**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

**ý****  QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended:  April 3,2005**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                            **

 

**Commissionfile 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  incorporation or organization)                     |       | (I.R.S. Employer  Identification Number) |
|                                                                                |       |                                     |
| **10900 Wilshire Blvd., Suite  850Los 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 May 1, 2005, was 28,584,594 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 APRIL 3, 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

 (amounts in thousands, exceptper share data)

(unaudited)

 
| ** **                                                                  | ** ** | **Three Months (13 Weeks) Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                  | ** ** | **April 3,  2005**           | ** ** | **March 28,  2004** | ** ** |
| ** **                                                                  | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net sales                                                                   |       | $                                 | 57,038     |   | $ | 61,832 |   |
| Cost of sales                                                               |       | 42,874                            |       | 46,773 |   |
|                                                                        |       |                              |       |   |   |
| Gross profit                                                                |       | 14,164                            |       | 15,059 |   |
| Research and development                                                    |       | 3,991                             |       | 3,400 |   |
| Selling, general and administrative                                         |       | 11,637                            |       | 10,617 |   |
|                                                                        |       |                              |       |   |   |
| Income (loss) from operations                                               |       | (1,464                            | )          | 1,042 |   |
| Interest expense                                                            |       | 486                               |       | 524 |   |
|                                                                        |       |                              |       |   |   |
| Income (loss) from continuing operations before  provision for income taxes |       | (1,950                            | )          | 518 |   |
| Provision for income taxes                                                  |       | 150                               |       | — |   |
| Income (loss) from continuing operations                                    |       | (2,100                            | )          | 518 |   |
|                                                                        |       |                              |       |   |   |
| Discontinued Operations:                                                    |       |                              |       |   |   |
| Loss from operations, net of tax                                            |       | (524                              | )          | (365 | ) |
| Arbitration award expense, net of tax                                       |       | (21,977                           | )          | — |   |
| Loss from discontinued operations                                           |       | (22,501                           | )          | (365 | ) |
|                                                                        |       |                              |       |   |   |
| Net income (loss)                                                           |       | $                                 | (24,601    | ) | $ | 153 |   |
|                                                                        |       |                              |       |   |   |
| Earnings (loss) per common share                                            |       |                              |       |   |   |
|                                                                        |       |                              |       |   |   |
| Basic and diluted:                                                          |       |                              |       |   |   |
| Income (loss) from continuing operations                                    |       | $                                 | (0.07      | ) | $ | 0.02 |   |
| Loss from discontinued operations                                           |       | (0.79                             | )          | (0.01 | ) |
| Net income (loss)                                                           |       | $                                 | (0.86      | ) | $ | 0.01 |   |

 

See accompanying notes

 

3

----

 
| ** **                                                                  | ** ** | **Nine Months Ended**               | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                  | ** ** | **(40 Weeks)  April 3,  2005** | ** ** | **(39 Weeks)  March 28,  2004** | ** ** |
| ** **                                                                  | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Net sales                                                                   |       | $                                   | 185,245    |   | $ | 164,318 |   |
| Cost of sales                                                               |       | 139,358                             |       | 126,415 |   |
|                                                                        |       |                                |       |   |   |
| Gross profit                                                                |       | 45,887                              |       | 37,903 |   |
| Research and development                                                    |       | 11,180                              |       | 9,182 |   |
| Selling, general and administrative                                         |       | 34,161                              |       | 32,589 |   |
|                                                                        |       |                                |       |   |   |
| Income (loss) from operations                                               |       | 546                                 |       | (3,868 | ) |
| Interest expense                                                            |       | 1,184                               |       | 1,607 |   |
| Other income                                                                |       | (1,300                              | )          | — |   |
|                                                                        |       |                                |       |   |   |
| Income (loss) from continuing operations before  provision for income taxes |       | 662                                 |       | (5,475 | ) |
| Provision for income taxes                                                  |       | 525                                 |       | — |   |
| Income (loss) from continuing operations                                    |       | 137                                 |       | (5,475 | ) |
|                                                                        |       |                                |       |   |   |
| Discontinued Operations:                                                    |       |                                |       |   |   |
| Loss from operations, net of tax                                            |       | (1,259                              | )          | (2,059 | ) |
| Arbitration award expense, net of tax                                       |       | (21,977                             | )          | — |   |
| Loss from discontinued operations                                           |       | (23,236                             | )          | (2,059 | ) |
|                                                                        |       |                                |       |   |   |
| Net loss                                                                    |       | $                                   | (23,099    | ) | $ | (7,534 | ) |
|                                                                        |       |                                |       |   |   |
| Earnings (loss) per common share                                            |       |                                |       |   |   |
|                                                                        |       |                                |       |   |   |
| Basic and diluted:                                                          |       |                                |       |   |   |
| Income (loss) from continuing operations                                    |       | $                                   | 0.00       |   | $ | (0.20 | ) |
| Loss from discontinued operations                                           |       | (0.81                               | )          | (0.08 | ) |
| Net loss                                                                    |       | $                                   | (0.81      | ) | $ | (0.28 | ) |

 

See accompanying notes

 

4

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MAGNETEK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

 
| ** **                                      | ** ** | **April 3,  2005** | ** ** | **June 27,  2004** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**         | ** ** | ** **              | ** ** |
| ASSETS                                          |       |                    |       |                    |       |
| Current assets:                                 |       |                    |       |                    |       |
| Cash                                            |       | $                       | 3,330      |                    | $          | 2,318 |   |
| Accounts receivable, net                        |       | 52,613                  |       | 56,056                  |       |
| Inventories                                     |       | 51,039                  |       | 48,872                  |       |
| Prepaid expenses and other                      |       | 7,026                   |       | 8,972                   |       |
| Assets held for sale                            |       | 4,333                   |       | 4,474                   |       |
| Total current assets                            |       | 118,341                 |       | 120,692                 |       |
|                                            |       |                    |       |                    |       |
| Property, plant and equipment                   |       | 135,334                 |       | 122,563                 |       |
| Less-accumulated depreciation and amortization  |       | 102,881                 |       | 90,708                  |       |
| Property, plant and equipment, net              |       | 32,453                  |       | 31,855                  |       |
|                                            |       |                    |       |                    |       |
| Goodwill                                        |       | 64,679                  |       | 63,828                  |       |
| Prepaid pension                                 |       | 56,416                  |       | 57,523                  |       |
| Other assets                                    |       | 13,249                  |       | 14,249                  |       |
| Total Assets                                    |       | $                       | 285,138    |                    | $          | 288,147 |   |
|                                            |       |                    |       |                    |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |                    |       |                    |       |
|                                            |       |                    |       |                    |       |
| Current liabilities:                            |       |                    |       |                    |       |
| Accounts payable                                |       | $                       | 29,690     |                    | $          | 40,031 |   |
| Accrued liabilities                             |       | 8,754                   |       | 11,067                  |       |
| Accrued arbitration award                       |       | 22,602                  |       | —                  |       |
| Current portion of long-term debt               |       | 4,415                   |       | 1,997                   |       |
| Liabilities held for sale                       |       | 1,021                   |       | 1,634                   |       |
| Total current liabilities                       |       | 66,482                  |       | 54,729                  |       |
|                                            |       |                    |       |                    |       |
| Long-term debt, net of current portion          |       | 18,489                  |       | 16,129                  |       |
|                                            |       |                    |       |                    |       |
| Pension benefit obligations                     |       | 88,889                  |       | 88,889                  |       |
| Other long-term obligations                     |       | 8,095                   |       | 7,552                   |       |
|                                            |       |                    |       |                    |       |
| Deferred income taxes                           |       | 8,576                   |       | 8,326                   |       |
|                                            |       |                    |       |                    |       |
| Stockholders’ equity                       |       |                    |       |                    |       |
| Common stock                                    |       | 285                     |       | 285                     |       |
| Paid in capital in excess of par value          |       | 128,059                 |       | 127,692                 |       |
| Retained earnings                               |       | 46,389                  |       | 69,488                  |       |
| Accumulated other comprehensive loss            |       | (80,126                 | )          | (84,943                 | )          |
| Total stockholders’ equity                 |       | 94,607                  |       | 112,522                 |       |
|                                            |       |                    |       |                    |       |
| Total Liabilities and Stockholders’ Equity |       | $                       | 285,138    |                    | $          | 288,147 |   |

 

See accompanying notes

 

5

----

 

MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 
| ** **                                                                                          | ** ** | **Nine Months Ended**               | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                          | ** ** | **(40 Weeks)  April 3,  2005** | ** ** | **(39 Weeks)  March 28,  2004** | ** ** |
| Cash flows from operating activities:                                                               |       |                                |       |   |   |
| Income (loss) from continuing operations                                                            |       | $                                   | 137        |   | $ | (5,475 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                                       |       | 7,270                               |       | 7,457 |   |
| Tax refund proceeds, net                                                                            |       | 3,332                               |       | — |   |
| Changes in operating assets and liabilities                                                         |       | (6,982                              | )          | (6,517 | ) |
| Total adjustments                                                                                   |       | 3,620                               |       | 940 |   |
| Net cash provided by (used in) operating activities                                                 |       | 3,757                               |       | (4,535 | ) |
|                                                                                                |       |                                |       |   |   |
| Cash flows from investing activities:                                                               |       |                                |       |   |   |
| Proceeds from sale of businesses                                                                    |       | —                              |       | 1,062 |   |
| Capital expenditures                                                                                |       | (6,076                              | )          | (3,429 | ) |
| Net cash used in investing activities                                                               |       | (6,076                              | )          | (2,367 | ) |
|                                                                                                |       |                                |       |   |   |
| Cash flow from financing activities:                                                                |       |                                |       |   |   |
| Proceeds from issuance of common stock                                                              |       | 366                                 |       | 18,738 |   |
| Borrowings (repayments) under line-of-credit  agreements                                            |       | 6,024                               |       | (11,528 | ) |
| Principal payments under capital lease obligations                                                  |       | (417                                | )          | (172 | ) |
| Borrowings under (repayment of) long term notes                                                     |       | (829                                | )          | 1,514 |   |
| Increase in deferred financing costs                                                                |       | (82                                 | )          | (561 | ) |
| Net cash provided by financing activities                                                           |       | 5,062                               |       | 7,991 |   |
|                                                                                                |       |                                |       |   |   |
| Net cash provided by continuing operations                                                          |       | 2,743                               |       | 1,089 |   |
|                                                                                                |       |                                |       |   |   |
| Cash flow from discontinued operations:                                                             |       |                                |       |   |   |
| Loss from discontinued operations                                                                   |       | (23,236                             | )          | (2,059 | ) |
| Adjustments to reconcile net loss to net cash used  in discontinued operations:                     |       |                                |       |   |   |
| Depreciation and amortization                                                                       |       | 94                                  |       | 125 |   |
| Arbitration award expense                                                                           |       | 21,977                              |       | — |   |
| Changes in assets & liabilities of discontinued  operations                                     |       | (550                                | )          | 430 |   |
| Capital expenditures                                                                                |       | (16                                 | )          | (52 | ) |
| Net cash used in discontinued operations                                                            |       | (1,731                              | )          | (1,556 | ) |
|                                                                                                |       |                                |       |   |   |
| Net increase (decrease) in cash                                                                     |       | 1,012                               |       | (467 | ) |
| Cash at the beginning of the period                                                                 |       | 2,318                               |       | 1,680 |   |
| Cash at the end of the period                                                                       |       | $                                   | 3,330      |   | $ | 1,213 |   |

 

See accompanying notes

 

6

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MAGNETEK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

APRIL 3, 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 donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  For further information, refer to thefinancial statements and footnotes thereto included in the Company’s Form 10-Kfor the year ended 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 April 3, 2005, and the results of its operations and itscash flows for the three-month and nine-month periods ended April 3, 2005and March 28, 2004.  Results for thethree-months and nine-months ended April 3, 2005 are not necessarilyindicative of results that may be experienced for the full fiscal year.

 

On May 4, 2005, an arbitrator awarded damagesagainst the Company of $23.4 million in a patent dispute with Ole K. Nilssen(see Notes 3 and 5 of Notes to Condensed Consolidated FinancialStatements).  Based on the terms of thebinding arbitration, the Company is required to pay this amount to Mr. Nilssenwithin ten days of the award.  TheCompany currently does not have the ability to meet this obligation within theten-day timeframe.  Company managementhas entered into discussions with its advisors, and with Mr. Nilssen and hisadvisors regarding various available options to resolve this matter, includingthe possibility of extending the payment period while investigating financingalternatives.  Among the alternatives theCompany is exploring are debt financing, equity financing, or a sale of part ofthe business, or all of the Company.

 

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 April 3,2005 and March 28, 2004 (the Company’s third fiscal quarter) eachcontained thirteen weeks; the nine-month periods ended April 3, 2005 and March 28,2004 contained forty and thirty-nine 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:

 

*Accounts Receivable*

 

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.

 

7

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*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 lessfavorable than those projected by management, additional inventory write-downsmay be required.

 

*Reserves for Contingencies*

 

TheCompany periodically records the estimated impacts of various conditions,situations or circumstances involving uncertain outcomes.  The accounting for such events is prescribedunder Statement of Financial Accounting Standard (“SFAS”) No. 5, “Accountingfor Contingencies.”  SFAS No. 5 defines acontingency as an existing condition, situation, or set of circumstancesinvolving uncertainty as to possible gain or loss to an enterprise that willultimately be resolved when one or more future events occur or fail to occur.

 

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.

 

*Income Taxes*

 

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

 

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

 

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

 

*Pension Benefits*

 

The valuation of the Company’s pensionplan requires the use of assumptions and estimates to develop actuarialvaluations of expenses, assets and liabilities. These assumptions include discount rates, investment returns andmortality rates.  Changes in assumptionsand future investments returns could potentially have a material impact on theCompany’s expenses and related 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.

 

8

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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 improvement 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 over the term of the financingfacility, and related amortization expenses are included in interest expense inthe condensed consolidated statements of operations.

 

Earnings per Share –In accordance with SFAS No. 128, “Earnings per Share”, basic earnings per shareare computed using the weighted average number of common shares outstandingduring the period.  Diluted earnings pershare incorporate the incremental shares issuable upon the assumed exercise ofstock options as if all exercises had occurred at the beginning of the fiscalperiod.

 

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 ofFASB Statement 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**  | ** ** | **Nine Months Ended**    | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                                                                       | ** ** | **April 3,  2005** | ** ** | **March 28,  2004** | ** ** | **April 3,  2005** | ** ** | **March 28,  2004** | ** ** |
| Net income (loss)                                                                                                |       | $                       | (24,601    | )                        | $          | 153 |   | $ | (23,099 | ) | $ | (7,534 | ) |
|                                                                                                             |       |                    |       |                     |       |   |   |   |   |
| Deduct: Total stock-based employee compensation  expense determimed under fair value based method for all awards |       | (1,137                  | )          | (1,275                   | )          | (3,521 | ) | (3,565 | ) |
| Pro forma net loss                                                                                               |       | $                       | (25,738    | )                        | $          | (1,122 | ) | $ | (26,620 | ) | $ | (11,099 | ) |
|                                                                                                             |       |                    |       |                     |       |   |   |   |   |
| Earnings (loss) per share as reported:                                                                           |       |                    |       |                     |       |   |   |   |   |
| Basic and diluted                                                                                                |       | $                       | (0.86      | )                        | $          | 0.01 |   | $ | (0.81 | ) | $ | (0.28 | ) |
|                                                                                                             |       |                    |       |                     |       |   |   |   |   |
| Pro forma loss per share:                                                                                        |       |                    |       |                     |       |   |   |   |   |
| Basic and diluted                                                                                                |       | $                       | (0.90      | )                        | $          | (0.04 | ) | $ | (0.93 | ) | $ | (0.42 | ) |

 

RecentAccounting Pronouncements – 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”, andamends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach in SFASNo. 123(R) is similar to the approach described in SFAS No. 123.  However,SFAS No. 123(R) requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the income statementbased on their fair values. Pro forma disclosure is no longer an alternative.

 

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.

 

9

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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.

 

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 will have animpact on our result of operations, although it will have no impact on ouroverall financial position. The impact of adoption of SFAS No. 123(R) cannot bepredicted at this time because it will depend on levels of share-based paymentsgranted in the future.  However, had we adopted SFAS No. 123(R) in priorperiods, the impact of that standard would have approximated the impact of SFASNo. 123 as described in the disclosure of pro forma net income (loss) andearnings (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 April 3, 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 translation gainsand losses arising from differences in exchange rates from period to period areincluded as a component of accumulated other comprehensive loss in stockholders’equity.  The Company does not hold largecash balances in foreign currencies, therefore the effect of exchange ratechanges on these balances is not material to the consolidated statement of cashflows.

 

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

 

3.                                       DiscontinuedOperations

 

In January 2005,the Company committed to a plan to divest its telecom power system business andbegan marketing the business during the third quarter of fiscal 2005.  Management determined that the assets andliabilities to be sold constituted a disposal group under SFAS No. 144, “Accountingfor the Impairment of Disposal of Long-Lived Assets”, and that all of the “assetsheld for sale” criteria outlined in SFAS No. 144 were met.  The net book value of the disposal group at April 3,2005 is $3.3 million.  Management iscurrently in negotiations with a prospective buyer and expects the proceedsfrom the sale to approximate net book value. Accordingly, the operating results of this business are classified asdiscontinued operations in the accompanying condensed consolidated statementsof operations and its assets and liabilities are classified as held for sale inthe accompanying condensed consolidated balance sheets for all periodspresented.

 

Subsequentto the end of the third quarter of fiscal 2005, the Company learned that adecision had been reached in a long-standing patent dispute between the Companyand Ole K. Nilssen.  In April 1998, Mr. Nilssen filed alawsuit alleging infringement of patents pertaining to certain types ofelectronic ballasts previously sold by the Company, and seeking unspecifieddamages and injunctive relief.  TheCompany denied that these products, which it no longer

 

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manufactures, infringed any valid patent.  In April 2003, both parties agreed tosubmit limited issues in dispute to final and binding arbitration.  In May 2005, the Company learned that thearbitrator had awarded damages to Mr. Nilssen totaling $23.4 million (see Note5 of Notes to Condensed Consolidated Financial Statements).  As the business to which this award relateswas divested by the Company in June, 2001, the accompanying condensedconsolidated statements of operations include the impact of this award, net ofamounts previously recorded of $1.4 million, in loss from discontinuedoperations.

 

Theresults of discontinued operations are as follows:

 
| ** **                              | ** ** | **Three Months Ended**  | ** ** | **Nine Months Ended**    | ** ** |
|-----------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **April 3,  2005** | ** ** | **March 28,  2004** | ** ** | **April 3,  2005** | ** ** | **March 28,  2004** | ** ** |
| Net Sales                               |       | $                       | 1,896      |                     | $          | 2,983 |   | $ | 6,893 |   | $ | 9,023 |   |
| Loss from telecom business,  net of tax |       | $                       | (524       | )                        | $          | (365 | ) | $ | (1,259 | ) | $ | (2,059 | ) |
| Arbitration award expense,  net of tax  |       | (21,977                 | )          | —                   |       | (21,977 | ) | — |   |
| Loss of discontinued  operations        |       | $                       | (22,501    | )                        | $          | (365 | ) | $ | (23,236 | ) | $ | (2,059 | ) |

 

Theloss from the telecom business for the three- and nine-month periods ended March 28,2004, include the Company’s telecom service business as well as the telecompower system business.  The loss from thetelecom business for the nine-month period ended April 3, 2005, includethe telecom service business for a seven-week period, until that business wasdivested in August 2004, the first quarter of fiscal 2005.  No tax benefit was recorded related todiscontinued operations for any of the periods presented.

 

4.                                       Inventories

 

Inventoriesat April 3, 2005 and June 27, 2004 consist of the following:

 
| ** **                    | ** ** | **April 3,  2005** | ** ** | **June 27,  2004** | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Raw materials and stock parts |       | $                       | 29,742     |                    | $          | 26,974 |   |
| Work-in-process               |       | 10,694                  |       | 13,201                  |       |
| Finished goods                |       | 10,603                  |       | 8,697                   |       |
|                          |       | $                       | 51,039     |                    | $          | 48,872 |   |

 

5.                                       Commitmentsand Contingencies

 

In April 1998,Ole K. Nilssen filed a lawsuit in the U.S. District Court for the NorthernDistrict of Illinois alleging infringement by the Company of seven of hispatents pertaining to electronic ballast technology, and seeking unspecifieddamages and injunctive relief to preclude the Company from making, using orselling products allegedly infringing his patents.  The Company denied that the products, whichit no longer manufactures, infringed any valid patent and filed a responseasserting affirmative defenses, as well as a counterclaim for a judicialdeclaration that its products do not infringe the patents asserted by Mr.Nilssen and also that the asserted patents are invalid.  In April 2003, Mr. Nilssen’s lawsuit andthe counterclaims were dismissed with prejudice and both parties agreed tosubmit limited issues in dispute to final and binding arbitration.  The arbitration process commenced on November 8,2004 and closing arguments were heard on March 15, 2005.  As reported by the Company in its pressrelease issued May 4, 2005 and Form 8K filed with the SEC on May 4, 2005, onthe afternoon of May 3, 2005, the Company learned of the arbitrator’s decision,awarding damages to Nilssen in the amount of $23.4 million.  The award has a material adverse effect onthe Company’s financial position and results of operations for the period endedApril 3, 2005, and will have a material adverse effect on the Company’sfuture cash flows and liquidity.  Thepatent award also places the Company in default of its North American creditagreement, resulting in a reclassification of borrowings outstanding fromlong-term debt to a current liability. While the Company’s bank has indicated that it does not currently intendto discontinue the extension of credit or accelerate the loans, the bankreserves the right to do so at its discretion. The Company has entered into discussions with Mr. Nilssen regardingvarious available options for satisfying the award.

 

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In June 2001, the Company sold its lightingbusiness to Universal Lighting Technologies, Inc. (“ULT”), and agreed toprovide a limited indemnification against certain claims of infringement thatMr. Nilssen might allege against ULT.  InFebruary 2003, Mr. Nilssen filed a lawsuit in the U.S. District Court forthe Northern District of Illinois alleging infringement by ULT of twenty-nineof his patents pertaining to electronic ballast technology, and seekingunspecified damages and injunctive relief to preclude ULT from making, using orselling products allegedly infringing his patents.  ULT made a claim for indemnification, whichthe Company accepted, subject to the limitations set forth in the purchase andsale agreement.  The case wassuccessfully removed to the U.S. District Court for the Middle District ofTennessee and is expected to go to trial in February 2006.  As in the case against Magnetek, the Companydenies that the products for which it has an indemnification obligation to ULTinfringe any valid patent and has filed a response on behalf of ULT assertingaffirmative defenses, as well as a counterclaim for a judicial declaration thatthe products do not infringe Mr. Nilssen’s patents and that the patents areinvalid.  The Company will continue to aggressivelydefend the claims against ULT that are subject to defense andindemnification.  The patents andproducts involved are different than those involved in the May 2005 award, andthe Company intends to make different arguments in the U.S. District Court thatwere not available at the time of arbitration. However, there is a possibility that an adverse decision could berendered, and such an unfavorable decision could have a material adverse effecton the Company’s financial position and results of operations.  Discussions with Mr. Nilssen regardingavailable options for satisfying the arbitrator’s recent award will includepotential opportunities for concurrently satisfying Mr. Nilssen’s claimsagainst ULT.

 

The Company is a party to several product liabilitylawsuits associated with discontinued business operations that have beensold.  As part of the sales transactions,the Company agreed for a limited time to defend and indemnify the purchasers ofthe discontinued business operations against certain product liabilityclaims.  The last remaining contractualindemnification obligation of that type terminated on December 14, 2003;however, the Company remains obligated to continue defending and indemnifyingvalid claims made prior to the applicable termination date for each suchobligation.  The Company is also a namedparty in two product liability lawsuits related to the Telemotive IndustrialControls business acquired in December 2002, although insurance hasaccepted the Company’s tender of the defense of those claims and it is expectedthat the policies in effect for the Telemotive Industrial Controls businessprior to the sale will cover the losses, if any, and that the Company will beindemnified 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.

 

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 the asbestos-relatedlawsuits, individually or in the aggregate, will have a material adverse effecton its financial position or 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 third quarter of fiscal 2005 and are not expected toinvolve material expenditures during the fourth 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 several previouslyowned facilities and offsite locations. Its remediation activities as apotentially responsible party were not material in the third quarter of fiscal2005 and are not expected to be material during the fourth quarter of fiscal2005. 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

 

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contaminatedsites, the Company’s estimated share of liability, if any, for environmentalremediation, including its indemnification obligations, is not expected to bematerial.

 

Priorto the Company’s purchase of Century Electric, Inc. (“Century Electric”) in1986, Century Electric acquired a business from Gould Inc. (“Gould”) inMay 1983 that included a leasehold interest in a fractional horsepowerelectric motor manufacturing facility located in McMinnville, Tennessee. Gouldagreed to indemnify Century Electric from and against liabilities and expensesarising out of the handling and cleanup of certain waste materials, includingbut not limited to cleaning up any polychlorinated biphenyls (“PCBs”) at theMcMinnville facility (the “1983 Indemnity”). The presence of PCBs and 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) are covered by the1983 Indemnity. The Company sold its leasehold interest in the McMinnvilleplant in August 1999 and while the Company believes that Gould willcontinue 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 theindemnification agreement include completion of additional cleanup activities,if any, at the Bridgeport facility (sold in connection with the sale of thetransformer business in June 2001) and defense and indemnification againstliability for potential response costs related to offsite disposallocations.  FOL, the successor toUniversal, filed a petition for Reorganization under Chapter 11 of theBankruptcy Code in 1999 and the Company filed a proof of claim in theproceeding for obligations related to the environmental indemnificationagreement.  The Company believes that FOLhad substantially completed the clean-up obligations required by theindemnification agreement prior to the bankruptcy filing.  In November 2001, the Company and FOLentered into an agreement involving the allocation of certain potential taxdeductions and Magnetek withdrew its claims in the bankruptcy proceeding.  FOL’s obligation to the state of Connecticutwas not discharged in the reorganization proceeding.  FOL’s inability to satisfy its remainingobligations related to the Bridgeport facility and any offsite disposallocations, or the discovery of additional environmental contamination at theBridgeport facility could have a material adverse effect on the Company’sfinancial position or results of operations.

 

6.                                       ComprehensiveLoss

 

Forthe three- and nine-month periods ended April 3, 2005 and March 28,2004, comprehensive loss consisted of the following:

 
| ** **                      | ** ** | **Three Months Ended**    | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------------|------------|---------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **April 3,****2005** | ** ** | **March 28,****2004** | ** ** | **April 3,****2005** | ** ** | **March 28,****2004** | ** ** |
| Net income (loss)               |       | $                         | (24,601    | )                          | $          | 153 |   | $ | (23,099 | ) | $ | (7,534 | ) |
| Currency translation adjustment |       | (2,874                    | )          | (1,786                     | )          | 4,817 |   | 3,601 |   |
| Comprehensive loss              |       | $                         | (27,475    | )                          | $          | (1,633 | ) | $ | (18,282 | ) | $ | (3,933 | ) |

 

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7.                                       Earnings(Loss) Per Share

 

The following table setsforth the computation of basic and diluted earnings (loss) per share for thethree- and nine-month periods ended April 3, 2005 and March 28, 2004:

 
| ** **                                                                 | ** ** | **Three Months Ended**  | ** ** | **Nine Months Ended**    | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                                 | ** ** | **April 3,  2005** | ** ** | **March 28,  2004** | ** ** | **April 3,  2005** | ** ** | **March 28,  2004** | ** ** |
| **Numerators:**                                                            |       |                    |       |                     |       |   |   |   |   |
| Net income (loss) from continuing operations                               |       | $                       | (2,100     | )                        | $          | 518 |   | $ | 137 |   | $ | (5,475 | ) |
| Loss from discontinued operations                                          |       | (22,501                 | )          | (365                     | )          | (23,236 | ) | (2,059 | ) |
| Net income (loss)                                                          |       | $                       | (24,601    | )                        | $          | 153 |   | $ | (23,099 | ) | $ | (7,534 | ) |
| **Denominator:**                                                           |       |                    |       |                     |       |   |   |   |   |
| Weighted average shares used to compute basic  earnings (loss) per share   |       | 28,544                  |       | 28,469                   |       | 28,525 |   | 26,629 |   |
| Add dilutive effect of stock options outstanding                           |       | —                  |       | 486                      |       | 704 |   | — |   |
| Weighted average shares used to compute diluted  earnings (loss) per share |       | 28,544                  |       | 28,955                   |       | 29,229 |   | 26,629 |   |
|                                                                       |       |                    |       |                     |       |   |   |   |   |
| **Net income (loss) per share from  continuing operations:**               |       |                    |       |                     |       |   |   |   |   |
| Basic                                                                      |       | $                       | (0.07      | )                        | $          | 0.02 |   | $ | 0.00 |   | $ | (0.20 | ) |
| Diluted                                                                    |       | $                       | (0.07      | )                        | $          | 0.02 |   | $ | 0.00 |   | $ | (0.20 | ) |
|                                                                       |       |                    |       |                     |       |   |   |   |   |
| **Net loss per share from  discontinued operations:**                      |       |                    |       |                     |       |   |   |   |   |
| Basic                                                                      |       | $                       | (0.79      | )                        | $          | (0.01 | ) | $ | (0.81 | ) | $ | (0.08 | ) |
| Diluted                                                                    |       | $                       | (0.79      | )                        | $          | (0.01 | ) | $ | (0.81 | ) | $ | (0.08 | ) |
|                                                                       |       |                    |       |                     |       |   |   |   |   |
| **Net income (loss) per share:**                                           |       |                    |       |                     |       |   |   |   |   |
| Basic                                                                      |       | $                       | (0.86      | )                        | $          | 0.01 |   | $ | (0.81 | ) | $ | (0.28 | ) |
| Diluted                                                                    |       | $                       | (0.86      | )                        | $          | 0.01 |   | $ | (0.81 | ) | $ | (0.28 | ) |

 

The dilutiveeffect of stock options outstanding was not included in the calculation ofdilutive loss per share from continuing operations for the three-month periodended April 3, 2005 and nine-month period March 28, 2004,respectively.  The Company’s continuingoperations had a net loss for those periods, and as a result, inclusion of thedilutive effect of stock options would have had an anti-dilutive impact.  The dilutive effect of stock optionsoutstanding was not included in the calculation of dilutive loss per share fromdiscontinued operations for any of the periods presented, as all periodsresulted in losses from discontinued operations.

 

8.                                       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 warrantyreserve were as follows:

 
| ** **                                           | ** ** | **Nine Months Ended**   | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **April 3,  2005** | ** ** | **March 28,  2004** | ** ** |
| Balance, beginning of fiscal year                    |       | $                       | 254        |   | $ | 503 |   |
| Additions charged to earnings for product warranties |       | 420                     |       | 8 |   |
| Use of reserve for warranty obligations              |       | (354                    | )          | (29 | ) |
| Decrease to pre-existing warranties                  |       | (20                     | )          | (77 | ) |
| Reclass to liabilities held for sale                 |       | (50                     | )          | — |   |
| Balance, end of period                               |       | $                       | 250        |   | $ | 405 |   |

 

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

 

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9.                                       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 included a workforce reduction ofapproximately 200 positions in Europe and the relocation of those positions tolower cost facilities, primarily in China.  The Company completed theseactivities during the third quarter of fiscal 2005.  The total cost of these restructuringactivities was $1.7 million, related to employee severance and leasetermination costs.  Costs incurred in the three-month and nine-month periodsended April 3, 2005 were $0.1 million and $0.3 million respectively, whichare included in selling, general and administrative expense in the accompanyingcondensed consolidated statements of operations.

 

In thefourth quarter of fiscal 2004, the Company began the consolidation of itsGlendale Heights, Illinois operation into its Menomonee Falls, Wisconsinfacility.  The Company completed theseactivities during the third quarter of fiscal 2005.  The total cost of the consolidationactivities was $1.3 million, related to employee severance, relocation andlease termination costs.  Costs incurredin the three-month period ended April 3, 2005 were $0.4 million, which areincluded in selling, general and administrative expense in the accompanyingcondensed consolidated statements of operations.  Costs incurred in the nine-month period endedApril 3, 2005 were $0.9 million, of which $0.3 million are included incost of goods sold and $0.6 million are included in selling, general andadministrative expense in the accompanying condensed consolidated statements ofoperations.

 

10.                                 PensionExpense

 

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

 
| ** **                          | ** ** | **Three Months Ended**  | ** ** | **Nine Months Ended**    | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **April 3,  2005** | ** ** | **March 28,  2004** | ** ** | **April 3,  2005** | ** ** | **March 28,  2004** | ** ** |
| Service cost                        |       | $                       | —     |                     | $          | — |   | $ | — |   | $ | — |   |
| Interest cost                       |       | 2,699                   |       | 2,563                    |       | 7,602 |   | 7,688 |   |
| Expected return on plan  assets     |       | (3,066                  | )          | (2,649                   | )          | (8,635 | ) | (7,947 | ) |
| Amortization of prior  service cost |       | —                  |       | —                   |       | — |   | — |   |
| Recognized net actuarial  losses    |       | 760                     |       | 885                      |       | 2,140 |   | 2,654 |   |
|                                |       |                    |       |                     |       |   |   |   |   |
| Total net pension expense           |       | $                       | 393        |                     | $          | 799 |   | $ | 1,107 |   | $ | 2,395 |   |

 

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

 

**Item 2 - Management****’s Discussion and Analysis of Results of Operations andFinancial 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, and power inverters for fuelcell, wind and photovoltaic markets.

 

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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 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 experienced recent signs of slowing growth in certain of our servedmarkets.  This recent weakness isreflected in our bookings (new orders received) during our second and thirdquarters of fiscal 2005.

 

Third-quarter fiscal 2005 bookings were $55.3million, 97% of our third-quarter sales, and our backlog as of April 3,2005 was $65.0 million.  Bookings for thethird quarter of fiscal 2004 were $70.2 million and our backlog as of March 28,2004 was $68.3 million.  Second-quarterfiscal 2005 bookings were $53.6 million, 86% of our second- quarter sales, andour backlog as of January 2, 2005 was $69.9 million.  The decline in bookings versus the prior yearis primarily related to traditional embedded power products. We continue tofocus on gaining share in systems markets and on new product introductions inindustrial, transportation, utility, and alternative energy markets, and ourfuture sales growth is largely dependent on the success of this strategy.  As a result, we expect that our productdevelopment costs and selling expenses could continue to exceed prior yearlevels in the fourth quarter of fiscal 2005.

 

Fiscal2005 third-quarter sales were $57.0 million, an 8% decrease from fiscal 2004third-quarter sales of $61.8 million, and down 8% from the fiscal 2005second-quarter sales of $62.0 million. The decrease in sales volume relates directly to the decline in bookingsfor traditional embedded power products. We continued to gain new orders for our alternative energy productsduring the third quarter of fiscal 2005, but sales of those products are notyet contributing significantly to our total sales.

 

Ourloss from continuing operations was $2.1 million in the third quarter of fiscal2005 compared to income from continuing operations of $0.5 million in the thirdquarter of fiscal 2004.  Income fromcontinuing operations was $0.1 million for the nine months ended April 3,2005 compared to a loss from continuing operations of $5.5 million for the ninemonths ended March 28, 2004.  Theloss from continuing operations in the third quarter of fiscal 2005 wasprimarily due to lower sales volume, increased legal fees, plant relocationcosts, efficiency issues related to our factory move in China, and increasedspending on research and development (R&D). We feel increased spending on R&D is essential to achievement of oursales strategy.  We completedrestructuring activities in the third quarter of fiscal 2005, related mainly toplant consolidation in the U.S. and a move of our existing operations in Chinato a nearby larger facility, which should double our production capacity inChina.

 

Ourtelecom power system business continued to generate losses throughout fiscal2005, and as a result, we are in the process of divesting this business.  We are currently in negotiations with aprospective buyer, and we will account for our telecom power system business asdiscontinued operations until it is divested.

 

Subsequentto the end of the third quarter of fiscal 2005, we were informed of a decisionin a patent infringement claim brought against us by Ole K. Nilssen (see Note 5of Notes to Condensed Consolidated Financial Statements).  We had earlier agreed to binding and finalarbitration, and in May 2005, the arbitrator awarded damages to Mr. Nilssen of$23.4 million.  Since the patentinfringement award relates to a business we divested in June 2001, theaccompanying financial statements reflect the impact of this award, net ofamounts previously recorded of $1.4 million, in discontinued operations.  Mainly as a result of this award, our lossfrom discontinued operations was $22.5 million for the third quarter of fiscal2005 compared to a loss of $0.4 million in the third quarter of fiscal 2004.  Our loss from discontinued operations totaled$23.2 million and $2.1 million for the nine months ended April 3, 2005 andMarch 28, 2004, respectively (see Note 3 of Notes to CondensedConsolidated Financial Statements). Based on the terms of the arbitration, we are required to pay the $23.4million award, net of amounts previously paid of $0.8 million, to Mr. Nilssenwithin ten days after issuance of the arbitrator’s decision.  The award has a material adverse effect onthe Company’s financial position and results of operations for the period endedApril 3, 2005, and will have a material adverse effect on the Company’sfuture cash flows and liquidity (see “Liquidity and Capital Resources” below).

 

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Ourcash balances decreased $0.7 million during the third quarter of fiscal 2005,and our total outstanding debt balances decreased by $0.3 million.  Fiscal 2005 third-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 believed to be reasonable given known circumstances.  Actual results could differ from thoseestimates.  On an ongoing basis, weevaluate and update our estimates, and we believe the following discussionaddresses our policies which are most critical to understanding our financialposition and results of operations, and which require our most complexjudgments.

 

*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 timereceivables are past due, significant one-time events, financial condition ofcustomers and historical experience. We record specific provisions forindividual accounts when we become aware of a customer’s inability to meet itsfinancial obligations to us, such as in the case of bankruptcy filings ordeterioration in the customer’s operating results or financial position. Inaddition, a general allowance is established based on historical bad debtexperience as a percentage of sales.  Wefeel these estimates have been accurate in the past; however, market conditionsin our industry can change very rapidly. Changes in market conditions, customer circumstances, bad debtexperience or sales volumes would impact our assumptions, and our estimates ofthe recoverability of receivables would be further adjusted, either upward ordownward.

 

*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

 

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discountedfuture cash flows of our reporting units to determine the fair value of thosereporting units.    Such estimatesinclude, but are not limited to, projected future operating results, workingcapital ratios, cash flow, terminal values, market discount rates and taxrates.  When performing our annualimpairment tests, we compare all relevant assumptions from the prior year testto the actual results, and have found our assumptions to be accurate inidentifying impairment charges.  Ifcircumstances cause these estimates to change in the future, or if actualcircumstances vary significantly from these assumptions, this could result inadditional goodwill impairment 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, including changesin investment returns and interest rates, in making these assumptions.  Our plan assets are comprised mainly ofcommon stock and bond funds.  Theexpected rate of return on plan assets is a long-term assumption and isgenerally not changed on an annual basis. The discount rate reflects the market for high-quality fixed income debtinstruments and is subject to change each year. Changes in assumptions typically result in actuarial gains or lossesthat are amortized in accordance with the methods specified in SFAS No. 87, “Employers’Accounting for Pensions”.

 

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 a determinationis made.  

 

Results of Operations - Three Months Ended April 3,2005 and March 28, 2004

 

Net Sales and Gross Profit

 

Net sales for the third quarter of fiscal 2005were $57.0 million, a decrease of 8% from the third quarter of fiscal 2004sales of $61.8 million.  The decrease ismainly due to lower sales of embedded power supplies, $4.2 million, and lowersales of power control systems, $1.8 million, partially offset by currencytranslation impact from the stronger Euro, $1.2 million.

 

Our fiscal 2005 third quarter gross profit was$14.2 million, or 24.9% of sales, versus $15.1 million, or 24.4% of sales inthe third quarter of fiscal 2004.  Thereduction of gross profit of $0.9 million from the prior year is due to lowersales volume, $1.2 million negative impact to gross profit, excess inventorycharges of $0.3 million, and efficiency issues related to the move of our plantin China to a nearby larger facility, partially offset by the relocation ofcertain product lines from Europe to China and currency translation impact fromthe stronger Euro.

 

Research and Development, Selling, General andAdministrative

 

We continued to increase our investment inR&D during the third quarter of fiscal 2005.  R&D expense was $4.0 million, or 7.0% ofsales, in the third quarter of fiscal 2005 compared to $3.4 million, or 5.5% ofsales, in the third quarter of fiscal 2004. We have increased spending on new product development for utility andalternative energy markets, and continue to invest in new power-electronicplatforms and applications and expand the breadth of existing productlines.  This accounts for $0.5 million ofthe increase in R&D, mainly in payroll-related expenses, and prototype andproduct development expenses, with the remaining $0.1 million due to currencytranslation impact.

 

Selling,general and administrative (SG&A) expense was $11.6 million (20.4% ofsales) in the third quarter of fiscal 2005 versus $10.6 million (17.2% ofsales) in the third quarter of fiscal 2004. Our third quarter fiscal 2005 selling

 

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expenseswere $4.3 million, versus $3.9 million in the third quarter of fiscal 2004, duemainly to higher payroll-related expenses from increased headcount.  Our third quarter fiscal 2005 general andadministrative (G&A) expense was $7.3 million, compared to third quarterfiscal 2004 expense of $6.7 million.  Theincrease is due to higher legal fees, $0.4 million, increased bad debtprovision, $0.4 million, higher payroll-related costs of $0.3 million, andincreased restructuring costs of $0.1 million, partially offset by lowerpension expense of $0.4 million.  G&Aexpense for the third quarter of fiscal 2005 reflects legal fees of $0.7million related mainly to the Nilssen patent infringement arbitration (see Note5 of Notes to Condensed Consolidated Financial Statements), and $0.5 million ofrestructuring expense related to plant closure and relocation.  The fiscal 2004 third quarter included $0.4million of restructuring expense related to plant closure and relocation.  Pension expense in the third quarter offiscal 2005 was $0.4 million versus pension expense of $0.8 million in thethird quarter of fiscal 2004 (see Note 10 of Notes to Condensed Consolidated FinancialStatements).

 

Income(Loss) from Operations

 

Our loss from operations for the third quarterof fiscal 2005 was $1.5 million compared to income from operations of $1.0million for the third quarter of fiscal 2004. The loss in the third quarter of fiscal 2005 resulted from lower grossprofit due to lower sales volumes, and increased R&D and SG&A expenses.

 

Interest Expense

 

Interest expense was $0.5 million in the thirdquarter of fiscal 2005, comparable to interest expense of $0.5 million in thethird quarter of fiscal 2004.  There wasno allocation of interest expense to discontinued operations in fiscal 2005 or2004.

 

Loss from Discontinued Operations

 

Our loss from discontinued operations was $22.5million in the third quarter of fiscal 2005, compared to a loss of $0.4 millionin the third quarter of fiscal 2004 (see Note 3 of Notes to CondensedConsolidated Financial Statements).  Theincreased loss in the third quarter of fiscal 2005 is due to a patentarbitration charge of $22.0 million.

 

Net Income (Loss)

 

Our net loss was $24.6 million in the thirdquarter of fiscal 2005, compared to net income of $0.1 million in the thirdquarter of fiscal 2004.  On a per sharebasis, our net loss was $0.86 per share for the three months ended April 3,2005, compared to net income of $0.01 per diluted share for the three monthsended March 28, 2004.  We recorded atax provision of $0.1 million in the third quarter of fiscal 2005, associatedwith our foreign operations.  We did notrecord a tax benefit on our pretax loss, due to the uncertainty of realizingany such tax benefits.  We did not recorda tax provision in the third quarter of fiscal 2004.

 

Results of Operations - Nine Months Ended April 3,2005 and March 28, 2004

 

Net Sales and Gross Profit

 

Net sales for the first nine months of fiscal2005 were $185.2 million, an increase of 12.7% from the fiscal 2004 firstnine-month sales of $164.3 million.  Theincrease of $20.9 million is due to higher sales of power systems, $8.4million, higher sales of embedded power supplies, $6.8 million, and currencytranslation impact from the stronger Euro, $5.7 million.  In addition, the first nine months of fiscal2005 contained forty weeks while the first nine months of fiscal 2004 containedthirty-nine 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 nine months offiscal 2005 was $45.9 million, or 24.8% of sales, versus $37.9 million, or23.1% of sales, in the first nine months of fiscal 2004.  The improvement in gross profit of $8.0million is primarily due to higher sales volume and improved product mix, $4.8million, relocation of production to lower cost facilities, $3.6 million, andcurrency translation impact from the stronger Euro, $1.1 million, partiallyoffset by excess inventory charges of $0.3 million and restructuring costs of$0.3 million (see Note 9 of Notes to Condensed Consolidated FinancialStatements).  The divestiture in the firsthalf of fiscal 2004 of our telecom service business also improved margins by$0.7 million on a comparable basis in fiscal 2005, as that business wasgenerating negative gross profits in fiscal 2004.

 

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Research and Development, Selling, General andAdministrative

 

R&D expense was $11.2 million, or 6.0% ofsales, for the first nine months of fiscal 2005 compared to $9.2 million, or5.6% of sales for the first nine months of fiscal 2004.  The increase is due to higher payroll-relatedexpenses from increased headcount, increased prototype, testing andcertification expenses, and currency translation impact from the stronger Euro,as most of our R&D spending (60%) occurs in Europe.  For the first nine months of fiscal 2005, wecontinued to increase spending in new product development aimed at utility,transportation, back-up power and alternative energy markets, in addition tocontinued spending for development of new power-electronic platforms andapplications.

 

SG&Aexpense was $34.2 million (18.5% of sales) for the first nine months of fiscal2005 versus $32.6 million (19.8% of sales) for the first nine months of fiscal2004.  Of these amounts, selling expenseswere $13.8 million for the first nine months of fiscal 2005, versus $11.5million for the first nine months of fiscal 2004, due mainly to increasedcommission expense on the higher sales volume. G&A expenses were $20.4 million for the first nine months of fiscal2005, versus $21.1 for the first nine months of fiscal 2004.  The reduction in G&A expense is due toreduced provision for bad debts, $1.3 million, lower pension expense, $1.3million, and reduced insurance expense, $0.5 million, partially offset byhigher legal fees, $1.3 million, and payroll-related expenses of $1.2 million.  G&A expense for the first nine months offiscal 2005 includes legal fees of $1.5 million related to the Nilssen patentinfringement arbitration (see Note 5 of Notes to Condensed ConsolidatedFinancial Statements), and pension expense of $1.1 million.  G&A expense for fiscal 2004 includespension expense of $2.4 million, and a $1.7 million charge to write down thevalue of accounts receivable related to a customer bankruptcy.

 

Income(Loss) from Operations

 

Income from operations for the first nine monthsof fiscal 2005 was $0.5 million compared to a loss from operations of $3.9million for the first nine months of fiscal 2004.  The improvement in income from operations isdue to higher sales volumes, which resulted in improvement in gross profits,partially offset by higher SG&A expense as described above.

 

Interest Expense

 

Interest expense was $1.2 million for the firstnine months of fiscal 2005 compared to interest expense of $1.6 million for thesame period in fiscal 2004.  The decreaseis mainly due to deferred financing charges, which decreased from $0.5 millionin the first nine months of fiscal 2004 to $0.2 million in the first nine monthof fiscal 2005.  There was no allocationof interest expense to discontinued operations in fiscal 2005 or 2004.

 

Other Income

 

Other income for the first nine 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 nine months of fiscal 2004.

 

Loss from Discontinued Operations

 

Our loss from discontinued operations for thefirst nine months of fiscal 2005 was $23.2 million, compared to a loss of $2.1million for the first nine months of fiscal 2004 (see Note 3 of Notes toCondensed Consolidated Financial Statements). The increased loss in the first nine months of fiscal 2005 is due to apatent arbitration charge of $22.0 million, partially offset by the divestitureof our telecom service business during the first quarter of fiscal 2004, whichwas generating significant operating losses in fiscal 2004.  

 

Net Loss

 

Our net loss for the first nine months of fiscal2005 was $23.1 million compared to a net loss of $7.5 million for the firstnine months of fiscal 2004.  On a pershare basis, our net loss was $0.81 per share for the nine months ended April 3,2005, compared to a net loss of $0.28 per share for the nine months ended March 28,2004.  We recorded a tax provision of$0.5 million in the first nine months of fiscal 2005, associated with ourforeign operations.  We did not record atax benefit on our pretax loss in the first nine months of fiscal 2004.

 

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Liquidity and Capital Resources

 

Our cash balances increased $1.0 million in thefirst nine months of fiscal 2005, from $2.3 million at June 27, 2004 to$3.3 million at April 3, 2005.  Ourprimary sources of cash in the first nine months of fiscal 2005 were increasedborrowings of $6.0 million under line-of-credit agreements, a reduction of $3.6million in our accounts receivable balances, a $3.3 million net tax refundreceived from the Internal Revenue Service, and a $1.3 million payment receivedfrom the one-time sale and license of rights and patents, partially offset by adecrease of $12.0 million in our accounts payable and accrued liabilities balancescompared to June 27, 2004.  Capitalexpenditures for the third quarter of fiscal 2005 were $2.2 million and for thenine months ended April 3, 2005 were $6.1 million, less than depreciationand amortization expense of $2.4 million for the third quarter of fiscal 2005and $7.3 million for the same period.  Weanticipate that our capital expenditures for the fiscal year will be less thandepreciation and amortization expense for the fiscal year, which is estimatedat approximately $10.0 million.

 

On May 3, 2005, an arbitrator awarded damagesagainst us of $23.4 million in a patent dispute with Ole K. Nilssen.  Based on the terms of the bindingarbitration, we are required to pay this amount, net of amounts previously paidof $0.8 million, to Mr. Nilssen within ten days of the award.  We currently do not have the ability to meetthis obligation within the ten-day timeframe. We have entered into discussions with our advisors, and with Mr. Nilssenand his advisors regarding various available options to resolve this matter,including the possibility of extending the payment period while investigatingfinancing alternatives.  Among thealternatives we are exploring are debt financing, equity financing, or a saleof part of the business, or all of the Company.

 

As of April 3, 2005, our long-termborrowings (including current portion) were $22.9 million, an increase of $4.8million from 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.  At the end of the second quarterof fiscal 2005, we were in violation of certain covenants and received a waiverof all covenant violations from our bank in exchange for a temporary reductionin available credit of $7.0 million.  Asa result, we had $5.7 million of available borrowing capacity as of April 3,2005, with $2.9 million of borrowings outstanding under the facility.   The patent award described above places usin default of our Credit Agreement, resulting in a reclassification ofborrowings outstanding from long-term debt to a current liability.  While our bank has indicated to us that itdoes not currently intend to discontinue the extension of credit or acceleratethe loans, it reserves the right to do so at its discretion.

 

Our European subsidiary maintains revolvingborrowing arrangements with local banks, primarily to support working capitalneeds.  Available borrowings under thesearrangements aggregate approximately Euro 20.0 million depending in part uponlevels of accounts receivable, and bear interest at various rates ranging from2% to 8%.  During the first quarter offiscal 2004, our European subsidiary entered into an agreement with a Europeanbank to provide borrowings secured by the subsidiary’s land and building over aten-year period.    Borrowings under thisagreement bear interest at EURIBOR plus one and one-half percent.  The initial commitment to lend under thisagreement is Euro 7.0 million, with the commitment reduced ratably on aquarterly basis beginning March 31, 2004 and ending December 31, 2013.  Amounts outstanding at April 3, 2005under all of our European lending agreements were $20.0 million.

 

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 April 3, 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 ninemonths of fiscal 2005.

 

Our current borrowing capacity under ourrevolving loan facilities and our internally generated cash flows will not besufficient to fund the patent award, anticipated working capital needs, capitalexpenditures, and other near-term commitments during the next twelvemonths.  Our ability to fund such itemsis dependent on our ability to successfully negotiate a settlement with orsatisfy our obligation to Mr. Nilssen, by raising funds from equity financing,debt financing, asset sales, or some combination thereof.

 

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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 risks facingpublic companies, including business cycles and trends in the general economy,financial market conditions, changes in interest rates, demand variations andvolatility, potential loss of key personnel, supply chain disruptions,government legislation and regulation, and natural causes.  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 are the following:

 

*Inability to Satisfy Patent Award Obligation*

 

On May3, 2005, an arbitrator awarded damages against us in the Ole K. Nilssen patentinfringement case in the amount of $23.4 million.  Based on the terms of the arbitration, we arerequired to pay this amount to Mr. Nilssen within ten days after issuance ofthe award.  We currently do not have theability to meet this obligation within the ten-day timeframe.  Our current borrowing capacity under ourrevolving loan facilities and our internally generated cash flows will not besufficient to fund payment of the award. We have entered into discussions with our advisors, and with Mr. Nilssenand his advisors regarding various available options to resolve this matter,including the possibility of extending the payment period while investigatingfinancing alternatives.  If we are unableto raise sufficient funds to satisfy our payment obligation or cannot reachagreement with Mr. Nilssen regarding an appropriate payment method ortimetable, we may be forced to pursue a reorganization of the Company viaChapter 11 bankruptcy proceedings.

 

*Economic Conditions and Demand for our Products*

 

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

 

*Competitive Industry*

 

Weoperate in an intensely competitive industry characterized by rapid changes intechnology, product demand, prices and lead times.  Our future profitability depends on ourability to successfully identify and react to these changing trends.  Specifically, achievement of our sales andprofit goals is dependent in part upon our ability to successfully anticipateproduct demand, to introduce new products to meet that demand in a timelymanner at

 

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competitiveprices, to gain acceptance of our products in the marketplace, and to adapt ourexisting product platforms in the event of changes in technology.  Failure to do so could result in low returnson investment in new products and technologies, a loss of competitive positionrelative to our peers, obsolete products and technologies, and adverse impacton our operating results.  In addition,price erosion in our served markets could have a material impact on ourfinancial position or results 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 other currencies,primarily the Euro, or changes in any of the other risks listed previously,could have an adverse effect on our financial position or results ofoperations.

 

*Restructuring and Outsourcing*

 

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

 

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*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 highly dependent on both patented and proprietary intellectualproperty.  Therefore, major advancementsin digital power-electronic technology by competitors or the advent oftechnologies obviating digital power-electronic solutions could have an adverseeffect on our financial position or results of operations.

 

Likewise,as evidenced by the Nilssen arbitration award that was entered against us inMay 2005, we could be adversely affected financially should we be judged tohave infringed 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.

 

Inconnection with our June 2001 sale of our lighting business to UniversalLighting Technologies, Inc. (“ULT”), we agreed to provide a limitedindemnification against certain claims of patent infringement that Ole K.Nilssen might allege against ULT.  Mr.Nilssen subsequently filed a lawsuit against ULT alleging infringement by ULTof 29 of his patents pertaining to electronic ballast technology.  The lawsuit is currently pending in the U.S.District Court for the Middle District of Tennessee.  ULT has made a claim for indemnificationagainst us in respect of this matter, which we accepted.  If Mr. Nilssen succeeds in his claim againstULT, our obligation to indemnify ULT for its damages payable to Mr. Nilssencould have a material adverse effect on our financial position and results ofoperations.  Further, if we are unable toraise sufficient funds to satisfy our indemnification obligation to ULT orcannot reach agreement with ULT regarding an appropriate payment method ortimetable, we may be forced to pursue a reorganization of the Company viaChapter 11 bankruptcy proceedings.

 

**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 $22.9 million at April 3, 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 April 3, 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

 

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sale,and (3) the exposure that upon translation of our subsidiaries’ periodicfinancial statements, a weakening local currency would result in lower reportedsales in U.S. dollars than if the local currency had been stable relative tothe U.S. dollar.  In the latter case,operating expenses would also be translated at the lower amount andaccordingly, the effect on net income would be mitigated.  We had no foreign currency contractsoutstanding at April 3, 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 April 3, 2005, and (ii) no change ininternal control over financial reporting occurred during the quarter ended April 3,2005, that has materially affected, or is reasonably likely to materiallyaffect, such internal control over financial reporting.

 

**PART II – OTHER****INFORMATION**

 

**Item 1 – Legal****Proceedings**

 

In April 1998,Ole K. Nilssen filed a lawsuit in the U.S. District Court for the NorthernDistrict of Illinois alleging infringement by the Company of seven of hispatents pertaining to electronic ballast technology, and seeking unspecifieddamages and injunctive relief to preclude the Company from making, using orselling products allegedly infringing his patents.  The Company denied that the products, whichit no longer manufactures, 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 April 2003, Mr. Nilssen’s lawsuit and the counterclaims weredismissed with prejudice and both parties agreed to submit limited issues indispute to final and binding arbitration. The arbitration process commenced on November 8, 2004 and closingarguments were heard on March 15, 2005. As reported by the Company in its press release issued May 4, 2005 andForm 8K filed with the SEC on May 4, 2005, on the afternoon of May 3, 2005, theCompany learned of the arbitrator’s decision, awarding damages to Nilssen inthe amount of $23.4 million.  The awardhas a material adverse effect on the Company’s financial position and resultsof operations for the period ended April 3, 2005, and will have a materialadverse effect on the Company’s future cash flows and liquidity.  The patent award also places the Company indefault of its North American credit agreement, resulting in a reclassificationof borrowings outstanding from long-term debt to a current liability.  While the Company’s bank has indicated thatit does not currently intend to discontinue the extension of credit oraccelerate the loans, the bank reserves the right to do so at itsdiscretion.  The Company has entered intodiscussions with Mr. Nilssen regarding various available options for satisfyingthe award.

 

In June 2001, theCompany sold its lighting business to Universal Lighting Technologies, Inc. (“ULT”),and agreed to provide a limited indemnification against certain claims ofinfringement that Mr. Nilssen might allege against ULT.  In 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 was successfully removed to the U.S. District Court for theMiddle District of Tennessee and is expected to go to trial in February 2006.  As in the case against Magnetek, the Companydenies that the products for which it has an indemnification obligation to ULTinfringe any valid patent and has filed a response on behalf of ULT assertingaffirmative defenses, as well as a counterclaim for a judicial declaration thatthe products do not infringe Mr. Nilssen’s patents and that the patents areinvalid.  The Company will continue toaggressively defend the claims against ULT that are subject to defense andindemnification.  The patents andproducts involved are different than those involved in the May 2005 award, andthe Company intends to make different arguments in the U.S. District Court thatwere not available at the time of arbitration. However, there is a possibility that an adverse decision could berendered, and such an unfavorable decision could have a material adverse effecton the Company’s financial position and results of operations.  Discussions with Mr. Nilssen regardingavailable options for satisfying the arbitrator’s recent award will includepotential opportunities for concurrently satisfying Mr. Nilssen’s claimsagainst ULT.

 

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**Item 2– Unregistered****Salesof Equity Securities and Use of Proceeds**

 

There were no unregistered sales of equitysecurities and there were no repurchases of equity securities during our thirdfiscal quarter ended April 3, 2005.

 

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

 

None.

 

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

 

None.

 

**Item 5 – Other Information**

 

None.

 

**Item 6- Exhibits**

 

(a)                                  Indexto Exhibits

 

31.1               Certificationof the Chief Executive Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934. *

 

31.2               Certificationof the Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934. *

 

32.1               Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002. *

 

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*Filedwith this Report on Form 10-Q.

 

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: May 12,  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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