**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D. C.20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **ý**                                                       |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |
|------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|
|                                                             |   |                                                                                                 |
| **For the quarterly period ended:  December 31, 2003** |
|                                                             |   |                                                                                                 |
|                                                             |   | **OR**                                                                                               |
|                                                             |   |                                                                                                 |
| **o**                                                            |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |

 

**For the transition period from**

 

**Commission file number 1-10233**

 

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**MAGNETEK, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**10900 WilshireBlvd., Suite 850Los Angeles, California 90024**

(Address of principal executive offices)

(Zip Code)

 

**(310) 208-1980**

(Registrant’s telephone number, includingarea code)

 

 

(Former name, former address and formerfiscal year,if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  o  No  ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes  ý  No  o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number ofshares outstanding of Registrant’s Common Stock, as of February 9, 2004 was28,472,323 shares.

 

 

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2004 MAGNETEK FORM 10-Q

 

TABLE OF CONTENTS FOR THE QUARTERLY REPORT ONFORM 10Q

FOR THE FISCAL QUARTER ENDEDDECEMBER 31, 2003

 

MAGNETEK, INC.

 
| **Part I.**   | **Financial Information**                                                                   |   |
|---------------|---------------------------------------------------------------------------------------------|--------|
|          |                                                                                        |   |
| Item 1.       | Financial  Statements                                                                       |   |
| Item 2.       | Management’s Discussion and Analysis of  Results of Operations and Financial Condition |   |
| Item 3.       | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
| Item 4.       | Controls  and Procedures                                                                    |   |
|          |                                                                                        |   |
| **Part  II.** | **Other  Information**                                                                      |   |
|          |                                                                                        |   |
| Item 1.       | Legal Proceedings                                                                           |   |
| Item 6.       | Exhibits and Reports on Form 8-K                                                            |   |
|          |                                                                                        |   |
| Signatures    |                                                                                        |   |

 

2

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PART I.                             FINANCIALINFORMATION

 

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 andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles for complete financial statements.

 

In the opinion ofmanagement, the accompanying condensed consolidated financial statementscontain all adjustments necessary to fairly present the financial position asof December 31, 2003 and the results of operations and cash flows for thethree-month and six-month periods ended December 31, 2003 and 2002.  It is suggested that these condensedconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and notes included in the Company’s latest Annual Reporton Form 10-K.  Results for thethree-months and six-months ended December 31, 2003 are not necessarilyindicative of results that may be experienced for the full fiscal year.

 

This document,including documents incorporated herein by reference, contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  The words “believe”, “expect”,“estimate”, “anticipate”, “intend”, “may”, “might”, “will”, “would”, “could”,“project”, and “predict”, or similar words and phrases generally identifyforward-looking statements. Forward-looking statements contained or incorporated by reference inthis document, including those set forth in the section of this documententitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations”, include, but are not limited to, statements regardingprojections of revenues, income or loss, capital expenditures, plans for futureoperations, products or services and financing needs or expectations, as wellas assumptions relating to the foregoing.

 

Forward-lookingstatements are inherently subject to risks and uncertainties which in manycases are beyond the control of the Company and which cannot be predicted orquantified.  As a result, future eventsand actual results could differ materially from those set forth in,contemplated by, or underlying forward-looking statements.  Such risks and uncertainties include but arenot limited to economic conditions in general, sensitivity to industryconditions, competitive factors such as technology and pricing pressures,business conditions in the telecommunications and electronic equipment markets,international sales and operations, dependence on significant customers,increased material costs, risks and costs associated with acquisitions anddivestitures, environmental matters and the risk that the Company’s ultimatecosts of doing business exceed present estimates.  Further information on factors that could affect Magnetek’sfinancial results can be found in the Company’s filings with the Securities andExchange Commission.

 

Forward-lookingstatements contained in this document speak only as of the date of thisdocument or, in the case of any document incorporated by reference, the date ofthat document.  The Company does nothave any obligation to publicly update or revise any forward-looking statementcontained or incorporated by reference in these documents to reflect changedassumptions, the occurrence of unanticipated events or changes to futureoperating results over time.

 

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ITEM 1

 

MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS

FOR THE THREE MONTHS ENDED

December 31, 2003 and 2002

(amounts in thousands, except per share data)

(unaudited)

 
|                                  |   | **2003** |   | **2002** |   |
|---------------------------------------|--------|----------|--------|----------|--------|
|                                  |   |     |   |     |   |
| Net sales                             |   | $        | 58,091 |     | $      | 51,268 |   |
| Cost of sales                         |   | 45,188   |   | 45,026   |   |
|                                  |   |     |   |     |   |
| Gross profit                          |   | 12,903   |   | 6,242    |   |
| Research and development              |   | 3,285    |   | 2,945    |   |
| Selling, general and  administrative  |   | 13,255   |   | 9,951    |   |
| Goodwill and fixed asset  impairment  |   | —   |   | 34,019   |   |
|                                  |   |     |   |     |   |
| Loss from operations                  |   | (3,637   | )      | (40,673  | )      |
| Interest and other expense            |   | 411      |   | 233      |   |
|                                  |   |     |   |     |   |
| Loss before benefit for income  taxes |   | (4,048   | )      | (40,906  | )      |
| Benefit for income taxes              |   | —   |   | (721     | )      |
| Net loss                              |   | $        | (4,048 | )        | $      | (40,185 | ) |
|                                  |   |     |   |     |   |
| Loss per common share                 |   |     |   |     |   |
|                                  |   |     |   |     |   |
| Basic and diluted:                    |   |     |   |     |   |
| Net loss                              |   | $        | (0.15  | )        | $      | (1.70 | ) |

 

See accompanying notes

 

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MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS

FOR THE SIX MONTHS ENDED

December 31, 2003 and 2002

(amounts in thousands, except per share data)

(unaudited)

 
|                                           |   | **2003** |    | **2002** |   |
|------------------------------------------------|--------|----------|---------|----------|--------|
|                                           |   |     |    |     |   |
| Net sales                                      |   | $        | 108,526 |     | $      | 94,094 |   |
| Cost of sales                                  |   | 85,277   |    | 78,068   |   |
|                                           |   |     |    |     |   |
| Gross profit                                   |   | 23,249   |    | 16,026   |   |
| Research and development                       |   | 6,128    |    | 5,458    |   |
| Selling, general and  administrative           |   | 23,725   |    | 19,415   |   |
| Gain from termination of retiree  medical plan |   | —   |    | (27,771  | )      |
| Goodwill and fixed asset  impairment           |   | —   |    | 34,019   |   |
|                                           |   |     |    |     |   |
| Loss from operations                           |   | (6,604   | )       | (15,095  | )      |
| Interest and other expense                     |   | 1,083    |    | 419      |   |
|                                           |   |     |    |     |   |
| Loss before provision for income  taxes        |   | (7,687   | )       | (15,514  | )      |
| Provision for income taxes                     |   | —   |    | 8,928    |   |
| Net loss                                       |   | $        | (7,687  | )        | $      | (24,442 | ) |
|                                           |   |     |    |     |   |
| Loss per common share                          |   |     |    |     |   |
|                                           |   |     |    |     |   |
| Basic and diluted:                             |   |     |    |     |   |
| Net loss                                       |   | $        | (0.30   | )        | $      | (1.03 | ) |

 

See accompanying notes

 

5

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MAGNETEK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2003 and JUNE 30, 2003

(amounts in thousands) 

 
|                                             |   | **December 31** |    | **June 30** |   |
|--------------------------------------------------|--------|-----------------|---------|-------------|--------|
|                                             |   | **(unaudited)** |    |        |   |
| ASSETS                                           |   |            |    |        |   |
| Current assets:                                  |   |            |    |        |   |
| Cash                                             |   | $               | 2,758   |        | $      | 1,680 |   |
| Accounts receivable, net                         |   | 49,049          |    | 46,745      |   |
| Inventories                                      |   | 49,584          |    | 48,843      |   |
| Prepaid expenses and other                       |   | 9,358           |    | 12,908      |   |
| Total current assets                             |   | 110,749         |    | 110,176     |   |
|                                             |   |            |    |        |   |
| Property, plant and equipment                    |   | 122,000         |    | 111,723     |   |
|                                             |   |            |    |        |   |
| Less-accumulated depreciation and  amortization  |   | 88,306          |    | 77,929      |   |
| Property, plant and equipment, net               |   | 33,694          |    | 33,794      |   |
|                                             |   |            |    |        |   |
| Goodwill                                         |   | 64,104          |    | 63,067      |   |
| Prepaid pension and other assets                 |   | 72,701          |    | 73,614      |   |
| Total Assets                                     |   | $               | 281,248 |        | $      | 280,651 |   |
|                                             |   |            |    |        |   |
| LIABILITIES AND STOCKHOLDERS’  EQUITY       |   |            |    |        |   |
|                                             |   |            |    |        |   |
| Current liabilities:                             |   |            |    |        |   |
| Accounts payable                                 |   | $               | 33,016  |        | $      | 35,496 |   |
| Accrued liabilities                              |   | 13,229          |    | 13,452      |   |
| Current portion of long-term debt                |   | 701             |    | 805         |   |
| Total current liabilities                        |   | 46,946          |    | 49,753      |   |
|                                             |   |            |    |        |   |
| Long-term debt, net of current  portion          |   | 12,207          |    | 25,897      |   |
|                                             |   |            |    |        |   |
| Other long-term obligations                      |   | 117,317         |    | 118,861     |   |
|                                             |   |            |    |        |   |
| Deferred income taxes                            |   | 6,248           |    | 6,469       |   |
|                                             |   |            |    |        |   |
| Stockholders’ equity                        |   |            |    |        |   |
| Common stock                                     |   | 285             |    | 237         |   |
| Paid in capital in excess of par  value          |   | 127,652         |    | 106,541     |   |
| Retained earnings                                |   | 73,272          |    | 80,959      |   |
| Accumulated other comprehensive  loss            |   | (102,679        | )       | (108,066    | )      |
| Total stockholders’ equity                  |   | 98,530          |    | 79,671      |   |
|                                             |   |            |    |        |   |
| Total Liabilities and  Stockholders’ Equity |   | $               | 281,248 |        | $      | 280,651 |   |

 

See accompanying notes

 

6

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MAGNETEK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE SIX MONTHS ENDED

December 31, 2003 and 2002

(amounts in thousands)

(unaudited)

 
|                                                                                       |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash flows from operating  activities:                                                     |   |     |   |     |   |
| Net loss                                                                                   |   | $        | (7,687 | )        | $      | (24,442 | ) |
| Adjustments to reconcile net loss  to net cash provided by (used in) operating activities: |   |     |   |     |   |
| Depreciation and amortization                                                              |   | 5,041    |   | 4,581    |   |
| Gain from termination of retiree  medical, net of tax                                      |   | —   |   | (17,218  | )      |
| Goodwill and fixed asset  impairment                                                       |   | —   |   | 34,019   |   |
| Changes in operating assets and  liabilities                                               |   | 522      |   | 4,116    |   |
|                                                                                       |   |     |   |     |   |
| Total adjustments                                                                          |   | 5,563    |   | 25,498   |   |
| Net cash provided by (used in)  operating activities                                       |   | (2,124   | )      | 1,056    |   |
|                                                                                       |   |     |   |     |   |
| Cash flows from investing  activities:                                                     |   |     |   |     |   |
| Proceeds from sale of business                                                             |   | 1,250    |   | —   |   |
| Capital expenditures                                                                       |   | (2,506   | )      | (2,704   | )      |
| Net cash used in investing  activities                                                     |   | (1,256   | )      | (2,704   | )      |
|                                                                                       |   |     |   |     |   |
| Cash flow from financing  activities:                                                      |   |     |   |     |   |
| Proceeds from issuance of common  stock                                                    |   | 18,768   |   | 169      |   |
| Repayment of bank and other long  term obligations                                         |   | (13,794  | )      | (306     | )      |
| Increase in deferred financing  costs                                                      |   | (516     | )      | (42      | )      |
| Net cash provided by (used in)  financing activities                                       |   | 4,458    |   | (179     | )      |
|                                                                                       |   |     |   |     |   |
| Net increase (decrease) in cash                                                            |   | $        | 1,078  |     | $      | (1,827 | ) |
| Cash at the beginning of the  period                                                       |   | 1,680    |   | 4,816    |   |
|                                                                                       |   |     |   |     |   |
| Cash at the end of the period                                                              |   | $        | 2,758  |     | $      | 2,989 |   |

 

See accompanying notes

 

7

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MAGNETEK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

DECEMBER 31, 2003

(Amounts in thousands, except per share data)

(unaudited)

 

1.                                       Basis ofPresentation

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial reporting. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for fiscal year endfinancial statements.  For furtherinformation, refer to the financial statements and footnotes thereto includedin the Company’s Form 10-K for the year ended June 30, 2003 filed with theSecurities and Exchange Commission.  Inthe Company’s opinion, these unaudited statements contain all adjustments (consistingof normal recurring adjustments) necessary to present fairly the financialposition of Magnetek, Inc. as of December 31, 2003, and the results of itsoperations and its cash flows for the three-month and six-month periods thenended.

 

The Company uses a fifty-two, fifty-three week fiscal year ending onthe Sunday nearest to June 30. Fiscal quarters are the thirteen or fourteen week periods ending on theSunday nearest September 30, December 31, March 31 andJune 30.  For clarity ofpresentation, all periods are presented as if they ended on the last day of thecalendar period.  The three-month andsix-month periods ended December 31, 2003 and 2002 each contained thirteenand twenty-six weeks respectively.

 

2.                                       Summaryof Significant Accounting Policies

 

Principles of Consolidation– The consolidated financial statements include the accounts of Magnetek, Inc.and its subsidiaries (the “Company”). All significant intercompany accounts and transactions have beeneliminated.

 

Use of Estimates –The preparation of financial statements in accordance with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.   Significant areas requiringmanagement estimates include the following key financial areas:

 

*Accounts Receivable*

 

Accounts receivable represent receivablesfrom customers in the ordinary course of business.  The Company is subject to losses from uncollectible receivablesin excess of its allowances.  TheCompany maintains allowances for doubtful accounts for estimated losses fromcustomers’ inability to make required payments.  In order to estimate the appropriate level of this allowance, theCompany analyzes historical bad debts, customer concentrations, currentcustomer creditworthiness, current economic trends and changes in customerpayment patterns.  If the financialconditions of the Company’s customers were to deteriorate and to impair theirability to make payments, additional allowances may be required in futureperiods.  The Company’s managementbelieves that all appropriate allowances have been provided.

 

*Inventories*

 

The Company’sinventories are stated at the lower of cost or market.  Cost is determined by the first-in,first-out (FIFO) method, including material, labor and factory overhead.  Inventory on hand may exceed future demandeither because the product is obsolete, or the amount on hand is more than canbe used to meet future needs.  TheCompany identifies potentially obsolete and excess inventory by evaluatingoverall inventory levels.  In assessingthe ultimate realization of

 

8

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inventories, theCompany is required to make judgments as to future demand requirements andcompare 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 Litigation andEnvironmental Issues*

 

The Company periodically records theestimated impacts of various conditions, situations or circumstances involvinguncertain outcomes.  The accounting forsuch events is prescribed under Statement of Financial Accounting Standard(SFAS) No. 5, “Accounting for Contingencies.” SFAS No. 5 defines a contingency as “an existing condition, situation,or set of circumstances involving uncertainty as to possible gain or loss to anenterprise that will ultimately be resolved when one or more future eventsoccur or fail to occur.”

 

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

 

The accrual of a contingency involvesconsiderable judgment on the part of management.  The Company uses its internal expertise, and outside experts, asnecessary, to help estimate the probability that a loss has been incurred andthe amount (or range) of the loss.

 

*Income Taxes*

 

The Company uses the liability method toaccount for income taxes.  Thepreparation of consolidated financial statements involves estimating theCompany’s current tax exposure together with assessing temporary differencesresulting from differing treatment of items for tax and accountingpurposes.  These differences result indeferred tax assets and liabilities, which are included in the consolidatedbalance sheets.  An assessment of therecoverability of the deferred tax assets is made, and a valuation allowance isestablished based upon this assessment.

 

Federal income taxes are not providedcurrently on undistributed earnings of foreign subsidiaries since the Companypresently intends to reinvest any earnings overseas indefinitely.

 

*Pension Benefits*

The valuation ofthe Company’s pension plan requires the use of assumptions and estimates todevelop actuarial valuations of expenses, assets and liabilities.  These assumptions include discount rates,investment returns and mortality rates. Changes in assumptions and future investments returns could potentiallyhave a material impact on the Company’s expenses and related fundingrequirements.

 

Revenue Recognition – The Company’s policy isto record and recognize sales only upon shipment.  Amounts billed to customers for shipping costs are reflected innet sales; shipping costs are reflected in cost of sales.

 

Property, Plant and Equipment– Additions and improvement are capitalized at cost, whereas expenditures formaintenance and repair are charged to expense as incurred.  Depreciation is provided over the estimateduseful lives of the respective assets (ranging from three to forty years)principally using the straight-line method.

 

Goodwill– The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”,effective July 1, 2001.  Under SFASNo. 142, goodwill and other intangible assets deemed to have indefinite livesare no longer amortized but are subject to annual impairment tests, or interimimpairment tests if certain indicators arise. Management reviews the valuation of goodwill at least annually, using discountedfuture cash flow analyses of each of the Company’s reporting units.

 

9

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Deferred FinancingCosts – Costs incurred to obtain financing are deferred andincluded in other assets in the condensed consolidated balance sheets.  Deferred financing costs are amortized overthe term of the financing facility.

 

Warranties– The Company offers warranties for certain products that it manufactures, withthe warranty term generally ranging from one to two years.  Warranty reserves are established for costsexpected to be incurred after the sale and delivery of products under warranty,based mainly on known product failures and historical experience.  Actual repair costs incurred for productsunder warranty are charged against the established reserve balance as incurred.

 

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

 

Stock-Based Compensation– The Company has elected to continue to use the intrinsic-value method ofaccounting as prescribed by Accounting Principles Board (APB) No. 25“Accounting for Stock Issued to Employees” in accounting for stock based awardsto employees.  Under APB 25, the Companyrecognizes no compensation expense with respect to such awards when the exerciseprice is equal to or greater than the market price at the date of grant.  Accordingly, no stock-based employeecompensation cost is reflected in reported results of operations for allperiods presented.

 

The Company adopted the interim disclosure provisions of SFAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure – anAmendment of FASB Statement no. 123”, effective January 1, 2003.

 

The following table illustrates the effect on net loss and loss pershare if the Company had applied the fair value recognition provisions of SFASNo. 123 “Accounting for Stock-Based Compensation” to stock-based employeecompensation:

 
|                                                                                                                                          |   | **Three  Months Ended****December  31,** |   | **Six  Months Ended  December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                                                          |   | **2003**                                 |   | **2002**                            |   | **2003** |   | **2002** |   |
| Net loss                                                                                                                                      |   | $                                        | (4,048 | )                                   | $      | (40,185 | ) | $ | (7,687 | ) | $ | (24,442 | ) |
|                                                                                                                                          |   |                                     |   |                                |   |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (713                                     | )      | (673                                | )      | (1,420 | ) | (1,473 | ) |
| Pro forma net loss                                                                                                                            |   | $                                        | (4,761 | )                                   | $      | (40,858 | ) | $ | (9,107 | ) | $ | (25,915 | ) |
|                                                                                                                                          |   |                                     |   |                                |   |   |   |   |   |
| Loss per share as reported:                                                                                                                   |   |                                     |   |                                |   |   |   |   |   |
| Basic and diluted                                                                                                                             |   | $                                        | (0.15  | )                                   | $      | (1.70 | ) | $ | (0.30 | ) | $ | (1.03 | ) |
|                                                                                                                                          |   |                                     |   |                                |   |   |   |   |   |
| Pro forma earnings loss per share:                                                                                                            |   |                                     |   |                                |   |   |   |   |   |
| Basic and diluted                                                                                                                             |   | $                                        | (0.17  | )                                   | $      | (1.73 | ) | $ | (0.35 | ) | $ | (1.10 | ) |

 

Derivative Financial Instruments– The Company uses derivative financial instruments to reduce financial marketrisks. These instruments are used to hedge foreign currency and interest ratemarket exposures. The Company does not use derivative financial instruments forspeculative or trading purposes.  TheCompany accounts for derivative instruments in accordance with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”, and SFAS No.149, “Amendment of Statement 133 on Derivatives and Hedging”, issued inApril 2003.  These statementsrequire that an entity recognize all derivatives as either

 

10

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assets or liabilities in the statement offinancial position, measured at fair value, and that hedge accounting beapplied when certain conditions are met.

 

Foreign Currency Translation– The Company’s foreign entities’ accounts are measured using local currency asthe functional currency.  Assets andliabilities are translated at the exchange rate in effect at period-end.  Revenues and expenses are translated at therates of exchange prevailing during the year. Unrealized translation gains and losses arising from differences inexchange rates from period to period are included as a component of accumulatedother comprehensive loss in stockholders’ equity.

 

Recent Accounting Pronouncements –In January 2003, the Financial Accounting Standards Board("FASB") issued Interpretation No. 46 (FIN 46),“Consolidation of Variable Interest Entities (VIE)”, which was amended inDecember 2003.  FIN 46 asamended requires that if a company holds a controlling financial interest in aVIE, the assets, liabilities and results of the VIE’s activities should beconsolidated in the entity’s financial statements. The Company does not expectFIN 46 to have a material impact on its results of operations or financialposition.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivatives and Hedging”, which amends andclarifies accounting for derivative instruments, including certain derivativeinstruments embedded in other contracts and for hedging activities underStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities.”** SFAS No. 149 is generally effective for derivative instruments,including derivative instruments embedded in certain contracts, entered into ormodified after June 30, 2003 and for hedging relationships designatedafter June 30, 2003. The adoption of SFAS No. 149 did not have a materialimpact on the Company’s results of operations or financial position.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristic of BothLiabilities and Equity”.  This statementestablishes standards for how an issuer classifies and measures in itsstatement of financial position certain financial instruments withcharacteristics of both liabilities and equity.  SFAS No. 150 requires that an issuer classify a financialinstrument that is within the scope of SFAS No. 150 as a liability (or an assetin some circumstances) because that financial instrument embodies an obligationof the issuer. SFAS No. 150 is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim periods beginning after June 15, 2003.  The adoption of SFAS No. 150 did not have amaterial impact on the Company’s results of operations or financial position.

 

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

 

3.                                       Inventories

 

Inventories at December 31, 2003 and June 30, 2003 consist ofthe following:

 
|                          |   | **December 31** |   | **June 30** |   |
|-------------------------------|--------|-----------------|--------|-------------|--------|
| Raw materials and stock parts |   | $               | 24,779 |        | $      | 26,994 |   |
| Work-in-process               |   | 17,783          |   | 15,217      |   |
| Finished goods                |   | 7,022           |   | 6,632       |   |
|                          |   | $               | 49,584 |        | $      | 48,843 |   |

 

4.                                       Commitmentsand Contingencies

 

The Company is a party toa number of product liability lawsuits, all of which arise from business operationsno longer owned by Magnetek. Contractual liability for new claims resultingfrom indemnification obligations related to sales of the various businessoperations has terminated.  All of thepending product liability cases are being aggressively defended by the Company,and management

 

11

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believes that itsinsurers will bear all liability, if any, that exceeds applicable deductibles,and that none of these proceedings individually or in the aggregate will have amaterial effect on the Company’s results of operations or financial position.

 

The Company has beennamed, along with numerous other defendants, in asbestos-related lawsuits. TheCompany has never produced asbestos-containing products and is eithercontractually indemnified against liability for asbestos-related claims orbelieves that it has no liability for such claims, all of which arise frombusiness operations the Company acquired but no longer owns. While the outcomeof these cases cannot be predicted with certainty, the Company is aggressivelyseeking to be dismissed from the proceedings and does not believe theproceedings, individually or in the aggregate, will have a material adverseeffect on its results of operations or financial position.

 

In April 1998, OleK. Nilssen filed a lawsuit in the U.S. District Court for the Northern Districtof Illinois alleging infringement by the Company of seven of his patentspertaining to electronic ballast technology, and seeking unspecified damages andinjunctive relief to preclude the Company from making, using or sellingproducts allegedly infringing his patents. The Company denied that its productsinfringed any valid patent and filed a response asserting affirmative defenses,as well as a counterclaim for a judicial declaration that its products do notinfringe the patents asserted by Nilssen and also that the asserted patents areinvalid. In April 2003, the lawsuit and counterclaims were dismissed bythe parties with prejudice and both parties agreed to submit limited issues indispute to binding arbitration before an arbitrator with a relevant technicalbackground.  The ballast division wassold in 2001 and the Company agreed to a limited indemnification of the buyerof the division against substantively the same claims raised against theCompany.  In February 2003, Nilssenfiled a suit against the buyer and the buyer has asserted a claim forindemnification in connection therewith. Although the Company will continue to assert what it believes are strongdefenses to Nilssen's claims, an unfavorable decision in the arbitration or thefailure to obtain a favorable resolution of Nilssen’s claims against the buyerof the ballast division could have a material adverse effect on the Company’sfinancial position, cash flows or results of operations.

 

From time to time, the Company discovered theexistence of hazardous substances at certain facilities associated withpreviously owned businesses and responded as necessary to bring the facilitiesinto compliance with applicable laws and regulations. Upon sale of thebusinesses, the Company agreed, in some cases, to indemnify the buyers againstenvironmental claims associated with the divested operations, subject tovarious conditions and limitations. Remediation activities, including thoserelated to the Company’s indemnification obligations, did not involve materialexpenditures during the first half of fiscal year 2004.

 

The Company has also been identified by theUnited States Environmental Protection Agency and certain state agencies as apotentially responsible party for cleanup costs associated with alleged pastwaste disposal practices at several previously owned facilities and offsitelocations. Its remediation activities as a potentially responsible party werenot material in the first half of fiscal year 2004.  Although the materiality of future expenditures for environmentalactivities may be affected by the level and type of contamination, the extentand nature of cleanup activities required by governmental authorities, thenature of the Company’s alleged connection to the contaminated sites, thenumber and financial resources of other potentially responsible parties, theavailability of indemnification rights against third parties and theidentification of additional contaminated sites, the Company’s estimated shareof liability, if any, for environmental remediation, including itsindemnification obligations, is not expected to be material.

 

Prior to the Company’s purchase of CenturyElectric, Inc. (“Century Electric”) in 1986, Century Electric acquired abusiness from Gould Inc. (“Gould”) in May 1983 that included aleasehold interest in a fractional horsepower electric motor manufacturingfacility located in McMinnville, Tennessee. Gould agreed to indemnify CenturyElectric from and against liabilities and expenses arising out of the handlingand cleanup of certain waste materials, including but not limited to cleaningup any polychlorinated biphenyls (“PCBs”) at the McMinnville facility (the“1983 Indemnity”).  The presence of PCBsand other substances, including solvents, in the soil and in the groundwaterunderlying the facility and in certain offsite soil, sediment and biota sampleshas been identified. The McMinnville plant is listed as a Tennessee InactiveHazardous Waste

 

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Substance Site and plant employees werenotified of the presence of contaminants at the facility. Gould has completedan interim remedial excavation and disposal of onsite soil containing PCBs anda preliminary investigation and cleanup of certain onsite and offsitecontamination. The Company believes the cost of further investigation andremediation (including ancillary costs) are covered by the 1983 Indemnity. TheCompany sold its leasehold interest in the McMinnville plant inAugust 1999 and while the Company believes that Gould will continue toperform substantially under its indemnity obligations, Gould’s substantialfailure to perform such obligations could have a material adverse effect on theCompany’s financial position, cash flows or results of operations.

 

The Company acquired the stock of UniversalManufacturing Company (“Universal”) from a predecessor of Fruit of the Loom(“FOL”), and the predecessor agreed to indemnify the Company against certainenvironmental liabilities arising from pre-acquisition activities.Environmental liabilities covered by the indemnification agreement includecompletion of additional cleanup activities, if any, at the Bridgeport,Connecticut facility (sold in connection with the sale of the transformerbusiness in June 2001) and defense and indemnification against liabilityrelated to offsite disposal locations where Magnetek may have a share ofpotential response costs. In 1999 FOL filed a petition for Reorganization underChapter 11 of the Bankruptcy Code and the Company filed a proof of claim in theproceeding for obligations related to the environmental indemnificationagreement. In November 2001, the Company and FOL entered into an agreementinvolving the allocation of certain potential tax credits and Magnetek withdrewits claims in the bankruptcy proceeding. Although the Company believes that FOL has substantially completed theobligations required by the indemnification agreement, its ability to set asideany remaining obligations to the states of Connecticut and New Jersey throughbankruptcy, or the discovery of additional environmental contamination at theBridgeport facility could have a material adverse effect on the Company’s financialposition or results of operations.

 

5.                                       ComprehensiveIncome (Loss)

 

For the fiscal quarters and six months to date ended December 31,2003 and 2002, comprehensive income (loss) consisted of the following:

 
|                            |   | **Three  Months Ended  December 31,** |   | **Six Month  Ended  December 31,** |   |
|---------------------------------|--------|---------------------------------------|--------|------------------------------------|--------|
|                            |   | **2003**                              |   | **2002**                           |   | **2003** |   | **2002** |   |
| Net loss                        |   | $                                     | (4,048 | )                                  | $      | (40,185 | ) | $ | (7,687 | ) | $ | (24,442 | ) |
| Currency translation adjustment |   | 4,295                                 |   | 2,176                              |   | 5,387 |   | 1,749 |   |
| Comprehensive income (loss)     |   | $                                     | 247    |                               | $      | (38,009 | ) | $ | (2,300 | ) | $ | (22,693 | ) |

 

6.                                       LossPer Share

 

The following table sets forth the computation ofbasic and diluted loss per share.

 
|                                                   |   | **Three  Months  Ended December 31** |   | **Six  Months Ended  Ended December 31** |   |
|--------------------------------------------------------|--------|--------------------------------------|--------|------------------------------------------|--------|
|                                                   |   | **2003**                             |   | **2002**                                 |   | **2003** |   | **2002** |   |
| **Basic and Diluted  loss per share:**                 |   |                                 |   |                                     |   |   |   |   |   |
| Net loss                                               |   | $                                    | (4,048 | )                                        | $      | (40,185 | ) | $ | (7,687 | ) | $ | (24,442 | ) |
|                                                   |   |                                 |   |                                     |   |   |   |   |   |
| Basic and diluted weighted average  shares outstanding |   | 27,618                               |   | 23,632                                   |   | 25,709 |   | 23,623 |   |
|                                                   |   |                                 |   |                                     |   |   |   |   |   |
| **Basic and Diluted  loss per share**                  |   | $                                    | (0.15  | )                                        | $      | (1.70 | ) | $ | (0.30 | ) | $ | (1.03 | ) |

 

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The dilutive effect of stock options outstanding at December 31,2003 and 2002 was not included in the calculation of dilutive loss per sharefor the three- and six-month periods ended December 31, 2003 and 2002.  The Company had a net loss for each of theseperiods, and as a result, inclusion of the dilutive effect of stock optionswould have had an anti-dilutive impact.

 

7.                                       Goodwill

 

Thechanges in the carrying value of goodwill by reporting unit, net of accumulatedamortization of $9,720, are as follows:

 
|                                              |   | **Telecom  Power** |   | **Power  Electronics** |   | **Industrial  Controls** |   | **Total** |   |
|---------------------------------------------------|--------|--------------------|--------|------------------------|--------|--------------------------|--------|-----------|--------|
|                                              |   |               |   |                   |   |                     |   |      |   |
| **Balance at June  30, 2003**                     |   | $                  | — |                   | $      | 35,058                   |   | $         | 28,009 |   | $ | 63,067 |   |
|                                              |   |               |   |                   |   |                     |   |      |   |
| Purchase price adjustments and  reclassifications |   | —             |   | —                 |   | 29                       |   | 29        |   |
|                                              |   |               |   |                   |   |                     |   |      |   |
| Currency translation                              |   | —             |   | 974                    |   | 34                       |   | 1,008     |   |
|                                              |   |               |   |                   |   |                     |   |      |   |
| Impairment of goodwill                            |   | —             |   | —                 |   | —                   |   | —    |   |
|                                              |   |               |   |                   |   |                     |   |      |   |
| **Balance at  December 31, 2003**                 |   | $                  | — |                   | $      | 36,032                   |   | $         | 28,072 |   | $ | 64,104 |   |

 

8.                                       Warranties

 

The Company offerswarranties for certain products that it manufactures, with the warranty termgenerally ranging from one to two years. Warranty reserves are established for costs expected to be incurredafter the sale and delivery of products under warranty, based mainly on known productfailures and historical experience. Actual repair costs incurred for products under warranty are chargedagainst the established reserve balance as incurred.  Changes in the warranty reserve for the six months endedDecember 31, 2003 were as follows:

 
|                                                 |   | **WarrantyReserve** |   |
|------------------------------------------------------|--------|---------------------|--------|
| Balance, June 30, 2003                               |   | $                   | 503    |   |
| Additions charged to earnings for product warranties |   | 31                  |   |
| Use of reserve for warranty obligations              |   | (51                 | )      |
| Decrease to pre-existing warranties                  |   | (75                 | )      |
| Balance, December 31, 2003                           |   | $                   | 408    |   |

 

Warranty reserves areincluded in accrued liabilities in the condensed consolidated balance sheets.

 

9.                                       RestructuringCosts

 

The Company beganrestructuring activities during the second quarter of fiscal 2004, whichinclude a workforce reduction of approximately 200 positions in Europe and therelocation of those positions to lower cost facilities in Eastern Europe andChina.  The total cost of allrestructuring activities is estimated at $1.6 million, related to employee severanceand lease termination costs.  TheCompany expects to complete these restructuring activities by the end ofcalendar 2004.  Costs incurred to dateare $0.6 million and are included in selling, general and administrativeexpense in the accompanying condensed consolidated statements of operations forthe three- and six-month periods ended December 31, 2003.

 

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10.                                 BankBorrowing Arrangements

 

The Company has an assetbased credit agreement (“Credit Agreement”) with Bank One.  The aggregate lending commitment under theCredit Agreement is $19,000 with available borrowings determined by a borrowingbase as defined in the agreement, supported mainly by levels of domesticaccounts receivable and inventory. Borrowings under the Credit Agreement are secured by substantially allof the Company’s North American assets, and bear interest at the bank’s primelending rate plus one percent or, at the Company’s option, the London InterbankOffered Rate (LIBOR) plus three and one-quarter percent.  The Company is required to pay a commitmentfee of 0.5 percent on the unused available commitment.  As of December 31, 2003, the Companyhad $13.0 million of available borrowing capacity, with $2.5 million ofborrowings outstanding, under the facility.

 

The Credit Agreementcontains certain provisions and covenants which, among other things, prohibitsthe payment of cash dividends and repurchases of common stock, limit the amountof future indebtedness and capital expenditures and require the Company tomaintain specified levels of earnings before interest, taxes, depreciation andamortization (“EBITDA”) and fixed charge coverage.  The Company was in violation of the fixed charge coveragecovenant for the quarter ended December 31, 2003, and was also inviolation of the minimum EBITDA covenant for the six month period endedDecember 31, 2003.  InFebruary 2004, the Company received a waiver of the covenant violationsfrom Bank One and also negotiated amendments to the covenants in favor of theCompany for future measurement periods.

 

MANAGEMENT’S DISCUSSIONAND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

Overview

 

We are a global providerof digital power-electronic products, including electronic converters,inverters, rectifiers and systems. These products are used primarily in industrial, telecommunications,data processing, consumer, imaging, alternative energy, power generation andother applications requiring precise, efficient, reliable power.  We believe that with our technical andproductive resources, we are well positioned to respond to increasing demandfor such power.  We operate in a singlebusiness segment, Digital Power Products, which includes two broad productcategories, power control products and power control systems.

 

Our embedded powercontrol products, which are sold to original equipment manufacturers forinstallation in their products, include: AC-to-DC switching power supplies,AC-to-DC rectifiers and battery chargers, DC-to-DC power converters, DC-to-ACpower inverters and peripheral component interconnects (PCI’s).  These products are used primarily intelecommunications (telecom), data processing and storage, digital imaging,semiconductor processing and testing equipment, medical instrumentation andhome appliances.

 

Our power control systemsconsist primarily of programmable motion control and power conditioning systemsand include: alternating current (AC) and direct current (DC)variable-frequency motor drives, fuel cell power inverters and telecom powerplants.  Our power systems also includecomplete DC power systems for telecom and networking applications.

 

Critical Accounting Policies

 

The following discussion and analysis of our financial condition andresults of operations is based upon our condensed consolidated financialstatements.  In preparing financialstatements in conformity with accounting principles generally accepted in theUnited States, we must make estimates and assumptions that affect the reportedamount of assets and liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities at the date of our financialstatements.  Such estimates are basedupon historical experience and other assumptions believed to be reasonablegiven known circumstances.  Actualresults could differ from those estimates. On an ongoing basis, we evaluate and update our

 

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estimates, including those related to accounting for inventories,goodwill, pension benefits, reserves for litigation and environmental issuesand income taxes.  We consider thefollowing policies critical to understanding our financial position and resultsof operations.

 

*Inventories*

Our inventories arestated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, includingmaterial, labor and factory overhead. We identify potentially obsolete and excess inventory by evaluatingoverall inventory levels in relation to expected future requirements and marketconditions, and provisions for excess and obsolete inventory and inventoryvaluation are recorded accordingly.  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.  Iffuture demand requirements are less favorable than those we project, additionalinventory write-downs may be required.

 

*Long-Lived Assets and Goodwill*

 

We periodically evaluatethe recoverability of our long-lived assets, including property, plant andequipment.  Impairment charges arerecorded in operating results when the undiscounted future expected cash flowsderived from an asset are less than the carrying value of the asset.

 

We also periodicallyevaluate the carrying value of goodwill for impairment.  We have identified our Telecom Power, PowerElectronics and Industrial Controls groups as reporting units under SFAS No.142.  In assessing potential impairment,we make significant estimates and assumptions regarding the discounted futurecash flows of our identified reporting units to determine the fair value ofthose reporting units.    Such estimatesinclude, but are not limited to, projected future operating results, workingcapital ratios, cash flow, market discount rates and tax rates.  If these estimates change in the future, orif actual circumstances vary significantly from these assumptions, this couldresult in additional goodwill impairment charges.

 

*Pension Benefits*

The valuation of ourpension plan 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 assumptions,or significant differences between actual future discount rates, investmentsreturns and mortality rates from those assumptions, could potentially have amaterial impact on our expenses and related funding requirements.

 

*Reserves for Litigation and Environmental Issues*

 

We periodically recordthe estimated impacts of various conditions, situations or circumstancesinvolving uncertain outcomes.  Theaccounting for such events is prescribed under SFAS No. 5, “Accounting forContingencies.”  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 notpermit the accrual of gain contingencies under any circumstances.  For loss contingencies, the loss must beaccrued if (1) information is available that indicates it is probable that theloss has been incurred, given the likelihood of uncertain events; and (2) thatthe amount of the loss can be reasonably estimated.

 

The accrual of a contingency involvesconsiderable judgment on our part.  Weuse our internal expertise, and outside experts as necessary, to help estimatethe probability that a loss has been incurred and the amount (or range) of theloss.

 

*Income Taxes*

 

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 willlikely not be realized in the foreseeable future.

 

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Three Months EndedDecember 31, 2003 and 2002

 

Net Sales andGross Profit

 

Net sales for the secondquarter of fiscal 2004 were $58.1 million, an increase of 13.3% from the secondquarter of fiscal 2003 sales of $51.3 million. The increase is due to higher sales of embedded power supplies, currencytranslation impact from the stronger Euro, and the inclusion of our TelemotiveIndustrial Controls subsidiary (acquired in the third quarter of fiscal year2003) in the second quarter of fiscal 2004, partially offset by lower telecomservice revenue.  We divested ourtelecom service business midway through the first quarter of fiscal 2004.  We have focused on gaining share in systemsmarkets and on new product introductions in industrial, consumer andalternative energy markets, as well as developing our distribution channel.  Our bookings in the second quarter of fiscal2004 were $66.0 million, an increase of 49.6% over second quarter fiscal 2003bookings of $44.1 million.  We expectour third quarter net sales to increase over the second quarter due toincreased demand for our embedded power supplies, increased net sales throughour distribution channel, and new product introductions.

 

Our second quarter fiscal2004 gross profit was $12.9 million versus $6.2 million in the second quarterof fiscal 2003.  As a percentage of netsales, gross profit percentage increased to 22.2% in the second quarter offiscal 2004 from 12.2% in the same period in fiscal 2003.  Fiscal 2003 gross profit included a chargeof $4.7 million to write down the value of telecom-related inventory.  Excluding this charge gross profit for thesecond quarter of fiscal 2003 would have been 21.3% of sales.  The improvement in gross profit is also dueto the sale of our telecom service business, which negatively impacted secondquarter fiscal 2003 gross profit.  Thestrength in the Euro relative to the U.S. dollar compressed gross profits onsales from our European subsidiary denominated in U.S. dollars, negativelyimpacting power supply gross profits in fiscal 2004.  This negative impact was offset by increased power supply unitvolumes, material cost reductions in certain components, and the transfer ofselected product lines from Europe to our lower cost manufacturing facility inChina.

 

Research andDevelopment, Selling, General and Administrative

 

We continued to increasethe amount invested in research and development (R&D).  R&D expense was $3.3 million, or 5.7% ofsales, in the second quarter of fiscal 2004 compared to $2.9 million, or 5.7%of sales, in the second quarter of fiscal 2003. We increased spending in newproduct development aimed at alternative energy markets.  In addition, we continued to invest in newpower-electronic platforms and applications and expand the breadth of existingproduct lines.

 

Selling, general and administrative (SG&A) expense was $13.3million (22.8% of sales) in the second quarter of fiscal 2004 versus $10.0million (19.4% of sales) in the second quarter of fiscal 2003.  Our second quarter fiscal 2004 sellingexpenses were $4.5 million versus $4.2 million in the second quarter of fiscal2003.  The increase was due to volume-relatedselling expenses, the acquisition of Telemotive and currency translation,partially offset by the divestiture of our telecom service business inJuly 2003 and cost reduction actions in our remaining telecom systemsbusiness.  General and administrativeexpenses increased to $8.8 million in the second quarter of fiscal 2004 from$5.8 million in the second quarter of fiscal 2003, due to a $1.7 million chargeto write down the value of accounts receivable related to a customerbankruptcy, restructuring expenses related to plant closure and relocation of$0.6 million (see Note 9 of Notes to Condensed Consolidated FinancialStatements), higher pension and other employee-related expenses, and currencytranslation.

 

## Goodwilland Fixed Asset Impairment

 

During the second quarter of fiscal 2003, we determined that there wereindicators of impairment in the carrying value of goodwill, based on thedecline in our market capitalization and the continuing decline in thetelecommunications industry at that time.  We performed an interim impairment test in accordance with SFAS142 based on forecasts of operating results and cash flows, and we recorded a$33.4 million

 

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goodwill impairment charge.  Thecharge related exclusively to our telecommunications business and effectivelyreduced the carrying value of goodwill for that business to zero.

 

We also performed an impairment review of our long-lived assets inaccordance with SFAS 144.  Based uponutilization and market values of certain fixed assets at that time, notably inour telecommunications business, we recorded a $0.6 million impairment chargeto reduce the carrying value of those assets.

 

## Lossfrom Operations

 

Lossfrom operations improved to an operating loss of $3.6 million for the secondquarter of fiscal 2004 from an operating loss of $40.7 million for the sameperiod in fiscal 2003, due mainly to asset impairment charges in fiscal 2003that did not recur in fiscal 2004.

 

Interest and OtherExpense

 

Net interest expense was$0.4 million in the second quarter of fiscal 2004 compared to net interestexpense of $0.2 million in the second quarter of fiscal 2003.  The increase in interest expense over theprior year is due to higher outstanding debt balances.

 

Net Loss

 

We recorded an after-taxloss of $4.0 million in the second quarter of fiscal 2004, compared to anafter-tax loss of $40.2 million, including the impact of the impairmentcharges, in the second quarter of fiscal 2003. Excluding all telecom-related asset write downs and impairment charges,we would have recorded an after-tax loss of $1.1 million in the second quarterof fiscal 2003.  We did not record anytax benefit related to our losses in the second quarter of fiscal 2004 due tothe uncertainty in realizing those benefits. The tax benefit in the second quarter of fiscal 2003 was $0.7 million(2% effective rate), as there was no tax benefit associated with the $33.4million goodwill impairment charge.

 

 SixMonths Ended December 31, 2003 and 2002

 

## NetSales and Gross Profit

 

Our net sales for the first six months of fiscal 2004 were $108.5million, a 15.3% increase from sales of $94.1 million for the first six monthsof fiscal 2003.  The increase was due tohigher sales of embedded power supplies, the acquisition of Telemotive, growthin sales in consumer markets and currency translation due to the strength ofthe Euro, partially offset by the divestiture of our telecom service businessin the first quarter of fiscal 2004.

 

Our fiscal 2004 gross profitfor the first six months was $23.2 million, or 21.4% of sales, versus $16.0million, or 17.0% of sales, in the first six months of fiscal 2003.  The gross profit for the first six months offiscal 2003 reflects a charge of $4.7 million to write down the value oftelecom-related inventory.  Excludingthis charge, gross profit for such period would have been $20.7 million, or22.0% of sales. While net sales for the first six months of fiscal 2004increased, the strength in the Euro relative to the U.S. dollar compressedgross profits on sales from our European subsidiary denominated in U.S.dollars, negatively impacting power supply gross profits.

 

## Researchand Development, Selling, General and Administrative

 

Research and development(R&D) expense was $6.1 million, or 5.6% of sales, in the first six monthsof fiscal 2004 compared to $5.5 million, or 5.8% of sales, in the first sixmonths of fiscal 2003.  For the firstsix months of fiscal 2004, we increased spending in new product developmentaimed at alternative energy markets.  Inaddition, we continued to invest in new power-electronic platforms andapplications and expand the breadth of existing product lines.

 

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Selling, general and administrative (SG&A) expense was $23.7million, or 21.9% of sales, for the first six months of fiscal 2004 versus$19.4 million, or 20.6% of sales, for the first six months of fiscal 2003.  Fiscal 2004 selling expenses were $8.5million for the first six months versus $8.3 million in the first six months offiscal 2003, due to volume-related selling expenses, the acquisition ofTelemotive and currency translation, partially offset by headcount reductionsin our telecom systems business and the divestiture of our telecom servicebusiness.  General and administrative(G&A) expenses were $15.2 million for the first six months of fiscal 2004compared to $11.1 million for the first six months of fiscal 2003.  The increase in G&A expense of $4.1million was due to a $1.7 million charge to write down the value of accountsreceivable related to a customer bankruptcy, restructuring expenses related toplant closure and relocation of $0.6 million (see Note 9 of Notes to CondensedConsolidated Financial Statements), higher pension and other employee-relatedexpenses, and currency translation, partially offset by lower G&A expensein our telecom business, due to the divestiture of our telecom service businessand headcount reductions.

 

## Gainfrom Termination of Retiree Medical Plan

 

Fiscal2003 results for the first six months include a nonrecurring pre-tax gain of$27.8 million related to the termination in the first quarter of fiscal 2003 ofour retiree medical plan.  The financialimpact in future fiscal quarters subsequent to the first quarter of fiscal 2003was a reduction of income from operations of approximately $0.4 million, due toelimination of the amortization credit associated with the related liability.

 

## Goodwilland Fixed Asset Impairment 

 

During the second quarter of fiscal 2003, we determined that there wereindicators of impairment in the carrying value of goodwill, based on thedecline in our market capitalization and the continued decline in thetelecommunications industry at that time. We performed an interim impairment test in accordance with SFAS 142based on forecasts of operating results and cash flows, and we recorded a $33.4million goodwill impairment charge.  Thecharge related exclusively to our telecommunications business and effectivelyreduced the carrying value of goodwill for that business to zero.

 

We also performed an impairment review of our long-lived assets inaccordance with SFAS 144.  Based uponutilization and market values of certain fixed assets at that time, notably inour telecommunications business, we recorded a $0.6 million impairment chargeto reduce the carrying value of those assets.

 

## Lossfrom Operations

 

As aresult of the above factors, our loss from operations for the six months endedDecember 31, 2003 was $6.6 million versus a loss from operations for thesix months ended December 31, 2002 of $15.1 million.  The reduction in our loss from operations isdue mainly to increased gross profit from higher sales in the first six monthsof fiscal 2004 and asset impairment charges in the first six months of fiscal2003 that did not recur in fiscal 2004

 

Interest and OtherExpense (Income)

 

Net interest expense was$1.1 million for the first six months of fiscal 2004 compared to net interestexpense of $0.4 million for the same period in fiscal 2003.  The increase in net interest expense overthe prior year is attributable to higher outstanding debt balances during thefirst six months of fiscal 2004.

 

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Net Loss

 

Net loss for the firstsix months of fiscal 2004 was $7.7 million compared to a net loss of $24.4million for the first six months of fiscal 2003.  The net loss for the first six months of fiscal 2003 included theimpact of both the nonrecurring gain and the impairment charges.  Excluding the impact of the nonrecurringgain and all telecom-related asset write-downs and impairment charges, we wouldhave recorded an after-tax loss of $2.6 million for the first six months offiscal 2003.  We did not record any taxbenefit related to our losses in the first six months of fiscal 2004 due to theuncertainty in realizing those benefits. The tax provision for the first six months of fiscal 2003 was $8.9million.  While we recorded a pretaxoperating loss of $15.5 million for the first six months of fiscal 2003, wealso recorded a tax provision during the same period, associated mainly withthe $27.8 million nonrecurring gain recorded in the first quarter of fiscal2003. There was no tax benefit associated with the $33.4 million goodwillimpairment charge recorded in the second quarter of fiscal 2003, as thegoodwill is not deductible for income tax purposes.

 

Liquidity andCapital Resources

 

Our cash balanceincreased $1.1 million to $2.8 million at December 31, 2003 from $1.7million at June 30, 2003.  Ourprimary sources of cash for the first six months of fiscal 2004 were proceedsof $18.8 million from the sale of our common stock (described below) andproceeds of $1.2 million from the sale of our telecom service business.  Our primary uses of cash for the first sixmonths of fiscal 2004 were for repayment of bank obligations of $13.8 million,cash used in operations of $2.1 million, costs incurred in refinancing our bankdebt of $0.5 million and capital expenditures of $2.5 million.  We anticipate that our capital expendituresfor the fiscal year 2004 will be less than $8.0 million.

 

As of December 31,2003, long-term borrowings including current portion were $12.9 millioncompared to $26.7 million as of June 30, 2003.  In August 2003, we replaced our then-existing creditfacility with an asset based credit agreement (“Credit Agreement”) with BankOne.  The aggregate lending commitmentunder the Credit Agreement is $19.0 million with available borrowings determinedby a borrowing base as defined in the agreement, supported by eligible domesticaccounts receivable and inventory. Borrowings under the Credit Agreement bear interest at the bank’s primelending rate plus one percent or, at our option, the London Interbank OfferingRate (LIBOR) plus three and one-quarter percent.  Borrowings under the Credit Agreement are secured bysubstantially all of the Company’s North American assets.  This facility also supports the issuance ofletters of credit.  As ofDecember 31, 2003, we had $13.0 million of available borrowing capacity,with $2.5 million of borrowings outstanding, under the facility.

 

The Credit Agreementcontains certain covenants that require us to maintain specified levels ofearnings before interest, taxes, depreciation and amortization (“EBITDA”) andfixed charge coverage.  We were inviolation of the fixed charge coverage covenant for the quarter endedDecember 31, 2003, and were also in violation of the minimum EBITDAcovenant for the six month period ended December 31, 2003.  In February 2004, we received a waiverof the covenant violations from Bank One and also negotiated amendments to thecovenants in our favor for future measurement periods.

 

Additionally, ourEuropean subsidiary maintains revolving borrowing arrangements with local banks,primarily to support working capital needs. Available borrowings under these arrangements aggregate approximatelyEuro 20.0 million depending in part upon levels of accounts receivable, andbear interest at various rates ranging from 2% to 8%.  During the first quarter of fiscal 2004, our European subsidiaryentered into an agreement with a European bank to provide borrowings secured bythe subsidiary’s land and building over a ten year period.    Borrowings under this agreement bearinterest at EURIBOR plus one and one-half percent.  The initial commitment to lend under this agreement is Euro 7.0million, with the commitment reduced ratably on a quarterly basis beginningMarch 31, 2004 and ending September 30, 2013.  Amounts outstanding at December 31,2003 under all of our European bank lending agreements were $5.1 million.

 

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As a result of thedecline in interest rates and stock market equity values over the past twoyears, the accumulated benefit obligation of our defined benefit pension planexceeds plan assets as of the end of December 31, 2003.  The amount and timing of futurecontributions to the plan are dependent upon values in equity and fixed incomemarkets, and to a lesser extent, the level of interest rates.  While no contributions were mandated, we didelect to contribute 535,000 shares of our common stock, valued at approximately$2.4 million, to the plan during the first quarter of fiscal 2004.

 

OnOctober 8, 2003, we entered into agreements with a small number ofinvestors to purchase 4.2 million shares of our common stock at a discount of8% from the $5.10 closing price on that date. On October 17, 2003 we issued the shares, receiving aggregateproceeds, net of fees and expenses, of approximately $18.5 million.  The proceeds were used to repay debt.  We have registered the shares and they havebeen approved for resale by the Securities and Exchange Commission.

 

Based upon current plansand business conditions, management believes that borrowing capacity under ourrevolving loan facilities and internally generated cash flows will besufficient to fund anticipated working capital needs, capital expenditures, andother near-term commitments during the next twelve months.

 

ITEM 3

 

## QUALITATIVEAND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to marketrisks in the areas of foreign exchange and interest rates.  To mitigate the effect of such risks, weselectively use specific financial instruments. Hedging transactions can beentered into under Company policies and procedures and are monitored monthly.Our policy clearly prohibits the use of such financial instruments for tradingor speculative purposes.  There havebeen no material changes in the reported market risks since that reported inour Annual Report on Form 10-K dated June 30, 2003.

 

InterestRates

 

The fair value of our debt was $12.9 millionat December 31, 2003.  The fairvalue of our debt is equal to the borrowings outstanding from domestic andforeign banks and small amounts owed under capital lease and note arrangements.Prospectively, we do not consider there to be material risk due to changes inthe interest rate structure of borrowing rates applicable to such debt. For ourdebt outstanding at December 31, 2003, a hypothetical 10% adverse changein interest rates would not have had a material impact on our pre-tax earningsand cash flow due to relatively low variable interest rates and debt balances.

 

ForeignCurrency Exchange Rates

 

We may selectively enter into foreignexchange contracts to hedge certain exposures in Europe.  A portion of our products are manufacturedin Europe and sold in the U.S.  Many ofthese sales to U.S. customers are denominated in U.S. dollars.  As a result, our financial results could besignificantly impacted by changes in exchange rates, particularly the exchangerate between the U.S. dollar and the Euro. Our exposure on sales by our European subsidiaries consists of (1) theexposure related to a weakening U.S. dollar for U.S. dollar denominated sales,as most of our European subsidiaries’ costs are in Euro; in the event of aweakening U.S. dollar, locally recorded sales in the functional currency (theEuro) are decreased, (2) the exposure related to a weakening U.S. dollar whenpayment of U.S. dollar receivables are received from customers, resulting inless local currency than was originally recorded at the date of sale, and (3)the exposure that upon translation of the subsidiaries’ periodic financialstatements, a weakening local currency would result in lower reported sales inU.S. dollars than if the local currency had been stable relative to the U.S.dollar.  In the latter case, operatingexpenses would also be translated at the lower amount and accordingly, theeffect on net income would be mitigated. We had no foreign currency contracts outstanding at December 31,2003.

 

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ITEM 4

 

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls andProcedures

 

We have evaluated, under the supervision and withthe participation of management, including our Chief Executive Officer andChief Financial Officer, the effectiveness of the design and operation ofour disclosure controls and procedures (as that term is defined under Rule13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934) and ourinternal control over financial reporting (as that term is defined under Rule13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934).  The controls and procedures are designed toensure that material information relating to us, including our subsidiaries, ismade known to us.  Procedures related tointernal control over financial reporting are designed to provide reasonableassurances regarding the reliability of our reporting and preparation offinancial statements in accordance with generally accepted accountingprinciples.  Based upon this evaluation,our Chief Executive Officer and Chief Financial Officer concluded that, asof our second quarter ended December 31, 2003, our disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to us and required to be included in our periodic SECfilings.

 

Changes in Internal Controls Over FinancialReporting

 

There was no change in our internal controlover financial reporting that occurred during our second quarter endedDecember 31, 2003 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

PART II                            OTHERINFORMATION

 

ITEM 1.                             LegalProceedings

 

See Part I, Item1, Note 4.

 

ITEM 6.                             Exhibits and Reports onForm 8-K

 

(a)               Index to Exhibits

 

The followingexhibits are filed as part of this Quarterly Report Form 10Q, or areincorporated herein by reference.  Wherean exhibit is incorporated by reference, the number which precedes thedescription of the exhibit indicates the documents to which cross reference ismade.

 
| **Exhibit  No.** |   | **Note** |   | **Description of Exhibit**                                                                                                                                        |
|------------------|--------|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |     |   |                                                                                                                                                              |
| 3.1              |   | (1)      |   | Restated  Certificate of Incorporation of the Company, as filed with the Delaware  Secretary of State on November 21, 1989.                                       |
|             |   |     |   |                                                                                                                                                              |
| 3.2              |   | (2)      |   | By-laws of  the Company, as amended and restated.                                                                                                                 |
|             |   |     |   |                                                                                                                                                              |
| 4.1              |   | (3)      |   | Form of  Registration Rights Agreement by and among the Company and the Investors.                                                                                |
|             |   |     |   |                                                                                                                                                              |
| 4.2              |   | (3)      |   | Form of  Registration Rights Agreement, by and among the Company and NASD Affiliated  Investors                                                                   |
|             |   |     |   |                                                                                                                                                              |
| 5.1              |   | (4)      |   | Opinion and  consent of Tina D. McKnight, Esq.                                                                                                                    |
|             |   |     |   |                                                                                                                                                              |
| 10.1             |   | (3)      |   | Form of  Stock Purchase Agreement, by and among the Company and the Investors                                                                                     |
|             |   |     |   |                                                                                                                                                              |
| 10.2             |   | (4)      |   | Italian Loan  Agreement, between Magnetek SpA, a 100% subsidiary of the Company, and  UniCredit Banca d'Impresa SpA., dated July 10, 2003.                        |
|             |   |     |   |                                                                                                                                                              |
| 23.1             |   | (4)      |   | Consent of  Tina D. McKnight, Esq. (contained in Exhibit 5.1).                                                                                                    |
|             |   |     |   |                                                                                                                                                              |
| 23.2             |   | (4)      |   | Consent of  Ernst & Young LLP, independent   auditors.                                                                                                   |
|             |   |     |   |                                                                                                                                                              |
| 24.1             |   | (5)      |   | Power of  Attorney                                                                                                                                                |
|             |   |     |   |                                                                                                                                                              |
| 31.1             |   |     |   | Certification  of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934                                                  |
|             |   |     |   |                                                                                                                                                              |
| 31.2             |   |     |   | Certification  of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934                                                  |
|             |   |     |   |                                                                                                                                                              |
| 32.1             |   |     |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|             |   |     |   |                                                                                                                                                              |
| 32.2             |   |     |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

(1)               Previouslyfiled with the Registration Statement on Form S-3 filed on August 1, 1991Commission File No. 33-41854.

 

(2)               Previouslyfiled with the Annual Report on Form 10-K for the fiscal year ended June 30,2003, Commission File No. 1-10233.

 

(3)               Previouslyfiled with the Company’s Periodic Report on Form 8-K filed on October 21, 2003,Commission File No. 1-0233.

 

(4)               Previouslyfiled with the Registration Statement on Form S-3 filed on November 13, 2003,Commission File No. 333-110460

 

(5)               Incorporated byreference to the signature page of the Registration Statement on Form S-3 filedon November 13, 2003, Commission File No. 333-110460

 

(b)                                  Reportson Form 8-K

 

Form8-K filed October 14, 2003, Press release announcing the Company raisedequity to repay debt.

 

Form8-K filed October 21, 2003, announcing that the Company had completed itsprivate equity placement.

 

Form8-K filed October 29, 2003, announcing fiscal 2004 first quarter results.

 

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SIGNATURES

 

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

 
|                         | MAGNETEK,  INC.                  |   |
|------------------------------|----------------------------------|--------|
|                         | (Registrant)                     |   |
|                         |                             |   |
|                         |                             |   |
| Date: February 13, 2004 | /s/ DAVID P.  REILAND            |   |
|                         | David P.  Reiland                |   |
|                         | Executive  Vice President        |   |
|                         | and Chief  Financial Officer     |   |
|                         | (Duly authorized  officer of the |   |
|                         | registrant  and principal        |   |
|                         | financial  officer)              |   |

 

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