuits, individually or in the aggregate, will have amaterial adverse effect on its financial position or results of operations.

 

In April 1998, Ole K. Nilssen filed alawsuit in the U.S. District Court for the Northern District of Illinoisalleging infringement by the Company of seven of his patents pertaining toelectronic ballast technology, and seeking unspecified damages and injunctiverelief to preclude the Company from making, using or selling products allegedlyinfringing his patents.  The Companydenied that its products infringed any valid patent and filed a responseasserting affirmative defenses, as well as a counterclaim for a judicial declarationthat its products do not infringe the patents asserted by Mr. Nilssen and alsothat the asserted patents are invalid. In June 2001, the Company sold its lighting business to UniversalLighting Technologies, Inc. (“ULT”), and agreed to provide a limitedindemnification against certain claims of infringement that Mr. Nilssen mightallege against ULT.  In April 2003,Mr. Nilssen’s lawsuit and the counterclaims were dismissed with prejudice andboth parties agreed to submit limited issues in dispute to binding arbitrationbefore an arbitrator with a relevant technical background.  Arbitration commenced on November 8,2004 and a decision is expected prior to the end of fiscal year 2005.  The Company presented what it believes arestrong defenses at arbitration; however, an unfavorable decision could have amaterial adverse effect on the Company’s financial position and results ofoperations.

 

In February 2003, Mr. Nilssen filed alawsuit in the U.S. District Court for the Northern District of Illinoisalleging infringement by ULT of twenty-nine of his patents pertaining toelectronic ballast technology, and seeking unspecified damages and injunctiverelief to preclude ULT from making, using or selling products allegedlyinfringing his patents.  ULT made a claimfor indemnification, which the Company accepted, subject to the limitations setforth in the purchase and sale agreement. The case is now pending in the U.S. District Court for the MiddleDistrict of Tennessee following the Company’s successful motion to remove thecase to a more appropriate forum.  As inthe case against Magnetek, the Company denies that the products for which ithas an indemnification obligation to ULT infringe any valid patent and hasfiled a response on behalf of ULT asserting affirmative defenses, as well as acounterclaim for a judicial declaration that the products do not infringe Mr.Nilssen’s patents and that the patents are invalid.  The Company will continue to aggressivelydefend the claims against ULT that are subject to defense andindemnification and believes its defenses against the indemnifiableclaims are strong; however, an unfavorable decision could have a materialadverse effect on the Company’s financial position and results of operations.

 

From time to time, theCompany discovered the existence of hazardous substances at certain facilitiesassociated with previously owned businesses and responded as necessary to bringthe facilities into compliance with applicable laws and regulations. Upon saleof the businesses, the Company agreed, in some cases, to indemnify the buyersagainst environmental claims associated with the divested operations, subjectto various conditions and limitations. Remediation activities, including thoserelated to the Company’s indemnification obligations, did not involve materialexpenditures during the second quarter of fiscal 2005 and are not expected toinvolve material expenditures during the third quarter of fiscal of 2005.

 

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 second quarter offiscal 2005 and are not expected to be material during the third quarter offiscal 2005. Although the materiality of future expenditures for environmentalactivities may be affected by the level and type of contamination, the extentand nature of cleanup activities required by governmental authorities, thenature of the Company’s alleged connection to the contaminated sites, thenumber and financial resources of other potentially responsible parties, theavailability of indemnification rights against third parties and theidentification of additional contaminated sites, the Company’s estimated shareof liability, if any, for environmental remediation, including itsindemnification obligations, is not expected to be material.

 

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

 

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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 other substances, including solvents, in thesoil and in the groundwater underlying the facility and in certain offsitesoil, sediment and biota samples has been identified. The McMinnville plant islisted as a Tennessee Inactive Hazardous Waste Substance Site and plantemployees were notified of the presence of contaminants at the facility. Gouldhas completed an interim remedial excavation and disposal of onsite soilcontaining PCBs and a preliminary investigation and cleanup of certain onsiteand offsite contamination. The Company believes the cost of furtherinvestigation and remediation (including ancillary costs) arecovered by the 1983 Indemnity. The Company sold its leasehold interest in theMcMinnville plant in August 1999 and while the Company believes that Gouldwill continue to perform substantially under its indemnity obligations, Gould’ssubstantial failure to perform such obligations could have a material adverseeffect on the Company’s financial position, cash flows or results ofoperations.

 

In 1986, the Companyacquired the stock of Universal Manufacturing Company (“Universal”) from apredecessor of Fruit of the Loom (“FOL”), and the predecessor agreed toindemnify the Company against certain environmental liabilities arising frompre-acquisition activities at a facility in Bridgeport, Connecticut.  Environmental liabilities covered by the indemnificationagreement include completion of additional cleanup activities, if any, at theBridgeport facility (sold in connection with the sale of the transformerbusiness in June 2001) and defense and indemnification against liabilityfor potential response costs related to offsite disposal locations.  FOL, the successor to Universal, filed apetition for Reorganization under Chapter 11 of the Bankruptcy Code in 1999 andthe Company filed a proof of claim in the proceeding for obligations related tothe environmental indemnification agreement. The Company believes that FOL had substantially completed the clean-upobligations required by the indemnification agreement prior to the bankruptcyfiling.  In November 2001, theCompany and FOL entered into an agreement involving the allocation of certainpotential tax deductions and Magnetek withdrew its claims in the bankruptcyproceeding.  FOL’s obligation to thestate of Connecticut was not discharged in the reorganization proceeding.  FOL’s inability to satisfy its remainingobligations related to the Bridgeport facility and any offsite disposallocations, or the discovery of additional environmental contamination at theBridgeport facility could have a material adverse effect on the Company’sfinancial position or results of operations.

 

5.                                       ComprehensiveIncome (Loss)

 

Forthe three- and six-month periods ended January 2, 2005 and December 28,2003, comprehensive income (loss) consisted of the following:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **January 2,**    | ** ** | **December 28,** | ** ** | **January 2,** | ** ** | **December 28,** | ** ** |
| ** **                      | ** ** | **2005**               | ** ** | **2003**              | ** ** | **2005** | ** ** | **2003** | ** ** |
| Net income (loss)               |       | $                      | 562        |                  | $          | (4,048 | ) | $ | 1,502 |   | $ | (7,687 | ) |
| Currency translation adjustment |       | 5,816                  |       | 4,295                 |       | 7,691 |   | 5,387 |   |
| Comprehensive income (loss)     |       | $                      | 6,378      |                  | $          | 247 |   | $ | 9,193 |   | $ | (2,300 | ) |

 

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6.                                       Earnings(Loss) Per Share

 

The following table setsforth the computation of basic and diluted earnings (loss) per share for thethree- and six-month periods ended January 2, 2005 and December 28,2003:  

 
| ** **                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|----------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                 | ** ** | **January 2,**    | ** ** | **December 28,** | ** ** | **January 2,** | ** ** | **December 28,** | ** ** |
| ** **                                                                 | ** ** | **2005**               | ** ** | **2003**              | ** ** | **2005** | ** ** | **2003** | ** ** |
| **Numerator:**                                                             |       |                   |       |                  |       |   |   |   |   |
| Net income (loss)                                                          |       | $                      | 562        |                  | (4,048     | ) | $ | 1,502 |   | (7,687 | ) |
| **Denominator:**                                                           |       |                   |       |                  |       |   |   |   |   |
| Weighted average shares used to compute basic  earnings (loss) per share   |       | 28,520                 |       | 27,618                |       | 28,511 |   | 25,709 |   |
| Add dilutive effect of stock options outstanding                           |       | 758                    |       | —                |       | 761 |   | — |   |
| Weighted average shares used to compute diluted  earnings (loss) per share |       | 29,278                 |       | 27,618                |       | 29,272 |   | 25,709 |   |
|                                                                       |       |                   |       |                  |       |   |   |   |   |
| **Net income (loss) per share:**                                           |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                      |       | $                      | 0.02       |                  | $          | (0.15 | ) | $ | 0.05 |   | $ | (0.30 | ) |
| Diluted                                                                    |       | $                      | 0.02       |                  | $          | (0.15 | ) | $ | 0.05 |   | $ | (0.30 | ) |

 

Thedilutive effect of stock options outstanding at December 28, 2003 was not includedin the calculation of dilutive loss per share for the three-month and six-monthperiods ended December 28, 2003. The Company had a net loss for those periods, and as a result, inclusionof the dilutive effect of stock options would have had an anti-dilutive impact

 

7.                                       Warranties

 

The Company offers warranties for certainproducts that it manufactures, with the warranty term generally ranging fromone to two years.  Warranty reserves areestablished for costs expected to be incurred after the sale and delivery ofproducts under warranty, based mainly on known product failures and historicalexperience.  Actual repair costs incurredfor products under warranty are charged against the established reserve balanceas incurred.  Changes in the warranty reservewere as follows:

 
| ** **                                           | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|
| ** **                                           | ** ** | **January 2,**  | ** ** | **December 28,** | ** ** |
| ** **                                           | ** ** | **2005**             | ** ** | **2003** | ** ** |
| Balance, beginning of fiscal year                    |       | $                    | 254        |   | $ | 503 |   |
| Additions charged to earnings for product warranties |       | 363                  |       | 31 |   |
| Use of reserve for warranty obligations              |       | (288                 | )          | (51 | ) |
| Decrease to pre-existing warranties                  |       | —               |       | (75 | ) |
| Balance, end of period                               |       | $                    | 329        |   | $ | 408 |   |

 

Warranty reserves are included in accruedliabilities in the accompanying condensed consolidated balance sheets.

 

8.                                       RestructuringCosts

 

Duringfiscal year 2004, the Company began a series of restructuring activities thatimpact both its domestic and foreign operations.  The Company is accounting for theseactivities in accordance with SFAS No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities”, which requires that liabilities associatedwith exit or disposal activities initiated after December 31, 2002, berecognized when the liability is incurred, with the exception of termination ofcertain leases and contracts.

 

TheCompany began restructuring activities in its European operations during thesecond quarter of fiscal 2004, which include a workforce reduction ofapproximately 200 positions in Western Europe and the relocation of thosepositions to lower cost facilities in Eastern Europe and China.  The totalcost of these restructuring activities from commencement to completion isestimated at $1.7 million, related to employee severance and lease terminationcosts.  The Company expects to complete these restructuring activities bythe end of March 2005.  Costs incurred in

 

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the three-month and six-monthperiods ended January 2, 2005 were $0.1 million and $0.2 millionrespectively, which are included in selling, general and administrative expensein the accompanying condensed consolidated statements of operations.  The Company has incurred $1.6 million intotal restructuring costs to date related to these activities.  The Company estimates an additional $0.1million of costs will be incurred in the third quarter of fiscal 2005 tocomplete these restructuring activities.

 

In thefourth quarter of fiscal 2004, the Company began the consolidation of itsGlendale Heights, Illinois operation into its Menomonee Falls, Wisconsinfacility.  The total cost of theconsolidation activities from commencement to completion is estimated at $1.0million, related to employee severance, relocation and lease terminationcosts.  The Company expects to completethese restructuring activities by the end of March 2005.  Costs incurred in the three-month periodended January 2, 2005 were $0.2 million, of which $0.1 million areincluded in cost of goods sold and $0.1 million are included in selling,general and administrative expense in the accompanying condensed consolidatedstatements of operations.  Costs incurredin the six-month period ended January 2, 2005 were $0.6 million, of which$0.3 million are included in cost of goods sold and $0.3 million are includedin selling, general and administrative expense in the accompanying condensedconsolidated statements of operations. Cumulative costs incurred to date related to these restructuringactivities are $0.9 million.  The Companyestimates an additional $0.1 million of costs will be incurred in the thirdquarter of fiscal 2005 to complete these restructuring activities.

 

9.                                       PensionExpense

 

Pensionexpense related to the Company’s defined benefit pension plan consisted of thefollowing:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **January 2,**    | ** ** | **December 28,** | ** ** | **January 2,** | ** ** | **December 28,** | ** ** |
| ** **                          | ** ** | **2005**               | ** ** | **2003**              | ** ** | **2005** | ** ** | **2003** | ** ** |
| Service cost                        |       | $                      | —     |                  | $          | — |   | $ | — |   | $ | — |   |
| Interest cost                       |       | 2,364                  |       | 2,413                 |       | 4,903 |   | 5,125 |   |
| Expected return on plan  assets     |       | (2,630                 | )          | (2,770                | )          | (5,569 | ) | (5,298 | ) |
| Amortization of prior  service cost |       | —                 |       | —                |       | — |   | — |   |
| Recognized net actuarial  losses    |       | 659                    |       | 934                   |       | 1,380 |   | 1,770 |   |
|                                |       |                   |       |                  |       |   |   |   |   |
| Total net pension expense           |       | $                      | 393        |                  | $          | 577 |   | $ | 714 |   | $ | 1,597 |   |

 

Thenet pension expense amounts above are included in selling, general andadministrative expense in the accompanying condensed consolidated statements ofoperations.

 

10.                                 SubsequentEvents

 

In January 2005,the Company committed to a plan to divest its telecom power systems businessand intends to begin marketing the business during the third quarter of fiscal2005.  As a result we expect thisbusiness to be classified as a discontinued operation beginning in the thirdfiscal quarter.

 

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

 

Overview

 

We area global provider of digital power-electronic products, including electronicconverters, inverters, rectifiers and systems. These products are used primarily in industrial, telecommunications(telecom), data processing, consumer, imaging, alternative energy, powergeneration and other applications requiring precise, efficient, reliablepower.  We believe that with ourtechnical and productive resources we are well positioned to respond toincreasing demand for such power.  Weoperate in a single business segment, Digital Power Products, which includestwo broad product categories, Systems and Components

 

Ourpower control systems consist primarily of programmable motion control andpower conditioning systems and include alternating current (AC) and directcurrent (DC) variable-frequency motor drives, power inverters for fuel cell,wind and photovoltaic markets, and telecom power plants.  Our powersystems also include complete DC power systems for telecom and networkingapplications.

 

Ourembedded power control products, which are sold primarily to original equipmentmanufacturers for installation in their products, include: AC-to-DC switchingpower supplies, AC-to-DC rectifiers and battery chargers, DC-to-DC

 

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powerconverters, DC-to-AC power inverters and peripheral componentinterconnects.  These products are used primarily in telecommunications,data processing and storage, digital imaging, semiconductor processing andtesting equipment, medical instrumentation and home appliances.

 

Thepast several years have been very challenging in the electronic powerindustry.  The industry is characterizedby a large number of competitors, rapid changes in markets, productrequirements and demand, and consistent price pressure.  Beginning in fiscal year 2001 and continuingthrough fiscal 2003, there was a significant decrease in demand in many of ourserved markets.  This reduction in demandresulted in overcapacity in the industry and, as a result, we generatedoperating losses throughout fiscal 2003 and during the first half of fiscal2004.  We began to see recovery andincreased demand in certain of our end markets in the second half of fiscalyear 2004, and that recovery continued into our first half of fiscal 2005,ended January 2, 2005.  However wehave also experienced recent signs of slowing growth in certain of our servedmarkets.  This recent weakness isreflected in our bookings (new orders received) during our second quarter offiscal 2005.

 

Second-quarter fiscal 2005 bookings were $55.7million, 87% of our second quarter sales, and our backlog as of January 2,2005 was $70.6 million.  Bookings for thesecond quarter of fiscal 2004 were $66.0 million and our backlog as of December 28,2003 was $61.5 million.  First quarterfiscal 2005 bookings were $70.1 million, slightly higher than our first quartersales, and our backlog as of September 30, 2004 was $77.3 million.  The decline in bookings is primarily relatedto traditional embedded power products, and to a lesser degree, telecom systems.We continue to focus on gaining share in systems markets and on new productintroductions in industrial, transportation, utility, and alternative energymarkets, and our future sales growth is largely dependent on the success ofthis strategy.  As a result, we expectthat our product development costs and selling expenses could continue toexceed prior year levels during much of fiscal 2005.

 

Fiscal2005 second-quarter sales were $64.0 million, a 10% increase over fiscal 2004second-quarter sales of $58.1 million, and down 7% from the fiscal 2005 firstquarter sales of $69.2 million.  Thefirst quarter of fiscal 2005 contained fourteen weeks, while the other periodscontained thirteen weeks. The extra week, which equates to 7% of thefourteen-week fiscal 2005 first-quarter, was the main factor in the sequentialquarterly decline in sales.   Our averageweekly sales were flat in the second quarter of fiscal 2005 compared to thefirst quarter of fiscal 2005, as we experienced little or no sales growth in embeddedpower supplies, material handling and elevator served markets.  Also, demand for our telecom products wasnegatively impacted by a slowdown in capital spending in that sector.  We continued to gain new orders for ouralternative energy products during the second quarter of fiscal 2005, but salesof those products are not yet contributing significantly to our total sales.

 

Ouroperating loss was $0.3 million in the second quarter of fiscal 2005 comparedto an operating loss of $3.6 million in the second quarter of fiscal 2004.  Operating income was $1.3 million for the sixmonths ended January 2, 2005 compared to an operating loss of $6.6 millionfor the six months ended December 28, 2003.  The operating loss in the second quarter offiscal 2005 was primarily due to operating losses in our telecom systemsbusiness, increased legal fees, increased spending on research and development(R&D) and continuing restructuring costs. We intend to divest our telecom systems business and we will continue toidentify cost reduction opportunities, however we feel increased spending onR&D is essential to achievement of our sales strategy.  We began restructuring activities in thesecond quarter of fiscal 2004, related mainly to plant consolidation in theU.S. and relocation of product lines from Europe to our factory in China.  Our second quarter fiscal 2005 resultsinclude the impact of $0.3 million in restructuring costs, comprised mainly ofemployee severance.  We expect tocomplete these activities during the third quarter of fiscal 2005 (March 2005).We are also moving our manufacturing operations in China to a nearby largerfacility. This move will be completed during the third quarter of fiscal 2005.The estimated cost of the move is not significant and will approximately doubleour manufacturing capacity in China.

 

Ourcash balances increased $1.7 million during the second quarter of fiscal 2005,and our total outstanding debt balances increased by $5.1 million.  Fiscal 2005 second-quarter capitalexpenditures were $2.2 million, and we currently have no plans for majorcapital outlays.

 

Our strategy will continue to emphasizediversity in both our product offerings and our targeted markets, continuedrelocation of manufacturing operations to China, outsourcing of certainproducts and processes, and increased sales of higher margin products andsystems.  We believe that futuresustained profitability is highly dependent upon increasing sales and grossmargins, penetration of higher margin markets (such as utilities andalternative energy) and a shift in our sales mix to a proportionately higherpercentage of Systems.

 

Critical Accounting Policies

 

Thefollowing discussion and analysis of our financial position and results ofoperations is based upon our condensed consolidated financial statements.  In preparing financial statements inconformity with accounting principles generally accepted in the United States,we are required to make estimates and assumptions that affect the reportedamount of assets and liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities at the date of our financialstatements. Such estimates are based upon historical experience and otherassumptions

 

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believed to be reasonable givenknown circumstances.  Actual resultscould differ from those estimates.  On anongoing basis, we evaluate and update our estimates, and we believe the followingdiscussion addresses our policies which are most critical to understanding ourfinancial position and results of operations, andwhich require our most complex judgments.

 

*Accounts Receivable and Allowancefor Doubtful Accounts*

 

Our allowance for doubtful accounts is determinedusing a combination of factors to reasonably ensure that receivables balancesare not overstated due to uncollectibility. We maintain an allowance fordoubtful accounts based on a variety of factors,including the length of time receivables are past due, significant one-timeevents, financial condition of customers and historical experience. We recordspecific provisions for individual accounts when we become aware of a customer’sinability to meet its financial obligations to us, such as in the case ofbankruptcy filings or deterioration in the customer’s operating results orfinancial position. In addition, a general allowance is established based onhistorical bad debt experience as a percentage of sales.  We feel these estimates have been accurate inthe past; however, market conditions in our industry can change veryrapidly.  Changes in market conditions,customer circumstances, bad debt experience or sales volumes would impact ourassumptions, and our estimates of the recoverability of receivables would befurther adjusted, either upward or downward.

 

*Inventories*

 

Weidentify potentially obsolete and excess inventory by evaluating overallinventory levels in relation to expected future requirements and marketconditions, and provisions for excess and obsolete inventory and inventoryvaluation are recorded accordingly. Obsolete inventory is defined as inventory with no usage or requirementsfor the past six months and no future requirements.  Provisions are made for obsolete inventory atthe point in time the determination is made that the inventory is obsolete.

 

Excessinventory is defined as those items where quantities on hand exceed twelvemonths’ usage.  Twelve months’ usagefigures consider usage over the past twelve months as well as future expectedusage.  Adjustments for excess inventoryare recorded to cost of sales quarterly.

 

Inassessing the ultimate realization of inventories, we are required to makejudgments as to future demand requirements and compare those with the currentor committed inventory levels.  Ourestimates have been reliable in the past in identifying and quantifying excessand obsolete inventory, with the exception of inventory related to our telecomproducts, where demand decreased more rapidly and in greater magnitude than weanticipated during fiscal 2002 and 2003, when additional reserves wererecorded.  If future demand requirementsare less favorable than those we currently project, our assumptions couldchange in the future and additional provisions to increase inventory reservesmay be required.

 

*Long-Lived Assets and Goodwill*

 

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

 

We arerequired to perform annual impairment tests of our goodwill, and may berequired to test more frequently in certain circumstances.  We have elected to perform our annualimpairment test in the fourth quarter of our fiscal year.  We have identified our Telecom Power, PowerComponents and Power Systems groups as reporting units under SFAS No. 142.  In assessing potential impairment, we makesignificant estimates and assumptions regarding the discounted future cashflows of our reporting units to determine the fair value of those reportingunits.    Such estimates include, but arenot limited to, projected future operating results, working capital ratios,cash flow, terminal values, market discount rates and tax rates.  When performing our annual impairment tests,we compare all relevant assumptions from the prior year test to the actualresults, and have found our assumptions to be accurate in identifyingimpairment charges.  If circumstancescause these estimates to change in the future, or if actual circumstances varysignificantly from these assumptions, this could result in additional goodwillimpairment charges.

 

*Pension Benefits*

 

We sponsor a defined benefit plan that covers anumber of current and former employees in the U.S.  The valuation of our pension plan requiresthe use of assumptions and estimates that attempt to anticipate future eventsto develop actuarial valuations of expenses, assets and liabilities.  These assumptions include discount rates,expected rates of return on plan assets and mortality rates.  We consider market conditions, includingchanges in investment returns and interest rates, in making theseassumptions.  Our plan assets arecomprised mainly of common stock and bond funds.  The expected rate of return on plan assets isa long-term assumption and is generally not changed on an annual basis.  The discount rate reflects the market forhigh-quality fixed income debt instruments and is subject to change eachyear.  Changes in assumptions typicallyresult in actuarial gains or losses that are amortized in accordance with themethods specified in SFAS No. 87, “Employers’ Accounting for Pensions”.

 

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

 

*Income Taxes*

 

Weoperate in several tax jurisdictions and are therefore subject to a variety ofincome and related taxes.  We recordestimated tax provisions and liabilities for estimated income taxes due invarious tax jurisdictions where we earn taxable income and where we havedetermined such liabilities are probable and reasonably estimable.    We record deferred income tax assets in taxjurisdictions where we generate losses for income tax purposes.  We also record valuation allowances againstthese deferred tax assets in accordance with SFAS No. 109, “Accounting forIncome Taxes”, when in our judgment, the deferred income tax assets will likelynot be realized in the foreseeable future.

 

Considerablejudgment is required in determining income tax provisions, tax liabilities,deferred tax assets and valuation allowances. We assess the adequacy of our tax accounts on a quarterly basis andbelieve we have reasonably estimated our tax provisions, liabilities, andassets for all jurisdictions.  However,it is possible that our actual tax provision and related accounts could differfrom our estimates, and any related adjustment could have a material impact onour income tax provision and operating results in any period such adetermination is made.  

 

Results of Operations - Three Months Ended January 2,2005 and December 28, 2003

 

Net Sales and Gross Profit

 

Net sales for the second quarter of fiscal 2005were $64.0 million, an increase of 10% from the second quarter of fiscal 2004sales of $58.1 million.  The increase ismainly due to currency translation impact from the stronger Euro, $3.6 million,and higher sales of power control systems, $1.8 million.

 

Our fiscal 2005 second-quarter gross profit was$15.9 million, or 24.9% of sales, versus $12.9 million, or 22.2% of sales inthe second quarter of fiscal 2004.  Theimprovement of $3.0 million in gross profit is due to the relocation ofproduction to lower cost facilities, including our plant in China, $2.0million, currency translation impact from the stronger Euro, $0.8 million, andhigher sales volumes, $0.5 million, partially offset by restructuring costs of$0.1 million (see Note 8 of Notes to Condensed Consolidated FinancialStatements) and lower gross profits in our telecom systems business of $0.1million.

 

Research and Development, Selling, General andAdministrative

 

We continued to increase our investment inR&D during the second quarter of fiscal 2005.  R&D expense was $3.9 million, or 6.1% ofsales, in the second quarter of fiscal 2005 compared to $3.3 million, or 5.7%of sales, in the second quarter of fiscal 2004. We continue to invest in new power-electronic platforms and applicationsand expand the breadth of existing product lines, and have increased spendingon new product development for utility and alternative energy markets.  This accounts for $0.4 million of theincrease in R&D, with the remaining $0.2 million due to currencytranslation impact.

 

Selling,general and administrative (SG&A) expense was $12.3 million (19.2% ofsales) in the second quarter of fiscal 2005 versus $13.3 million (22.8% ofsales) in the second quarter of fiscal 2004. Our second quarter fiscal 2005 selling expenses were $5.0 million,versus $4.5 million in the second quarter of fiscal 2004, due mainly toincreased commission expense.  Our secondquarter fiscal 2005 general and administrative (G&A) expense was $7.3million, compared to second quarter fiscal 2004 expense of $8.8 million.  G&A expense for the second quarter offiscal 2005 reflects legal fees of $0.9 million related mainly to the Nilssenpatent infringement arbitration (see Note 4 of Notes to Condensed ConsolidatedFinancial Statements), and $0.2 million of restructuring expense related toplant closure and relocation.  The fiscal2004 second quarter included a $1.7 million charge to write down the value ofaccounts receivable related to a customer bankruptcy, and $0.6 million ofrestructuring expense related to plant closure and relocation.  Pension expense in the second quarter offiscal 2005 was $0.4 million versus pension expense of $0.6 million in thesecond quarter of fiscal 2004 (see Note 9 of Notes to Condensed ConsolidatedFinancial Statements).  Professionalfees, payroll-related expenses and currency translation impact make up theremaining difference.

 

Lossfrom Operations

 

Our loss from operations for the second quarterof fiscal 2005 was $0.3 million compared to a loss from operations of $3.6million for the second quarter of fiscal 2004. The reduction in loss from operations is due to higher sales volumes,improvement in gross profits, and lower SG&A expense as described above.

 

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Interest Expense

 

Interest expense was $0.3 million in the secondquarter of fiscal 2005, comparable to interest expense of $0.4 million in thesecond quarter of fiscal 2004.

 

Other Income

 

Other income for the second quarter of fiscal2005 was $1.3 million, comprised of the one-time sale and license of certainpatents and technology rights.   Underthe terms of the sale agreement, we have no remaining obligations nor will wereceive future royalties.  We received$1.3 million in cash upon consummation of the agreement during the secondquarter of fiscal 2005.  There was noother income in the second quarter of fiscal 2004.

 

Net Income (Loss)

 

Our net income was $0.6 million in the second quarterof fiscal 2005, compared to a net loss of $4.0 million in the second quarter offiscal 2004.  Earnings were $0.02 perdiluted share for the three months ended January 2, 2005, compared to aloss of $0.15 per diluted share for the three months ended December 28,2003.  We recorded a tax provision of$0.1 million in the second quarter of fiscal 2005, associated with our foreignoperations.  We did not record a taxbenefit on our pretax loss in the second quarter of fiscal 2004.

 

Results of Operations - Six Months Ended January 2,2005 and December 28, 2003

 

Net Sales and Gross Profit

 

Net sales for the first six months of fiscal2005 were $133.2 million, an increase of 22.8% from the fiscal 2004 firstsix-month sales of $108.5 million.  Theincrease of $24.7 million is due to higher sales of embedded power supplies,$9.6 million, higher sales of power systems, $9.4 million, and currencytranslation impact from the stronger Euro, $6.7 million, partially offset bylower telecom product sales, $1.0 million.  In addition, the second quarter of fiscal 2005contained twenty-seven weeks while the second quarter of fiscal 2004 containedtwenty-six weeks.  This additional weekaccounts for approximately $4.9 million of the sales increase in power suppliesand power systems described above.

 

Our gross profit for the first six months offiscal 2005 was $32.9 million, or 24.7% of sales, versus $23.2 million, or21.4% of sales, in the first six months of fiscal 2004.  The improvement in gross profit of $9.7million is primarily due to relocation of production to lower cost facilities,$4.2 million, higher sales volume and improved product mix, $3.8 million, andcurrency translation impact from the stronger Euro, $1.5 million, partiallyoffset by restructuring costs, $0.3 million (see Note 8 of Notes to CondensedConsolidated Financial Statements).  Thedivestiture in the first half of fiscal 2004 of our telecom service businessalso improved margins by $0.7 million on a comparable basis in fiscal 2005, asthat business was generating negative gross profits in fiscal 2004.

 

Research and Development, Selling, General andAdministrative

 

R&D expense was $7.6 million, or 5.7% ofsales, for the first six months of fiscal 2005 compared to $6.1 million, or5.6% of sales for the first six months of fiscal 2004.  The increase is due to higher payroll-relatedexpenses from increased headcount, increased testing and certification expensesand the currency translation impact from the stronger Euro, as most of ourR&D spending occurs in Europe.  Forthe first six months of fiscal 2005, we continued to increase spending in newproduct development aimed at utility, transportation and alternative energymarkets, in addition to continued spending for development of newpower-electronic platforms and applications.

 

SG&Aexpense was $24.0 million (18.0% of sales) for the first six months of fiscal2005 versus $23.7 million (21.9% of sales) for the first six months of fiscal2004.  Of these amounts, selling expenseswere $10.2 million for the first six months of fiscal 2005, versus $8.5 millionfor the first six months of fiscal 2004, due mainly to increased commissionexpense.  G&A expenses were $13.8million for the first six months of fiscal 2005, versus $15.2 for the first sixmonths of fiscal 2004.  G&A expensefor the first six months of fiscal 2005 includes legal fees of $1.1 millionrelated to the Nilssen patent infringement arbitration (see Note 4 of Notes toCondensed Consolidated Financial Statements), pension expense of $0.7 millionand restructuring expenses of $0.5 million (see Note 9 of Notes to CondensedConsolidated Financial Statements). G&A expense for fiscal 2004 includes a $1.7 million charge to writedown value of account receivable related to a customer bankruptcy, pension expenseof $1.6 million and restructuring expenses of $0.6 million.

 

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Income(Loss) from Operations

 

Income from operations for the first six monthsof fiscal 2005 was $1.3 million compared to a loss from operations of $6.6million for the first six months of fiscal 2004.  The improvement in income from operations isdue to higher sales volumes, improvement in gross profits, and lower SG&Aexpense as described above.

 

Interest Expense

 

Interest expense was $0.7 million for the firstsix months of fiscal 2005 compared to interest expense of $1.1 million for thesame period in fiscal 2004.  The decreaseis mainly due to deferred financing charges, which decreased from $0.4 millionin the first six months if fiscal 2004 to $0.1 million in the first six monthof fiscal 2005.

 

Other Income

 

Other income for the first six months of fiscal2005 was $1.3 million, comprised of the one-time sale and license of certainpatents and technology rights.   Underthe terms of the sale agreement, we have no remaining obligations nor will wereceive future royalties.  We received$1.3 million in cash upon consummation of the agreement during the secondquarter of fiscal 2005.   There was noother income in the first six months of fiscal 2004.

 

Net Income (Loss)

 

Net income for the first six months of fiscal2005 was $1.5 million compared to a net loss of $7.7 million for the first sixmonths of fiscal 2004.  Earnings were$0.05 per diluted share for the six months ended January 2, 2005, comparedto a loss of $0.30 per diluted share for the six months ended December 28,2003.  We recorded a tax provision of$0.4 million in the first six months of fiscal 2005, associated with ourforeign operations.  We did not record atax benefit on our pretax loss in the first six months of fiscal 2004.

 

Liquidity and Capital Resources

 

Our cash balances increased $1.7 million in thefirst six months of fiscal 2005, from $2.3 million at June 27, 2004 to$4.0 million at January 2, 2005. Our primary sources of cash in the first six months of fiscal 2005 wereincreased borrowings of $6.4 million under line-of-credit agreements, a $3.3million net tax refund received from the Internal Revenue Service, and a $1.3million payment received from the one-time sale and license of rights andpatents, partially offset by an increase of $5.4 million in our accountsreceivables balances and a decrease of $5.1 million in our accounts payablebalances compared to June 27, 2004. Capital expenditures for the six months ended January 2, 2005 were$3.9 million, less than depreciation expense of $4.9 million for the sameperiod.  We anticipate that our capitalexpenditures for the fiscal year will be less than depreciation andamortization expense for the fiscal year, which is estimated at approximately$10.0 million.

 

As of January 2, 2005, long-term borrowings(including current portion) were $23.2 million, an increase of $5.1 millionfrom borrowings of $18.1 million as of June 27, 2004.  The aggregate lending commitment under ourNorth American credit agreement (“Credit Agreement”) is $19.0 million withavailable borrowings determined by a borrowing base as defined in theagreement, supported by eligible domestic accounts receivable andinventory.  Borrowings under the CreditAgreement bear interest at the bank’s prime lending rate plus one percent or,at our option, the London Interbank Offering Rate (LIBOR) plus three andone-quarter percent.  Borrowings underthe Credit Agreement are secured by substantially all of our North Americanassets.  This facility also supports theissuance of letters of credit.  As of January 2,2005, we had $7.0 million of available borrowing capacity, with $2.8 million ofborrowings outstanding, under the facility. We were in violation of certain covenants as of January 2, 2005,and received a waiver of all covenant violations from our bank in exchange fora temporary reduction in available credit of $7.0 million.  This temporary reduction is reflected in ouravailable borrowing capacity figure above.

 

Additionally, our European subsidiary maintainsrevolving borrowing arrangements with local banks, primarily to support workingcapital needs.  Available borrowingsunder these arrangements aggregate approximately Euro 20.0 million depending inpart upon levels of accounts receivable, and bear interest at various ratesranging from 2% to 8%.  During the firstquarter of fiscal 2004, our European subsidiary entered into an agreement witha European bank to provide borrowings secured by the subsidiary’s land andbuilding over a ten-year period.   Borrowings under this agreement bear interest at EURIBOR plus one andone-half percent.  The initial commitmentto lend under this agreement is Euro 7.0 million, with the commitment reducedratably on a quarterly basis beginning March 31, 2004 and ending December 31,2013.  Amounts outstanding at January 2,2005 under all of our European lending agreements were $20.4 million.

 

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As a result of the decline in interest rates andstock market equity values over the past two years, the accumulated benefitobligation of our defined benefit pension plan exceeds plan assets as of theend of January 2, 2005.  The amountand timing of future contributions to the plan are dependent upon values inequity and fixed income markets, and to a lesser extent, the level of interestrates.  Actuarial projections indicate nomandatory contributions to the plan would be required through fiscal year 2008,although we may elect to make contributions prior to that time.  No contributions were made in the first sixmonths of fiscal 2005

 

Based upon current plans and businessconditions, management believes that borrowing capacity under our revolvingloan facilities and internally generated cash flows will be sufficient to fundanticipated working capital needs, capital expenditures, and other near-termcommitments during the next twelve 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 similar words and phrases generally identify forward-lookingstatements.  Forward-looking statementsare inherently subject to risks and uncertainties which in many cases arebeyond our control and which cannot be predicted or quantified.  As a result, future events and actual resultscould differ materially from those set forth in, contemplated by, or underlyingforward-looking statements. Forward-looking statements contained in this document speak only as ofthe date of this document or, in the case of any document incorporated byreference from another document, the date of that document.  We do not have any obligation to publiclyupdate or revise any forward-looking statement contained or incorporated byreference in these documents to reflect changed assumptions, the occurrence ofunanticipated events 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, thestatements regarding future economic conditions, the recovery in the electronicpower industry, our goals and strategies, new product introductions,penetration of new markets, projections of sales revenues, manufacturing costsand operating costs, pricing of our products and raw materials required tomanufacture our products, gross margin expectations, relocation and outsourcingof production capacity, capital spending, research and development expenses,the outcome of pending legal proceedings and environmental matters, tax rates,sufficiency of funds to meet our needs including contributions to our definedbenefit pension plan, and our plans for future operations, as well as ourassumptions relating to the foregoing, are all subject to risks anduncertainties.

 

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

 

*Economic Conditions and Demand for our Products*

 

Demandfor our products, which impacts our revenue and grossprofit, is affected by general business and economic conditions, and morespecifically by conditions in the electronic power industry.  A low level of demand for power products inthe telecommunications and information technologies industries had an adverseeffect on our operating results in fiscal 2003 and to a lesser extent in fiscal2004, and we incurred significant losses in those years.  Demand for our products is also impacted by changesin customer order patterns, such as changes in inventory levels maintained bycustomers and the timing of customer purchases. If demand in certain of our served markets deteriorates in subsequentperiods, our operating results could be adversely affected and losses couldrecur.

 

*Competitive Industry*

 

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

 

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impact on our operatingresults.  In addition, price erosion inour served markets could have a material impact on our financial position orresults of operations.

 

*Dependence on Customers and Credit Risk*

 

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

 

*Reliance on Suppliers*

 

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

 

##### ***CompetitiveSize***

##### ** **

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

 

Inpower systems, we compete with crane and hoist drive manufacturers and drivesystem integrators, elevator drive manufactures and control system integrators,mining machinery drive builders, power inverter builders and telecom powersystems builders.  The total number ofsuch enterprises with whom we compete directly is considered to be fewer than100.  However, certain of our competitorsare significantly larger and have substantially greater resources than us, andsome are global in scope, whereas we currently compete primarily in the NorthAmerican market.

 

*International Business*

 

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

 

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

 

*Restructuring and Outsourcing*

 

We arecurrently taking actions to relocate some of our production capacity, primarilyto China. In addition, we are moving our existing operations in China to anearby larger facility and are consolidating two manufacturing plants into oneplant in the United States.  We maydevelop action plans regarding additional relocation or consolidationactivities in the future.  While webelieve that these actions will result in a more competitive position andshould also increase our gross profits and reduce our operating expenses, thereis no guarantee that these plans will succeed. There is also no assurance that the expected cost savings andimprovement in gross profits will be realized, and in addition, these actionsmay result in quality issues or delays in production or shipment to customersthat could have an adverse impact on our results of operations.  In addition, there is no assurance that anyfuture activities not yet planned would provide any benefits to our operatingresults, and any such future plans may result in asset impairment charges.

 

*Intellectual Property*

 

Webelieve that our intellectual property in the area of digital power-electronicsis equal or superior to our competitors’ and we do not know of any newtechnologies that could cause a shift away from digital power-electronicsolutions.  However, as atechnology-based company in an industry characterized by short product lifecycles, we are

 

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highly dependent on both patentedand proprietary intellectual property. Therefore, major advancements in digital power-electronic technology bycompetitors or the advent of technologies obviating digital power-electronicsolutions could have an adverse effect on our financial position or results ofoperations.

 

Likewise,we could be adversely affected financially should we be judged to haveinfringed upon the intellectual property of others.

 

*Legal and Environmental Issues*

 

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

 

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

 

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

 

Weare exposed to market risks in the areas of foreign exchange and interestrates.  To mitigate the effect of suchrisks, we selectively use specific financial instruments. Hedging transactionscan be entered into under Company policies and procedures and are monitoredmonthly. Our policy clearly prohibits the use of such financial instruments fortrading or speculative purposes.  Therehave been no material changes in the reported market risks since that reportedin the Company’s Annual Report on Form 10-K dated June 27, 2004.

 

Interest Rates

 

Thefair value of our debt, estimated based on the variable rates on ourborrowings, was $23.2 million at January 2, 2005, equal to the carryingvalue at that date.  Prospectively, we donot consider there to be material risk due to changes in the interest ratestructure of borrowing rates applicable to such debt. For our debt outstandingat January 2, 2005, a hypothetical 10% adverse change in interest rateswould not have had a material impact on the our pre-tax earnings and cash flowdue to relatively low variable interest rates.

 

Foreign Currency Exchange Rates

 

We mayselectively enter into foreign exchange contracts to hedge certain exposures inEurope.  A portion of our products aremanufactured in Europe and sold in the U.S. Many of these sales to U.S. customers are denominated in U.S.dollars.  As a result, our financialresults could be impacted by changes in exchange rates, particularly theexchange rate between the U.S. dollar and the Euro.  The exposure on sales by our Europeansubsidiaries consists of (1) the exposure related to a weakening U.S. dollarfor U.S. dollar denominated sales, as most of the our European subsidiaries’costs are in Euro; in the event of a weakening U.S. dollar, locally recordedsales in the functional currency (the Euro) are decreased, (2) the exposurerelated to a weakening U.S. dollar when payment of U.S. dollar receivables arereceived from customers, resulting in less local currency than was originallyrecorded at the date of sale, and (3) the exposure that upon translation of oursubsidiaries’ periodic financial statements, a weakening local currency wouldresult in lower reported sales in U.S. dollars than if the local currency hadbeen stable relative to the U.S. dollar. In the latter case, operating expenses would also be translated at thelower amount and accordingly, the effect on net income would be mitigated.  We had no foreign currency contractsoutstanding at January 2, 2005.

 

**Item 4–Controls and Procedures**

 

Underthe direction of our Chief Executive Officer and Chief Financial Officer, weevaluated our disclosure controls and procedures and internal control overfinancial reporting and concluded that (i) our disclosure controls andprocedures were effective as of January 2, 2005, and (ii) no changein internal control over financial reporting occurred during the quarterended January 2, 2005, that has materially affected, or is reasonablylikely to materially affect, such internal control over financial reporting.

 

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**PART II– OTHER INFORMATION**

 

**Item 1 –Legal Proceedings**

 

In April 1998, Ole K. Nilssen filed alawsuit in the U.S. District Court for the Northern District of Illinoisalleging infringement by the Company of seven of his patents pertaining toelectronic ballast technology, and seeking unspecified damages and injunctiverelief to preclude the Company from making, using or selling products allegedlyinfringing his patents.  The Companydenied that its products infringed any valid patent and filed a responseasserting affirmative defenses, as well as a counterclaim for a judicialdeclaration that the products do not infringe the patents asserted by Mr.Nilssen and also that the asserted patents are invalid.  In June 2001, the Company sold thelighting business to Universal Lighting Technologies, Inc. (“ULT”), and agreedto provide a limited indemnification against certain claims of infringementthat Mr. Nilssen might allege against ULT. In April 2003, Mr. Nilssen’s lawsuit and the counterclaims weredismissed with prejudice and both parties agreed to submit limited issues indispute to binding arbitration before an arbitrator with a relevant technicalbackground.  Arbitration commenced on November 8,2004, and a decision is expected prior to the end of fiscal year 2005.  The Company presented what it believes arestrong defenses at arbitration; however, an unfavorable decision could have amaterial adverse effect on the Company’s financial position and results ofoperations.

 

In February 2003, Mr. Nilssen filed alawsuit in the U.S. District Court for the Northern District of Illinoisalleging infringement by ULT of twenty-nine of his patents pertaining toelectronic ballast technology, and seeking unspecified damages and injunctiverelief to preclude ULT from making, using or selling products allegedlyinfringing his patents.  ULT made a claimfor indemnification, which the Company accepted, subject to the limitations setforth in the purchase and sale agreement. The case is now pending in the U.S. District Court for the MiddleDistrict of Tennessee following the Company’s successful motion to remove thecase to a more appropriate forum.  As inthe case against Magnetek, the Company denies that the products for which ithas an indemnification obligation to ULT infringe any valid patent.  The Company has filed a response on behalf ofULT asserting affirmative defenses, as well as a counterclaim for a judicialdeclaration that the products do not infringe Mr. Nilssen’s patents and thatthe patents are invalid.  The Companywill aggressively defend the claims against ULT that aresubject to defense and indemnification and believes its defenses againstthe indemnifiable claims are strong; however, an unfavorable decision couldhave a material adverse effect on the Company’s financial position and resultsof operations.

 

**Item 2 – Unregistered Sales of Equity Securities and Use ofProceeds**

 

There were no unregistered sales of equitysecurities and there were no repurchases of equity securities during our secondfiscal quarter ended January 2, 2005.

 

**Item 3 –Defaults****Upon****Senior Securities**

 

None.

 

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

 

None.

 

**Item 5 – Other Information**

 

None.

 

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**Item 6- Exhibits**

 

(a)                                  Indexto Exhibits

 
| 10.1   | Amendment No. 4 to Credit Agreement dated as  of December 31, 2004, among Magnetek, Inc., MagneTek ADS Power, Inc.,  Magnetek Mondel Holding, Inc., MagneTek Leasing Corporation, Magnetek  National Electric Coil, Inc., Mondel ULC, and JP Morgan Chase Bank, N.A.  (successor by merger to Bank One, NA) * |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                               |
| 10.2   | The 2004 Stock Incentive Plan of Magnetek,  Inc. (1)                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                               |
| 10.3   | The Second Amendment to the 1997 Non-Employee  Director Stock Option Plan of Magnetek, Inc. (1)                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                               |
| 31.1   | Certification  of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934. *                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                               |
| 31.2   | Certification  of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934. *                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                               |
| 32.1   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                              |

 

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*Filed with this Reporton Form 10-Q.

 

(1)  Incorporated by reference to the registrant’sdefinitive proxy statement on Schedule 14A filed September 22, 2004.

 

SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                          |                            | MAGNETEK, INC. |
|-------------------------------|---------------------------------|----------------|
|                          |                            | (Registrant)   |
|                          |                            |
| Date: February 11,  2005 | /s/ David P. Reiland            |           |
|                          | David P. Reiland                |           |
|                          | Executive Vice President        |           |
|                          | and Chief Financial Officer     |           |
|                          | (Duly authorized officer of the |           |
|                          | registrant and principal        |           |
|                          | financial officer)              |           |
|                               |                                 |                |  |

 

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