**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D. C. 20549**

**FORM 10-Q**

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

 

**For the quarterly periodended:  October 1, 2006**

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

 

**For thetransition period from                              **

**Commission file number 1-10233**

**MAGNETEK, INC.**

(Exact name ofRegistrant as specified in its charter)

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

 

**N49 W13650 Campbell Drive**

**Menomonee Falls, Wisconsin  53051**

(Address ofprincipal executive offices)

**(262) 783-3500**

(Registrant’stelephone number, including area code)

**8966 Mason Ave.**

**Chatsworth, California  91311**

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

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

Yes   x     No   o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):
| Large accelerated filer   o |   | Accelerated filer   x |   | Non-accelerated filer   o |
|--------------------------------------------|--------|--------------------------------------|--------|------------------------------------------|

 

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

Yes   o     No   x

The number of shares outstanding ofRegistrant’s Common Stock, as of October 31, 2006, was 29,312,152 shares.

 

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2007 MAGNETEK FORM10-Q

TABLE OF CONTENTS FOR THEQUARTERLY REPORT ON FORM 10Q

FOR THE FISCALQUARTER ENDED OCTOBER 1, 2006

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

 

2

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**PARTI.  FINANCIAL INFORMATION**

**Item 1 –Financial Statements**

MAGNETEK, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Amounts inthousands, except per share data, unaudited)
| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **(13 Weeks)**              | ** ** | **(13 Weeks)** | ** ** |
| ** **                                                         | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                               |       |                             |       |   |   |
| Net sales                                                          |       | $                                | 22,514     |   | $ | 20,083 |   |
| Cost of sales                                                      |       | 15,403                           |       | 13,640 |   |
| Gross profit                                                       |       | 7,111                            |       | 6,443 |   |
|                                                               |       |                             |       |   |   |
| Operating expenses:                                                |       |                             |       |   |   |
| Research and  development                                          |       | 1,019                            |       | 962 |   |
| Selling, general  and administrative                               |       | 6,658                            |       | 5,987 |   |
| Loss from operations                                               |       | (566                             | )          | (506 | ) |
|                                                               |       |                             |       |   |   |
| Non operating expense  (income):                                   |       |                             |       |   |   |
| Interest expense                                                   |       | 1,076                            |       | 409 |   |
| Interest income                                                    |       | (288                             | )          | (26 | ) |
| Loss from continuing  operations before provision for income taxes |       | (1,354                           | )          | (889 | ) |
|                                                               |       |                             |       |   |   |
| Provision for income  taxes                                        |       | 276                              |       | 334 |   |
| Loss from continuing  operations                                   |       | (1,630                           | )          | (1,223 | ) |
|                                                               |       |                             |       |   |   |
| Income (loss) from  discontinued operations, net of tax            |       | (1,564                           | )          | 169 |   |
|                                                               |       |                             |       |   |   |
| Net loss                                                           |       | $                                | (3,194     | ) | $ | (1,054 | ) |
|                                                               |       |                             |       |   |   |
| Earnings (loss) per  common share                                  |       |                             |       |   |   |
|                                                               |       |                             |       |   |   |
| Basic and diluted:                                                 |       |                             |       |   |   |
| Loss from continuing  operations                                   |       | $                                | (0.06      | ) | $ | (0.05 | ) |
| Income (loss) from  discontinued operations                        |       | (0.05                            | )          | 0.01 |   |
| Net loss                                                           |       | $                                | (0.11      | ) | $ | (0.04 | ) |
|                                                               |       |                             |       |   |   |
| Weighted average shares  outstanding:                              |       |                             |       |   |   |
| Basic                                                              |       | 28,966                           |       | 28,868 |   |
| Diluted                                                            |       | 28,966                           |       | 29,118 |   |

 

See accompanyingnotes

3

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MAGNETEK, INC.

CONDENSED CONSOLIDATEDBALANCE SHEETS

(Amounts inthousands)
| ** **                                       | ** ** | **October 1,** | ** ** | **July 2,** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2006**            | ** ** | **2006**         | ** ** |
| ** **                                       | ** ** | **(Unaudited)**     | ** ** | ** **       | ** ** |
| ASSETS                                           |       |                |       |             |       |
|                                             |       |                |       |             |       |
| Current assets:                                  |       |                |       |             |       |
| Cash                                             |       | $                   | 496        |             | $          | 96 |   |
| Restricted cash                                  |       | 22,602              |       | 22,602           |       |
| Accounts receivable, net                         |       | 14,195              |       | 13,056           |       |
| Inventories                                      |       | 10,884              |       | 9,836            |       |
| Prepaid expenses and other current assets        |       | 1,207               |       | 646              |       |
| Assets held for sale                             |       | 139,355             |       | 145,282          |       |
| Total current  assets                            |       | 188,739             |       | 191,518          |       |
|                                             |       |                |       |             |       |
| Property, plant  and equipment                   |       | 18,077              |       | 18,039           |       |
| Less-accumulated  depreciation                   |       | 14,397              |       | 14,066           |       |
| Net property,  plant and equipment               |       | 3,680               |       | 3,973            |       |
|                                             |       |                |       |             |       |
| Goodwill                                         |       | 28,150              |       | 28,150           |       |
| Other assets                                     |       | 8,237               |       | 8,822            |       |
| Total Assets                                     |       | $                   | 228,806    |             | $          | 232,463 |   |
|                                             |       |                |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY       |       |                |       |             |       |
|                                             |       |                |       |             |       |
| Current liabilities:                             |       |                |       |             |       |
| Accounts payable                                 |       | $                   | 8,424      |             | $          | 6,996 |   |
| Accrued liabilities                              |       | 6,893               |       | 7,992            |       |
| Accrued arbitration award                        |       | 22,602              |       | 22,602           |       |
| Liabilities held for sale                        |       | 73,999              |       | 76,907           |       |
| Current portion of long-term debt                |       | 28,336              |       | 27,412           |       |
| Total current  liabilities                       |       | 140,254             |       | 141,909          |       |
|                                             |       |                |       |             |       |
| Long-term debt,  net of current portion          |       | 40                  |       | 43               |       |
|                                             |       |                |       |             |       |
| Pension benefit  obligations, net                |       | 46,264              |       | 45,494           |       |
|                                             |       |                |       |             |       |
| Deferred income  taxes                           |       | 2,334               |       | 2,109            |       |
|                                             |       |                |       |             |       |
| Commitments and  contingencies                   |       |                |       |             |       |
|                                             |       |                |       |             |       |
| Stockholders’  equity                       |       |                |       |             |       |
| Common stock                                     |       | 287                 |       | 287              |       |
| Paid in capital in excess of par value           |       | 129,689             |       | 129,473          |       |
| Accumulated deficit                              |       | (10,025             | )          | (6,831           | )          |
| Accumulated other comprehensive loss             |       | (80,037             | )          | (80,021          | )          |
| Total  stockholders’ equity                 |       | 39,914              |       | 42,908           |       |
|                                             |       |                |       |             |       |
| Total Liabilities and  Stockholders’ Equity |       | $                   | 228,806    |             | $          | 232,463 |   |

 

See accompanyingnotes

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MAGNETEK, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOW

(Amounts inthousands, unaudited)
| ** **                                                                                                             | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                             | ** ** | **(13 Weeks)**              | ** ** | **(13 Weeks)** | ** ** |
| ** **                                                                                                             | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                                                                                             | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Cash flows from  continuing operating activities:                                                                      |       |                             |       |   |   |
| Loss from  continuing operations                                                                                       |       | $                                | (1,630     | ) | $ | (1,223 | ) |
| Adjustments to  reconcile loss from continuing operations to net cash used in operating  activities:                   |       |                             |       |   |   |
| Depreciation and amortization                                                                                          |       | 542                              |       | 652 |   |
| Stock based compensation expense                                                                                       |       | 126                              |       | 82 |   |
| Changes in operating assets and liabilities                                                                            |       | (1,035                           | )          | (191 | ) |
| Total  adjustments                                                                                                     |       | (367                             | )          | 543 |   |
| Net cash used in  continuing operating activities                                                                      |       | (1,997                           | )          | (680 | ) |
|                                                                                                                   |       |                             |       |   |   |
| Cash flows from  discontinued operations:                                                                              |       |                             |       |   |   |
| Income (loss)  from discontinued operations                                                                            |       | (1,564                           | )          | 169 |   |
| Adjustments to  reconcile (income) loss from discontinued operations to net cash provided by  discontinued operations: |       |                             |       |   |   |
| Depreciation and amortization                                                                                          |       | —                           |       | 1,634 |   |
| Changes in operating assets and liabilities                                                                            |       | 3,813                            |       | 889 |   |
| Capital expenditures                                                                                                   |       | (794                             | )          | (1,060 | ) |
| Net cash  provided by discontinued operations                                                                          |       | 1,455                            |       | 1,632 |   |
| Net cash  provided by (used in) operating activities                                                                   |       | (542                             | )          | 952 |   |
|                                                                                                                   |       |                             |       |   |   |
| Cash flows from  investing activities:                                                                                 |       |                             |       |   |   |
| Capital expenditures                                                                                                   |       | (43                              | )          | (103 | ) |
| Net cash used in  investing activities                                                                                 |       | (43                              | )          | (103 | ) |
|                                                                                                                   |       |                             |       |   |   |
| Cash flow from  financing activities:                                                                                  |       |                             |       |   |   |
| Proceeds from issuance of common stock                                                                                 |       | 90                               |       | 91 |   |
| Borrowings (repayments) under line-of-credit  agreements                                                               |       | 924                              |       | (153 | ) |
| Principal payments under capital lease obligations                                                                     |       | (3                               | )          | (3 | ) |
| Increase in deferred financing costs                                                                                   |       | (26                              | )          | (1,315 | ) |
| Net cash  provided by (used in) financing activities                                                                   |       | 985                              |       | (1,380 | ) |
| Net increase  (decrease) in cash                                                                                       |       | 400                              |       | (531 | ) |
| Cash at the  beginning of the period                                                                                   |       | 96                               |       | 595 |   |
| Cash at the end of the  period                                                                                         |       | $                                | 496        |   | $ | 64 |   |

 

See accompanying notes

5

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MAGNETEK, INC.

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

OCTOBER 1, 2006

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

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

Basisof Presentation

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Magnetek, Inc. and itssubsidiaries (the “Company”).  All significant intercompany accounts and transactionshave been eliminated.

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial reporting and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  For further information, refer to the financialstatements and footnotes thereto included in the Company’s Form 10-K for theyear ended July 2, 2006 filed with the Securities and Exchange Commission.  In the Company’s opinion, these unauditedstatements contain all adjustments, consisting of normal recurring adjustments,necessary to present fairly the financial position of the Company as of October1, 2006, and the results of its operations and its cash flows for the threemonths then ended.   Results for thethree-months ended October 1, 2006 are not necessarily indicative of resultsthat may be experienced for the full fiscal year.

The Company uses a fifty-two, fifty-three week fiscal year ending onthe Sunday nearest to June 30.  Fiscalquarters are the thirteen or fourteen week periods ending on the Sunday nearestSeptember 30, December 31, March 31 and June 30.  The three-month periods ended October 1, 2006and October 2, 2005 each contained thirteen weeks.

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

*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.

*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 inventories, the Company is required to makejudgments as to future demand requirements and compare those with the currentor committed inventory levels.  If futuredemand requirements are less favorable than those projected by management,additional inventory write-downs may be required.

*Reserves for Litigation and Environmental Issues*

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

6

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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) that theamount of the loss can be reasonably estimated.

The accrual of a contingency involves considerable judgment on the partof management.  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 the loss.

*Income Taxes*

The Company 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 condensed consolidated balance sheets. An assessment of the recoverability of the deferred tax assets is made,and a valuation allowance is established based upon this assessment.

*Pension Benefits*

The valuation of theCompany’s pension plan requires the use of assumptions and estimates to developactuarial 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’spolicy is to recognize revenue when the earnings process is complete.  Thecriteria used in making this determination are persuasive evidence that anarrangement exists, delivery has occurred, the sales price is fixed ordeterminable, and collectibility is reasonably assured.  Sales arerecorded net of returns and allowances, which are estimated using historicaldata at the time of sale.

Revenue is recognized upon shipment, except in those few cases whereterms of shipment are FOB destination, or where product is shipped to customerswith consignment stock agreements, wherein revenue is recognized when thecustomer receives the product, or removes the product from consignment stock. With the foregoing exceptions, terms of shipment are FOB shipping point, andpayment is not contingent upon resale or any other matter other than passage oftime.  Amounts billed to customers for shipping costs are reflected in netsales; shipping costs are reflected in cost of sales.

Sales to distributors are recorded with appropriate reserves for futurereturns in accordance with SFAS No. 48, *Revenue Recognition WhenRight of Return Exists*, and generally do not include futureinstallation obligations or acceptance requirements.

Stock-Based Compensation – TheCompany accounts for all stock-based compensation in accordance with SFAS No.123 (R), *Share-Based Payment*,**whichrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the Company’s financial statements basedupon their fair values.  The Companyadopted SFAS No. 123R in July, 2005 (fiscal year 2006) and selected themodified prospective method of adoption in which compensation cost is recognizedbeginning with the effective date.  Inaccordance with the modified prospective method of adoption, the Company’sresults of operations for periods prior to adoption were not restated.

Property, Plant andEquipment – Additions and improvement are capitalized atcost, whereas expenditures for maintenance and repair are charged to expense asincurred.  Depreciation is provided over the estimated useful lives of therespective assets principally on the straight-line method (machinery andequipment normally five to ten years, buildings and improvements normally tento forty years).

Goodwill – In accordance with SFASNo. 142, *Goodwill and Other Intangible Assets*,the Company reviews the carrying value of Goodwill at least annually, and morefrequently if indicators of potential impairment arise, using discounted futurecash flow analysis as prescribed in SFAS No. 142.

DeferredFinancing Costs – Costs incurred toobtain financing are deferred and included in other assets in the condensedconsolidated balance sheets.  Deferredfinancing costs are amortized over the term of the financing facility and theseexpenses are included in interest expense in the accompanying condensedconsolidated statements of operations.

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.

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

Recent Accounting Pronouncements –In May 2005, the FASB issued SFAS No. 154, *Accounting Changes andError Corrections. *SFAS No.154 replaces APB No. 20, *Accounting Changes*,and SFAS No. 3, *Reporting Accounting Changes in Interim FinancialStatements*, and establishes retrospective application as therequired method for reporting a change in accounting principle.  SFAS No. 154 provides guidance fordetermining whether retrospective application of a change in accountingprinciple is impracticable and for reporting a change when retrospectiveapplication is impracticable.  Thereporting of a correction of an error by restating previously issued financialstatements is also addressed.  SFAS No.154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. The adoption of this pronouncement on July 3, 2006, did not have amaterial effect on the Company’s financial position, results of operations orliquidity.

On July 13, 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”).  FIN 48 creates a single model to addressuncertainty in tax positions, clarifying the accounting for income taxes byprescribing the minimum recognition threshold a tax position is required tomeet before being recognized in the financial statements.  FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject toSFAS No. 109, *Accounting for Income Taxes*.

FIN 48 utilizes a two-step approach for evaluating tax positions.  Recognition (step one) occurs when anenterprise concludes that a tax position, based solely on its technical merits,is “more-likely-than-not” to be sustained upon examination.  Measurement (step two) is only addressed ifstep one has been satisfied.  Those taxpositions failing to qualify for initial recognition are recognized in the firstsubsequent interim period they meet the more-likely-than-not standard, or areresolved through negotiation or litigation with the taxing authority, or uponexpiration of the statute of limitations.

FIN 48 is effective for fiscal years beginning after December 15,2006.  Differences between the amountsrecognized in the statements of financial position prior to the adoption of FIN48 and the amounts reported after adoption would be accounted for as acumulative-effect adjustment recorded to the beginning balance of retainedearnings.  The adoption of thispronouncement is not expected to have a material effect on the Company’sfinancial position, results of operations, or liquidity.

DerivativeFinancial Instruments – TheCompany periodically uses derivative financial instruments to reduce financialmarket risks. These instruments are used to hedge foreign currency and interestrate market exposures. The Company does not use derivative financialinstruments for speculative or trading purposes.  The accounting policies for these instrumentsare based on the Company’s designation of such instruments as hedgingtransactions. The criteria the Company uses for designating an instrument as ahedge include the instrument’s effectiveness in risk reduction and the matchingof the derivative to the underlying transaction. The resulting gains or lossesare accounted for as part of the transactions being hedged, except that lossesnot expected to be recovered upon the completion of the hedge transaction areexpensed.  The Company’s continuingoperations had no derivative financial instruments at October 1, 2006 and July2, 2006.

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

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

8

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2.                                       **Discontinued Operations**

The Company’s power electronics business and telecom power business, aswell as certain expenses incurred related to businesses the Company no longerowns, are classified as discontinued operations.  The results of discontinued operations are asfollows:
|                                                                              | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                         |       |                             |       |   |   |
| Net sales                                                                    |       | $                                | 46,930     |   | $ | 40,537 |   |
|                                                                         |       |                             |       |   |   |
| Income (loss) from discontinued operations before interest and income  taxes |       | $                                | (965       | ) | $ | 1,124 |   |
| Interest  expense, net                                                       |       | 274                              |       | 339 |   |
| Provision for  income taxes                                                  |       | 325                              |       | 616 |   |
| Income (loss) from  discontinued operations                                  |       | $                                | (1,564     | ) | $ | 169 |   |

 

Income (loss) from discontinued operations in the table above includescharges of $30 and $412 for the first quarter of fiscal 2007 and 2006respectively, for legal fees and costs related to the patent infringementclaim, environmental issues, and asbestos claims, all of which relate tobusinesses the Company no longer owns.

During the fourth quarterof fiscal year 2006, the Company committed to a plan to divest its powerelectronics business.  As a result, in June 2006,the Company reclassified the assets and liabilities as held for sale and theresults of this business as discontinued operations.  The Company’s power electronics business iscomprised mainly of its wholly-owned subsidiaries Magnetek S.p.A. (Italy),Magnetek Kft. (Hungary) and Magnetek Electronics Co., Ltd. (China), and a NorthAmerican division located in Chatsworth, California.  Subsequent to October 1, 2006, the Companyentered into an agreement to sell the business to Power-One, Inc. (see Note 12of Notes to Condensed Consolidated Financial Statements), and the transactionwas completed on October 23, 2006.

The results of the Company’s power electronicsbusiness are as follows:
|                                                                              | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                         |       |                             |       |   |   |
| Net sales                                                                    |       | $                                | 43,489     |   | $ | 37,007 |   |
|                                                                         |       |                             |       |   |   |
| Income (loss) from discontinued operations before interest and income  taxes |       | $                                | (305       | ) | $ | 1,528 |   |
| Interest  expense, net                                                       |       | 274                              |       | 339 |   |
| Provision for  income taxes                                                  |       | 325                              |       | 616 |   |
| Income  (loss) from discontinued operations - power electronics business     |       | $                                | (904       | ) | $ | 573 |   |

 

9

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Assets and liabilitiesof the Company’s power electronics business classified as held for sale as ofOctober 1, 2006 and July 2, 2006, were as follows:
|                                                         | ** ** | **October 1,** | ** ** | **July 2,** | ** ** |
|---------------------------------------------------------|------------|---------------------|------------|------------------|------------|
| ** **                                              | ** ** | **2006**            | ** ** | **2006**         | ** ** |
|                                                    |       |                |       |             |       |
| Cash and  equivalents                                   |       | $                   | 2,532      |             | $          | 1,491 |   |
| Accounts  receivable                                    |       | 39,112              |       | 51,431           |       |
| Inventories                                             |       | 48,675              |       | 45,438           |       |
| Net property,  plant and equipment                      |       | 27,831              |       | 27,320           |       |
| Other assets                                            |       | 19,706              |       | 18,485           |       |
| Assets of  discontinued power electronics business      |       | $                   | 137,856    |             | $          | 144,165 |   |
| Eliminations                                            |       | (3,971              | )          | (3,616           | )          |
| Total assets                                            |       | $                   | 133,885    |             | $          | 140,549 |   |
|                                                    |       |                |       |             |       |
| Accounts payable                                        |       | $                   | 37,754     |             | $          | 34,985 |   |
| Other current  liabilities                              |       | 6,336               |       | 5,926            |       |
| Other long term  liabilities                            |       | 10,649              |       | 10,728           |       |
| Long term debt                                          |       | 17,362              |       | 24,294           |       |
| Liabilities of  discontinued power electronics business |       | $                   | 72,101     |             | $          | 75,933 |   |

 

During fiscal year2005, the Company committed to a plan to divest its telecom power business, andas a result, reclassified assets and liabilities as held for sale and theresults of the business as discontinued operations.

The results of theCompany’s telecom power business are as follows:
|                                                                     | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                |       |                             |       |   |   |
| Net sales                                                           |       | $                                | 3,441      |   | $ | 3,530 |   |
|                                                                |       |                             |       |   |   |
| Income (loss) from  discontinued operations -telecom power business |       | $                                | (630       | ) | $ | 8 |   |

 

No interest expense or provision for income tax was allocated to theCompany’s telecom power business for either of the periods presented above.

The Company did notcomplete the divestiture of its telecom power business as of October 1, 2006,despite actively marketing the business to potential interested parties at areasonable price.  Subsequent to October1, 2006, in the second quarter of fiscal 2007, the Company decided to ceaseactively marketing the business, and retain and restructure the power systemsportion of the business.  Accordingly,the operating results of the telecom power business will be classified ascontinuing operations and its assets and liabilities as held and used beginningin the second quarter of fiscal 2007.

3.                                     **Stock-Based Compensation**

The Company has twostock option plans (the “Plans”), one of which provides for the issuance ofboth incentive stock options (under Section 422A of the Internal RevenueCode of 1986) and non-qualified stock options at exercise prices not lessthan the fair market value at the date of grant, and one of which only providesfor the issuance of non-qualified stock options at exercise prices notless than the fair market value at the date of grant. One of the Plans alsoprovides for the issuance of stock appreciation rights, restricted stock,incentive bonuses and incentive stock units. The total number of shares of theCompany’s common stock authorized to be issued upon exercise of the stockoptions and other stock rights under the Plans is 2,100,000.  Options granted under these Plans vest inequal annual installments of two, three or four years.

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Effective July 4, 2005, the Company adopted SFAS No. 123 (R), *Share-Based Payment*, which requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe Company’s financial statements based upon their fair values.  The Company selected the modified prospectivemethod of adoption in which compensation cost is recognized beginning with theeffective date.  Compensation cost recognizedfor the three months ended October 1, 2006 is the same as that which would havebeen recognized had the fair value method of SFAS No. 123 been applied from itsoriginal effective date.  In accordancewith the modified prospective method of adoption, the Company’s results ofoperations for prior periods have not been restated.

In the fourth quarter of fiscal 2005, the Company approved theacceleration of the vesting of “underwater” unvested stock options held by theCompany’s current employees, including executive officers, on June 1, 2005. Nostock options held by directors were subject to the acceleration.  The decision to accelerate vesting of theseunderwater options was made primarily to avoid recognizing compensation cost inthe consolidated statement of operations upon adoption of SFAS No. 123 (R), asdescribed above.  As a result of theacceleration, the Company reduced the stock option compensation expense itotherwise would have been required to record by approximately $1.9 million infiscal 2006, $1.4 million in fiscal 2007 and less than $0.1 million in fiscal2008 on a pre-tax basis, resulting in an additional $3.4 million of pro-formaexpense in fiscal 2005.  The acceleratedvesting was a modification of outstanding awards as defined by FAS 123, whichresulted in incremental pro-forma compensation expense of $0.3 million infiscal 2005.

The Company did not issue any stock options in the first quarter offiscal 2007.  In August 2005 (fiscal2006), the Company granted 500,000 shares of restricted stock with a fair valueof $2.77 per share.  The restrictedshares fully vest on January 1, 2009. The total estimated compensation expense related to the grant of $1.4million is being recorded ratably from the grant date through the vestingdate.  As of October 1, 2006, there wasapproximately $0.9 million of total unrecognized compensation cost related tothe grant, to be amortized over a weighted-average period of 2.25 years.

The accompanying condensed consolidated statement of operations for thethree months ended October 1, 2006, includes compensation expense related toall stock-based awards of $126, comprised of $103 related to the restrictedstock grant and $23 related to nonvested director stock option grants.  The three-month period ended October 2, 2005,includes stock based compensation of $82, comprised of $46 related to therestricted stock grant and $36 related to nonvested director stock optiongrants.

Subsequent to October 1, 2006, the Company granted 200,000 shares ofrestricted stock to its former CEO with immediate vesting.  Accordingly, the Company will record stockcompensation expense of $952 related to the grant in its fiscal second quarter.

4.                                       **Inventories**

Inventories at October 1, 2006 and July 2, 2006 consist of thefollowing:
|                                | ** ** | **October 1,** | ** ** | **July 2,** | ** ** |
|--------------------------------|------------|---------------------|------------|------------------|------------|
| ** **                     | ** ** | **2006**            | ** ** | **2006**         | ** ** |
| Raw materials  and stock parts |       | $                   | 8,511      |             | $          | 7,579 |   |
| Work-in-process                |       | 954                 |       | 970              |       |
| Finished goods                 |       | 1,419               |       | 1,287            |       |
|                           |       | $                   | 10,884     |             | $          | 9,836 |   |

 

5.                                       **Commitments and Contingencies**

*Litigation—Product Liability*

The Company has settled or otherwise resolved all of the productliability lawsuits associated with its discontinued business operations. Thelast remaining limited obligation to defend and indemnify the purchaser of adiscontinued business operation against new product liability claims expired inDecember 2003 and the Company believes that any new claims would eitherqualify as an assumed liability, as defined in the various purchase agreements,or would be barred by an applicable statute of limitations.   The Company is also a named party in two product liability lawsuitsrelated to the Telemotive Industrial Controls business acquired inDecember 2002 through the purchase of the stock of MXT Holdings, Inc.  Both claims were tendered to the insurance companies that providedcoverage for MXT Holdings, Inc., against such claims and the defense andindemnification has been accepted by the carriers, subject to a reservation ofrights.

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Management believes that the insurers will bear all liability, if any,with respect to both cases and that the proceedings, individually or inthe aggregate, will not have a material adverse effect on the Company’s resultsof operations or financial position.

In addition to the two cases discussed above, in August 2006, Pamela L.Carney, Administrator of the Estate of Michael J. Carney, filed a lawsuit inthe Court of Common Pleas of Westmoreland County, Pennsylvania, against theCompany and other defendants, alleging that a product manufactured by theTelemotive Industrial Controls business acquired by the Company in December2002 contributed to an accident that resulted in the death of Michael J. Carneyin August 2004.  The claim has beentendered to the Company’s insurance carrier and legal counsel has been retainedto represent the Company.  Plaintiff’sclaim for damages is unknown at this time, but management believes that theCompany’s insurer will bear all liability for the claim, if any.

The Company has been named, along with multiple other defendants, inasbestos-related lawsuits associated with business operations previouslyacquired by the Company, but which are no longer owned. During the Company’sownership, none of the businesses produced or sold asbestos-containingproducts. With respect to these claims, the Company is either contractuallyindemnified against liability for asbestos-related claims or believesthat it has no liability for such claims. The Company aggressively seeksdismissal from these proceedings, and has also tendered the defense of thesecases to the insurers of the previously acquired businesses and is awaitingtheir response.  The Company has alsofiled a late claim in the amount of $2.5 million in the Federal-Mogulbankruptcy proceedings to recover attorney’s fee paid for the defense of theseclaims, which the Company believes is an obligation of Federal Mogul althoughthe claim is subject to challenge.  Management does not believe theasbestos proceedings, individually or in the aggregate, will have a materialadverse effect on its financial position or results of operations.

*Litigation—Patent Infringement*

In April 1998, Ole K. Nilssen filed a lawsuit in the U.S. DistrictCourt for the Northern District of Illinois alleging infringement by theCompany of seven of his patents pertaining to electronic ballast technology,and seeking unspecified damages and injunctive relief to preclude the Companyfrom making, using or selling products allegedly infringing his patents. TheCompany denied that its products infringed any valid patent and filed aresponse asserting affirmative defenses, as well as a counterclaim for ajudicial declaration that its products do not infringe the patents asserted byMr. Nilssen and also that the asserted patents are invalid. InJune 2001, the Company sold its lighting business to Universal LightingTechnologies, Inc. (“ULT”), and agreed to provide a limited indemnificationagainst certain claims of infringement that Nilssen might allege against ULT.In April 2003, Nilssen’s lawsuit and the counterclaims were dismissed withprejudice and both parties agreed to submit limited issues in dispute tobinding arbitration before an arbitrator with a relevant technical background.The arbitration occurred in November, 2004 and a decision awarding Nilssen$23.4 million was issued on May 3, 2005, to be paid within ten days of theaward. Nilssen’s counsel filed a motion to enter the award in U.S. DistrictCourt for the Northern District of Illinois, and Magnetek filed acounter-motion to vacate the award for a number of reasons, including that theaward was fraudulently obtained.  Magnetek’s request for oral argument wasgranted and the hearing took place on October 19, 2005.  A decision has not been announced.  An unfavorable decision by the Court wouldlikely result in payment of the award to Nilssen and would have a materialadverse effect on the Company’s cash flows.

In February 2003, Nilssen filed a second lawsuit in the U.S.District Court for the Northern District of Illinois alleging infringement byULT of twenty-nine of his patents pertaining to electronic ballast technology,and seeking unspecified damages and injunctive relief to preclude ULT frommaking, using or selling products allegedly infringing his patents. ULT made aclaim for indemnification, which the Company accepted, subject to thelimitations set forth in the sale agreement. The case is now pending in the Central District of Tennessee.  Nilssen voluntarily dismissed all but four ofthe patents from the lawsuit.  The Company denies that the products forwhich it has an indemnification obligation to ULT infringe any valid patent andresponded on behalf of ULT asserting affirmative defenses, as well as acounterclaim for a judicial declaration that the patents are unenforceable andinvalid and that the products do not infringe Nilssen’spatents.   ULT requested a re-examination of the patents atissue by the Patent and Trademark Office and the request was granted.  Meanwhile, the case against ULT has beenstayed pending Nilssen’s appeal of an unfavorable decision against him inanother case that could influence the outcome of his lawsuits against ULT.  The Company will continue to aggressivelydefend the claims against ULT that are subject to defense and indemnification;however, an unfavorable decision could have a material adverse effect on theCompany’s financial position, cash flows and results of operations.

*Environmental Matters - General*

From time to time, Magnetek has taken action to bring certainfacilities associated with previously owned businesses  into compliancewith applicable environmental laws and regulations. Upon the subsequent sale ofcertain businesses, the

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Company agreed to indemnify the buyers against environmental claimsassociated with the divested operations, subject to certain conditions andlimitations. Remediation activities, including those related to the Company’sindemnification obligations, did not involve material expenditures during thethree months ended October 1, 2006 and October 2, 2005.

The Company has also been identified by the United States EnvironmentalProtection Agency and certain state agencies as a potentially responsible partyfor cleanup costs associated with alleged past waste disposal practices atseveral previously owned facilities and offsite locations. Its remediationactivities as a potentially responsible party were not material in the firstquarter of fiscal years 2007 and 2006. 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.

*Century Electric (McMinnville,Tennessee)*

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

*Effect of Fruit of the LoomBankruptcy (Bridgeport, Connecticut)*

In 1986, the Company acquired the stock of Universal ManufacturingCompany (“Universal”) from a predecessor of Fruit of the Loom (“FOL”), and thepredecessor agreed to indemnify the Company against certain environmentalliabilities arising from pre-acquisition activities at a facility inBridgeport, 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 disposal locations.FOL, the successor to Universal’s indemnification obligation, filed a petitionfor Reorganization under Chapter 11 of the Bankruptcy Code in 1999 and theCompany filed a proof of claim in the proceeding for obligations related to theenvironmental indemnification agreement. The Company believes that FOL hadsubstantially completed the clean-up obligations required by theindemnification agreement prior to the bankruptcy filing. InNovember 2001, the Company and FOL entered into an agreement involving theallocation of certain potential tax credits and Magnetek withdrew its claims inthe bankruptcy proceeding. FOL’s obligation to the state of Connecticut was notdischarged in the reorganization proceeding. FOL’s inability to satisfy itsremaining obligations related to the Bridgeport facility and any offsitedisposal locations, or the discovery of additional environmental contaminationat the Bridgeport facility could have a material adverse effect on the Company’sfinancial position or results of operations.

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6.             **ComprehensiveLoss**

For the fiscal quarters ended October 1, 2006 andOctober 2, 2005, comprehensive loss consisted of the following:
|                                  | ** ** | **Three Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net loss                         |       | $                                | (3,194     | ) | $ | (1,054 | ) |
| Currency  translation adjustment |       | (16                              | )          | 842 |   |
| Comprehensive loss               |       | $                                | (3,210     | ) | $ | (212 | ) |

 

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

The following table setsforth the computation of basic and diluted earnings (loss) per share for thethree months ended October 1, 2006 and October 2, 2005:
|                                                         | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Numerator:                                              |       |                             |       |   |   |
| Loss from continuing operations                         |       | $                                | (1,630     | ) | $ | (1,223 | ) |
| Income (loss) from discontinued operations              |       | (1,564                           | )          | 169 |   |
| Net loss                                                |       | $                                | (3,194     | ) | $ | (1,054 | ) |
|                                                    |       |                             |       |   |   |
| Denominator:                                            |       |                             |       |   |   |
| Weighted average shares for basic earnings per share    |       | 28,966                           |       | 28,868 |   |
| Add dilutive effective of stock options outstanding     |       | —                           |       | 250 |   |
| Weighted average shares for diluted earnings per  share |       | 28,966                           |       | 29,118 |   |
|                                                    |       |                             |       |   |   |
| Basic &  Diluted:                                   |       |                             |       |   |   |
| Loss per share  from continuing operations              |       | $                                | (0.06      | ) | $ | (0.05 | ) |
| Earnings (loss)  per share from discontinued operations |       | $                                | (0.05      | ) | $ | 0.01 |   |
| Net loss per share                                      |       | $                                | (0.11      | ) | $ | (0.04 | ) |

 

Due to the loss from continuing operations, theloss from discontinued operations, and the net loss for the three months endedOctober 1, 2006, the effect of 0.5 million shares of stock options outstandingwas excluded from the calculation of diluted loss per share, as their impactwould be anti-dilutive.  Similarly, the dilutive effect of 0.3 millionshares of stock options outstanding was not included in the calculation ofdiluted loss per share from continuing operations or net loss per share for thethree months ended October 2, 2005, as inclusion of these shares would beanti-dilutive.

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 knownproduct failures 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 threemonth periods ended October 1, 2006 and October 2, 2005 were as follows:
|                                                       | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Balance,  beginning of fiscal year                    |       | $                                | 414        |   | $ | 260 |   |
| Additions  charged to earnings for product warranties |       | 123                              |       | 105 |   |
| Use of reserve  for warranty obligations              |       | (120                             | )          | (126 | ) |
| Balance, end of period                                |       | $                                | 417        |   | $ | 239 |   |

 

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

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9.             **Pension Expense**

For the three-month periods ended October 1, 2006 and October 2, 2005,pension expense related to the Company’s defined benefit pension plan consistedof the following:
|                                  | ** ** | **Three Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Interest Cost                    |       | $                                | 2,462      |   | $ | 2,440 |   |
| Expected return  on plan assets  |       | (2,678                           | )          | (2,552 | ) |
| Recognized net  actuarial losses |       | 986                              |       | 1,062 |   |
|                             |       |                             |       |   |   |
| Total net pension  expense       |       | $                                | 770        |   | $ | 950 |   |

 

Pension expense is included in selling,general and administrative expense in the accompanying condensed consolidatedstatements of operations.

10.                                 **Income Taxes**

Since fiscal 2002 theCompany has provided valuation reserves against its U.S. deferred tax assetsthat result in a zero net deferred tax position (net deferred assets equal todeferred tax liabilities).  In fiscal2005, the Company determined that a portion of its deferred tax liabilityrelated to tax-deductible amortization of goodwill that was no longer amortizedfor financial reporting purposes. These deferred tax liabilities wereconsidered to have an indefinite life and were therefore ineligible to beconsidered as a source of future taxable income in assessing the realization ofdeferred tax assets.

The Company’s taxprovision of $276 for the three months ended October 1, 2006 included an amountof $225 to increase the Company’s valuation allowance for deferred tax assetsrelated to tax-deductible amortization of goodwill.   The remaining tax provision of $51 for thethree months ended October 1, 2006 was comprised of income taxes of the Company’sforeign subsidiary in Canada.

11.                                 **Bank Borrowing Arrangements**

On September 30, 2005,the Company entered into an agreement with Ableco Finance LLC (Ableco)providing for an $18 million term loan and an agreement with Wells FargoFoothill, Inc. (WFF) providing for a $13 million revolving creditfacility.  Borrowings under the term loanbear interest at the lender’s reference rate plus 5%, or, at the Company’soption, the London Interbank Offering Rate (LIBOR) plus 7.5%.  Such rates may be increased by up to onepercentage point depending upon the level of U.S. funded debt to EBITDA asdefined in the agreement.  The term loanrequires quarterly principal payments of $1 million which were to begin inSeptember, 2006.  Borrowings under therevolving credit facility bear interest at the bank’s prime lending rate plus2.5% or, at the Company’s option, LIBOR plus 4%.  Borrowings under the revolving creditfacility are determined by a borrowing base formula as defined in theagreement, based on the level of eligible domestic accounts receivable andinventory.  The revolving credit facilityalso supports the issuance of letters of credit.  Borrowings under the term loan and revolvingcredit facility are secured by substantially all of the Company’s domesticassets.  The Company used the proceedsfrom the revolving credit facility to fully repay all outstanding obligationsunder its previous financing agreement with Chase Bank.

In November 2005, under terms of the financing agreements with WFF andAbleco, the Company deposited $22.6 million into an escrow account to fund theNilssen arbitration award in the event that the Company’s appeal of the awardis not successful (see Note 5 of Notes to Condensed Consolidated FinancialStatements). The deposit was funded by the $18.0 million term loan andborrowings of $4.6 million from the revolving credit facility, and is reportedas restricted cash in the accompanying condensed consolidated balance sheet asof October 1, 2006 and July 2, 2006. As of October 1, 2006, the $18.0 millionterm loan and approximately $10.3 million under the revolving credit facilitywere outstanding. The total of these two amounts, $28.3 million, is included incurrent portion of long-term debt in the accompanying condensed consolidatedbalance sheet. This classification reflects certain provisions in the term loanand revolving credit agreements which allow the lenders to declare a defaultand accelerate the loans should certain events occur which could be expected toresult in a “Material Adverse Effect” (as defined in the agreements) on theCompany. Such provisions are considered “subjective acceleration” clauses underaccounting guidelines which require the classification of debt balances ascurrent although the related agreements have termination dates that are beyondone year from the balance sheet date.

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As a result of lower than planned performance and certain expenses ofdiscontinued operations, the Company was in violation of certain financial covenantsincluded in its credit agreements for the quarter ended July 2, 2006.  During the fiscal quarter ended October 1,2006, the Company entered into a forbearance agreement with its lenders wherebythe lenders agreed not to take any action with respect to the covenantviolations through October 31, 2006, pending the divestiture of the Company’spower electronics business.  In addition,Ableco agreed to defer the initial $1 million term loan principal payment toOctober 31, 2006.  As discussed in Notes2 and 12 of the Notes to Condensed Consolidated Financial Statements, onOctober 23, 2006, the Company completed the divestiture of its powerelectronics business.  The Company used aportion of the proceeds from the divestiture to repay all borrowings outstandingunder its term loan and revolving credit facility.  The revolving credit facility remains inplace and the Company expects to modify the terms of the facility based onchanges in the Company’s domestic asset base from the divestiture of the powerelectronics business and the resulting impact on available borrowing baseamounts, as well as expected future performance.  The term loan was repaid prior to theDecember 2007 expiration date pursuant to the terms of the term loan agreementin exchange for a prepayment penalty of $325 from the Company to Ableco.  The debt repayment and related costs will bereflected in the Company’s second quarter fiscal 2007 results.

12.                                 **Divestiture of Power Electronics Business andSubsequent Events**

On September 28, 2006 the Company entered into anagreement to sell its power electronics business to Power One, Inc. for $71.7million in cash plus the assumption of approximately $16.7 million in net debt,subject to customary pre-closing and post-closing tangible net worth and netdebt adjustments.   Pursuant to thepurchase and sale agreement dated September 28, 2006 between the Company andPower One, Power-One agreed to purchase the power electronics business throughthe acquisition of all of the outstanding shares of Magnetek, S.p.A., asubsidiary of the Company, and of the assets and liabilities of the U.S.division of the Business.  The terms ofthe agreement were negotiated at arms-length. The agreement provides for indemnification for breaches ofrepresentations and warranties and other customary matters that the Companybelieves are typical for this type of transaction, and for the satisfaction orwaiver of customary closing conditions.

Subsequent to the end of the fiscal 2007 first quarter,on October 23, 2006, the Company completed the sale of the power electronicsbusiness to Power-One, Inc.  Thetransaction, which satisfied all applicable regulatory approvals and othercustomer closing conditions, included a payment (net of an initialestimate of the tangible net worth adjustment) by Power-One to the Company of $68 million in cash and the assumption byPower-One of approximately $16 million of the Company’s net debt.  The Company used approximately $29 million ofthe proceeds to repay all its remaining outstanding debt under U.S. loanagreements (see Note 11 of Notes to Condensed Consolidated FinancialStatements).  The Company intends to usethe remainder of the proceeds from the sale of the business primarily to fundpension obligations and support ongoing operations.

As a result of the divestiture of the Company’spower electronics business, the Company has decided to relocate its corporateoffice to Menomonee Falls, Wisconsin from Chatsworth, California.  In addition, the Company has not beensuccessful in divesting its telecom power business and in October 2006 decidedto cease actively marketing the business, and retain and restructure the powersystems portion of the business.  Norestructuring charges have been reflected in the first quarter fiscal 2007results related to these planned actions. The operating results of the telecom power business will be classifiedas continuing operations and its assets and liabilities as held and usedbeginning in the second quarter of fiscal 2007.

**Item 2 – Management’s Discussion and Analysis ofOperations and Financial Condition**

**Overview**

Since 2001, Magnetek has been a global provider of digitalpower-electronic products, including electronic converters, inverters,rectifiers and systems.  We have operatedin a single business segment, Digital Power Products, comprised of two broadproduct categories, systems and components. Our products are used primarily in industrial, telecommunications, dataprocessing, consumer, imaging, alternative energy, power generation and otherapplications.

Our operating results for the past several yearshave been negatively impacted by asset impairment and restructuring charges,including a $22 million charge for goodwill impairment in fiscal 2006, andother expenses related to businesses we no longer own, including a $22 millioncharge in fiscal 2005 for a patent infringement arbitration award (see Note 5of Notes to Condensed Consolidated Financial Statements).  Our fiscal 2006 cash flows were negativelyimpacted by higher interest expense and costs incurred to obtain new financingagreements, and we were anticipating that our future cash flows would beimpacted by scheduled debt repayments and pension contributions in fiscal years2007 and 2008. As a result, during the fourth quarter of fiscal 2006, wecompleted a review of various cash raising alternatives to enable us to addressthese pending obligations as well as provide funds for future growthinitiatives, and we decided to divest our power electronics business.

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Our power electronics business is engaged in themanufacture of embedded power electronic products, which are sold primarily tooriginal equipment manufacturers for installation in their products andinclude: AC-to-DC switching power supplies, AC-to-DC rectifiers and batterychargers, DC to-DC power converters, and DC-to-AC power inverters.  These products are used primarily intelecommunications (telecom), data processing and storage, digital imaging,semiconductor processing and testing equipment, medical instrumentation andhome appliances.  The business hasmanufacturing and administrative facilities in Italy, China, Hungary andChatsworth, California, and accounted for $166 million, or 69%, of our reportednet sales for fiscal year 2005 of $242 million.

Accordingly,during the fourth quarter of fiscal year 2006, we reclassified the assets andliabilities of our power electronics business as held for sale, and the resultsof operations of this business as discontinued operations (see Note 2 of Notesto Condensed Consolidated Financial Statements).  On September 28, 2006, we entered into anagreement to sell the business to Power-One, Inc.  On October 23, 2006, subsequent to the end ofour first quarter of fiscal 2007, we completed the transaction, which includeda net payment by Power-One to Magnetek of $68 million in cash and theassumption by Power-One of approximately $16 million of Magnetek’s net debt,subject to post closing adjustments (see Note 12 of Notes to CondensedConsolidated Financial Statements).  Weused a portion of the proceeds from the divestiture of the business to repayall of our outstanding debt, approximately $29 million (see Note 11 of Notes toCondensed Consolidated Financial Statements), and intend to use the remainingproceeds primarily to fund pension obligations and support ongoingoperations.  Asa result of the divestiture of the power electronics business, we no longerhave any operations in Italy, China or Hungary, and our operations are basedprimarily in North America.

Going forward, we intend to focus on digitalpower control systems and operate solely in this product category.  Our systems and subsystems are used primarilyin material handling, motion control and alternative energy applications.  We believe that with our technical and productiveresources we are well positioned to respond to increasing demand in our servedmarkets.  Our power control systemsconsist primarily of programmable motion control and power conditioning systemsused in the following applications: cranes and hoists; elevators; mining; fuel cell and wind markets.

During fiscal year 2005, we reclassified theassets and liabilities of our telecom power business as held for sale, and theresults of operations of this business as discontinued operations.  Over the past 18 months we have entered intovarious stages of negotiations with several interested buyers, however, we havenot been able to reach an agreement to sell the business.  As a result, in October 20006 we decided toretain the business and are implementing restructuring actions in order toimprove its operating results.  Theseactions will include the relocation and consolidation of the business with ourother power control systems operations to leverage our existing production and administrativecapability as well as our workforce.  Theaccompanying financial statements continue to reflect the classification of theassets and liabilities of our telecom power business as held for sale, and theresults of this business as discontinued operations for all periodspresented.  However, beginning in thesecond quarter of fiscal 2007, we will reclassify the assets and liabilities ofthe business as held and used, and the results of this business as continuing operations.

As stated above, our remaining power control systems business will becomprised mainly of operations in North America based in Menomonee Falls,Wisconsin.  Our results of continuingoperations reflected in the accompanying consolidated financial statementsinclude the results of power control systems and corporate operating expensesfor all periods presented.  Thedivestiture of our power electronics business results in a smaller company interms of sales but our gross margins in power control systems have historicallyexceeded 30%.  We intend to furtherconsolidate operations and administrative facilities during fiscal 2007, and weexpect that our second fiscal quarter results will be negatively impacted bycosts related to these actions.  Restructuringcosts will include severance for certain Company officers and other employees,and may include other charges and relocation costs related to our telecom powerbusiness.  We plan to complete theseactivities by the end of the second quarter of fiscal 2007 (December 2006),however, the third quarter of fiscal 2007 could also be impacted byrestructuring actions and related costs. We believe that the resulting cost savings, together with a reduction inpension expense from expected contributions to our pension plan and lowerinterest expense from reduced borrowings, should enable us to return toprofitability and positive cash generation in the second half of fiscal 2007.

**ContinuingOperations**

Demand in certain of ourkey markets, mainly material handling, was strong during the first quarter offiscal 2007 and our sales increased to $22.5 million, an increase of more than12% from first quarter fiscal 2006 sales of $20.1 million.  Gross profit in the first quarter of fiscal2007 was $0.7 million higher than the same period in fiscal 2006, due to highervolume.  However gross profit as apercentage of sales was slightly lower in the first quarter of fiscal 2007,mainly due to unfavorable sales mix.  Ourresearch and development (R&D) expense increased slightly in the firstquarter of fiscal 2007 compared to the first quarter of fiscal 2006, as wecontinued to invest in developing new products for existing and new markets,

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including alternativeenergy products for wind applications. We will continue to invest in R&D going forward, although the rateof growth in R&D investment may slow in fiscal 2007.  First quarter fiscal 2007 selling, generaland administrative (SG&A) expense increased by $0.7 million compared to thefirst quarter of fiscal 2006, and at $6.7 million, represents more than 29% ofsales.  During the second quarter offiscal 2007, we expect to consolidate administrative offices and implement costreduction actions in terms of payroll costs and general expenses, as well aspension expense with a planned contribution to our defined benefit pension planin fiscal 2007.  We expect that oursecond quarter fiscal 2007 operating results will be negatively impacted by thecost of these restructuring actions and other expenses associated with thedivestiture of our power electronics group, including but not limited toseverance costs, increased stock compensation expense, potential relocationcosts, prepayment penalties related to early debt repayment and acceleratedamortization of deferred financing assets.

Our total long-term debtincreased during the first quarter of fiscal 2007 by $0.9 million to $28.4million (including amounts due under capital lease obligations).  Subsequent to the end of the first quarter offiscal 2007, we used a portion of the proceeds from the divestiture of our powerelectronics group to repay all of our outstanding debt (see Notes 11 and 12 ofNotes to Condensed Consolidated Financial Statements).  We have not made any contributions to ourdefined benefit pension plan to date in fiscal 2007, although we do intend tomake a contribution in the second quarter of fiscal 2007.  Under current regulations, no mandatorycontributions are expected through fiscal 2007, however, required contributionsin periods subsequent to fiscal 2007 could be significant.  Ourfuture annual pension expense will depend on future interest rate levels,values in equity and fixed income markets, and the level and timing ofcontributions we make to the plan.

We are also focusing our development and marketing capabilities onhigher margin systems applications and markets. As noted above, we plan to further consolidate administrative operationsand functions in fiscal 2007, however in addition to reduced costs, futuresustained profitability is dependent upon improvement in revenues and gross margins,successful implementation of our strategy to penetrate higher margin markets,and introduction of new product offerings.

##### **DiscontinuedOperations**

The results of our power electronics business and our telecom powerbusiness, as well as certain expenses related to previously divestedbusinesses, have been reclassified as discontinued operations in theaccompanying condensed consolidated financial statements and footnotes for allperiods presented.   The assets andliabilities of our power electronics business and telecom power business areclassified as held for sale in the accompanying condensed consolidated balancesheets for all periods presented.

Our first quarter fiscal 2007 loss from discontinued operations was$1.5 million.  The loss was due mainly tolosses incurred in the power electronics business of $0.9 million and lossesincurred in our telecom power business of $0.6 million, as costs associatedwith other previously owned business were negligible in the period.  These costs have historically includedcharges for an arbitration award in a patent infringement claim and relatedlegal fees (see Note 5 of Notes to Consolidated Financial Statements), as wellas certain expenses for product liability claims, environmental issues, andasbestos claims.   All of these issuesrelate to businesses we no longer own and most relate to indemnificationagreements we provided when we divested those businesses.

Subsequent to October 1, 2006, we completed the sale of our powerelectronics business (see Note 12 of Notes to Condensed Consolidated FinancialStatements) and also decided to retain our telecom power business.  Beginning in the second quarter of fiscal2007, we intend to reclassify the assets and liabilities of the telecom powerbusiness as held and used, and the results of the business as continuingoperations.  Going forward, our secondquarter fiscal 2007 discontinued operations will include the results of ourpower electronics business for the three weeks of October prior to thedivestiture closing date of October 23, 2006, and will also include anyadditional costs we may incur related to businesses no longer owned.

**Critical Accounting Policies**

The following discussion and analysis of our financialcondition and results of operations is based upon our condensed consolidatedfinancial statements.  In preparingfinancial statements in conformity with accounting principles generallyaccepted in the United States, we must make estimates and assumptions thataffect the reported amount of assets and liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities at the date of ourfinancial statements.  Such estimates arebased upon historical experience and other assumptions believed to bereasonable given known circumstances. Actual results could differ from those estimates.  On an ongoing basis, we evaluate and updateour estimates, including those related to accounting for inventories, goodwill,pension benefits and reserves for litigation and environmental issues.  We consider the following policies criticalto understanding our financial position and results of operations.

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*Accounts Receivable*

Accounts receivable represent amounts due fromcustomers in the ordinary course of business. We are subject to losses from uncollectible receivables in excess of ourallowances.  We maintain allowances fordoubtful accounts for estimated losses from customers’ inability to makerequired payments.  In order to estimatethe appropriate level of this allowance, we analyze historical bad debts,customer concentrations, current customer creditworthiness, current economictrends and changes in customer payment patterns.  Our total allowance includes a specificallowance based on identification of customers where we feel full payment is indoubt, as well as a general allowance calculated based on our historical losseson accounts receivable as a percentage of historical sales.  We believe that our methodology has beeneffective in accurately quantifying our allowance for doubtful accounts and donot anticipate changing our methodology in the future.  However, if the financial conditions of anyof our customers were to deteriorate and impair their ability to make payments,additional allowances may be required in future periods.  We believe that all appropriate allowanceshave been provided.

*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.  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. Items with no usage for the past twelve months and no expected futureusage are considered obsolete, and are disposed of or fully reserved.  Reserves for excess inventory are determinedbased upon historical and anticipated usage as compared to quantities onhand.  Excess inventory is defined asinventory items with on-hand quantities in excess of one year’s usage andspecified percentages are applied to the excess inventory value in determiningthe reserve.  Our assumptions have notchanged significantly in the past, and we believe they are not likely to changein the foreseeable future.  We feel thatour assumptions regarding inventory valuation have been accurate in the past.

*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 are required to perform annual impairment tests ofour goodwill, and may be required to test more frequently in certaincircumstances.  We have elected toperform our annual impairment test in the fourth quarter of our fiscal year.  We have identified our power electronics andpower systems groups as reporting units under SFAS No. 142.  In assessing potential impairment, we makesignificant estimates and assumptions regarding the discounted future cashflows of our reporting units to determine the fair value of those reportingunits.    Such estimates include, but arenot limited to, projected future operating results, working capital ratios,cash flow, terminal values, market discount rates and tax rates.  We review the accuracy of our projections bycomparing them to our actual results annually, and have determined that,historically, our cash flow estimates used in determining the fair value of ourreporting units have been reasonably accurate. We use the results of this analysis as well as projected operatingresults to modify our estimates annually. However, if circumstances cause these estimates to change in the future,or if actual circumstances vary significantly from these assumptions, thiscould result in additional goodwill impairment charges.  We cannot predict the occurrence of futureevents that may adversely affect our reported goodwill balance.

*Pension Benefits*

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

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

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*Reservesfor Contingencies*

We periodically recordthe estimated impacts of various conditions, situations or circumstancesinvolving uncertain outcomes.  Theaccounting for such events is prescribed under SFAS No. 5, *Accountingfor Contingencies*.  SFAS No. 5defines a contingency as “an existing condition, situation, or set ofcircumstances 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.”

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

The accrual of a contingency involves considerable judgment on ourpart.  We use our internal expertise, andoutside experts as necessary, to help estimate the probability that a loss hasbeen incurred and the amount or range of the loss.

*Income Taxes*

We operate in numerous taxing jurisdictionsand are subject to a variety of income and related taxes.  Judgment is required in determining ourprovision for income taxes and related tax assets and liabilities.  We believe we have reasonably estimated ourtax positions for all jurisdictions for all open tax periods.  It is possible that, upon closure of our taxperiods, our final tax liabilities could differ from our estimates.

We record deferred income tax assets in tax jurisdictions where wegenerate losses for income tax purposes. We also record valuation allowances against these deferred tax assets inaccordance with SFAS No. 109, *Accounting for IncomeTaxes*, when, in our judgment, the deferred income tax assets willlikely not be realized in the foreseeable future.

**Results of Operations - Three Months Ended October1, 2006 and October 2, 2005**

NetSales and Gross Profit

Net sales for the first quarter of fiscal2007 were $22.5 million, an increase of 12.1% from the first quarter of fiscal2006 sales of $20.1 million.  Theincrease was due to higher sales of elevator products of $1.2 million andhigher sales of material handling products of $1.1 million.  Net sales by product line were as follows, inmillions:
|                     | ** ** | **Three Months Ended** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **October 1, 2006**    | ** ** | **October 2, 2005** | ** ** |
| Material  handling  |       | $                                | 17.0       |   | 75 | % | $ | 15.9 |   | 79 | % |
| Elevator            |       | 4.9                              |       | 22 | % | 3.7 |   | 18 | % |
| Alternative  energy |       | 0.6                              |       | 3 | % | 0.5 |   | 3 | % |
|                |       |                             |       |   |   |   |   |   |   |
| Total net sales     |       | $                                | 22.5       |   | 100 | % | $ | 20.1 |   | 100 | % |

 

Our fiscal 2007 firstquarter gross profit was $7.1 million, or 31.6% of sales, versus $6.4 million,or 32.1% of sales, in the first quarter of fiscal 2006.  The reduction in gross profit as a percentageof sales in the first quarter of fiscal 2007 as compared to the first quarterof fiscal 2006 was due to unfavorable sales mix within our material handlingproduct lines, combined with proportionately greater sales of elevatorproducts, as our gross profit margin in our material handling product line isslightly better than the margin in our elevator product line.

Researchand Development, Selling, General and Administrative

R&D expense was $1.0 million, or 4.5%of sales, in the first quarter of fiscal 2007, comparable to the fiscal 2006 firstquarter amount of $1.0 million, or 4.8% of sales.  We continue to invest in product developmentfor new markets and applications such as alternative energy products for windapplications.

SG&A expense was $6.7 million, or 29.6% of sales, in the firstquarter of fiscal 2007 versus $6.0 million, or 29.8% of sales, in the firstquarter of fiscal 2006.  Our firstquarter fiscal 2007 selling expenses were $2.4 million versus $2.0 million inthe first quarter of fiscal 2006, due to higher volume related commissions andhigher salary expense from increased headcount. General and administrative (G&A) expense was $4.3 million in thefirst quarter of fiscal 2007 compared to $4.0 million in the first quarter offiscal 2006, due to higher payroll-related expenses, partially offset by lowerrent expense and lower pension expense. In addition, the first quarter of fiscal 2006 included $0.3 million ofincome in G&A expense from the favorable resolution of a lease termination.

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Loss from Operations

Our loss from operations for the firstquarter of fiscal 2007 was $0.6 million compared to a loss from operations of$0.5 million for the first quarter of fiscal 2006.

InterestIncome and Expense 

Interest income was $0.3 million andinterest expense was $1.1 million in the first quarter of fiscal 2007.  Interest expense was $0.4 million andinterest income was negligible in the first quarter of fiscal 2006, and as aresult, net interest expense increased $0.4 million in the first quarter offiscal 2007 compared to the first quarter of fiscal 2006.  The increase in net interest expense in thefirst quarter of fiscal 2007 was due to higher outstanding debt balances, duemainly to borrowings associated with a patent arbitration award (see Note 5 ofNotes to Condensed Consolidated Financial Statements).  In November 2005, we deposited $22.6 millioninto escrow to satisfy payment of the arbitration award in the event our appealof the award is not successful.  Thedeposit was funded mainly by our $18.0 million term loan, which bore interestat an average rate of 12.8% while we received interest on the escrow deposit atan average rate of 5.0%.  As a result,both our reported interest income and expense increased in the first quarter offiscal 2007 as compared to the first quarter of fiscal 2006.

In addition, interest expense includesdeferred financing amortization expense of $0.2 million in the first quarter offiscal 2007 compared to $0.4 million in the first quarter of fiscal 2006, whichincluded the accelerated write off of deferred financing costs related to ourrefinancing of senior debt in September 2005.

As noted above, subsequent to the end ofthe first quarter of fiscal 2007, we used a portion of the proceeds from thedivestiture of our power electronics business to repay all of our outstandingdebt (see Notes 11and 12 of Notes to Condensed Consolidated Financial Statements).  As a result, we expect to have reducedinterest expense in the second fiscal quarter and throughout the balance offiscal 2007.

Provision for Income Taxes

Despite the pretax lossof $1.4 million in the first quarter of fiscal 2007 and the pretax loss of $0.9million in the first quarter of fiscal 2006, we recorded a tax provision of$0.3 million in each period, due to non-cash tax provisions related to goodwillamortization (see Note 10 of Notes to Condensed Consolidated FinancialStatements).

Loss from ContinuingOperations

We recorded a loss fromcontinuing operations of $1.6 million in the first quarter of fiscal 2007, or$0.06 loss per share on both a basic and diluted basis, compared to a loss fromcontinuing operations of $1.2 million in the first quarter of fiscal 2006, or$0.05 loss per share on both a basic and diluted basis.

Income (Loss) fromDiscontinued Operations

Our loss from discontinued operations for the first quarter of fiscal2007 was $1.6 million, or $0.05 loss per share on both a basic and dilutedbasis, compared to income from discontinued operations of $0.2 million, or$0.01 earnings per share on both a basic and diluted basis for the firstquarter of 2006.  Loss from discontinuedoperations in the first quarter of fiscal 2007 was comprised mainly of lossesin our power electronics business of $0.9 million, net of interest expense andprovision for income taxes, and losses in our telecom power business of $0.6million (see Note 2 of Notes to Condensed Consolidated FinancialStatements).  Income from discontinuedoperations of $0.2 million in the first quarter of fiscal 2006 was comprised ofnet income from our power electronics business of $0.6 million, partiallyoffset by expenses related to previously divested businesses of $0.4 million,mainly legal fees and other costs associated with the patent infringementclaim.

NetLoss

Our net loss was $3.2 million in thefirst quarter of fiscal 2007, or $0.11 loss per share, basic and diluted,compared to a net loss of $1.1 million in the first quarter of fiscal 2006, or$0.04 loss per share on both a basic and diluted basis.

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**Liquidity and Capital Resources**

Our cash balance increased $0.4 million during thefirst quarter of fiscal 2007, from $0.1 million at July 2, 2006 to $0.5 millionat October 1, 2006.  During the firstquarter of fiscal 2007, our accounts receivable balances increased $1.1 millionand inventories increased $1.0 million, while accounts payable balancesincreased $1.4 million and our long-term debt increased $0.9 million.  Cash paid for interest expense, net ofinterest income and deferred financing amortization expense, was $0.6 millionin the first quarter of fiscal 2007.  Ourcapital expenditures were less than $0.1 million, and we have no currentrequirements or plans for additional major capacity expansion.  We currently anticipate capital expendituresin fiscal 2006 to be less than $2 million. The expected amount of capital expenditures could change depending uponchanges in revenue levels, our financial condition and the general economy.

At October 1, 2006, long-term borrowings including current portion andamounts due under capital lease obligations were $28.4 million (see Note 11 ofNotes to Condensed Consolidated Financial Statements).  As a result of lower than planned performanceand certain expenses of discontinued operations, we were in violation ofcertain financial covenants included in our credit agreements for the quarterended July 2, 2006.  During the fiscalquarter ended October 1, 2006, we entered into a forbearance agreement with ourlenders whereby the lenders agreed not to take any action with respect to thecovenant violations through October 31, 2006, pending the divestiture of theour power electronics business.  Inaddition, Ableco agreed to defer the initial $1 million term loan principalpayment, which was due in September 2006, to October 31, 2006.  As discussed in Notes 2 and 12 of the Notesto Condensed Consolidated Financial Statements, on October 23, 2006, wecompleted the divestiture of our power electronics business.  We used a portion of the proceeds from thedivestiture to repay all borrowings outstanding under our term loan andrevolving credit facility.  The revolvingcredit facility remains in place and we expect to modify the terms of thefacility based on changes in our domestic asset base from the divestiture ofthe power electronics business, and the resulting impact on available borrowingbase amounts.  The term loan was repaidprior to the December 2007 expiration date pursuant to the terms of the termloan agreement in exchange for a prepayment penalty of $325 from us to Ableco.  The debt repayment and related costs will bereflected in our second quarter fiscal 2007 results.  At November 7, 2006, after repayment of all remaining outstanding debt under U.S. loanagreements, we had approximately $60.3 million in cash, including $22.6 millionin escrow.

As a result of the decline in interest rates and stockmarket equity values over the past several years, the accumulated benefitobligation of our defined benefit pension plan exceeds plan assets as ofOctober 1, 2006.  While we did not makeany contributions to the plan during the first quarter of fiscal 2007, as nonewere mandated, we intend to use a portion of the proceeds from the divestitureof our power electronics business to contribute to our pension fund in fiscal2007, likely during the second fiscal quarter. Based upon current contribution credits available under pension fundingregulations, actuarial projections indicate that no mandatory contributions tothe plan would be required through fiscal year 2007.  Depending upon changes in asset values andinterest rates, as well as any discretionary contributions made by us in theinterim period, required contributions in periods subsequent to fiscal 2007could be significant.

We are subject to certain potentialenvironmental and legal liabilities associated primarily with past divestituresof discontinued operations (see Note 5 of Notes to Condensed ConsolidatedFinancial Statements).   In the fourthquarter of fiscal 2005, a decision was rendered in a patent infringement actionbrought against us by Ole K. Nilssen.  Insettlement of pending litigation, we agreed to submit the matter to bindingarbitration, and in May 2005, the arbitrator awarded damages to Mr. Nilssen of$23.4 million, to be paid within ten days of the award.  Nilssen’s counsel filed a motion to enter theaward in U.S. District Court for the Northern District of Illinois, and wefiled a counter-motion to vacate the award on grounds that it was fraudulentlyobtained.  Our request for oral argument was granted and the hearing washeld on October 19, 2005.  The judge isexpected to render his decision by mail after further consideration.  An unfavorable decision by the Court couldresult in payment of the award of $22.6 million, net of previously paidamounts, to Nilssen.  In November 2005,we deposited $22.6 million into an escrow account to fund the Nilssenarbitration award in the event that our appeal of the award is not successfuland we are required to pay Nilssen (see Note 5 of Notes to CondensedConsolidated Financial Statements).

Wedo not have any off-balance sheet arrangements or variable interest entities asof October 1, 2006.

We believe our existing cash balances, internally generated cash flows,and borrowing capacity under our revolving credit facility will be sufficientto fund anticipated operational needs, capital expenditures and othercommitments over the next 12 months.

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**Caution Regarding Forward-LookingStatements and Risk Factors**

This document, including documents incorporated herein by reference,contains “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 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 statements are inherently subject to risksand uncertainties which in many cases are beyond our control and which cannotbe 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 thisdocument speak only as of the date of this document or, in the case of anydocument incorporated by reference from another document, the date of thatdocument.  We do not have any obligation to publicly update or revise anyforward-looking statement contained or incorporated by reference in thesedocuments to reflect changed assumptions, the occurrence of unanticipated eventsor changes to future operating results over time.

Our future results of operations and the other forward-lookingstatements contained in this filing, including this section titled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”,involve a number of risks and uncertainties.  In particular, thestatements regarding future economic conditions, our goals and strategies, newproduct introductions, penetration of new markets, projections of salesrevenues, manufacturing costs and operating costs, pricing of our products andraw materials required to manufacture our products, gross margin expectations,relocation and outsourcing of production capacity, capital spending, researchand development expenses, the outcome of pending legal proceedings andenvironmental matters, tax rates, sufficiency of funds to meet our needsincluding contributions to our defined benefit pension plan, and our plans forfuture operations, as well as our assumptions relating to the foregoing, areall subject to risks and uncertainties.

A number of factorscould cause our actual results to differ materially from ourexpectations.  We are subject to all of the business risks facing publiccompanies, including business cycles and trends in the general economy,financial market conditions, changes in interest rates, demand variations andvolatility, potential loss of key personnel, supply chain disruptions,government legislation and regulation, and natural causes.  Additionalrisks and uncertainties include but are not limited to industry conditions,competitive factors such as technology and pricing pressures, businessconditions in 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 our ultimate costs ofdoing business exceed present estimates. This list of risk factors is not all-inclusive, as other factors andunanticipated events could adversely affect our financial position or resultsof operations.  Further information onfactors that could affect our financial results can be found in our Form 10-Kfiling with the Securities and Exchange Commission for the year ended July 2,2006, under the heading “Risk Factors Affecting the Company’s Outlook”.

**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, from time to time we selectively use specific financial instruments.Hedging transactions can be entered into under Company policies and proceduresand are monitored monthly. Company policy prohibits the use of such financialinstruments for trading or speculative purposes. There have been no materialchanges in the reported market risks that we reported in our Annual Report onForm 10-K dated July 2, 2006.  Adiscussion of our accounting policies for derivative financial instruments isincluded in the Summary of Significant Accounting Policies under Note 1 in theNotes to Condensed Consolidated Financial Statements.  Our continuing operations did not have anyoutstanding hedge instruments or contracts at October 1, 2006 and July 2, 2006.

***Interest Rates***

The fair value of ourdebt was $28.4 million at October 1, 2006, equal to the carrying value at thatdate.  The fair value of our debt isequal to the borrowings outstanding from domestic banks and small amounts owedunder capital lease arrangements.  Forour debt outstanding at October 1, 2006, a hypothetical 10% adverse change ininterest rates would increase our annual interest expense by an estimated $0.2million.  Prospectively we expect ourinterest expense to decrease due to lower outstanding debt levels, assubsequent to October 1, 2006, we have fully repaid all of our debt outstandingunder our term loan and revolving credit facility with proceeds from thedivestiture of our power electronics business (see Liquidity and CapitalResources and Note 11 of Notes to Condensed Consolidated Financial Statements).

***Foreign Currency Exchange Rates***

We generally do notenter into foreign exchange contracts to protect against reductions in valueand volatility of future cash flows caused by changes in exchange rates, but wemay selectively enter into foreign exchange contracts to hedge certainexposures.  Gains and losses on thesenon-U.S.-currency investments would generally be offset by corresponding lossesand gains on the related hedging instruments, resulting in negligible netexposure.

We had no foreigncurrency contracts outstanding at October 1, 2006 and July 2, 2006.

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**Item4 – Controls and Procedures**

As required by Section 404 of the Sarbanes Oxley Act of 2002, wecontinue to test and evaluate our internal control procedures to determinewhether our controls are designed and operating effectively.  We concludedthat our disclosure controls and procedures were not effective as of July 2,2006 because of a material weakness in internal control over financialreporting related to our European subsidiary, Magnetek S.p.A., which lackedadequate levels of personnel to timely perform certain critical accountingactivities, including the review and approval of accounting adjustments andaccount reconciliations.

In connection with this Form 10-Q, under the direction of our ChiefExecutive Officer and Chief Financial Officer, we evaluated our disclosurecontrols and procedures, as defined in Exchange ActRules 13a-15(e) and 15d-15(e), and internal control over financialreporting and concluded that (i) our disclosure controls and procedures werenot effective as of October 1, 2006, as the material weakness describedabove related to our European subsidiary, Magnetek S.p.A. was not remediated asof October 1, 2006 and (ii) no change in internal control over financialreporting occurred during the quarter ended October 1, 2006, that hasmaterially affected, or is reasonably likely to materially affect, suchinternal control over financial reporting.

On October 23, 2006, we completed the divestiture of our powerelectronics group, which included the sale of Magnetek S.p.A., therefore thismaterial weakness is no longer applicable as of the date of this filing.

**PART II - OTHER INFORMATION**

**Item 1 – Legal Proceedings**

We are named as a party in two product liability lawsuits related tothe Telemotive Industrial Controls business that we acquired inDecember 2002 through the purchase of the stock of MXT Holdings, Inc. Both claims were tendered to the insurance companies that providedcoverage for MXT Holdings, Inc. against such claims and the defense andindemnification has been accepted by the carriers, subject to a reservation ofrights.  Management believes that theinsurers will bear all liability, if any, with respect to both cases andthat the proceedings, individually or in the aggregate, will not have amaterial adverse effect on the Company’s results of operations or financialposition.

In addition to the two cases described above, in August 2006, Pamela L.Carney, Administrator of the Estate of Michael J. Carney, filed a lawsuit inthe Court of Common Pleas of Westmoreland County, Pennsylvania, against us andother defendants, alleging that a product manufactured by the TelemotiveIndustrial Controls business contributed to an accident that resulted in thedeath of Michael J. Carney in August 2004. The claim has been tendered to our insurance carrier and we haveretained legal counsel to represent us in this matter.  The plaintiff’s claim for damages is unknownat this time, but management believes that our insurer will bear all liabilityfor the claim, if any.

In April 1998, Ole K. Nilssen filed a lawsuit in the U.S. DistrictCourt for the Northern District of Illinois alleging infringement by us ofseven of his patents pertaining to electronic ballast technology, and seekingunspecified damages and injunctive relief to preclude us from making, using orselling products allegedly infringing his patents. We denied that our productsinfringed any valid patent and filed a response asserting affirmative defenses,as well as a counterclaim for a judicial declaration that our products do not infringethe patents asserted by Mr. Nilssen and also that the asserted patents areinvalid. In June 2001, we sold our lighting business to Universal LightingTechnologies, Inc. (“ULT”), and agreed to provide a limitedindemnification against certain claims of infringement that Nilssen mightallege against ULT. In April 2003, Nilssen’s lawsuit and the counterclaimswere dismissed with prejudice and both parties agreed to submit limited issuesin dispute to binding arbitration before an arbitrator with a relevanttechnical background. The arbitration occurred in November 2004 and a decisionawarding Nilssen $23.4 million was issued on May 3, 2005, to be paid within tendays of the award. Nilssen’s counsel filed a motion to enter the award in U.S.District Court for the Northern District of Illinois, and we filed acounter-motion to vacate the award for a number of reasons, including that theaward was fraudulently obtained.  Our request for oral argument wasgranted and the hearing took place on October 19, 2005.  A decision has not been announced.  An unfavorable decision by the Court wouldlikely result in payment of the award to Nilssen, which would have a materialadverse effect on our cash flows.

In February 2003, Nilssen filed a second lawsuit in the U.S. DistrictCourt for the Northern District of Illinois alleging infringement by ULT oftwenty-nine of his patents pertaining to electronic ballast technology, andseeking unspecified

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damages and injunctive relief to preclude ULT from making, using orselling products allegedly infringing his patents. ULT made a claim forindemnification, which we accepted, subject to the limitations set forth in thesale agreement.  The case is now pendingin the Central District of Tennessee. Nilssen voluntarily dismissed all but four of the patents from thelawsuit.  We deny that the products for which we have an indemnificationobligation to ULT infringe any valid patent and responded on behalf of ULTasserting affirmative defenses, as well as a counterclaim for a judicialdeclaration that the patents are unenforceable and invalid and that theproducts do not infringe Nilssen’s patents.  ULT requested are-examination of the patents at issue by the Patent and Trademark Office andthe request was granted.  Meanwhile, thecase against ULT has been stayed pending Nilssen’s appeal of an unfavorabledecision against him in another case that could influence the outcome of hislawsuits against ULT.  We will continueto aggressively defend the claims against ULT that are subject to defense andindemnification; however, an unfavorable decision could have a material adverseeffect on our financial position, cash flows and results of operations.

**Item 1A – Risk Factors**

There have been no material changes to the riskfactors disclosed in our Annual Report on Form 10-K for the year ended July 2,2006.

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

Therewere no unregistered sales of equity securities and there were no repurchasesof equity securities during our first fiscal quarter ended October 1, 2006.

**Item3 – Defaults upon Senior Securities**

None.

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

(a)                                     TheAnnual Meeting of Stockholders of the Company was held on October 25, 2006.

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

Andrew G. Galef

Thomas G. Boren

Dewain K. Cross

Yon Yoon Jorden

Paul J. Kofmehl

Mitchell I. Quain

RobertE. Wycoff

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

 

| Nominee            | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------------|------------|------------|------------|--------------|------------|
|               |       |       |       |         |       |
| Andrew G. Galef    |       | 26,368,688 |       | 693,753      |       |
| Thomas G. Boren    |       | 26,604,230 |       | 458,211      |       |
| Dewain K. Cross    |       | 26,279,463 |       | 784,978      |       |
| Yon Yoon Jorden    |       | 26,395,536 |       | 666,905      |       |
| Paul J. Kofmehl    |       | 26,453,165 |       | 609,296      |       |
| Mitchell I.  Quain |       | 26,403,186 |       | 659,255      |       |
| Robert E. Wycoff   |       | 26,572,509 |       | 489,932      |       |

 

(d)                                    Theappointment of Ernst & Young LLP as the Company’s independent registeredpublic accounting firm for fiscal 2007 was ratified.  The votes cast for and against the appointment,and the votes that abstained were as follows:

 

| For        | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 26,871,856 |       | 14,275      |       | 176,310     |       |

 

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(e)                                     TheSecond Amendment to the Magnetek, Inc. Amended and Restated Director andOfficer Compensation and Deferral Investment Plan was approved.  The votes cast for and against the approval,the votes that abstained, and the non-votes were as follows:

 

| For       | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|---------------|------------|
| 9,941,944 |       | 5,761,400   |       | 46,657      |       | 11,312,440    |       |

 

**Item5 – Other Information**

None.

**Item6 - Exhibits**

(a)                                  Indexto Exhibits
| Exhibit    | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                            |
|------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.**    | ** ** | **Note**   | ** ** | **Exhibit Description**                                                                                                                                                                                               |
| ** ** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                            |
| 10.1       |       | (1)        |       | Agreement for the Sale of Magnetek, Inc. Power  Electronics Group dated as of September 28, 2006, by and between Magnetek,  Inc. and Power-One, Inc.                                                                  |
|       |       |       |       |                                                                                                                                                                                                                  |
| 10.2       |       | (1)        |       | Forbearance Agreement dated as of September 22,  2006, among Magnetek, Inc. and certain subsidiaries party thereto, the  lenders party thereto and Ableco Finance LLC, as collateral agent and  administrative agent. |
|       |       |       |       |                                                                                                                                                                                                                  |
| 10.3       |       | (1)        |       | Forbearance Agreement dated as of September 22,  2006, among Magnetek, Inc. and certain subsidiaries party thereto, the  lenders party thereto and Wells Fargo Foothill, Inc. as administrative agent.                |
|       |       |       |       |                                                                                                                                                                                                                  |
| 10.4       |       | (2)        |       | Magnetek, Inc. Second Amended and Restated Director  Compensation and Deferral Investment Plan.                                                                                                                       |
|       |       |       |       |                                                                                                                                                                                                                  |
| 31.1       |       | **         |       | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                                      |
|       |       |       |       |                                                                                                                                                                                                                  |
| 31.2       |       | **         |       | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                                      |
|       |       |       |       |                                                                                                                                                                                                                  |
| 32.1       |       | **         |       | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                   |

 

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Notes:

**                      Filedwith this Report on Form 10-Q.

(1)                      Previouslyfiled with the Company’s Form 10-K for fiscal year ended July 2, 2006, filedSeptember 29, 2006, and incorporated herein by this reference.

(2)                      Previouslyfiled as Appendix A to the Company’s definitive proxy statement, filed September29, 2006, and incorporated herein by this reference.

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                          |   |  MAGNETEK, INC.                                                         |
|--------------------------|--------|------------------------------------------------------------------------------|
|                     |   |  (Registrant)                                                           |
|                     |   |                                                                         |
|                     |   |                                                                         |
| Date: November  10, 2006 |   | /s/ David P. Reiland                                                         |   |
|                     |   | David P. Reiland                                                             |
|                     |   | President and  Chief Executive Officer                                       |
|                     |   | (Duly authorized officer of the Registrant  and principal executive officer) |
|                     |   |                                                                         |
|                     |   |                                                                         |
| Date: November  10, 2006 |   | /s/ Marty J. Schwenner                                                       |   |
|                     |   | Marty J.  Schwenner                                                          |
|                     |   | Vice-President  and Chief Financial Officer                                  |
|                     |   | (Duly authorized officer of the Registrant  and principal financial officer) |

 

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