**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington, D. C. 20549**

 

**FORM 10-Q**

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

 

**Commission file number 1-10233**

 

**MAGNETEK, INC.**

(Exact name of Registrant as specified in its charter)

 
| **DELAWARE**                                                                        | ** ** | **95-3917584**         |
|-------------------------------------------------------------------------------------|------------|------------------------|
| (State or other jurisdiction of                                                     |       | (I.R.S. Employer       |
| incorporation or organization)                                                      |       | Identification Number) |
|                                                                                |       |                   |
| **8966 Mason Ave.**                                                                 |
| **Chatsworth, California 91311**                                                    |
| (Address of principal executive offices)                                            |
|                                                                                |
| **(818) 727-2216**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |
| ** **                                                                          |
| (Former name, former address and former fiscal year,  if changed since last report) |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes  ý  No  o

 

Indicateby check mark whether the registrant is considered an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).   Yes  ý  No  o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes  o  No  ý

 

The number of sharesoutstanding of Registrant’s Common Stock, as of October 31, 2005, was 29,090,834shares.

 

 

----

 

2006 MAGNETEK FORM 10-Q

 

TABLE OF CONTENTS FOR THE QUARTERLY REPORT ON FORM 10Q

FOR THE FISCAL QUARTER ENDED OCTOBER 2, 2005

 

MAGNETEK, INC.

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

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1 – Financial Statements**

 

MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (amounts in thousands, exceptper share data)

(unaudited)

 
| ** **                                                           | ** ** | **Three Months Ended**                | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                           | ** ** | **(13 Weeks)  October 2,  2005** | ** ** | **(14 Weeks)  October 3,  2004** | ** ** |
| ** **                                                           | ** ** | ** **                            | ** ** | **(restated)** | ** ** |
|                                                                 |       |                                  |       |   |   |
| Net sales                                                            |       | $                                     | 56,511     |   | $ | 66,208 |   |
| Cost of sales                                                        |       | 42,023                                |       | 50,087 |   |
|                                                                 |       |                                  |       |   |   |
| Gross profit                                                         |       | 14,488                                |       | 16,121 |   |
| Research and  development                                            |       | 3,529                                 |       | 3,495 |   |
| Selling, general  and administrative                                 |       | 9,937                                 |       | 10,526 |   |
|                                                                 |       |                                  |       |   |   |
| Income from  operations                                              |       | 1,022                                 |       | 2,100 |   |
| Interest expense                                                     |       | 346                                   |       | 307 |   |
| Other expense                                                        |       | 376                                   |       | 57 |   |
|                                                                 |       |                                  |       |   |   |
| Income from  continuing operations before provision for income taxes |       | 300                                   |       | 1,736 |   |
| Provision for  income taxes                                          |       | 950                                   |       | 635 |   |
| Net income  (loss) from continuing operations                        |       | (650                                  | )          | 1,101 |   |
|                                                                 |       |                                  |       |   |   |
| Loss from  discontinued operations                                   |       | (404                                  | )          | (561 | ) |
|                                                                 |       |                                  |       |   |   |
| Net income  (loss)                                                   |       | $                                     | (1,054     | ) | $ | 540 |   |
|                                                                 |       |                                  |       |   |   |
| Earnings (loss)  per common share                                    |       |                                  |       |   |   |
|                                                                 |       |                                  |       |   |   |
| Basic and  diluted:                                                  |       |                                  |       |   |   |
| Net income  (loss) from continuing operations                        |       | $                                     | (0.02      | ) | $ | 0.04 |   |
| Loss from  discontinued operations                                   |       | (0.02                                 | )          | (0.02 | ) |
| Net income  (loss)                                                   |       | $                                     | (0.04      | ) | $ | 0.02 |   |
|                                                                 |       |                                  |       |   |   |
| Weighted average  shares outstanding:                                |       |                                  |       |   |   |
| Basic                                                                |       | 28,868                                |       | 28,501 |   |
| Diluted                                                              |       | 28,868                                |       | 29,252 |   |

 

See accompanying notes

 

3

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MAGNETEK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

 
| ** **                                       | ** ** | **October 2,  2005** | ** ** | **July 3,  2005** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**           | ** ** | ** **             | ** ** |
| ASSETS                                           |       |                      |       |                   |       |
|                                             |       |                      |       |                   |       |
| Current assets:                                  |       |                      |       |                   |       |
| Cash                                             |       | $                         | 2,181      |                   | $          | 6,854 |   |
| Accounts receivable, net                         |       | 52,805                    |       | 54,022                 |       |
| Inventories                                      |       | 51,394                    |       | 49,950                 |       |
| Prepaid expenses and other                       |       | 7,726                     |       | 5,713                  |       |
| Assets held for sale                             |       | 4,480                     |       | 4,727                  |       |
| Total current assets                             |       | 118,586                   |       | 121,266                |       |
|                                             |       |                      |       |                   |       |
| Property, plant  and equipment                   |       | 131,508                   |       | 129,473                |       |
| Less-accumulated  depreciation and amortization  |       | 100,088                   |       | 97,534                 |       |
| Net property,  plant and equipment               |       | 31,420                    |       | 31,939                 |       |
|                                             |       |                      |       |                   |       |
| Goodwill                                         |       | 63,790                    |       | 63,656                 |       |
| Other assets                                     |       | 12,383                    |       | 12,319                 |       |
| Total Assets                                     |       | $                         | 226,179    |                   | $          | 229,180 |   |
|                                             |       |                      |       |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY       |       |                      |       |                   |       |
|                                             |       |                      |       |                   |       |
| Current  liabilities:                            |       |                      |       |                   |       |
| Accounts payable                                 |       | $                         | 32,264     |                   | $          | 36,974 |   |
| Accrued liabilities                              |       | 8,716                     |       | 8,523                  |       |
| Accrued arbitration award                        |       | 22,602                    |       | 22,602                 |       |
| Liabilities held for sale                        |       | 1,439                     |       | 1,220                  |       |
| Current portion of long-term debt                |       | 5,043                     |       | 5,702                  |       |
| Total current liabilities                        |       | 70,064                    |       | 75,021                 |       |
|                                             |       |                      |       |                   |       |
| Long-term debt,  net of current portion          |       | 19,892                    |       | 19,528                 |       |
|                                             |       |                      |       |                   |       |
| Pension benefit  obligations, net                |       | 71,518                    |       | 70,568                 |       |
|                                             |       |                      |       |                   |       |
| Other long-term  obligations                     |       | 7,871                     |       | 7,627                  |       |
|                                             |       |                      |       |                   |       |
| Deferred income  taxes                           |       | 10,813                    |       | 10,376                 |       |
|                                             |       |                      |       |                   |       |
| Commitments and  contingencies                   |       |                      |       |                   |       |
|                                             |       |                      |       |                   |       |
| Stockholders’  equity                       |       |                      |       |                   |       |
| Common stock                                     |       | 286                       |       | 286                    |       |
| Paid in capital in excess of par value           |       | 128,837                   |       | 128,664                |       |
| Retained earnings                                |       | 38,964                    |       | 40,018                 |       |
| Accumulated other comprehensive loss             |       | (122,066                  | )          | (122,908               | )          |
| Total stockholders’ equity                  |       | 46,021                    |       | 46,060                 |       |
|                                             |       |                      |       |                   |       |
| Total  Liabilities and Stockholders’ Equity |       | $                         | 226,179    |                   | $          | 229,180 |   |

 

See accompanying notes

 

4

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MAGNETEK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(amounts in thousands)

(unaudited)

 
| ** **                                                                                                                     | ** ** | **Three Months Ended**                | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **(13 Weeks)  October 2,  2005** | ** ** | **(14 Weeks)  October 3,  2004** | ** ** |
| ** **                                                                                                                     | ** ** | ** **                            | ** ** | **(restated)** | ** ** |
| Cash flows from  continuing operating activities:                                                                              |       |                                  |       |   |   |
| Net income  (loss) from continuing operations                                                                                  |       | $                                     | (650       | ) | $ | 1,101 |   |
| Adjustments to reconcile net income (loss) from continuing  operations to net cash provided by (used in) operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                                                                  |       | 2,286                                 |       | 2,459 |   |
| Tax refund proceeds, net                                                                                                       |       | —                                |       | 3,332 |   |
| Stock based compensation expense                                                                                               |       | 82                                    |       | — |   |
| Changes in operating assets and liabilities                                                                                    |       | (3,771                                | )          | (2,944 | ) |
|                                                                                                                           |       |                                  |       |   |   |
| Total  adjustments                                                                                                             |       | (1,403                                | )          | 2,847 |   |
| Net cash  provided by (used in) continuing operating activities                                                                |       | (2,053                                | )          | 3,948 |   |
|                                                                                                                           |       |                                  |       |   |   |
| Cash flows from  discontinued operations:                                                                                      |       |                                  |       |   |   |
| Loss from discontinued operations                                                                                              |       | (404                                  | )          | (561 | ) |
| Adjustments to reconcile loss from discontinued  operations to net cash provided by (used in) discontinued operations:         |       |                                  |       |   |   |
| Depreciation and amortization                                                                                                  |       | —                                |       | 31 |   |
| Changes in operating assets and liabilities                                                                                    |       | 466                                   |       | (779 | ) |
| Capital expenditures                                                                                                           |       | —                                |       | (16 | ) |
|                                                                                                                           |       |                                  |       |   |   |
| Net cash  provided by (used in) discontinued operations                                                                        |       | 62                                    |       | (1,325 | ) |
| Net cash  provided by (used in) operating activities                                                                           |       | (1,991                                | )          | 2,623 |   |
| Cash flows from  investing activities:                                                                                         |       |                                  |       |   |   |
| Capital expenditures                                                                                                           |       | (1,163                                | )          | (1,633 | ) |
| Net cash used in  investing activities                                                                                         |       | (1,163                                | )          | (1,633 | ) |
|                                                                                                                           |       |                                  |       |   |   |
| Cash flow from  financing activities:                                                                                          |       |                                  |       |   |   |
| Proceeds from issuance of common stock                                                                                         |       | 91                                    |       | 98 |   |
| Borrowings (repayments) under line-of-credit  agreements                                                                       |       | (140                                  | )          | 435 |   |
| Repayment of long term notes                                                                                                   |       | (90                                   | )          | (300 | ) |
| Principal payments under capital lease obligations                                                                             |       | (65                                   | )          | (40 | ) |
| Increase in deferred financing costs                                                                                           |       | (1,315                                | )          | (20 | ) |
| Net cash  provided by (used in) financing activities                                                                           |       | (1,519                                | )          | 173 |   |
|                                                                                                                           |       |                                  |       |   |   |
| Net increase  (decrease) in cash                                                                                               |       | (4,673                                | )          | 1,163 |   |
| Cash at the  beginning of the period                                                                                           |       | 6,854                                 |       | 2,318 |   |
|                                                                                                                           |       |                                  |       |   |   |
| Cash at the end  of the period                                                                                                 |       | $                                     | 2,181      |   | $ | 3,481 |   |

 

See accompanying notes

 

5

----

 

MAGNETEK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

OCTOBER 2, 2005

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

(unaudited)

 

1.                                       Basisof Presentation

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of Magnetek, Inc. and its subsidiaries (the “Company”).  Allsignificant intercompany accounts and transactions have been eliminated.

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial reporting and with the instructions to Form 10-Q andArticle 10 of Regulation S-X.  Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  For further information, refer to thefinancial statements and footnotes thereto included in the Company’s Form 10-Kfor the year ended July 3, 2005 filed with the Securities and ExchangeCommission.  In the Company’s opinion,these unaudited statements contain all adjustments, consisting of normalrecurring adjustments, necessary to present fairly the financial position of theCompany as of October 2, 2005, and the results of its operations and itscash flows for the three months then ended. Results for the three-months ended October 2, 2005 are notnecessarily indicative of results that may be experienced for the full fiscalyear.

 

TheCompany uses a fifty-two, fifty-three week fiscal year ending on the Sundaynearest to June 30.  Fiscal quartersare the thirteen or fourteen week periods ending on the Sunday nearest September 30,December 31, March 31 and June 30.  The three-month periods ended October 2,2005 and October 3, 2004 contained thirteen and fourteen weeks,respectively.

 

2.             Summaryof Significant Accounting Policies

 

Restatement- The accompanying condensed consolidated financial statements have beenrestated for the three month period ended October 3, 2004.

 

Since fiscal 2002 the Company has providedvaluation reserves against its U.S. deferred tax assets that result in a zeronet deferred tax position (net deferred assets equal to deferred tax liabilities).  In its 2005 fiscal year-end review of its taxaccounts, the Company determined that a portion of its deferred tax liabilityrelated to tax-deductible amortization of goodwill that is no longer amortizedfor financial reporting purposes. Under applicable accounting rules, suchdeferred tax liabilities are considered to have an indefinite life and aretherefore ineligible to be considered as a source of future taxable income inassessing the realization of deferred tax assets.

 

The Company has determined that such deferredtax liabilities existed at July 3, 2005, and therefore increased its valuationallowance for deferred tax assets and the related provision for income taxes forfiscal year 2005 by $1.6 million. The Company further determined that the increasedprovision for income taxes should have been recorded on a pro-rata basisthroughout fiscal year 2005, and as a result, the Company has restated itsquarterly results for fiscal 2005.  Theimpact of this restatement on the three months ended October 3, 2004 was anincrease in the Company’s valuation allowance for deferred tax assets andrelated provision for income taxes of $0.4 million.

 

The restatement did not have a material impacton the Company’s financial position at the end of the reported period and hadno impact on the Company’s cash flows for the restated period.

 

6

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Thetable below reflects the impact of the restatement on the Company’s results ofoperations for three months ended October 3, 2004:

 

ConsolidatedStatements of Operations

 
| **For the three months ended  (Amounts in thousands except per share amounts)** | ** **                   | **October 3, 2004** | ** **       |
|---------------------------------------------------------------------------------|------------------------------|--------------------------|------------------|
| ** **                                                                      | **As  previously  reported** | ** **               | **As  restated** | ** ** |
|                                                                            |                         |                     |             |   |   |
| Provision for  income taxes                                                     |                         | $                        | 235              |   | $ | 635 |   |
|                                                                            |                         |                     |             |   |   |
| Net income                                                                      |                         | $                        | 940              |   | $ | 540 |   |
|                                                                            |                         |                     |             |   |   |
| Net income per  common share, basic and diluted                                 |                         | $                        | 0.03             |   | $ | 0.02 |   |

 

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

 

*AccountsReceivable*

 

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

 

*Inventories*

 

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

 

*Reserves for Litigation and EnvironmentalIssues*

 

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

 

SFAS No. 5 does not permit theaccrual of gain contingencies under any circumstances.  For loss contingencies, the loss must beaccrued if (1) information is available that indicates it is probable thatthe loss has been incurred, given the likelihood of uncertain events; and (2) thatthe amount of the loss can be reasonably estimated.

 

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

 

*IncomeTaxes*

 

TheCompany uses the liability method to account for income taxes.  The preparation of consolidated financial statementsinvolves estimating the Company’s current tax exposure together with assessingtemporary differences resulting from differing treatment of items for tax andaccounting purposes.  These differencesresult in deferred tax assets and liabilities, which are included in theconsolidated balance sheets.  Anassessment of the recoverability of the deferred tax assets is made, and avaluation allowance is established based upon this assessment.

 

7

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Withthe exception of approximately $3.0 million of foreign earnings that theCompany repatriated during the three months ended October 2, 2005 forvarious financing needs, the Company presently intends to reinvest any earningsoverseas indefinitely.

 

*Pension Benefits*

 

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

 

RevenueRecognition – The Company’s policy is to recognize revenuewhen the earnings process is complete.  The criteria used in making thisdetermination are persuasive evidence that an arrangement exists, delivery hasoccurred, the sales price is fixed or determinable, and collectibility isreasonably assured.  Sales are recorded net of returns and allowances, whichare estimated using historical data at the time of sale.

 

Revenueis recognized upon shipment, except in those few cases where terms of shipmentare FOB destination, or where product is shipped to customers with consignmentstock agreements, wherein revenue is recognized when the customer receives theproduct, or removes the product from consignment stock.  With the foregoingexceptions, terms of shipment are FOB shipping point, and payment is notcontingent upon resale or any other matter other than passage of time. Amounts billed to customers for shipping costs are reflected in net sales;shipping costs are reflected in cost of sales.

 

Salesto distributors are recorded with appropriate reserves for future returns inaccordance with SFAS No. 48, *Revenue Recognition WhenRight of Return Exists*, and generally do not include futureinstallation obligations or acceptance requirements.

 

Stock-BasedCompensation – On December 16, 2004, the FinancialAccounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), *Share-Based Payment*, which is a revision of *SFAS No. 123, Accounting for Stock-Based Compensation*. SFAS No. 123(R) supersedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees,* and amends SFAS No. 95, *Statement of Cash Flows*. Generally, the approach in SFAS No. 123(R)is similar to the approach described in SFAS No. 123.  However, SFAS No. 123(R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the income statement based on their fairvalues. Pro forma disclosure is no longer an alternative.

 

Priorto the quarter ending October 2, 2005, as was permitted under SFAS No. 123,*Accounting for Stock-Based Compensation*,the Company accounted for stock-based awards using the intrinsic-value methodunder APB No. 25.  Under APB No. 25,the Company recognized no compensation expense with respect to such awards, asthe exercise prices of stock option grants were always equal to or greater thanthe market price of the stock at the grant date.  Accordingly, no stock-based employeecompensation expense for stock options is reflected in net income in theaccompanying condensed consolidated financial statements for the three-monthperiod ended October 3, 2004.

 

EffectiveJuly 4, 2005, the Company adopted SFAS No. 123 (R), which requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the Company’s financial statements based upontheir fair values.  The Company selectedthe modified prospective method of adoption in which compensation cost isrecognized beginning with the effective date. Compensation cost recognized for the three months ended October 2,2005 is the same as that which would have been recognized had the fair valuemethod of SFAS No. 123 been applied from its original effective date.  In accordance with the modified prospectivemethod of adoption, the Company’s results of operations for prior periods havenot been restated.

 

In thefourth quarter of fiscal 2005, the Company approved the acceleration of thevesting of “underwater” unvested stock options held by the Company’s currentemployees, including executive officers, on June 1, 2005. No stock optionsheld 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), as described above.  As a result ofthe acceleration, the Company reduced the stock option compensation expense itotherwise would be required to record by approximately $1.9 million in fiscal2006, $1.4 million in fiscal 2007 and less than $0.1 million in fiscal 2008 ona pre-tax basis, resulting in an additional $3.4 million of pro-forma expensein fiscal 2005.  The accelerated vestingwas a modification of outstanding awards as defined by FAS 123, which resultedin incremental pro-forma compensation expense of $0.3 million in fiscal 2005.

 

8

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TheCompany did not issue any stock options in the first quarter of fiscal 2006.  In August 2005, the Company granted500,000 shares of restricted stock with a fair value of $2.77 per share.  The restricted shares fully vest on January 1,2009.  The total estimated compensationexpense related to the grant of $1.4 million will be recorded ratably from thegrant date through the vesting date. Compensation expense included in the condensed consolidated statement ofoperations for the three months ended October 2, 2005, is $46.  The remaining portion of stock-basedcompensation expense recorded in the three-month period ended October 2,2005, approximately $36, relates to nonvested director stock option grants.

 

Thefollowing table illustrates the effect on net income (loss) and earnings (loss)per share as if the fair value method had been applied to all outstanding andunvested awards in each period:

 
| ** **                                                                                                                    | ** ** | **Three Months Ended**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|
| **(Amounts in thousands, except per share amounts)**                                                                          | ** ** | **October 2,  2005** | ** ** | **October 3,  2004** | ** ** |
| ** **                                                                                                                    | ** ** | ** **                | ** ** | **(restated)** | ** ** |
| Net income  (loss), as reported                                                                                               |       | $                         | (1,054     | ) | $ | 540 |   |
|                                                                                                                          |       |                      |       |   |   |
| Add: Stock-based compensation expense included in  reported net income, net of related tax effects                            |       | 82                        |       | — |   |
|                                                                                                                          |       |                      |       |   |   |
| Deduct: Total stock-based compensation expense determined  under fair value method for all awards, net of related tax effects |       | (82                       | )          | (1,224 | ) |
|                                                                                                                          |       |                      |       |   |   |
| Pro forma net  loss                                                                                                           |       | $                         | (1,054     | ) | $ | (684 | ) |
|                                                                                                                          |       |                      |       |   |   |
| Earnings (loss)  per share as reported:                                                                                       |       |                      |       |   |   |
| Basic and diluted                                                                                                             |       | $                         | (0.04      | ) | $ | 0.02 |   |
|                                                                                                                          |       |                      |       |   |   |
| Pro forma earnings  (loss) per share:                                                                                         |       |                      |       |   |   |
| Basic and diluted                                                                                                             |       | $                         | (0.04      | ) | $ | (0.02 | ) |
|                                                                                                                          |       |                      |       |   |   |   |   |
| Earnings per share impact of stock based  compensation expense included in reported net income, net of related tax  effects   |       |                      |       |   |   |   |   |
| Basic and diluted                                                                                                             |       | $                         | (0.00      | ) |   | NA |   |

 

The fair value of the Company’s stock-basedawards to employees is estimated using the Black-Scholes model, assuming nodividends, using the following historical assumptions:

 
| ** **                                                    | ** ** | **Options** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|
| **weighted average assumptions used in recent fiscal years:** | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                          |       |        |       |   |   |   |   |
| Expected life  (years)                                        |       | 6.1         |       | 6.1 |   |   | 6.1 |   |   |
| Expected stock  price volatility                              |       | 72.2        | %     | 72.2 | % |   | 65.8 | % |   |
| Risk-free  interest rate                                      |       | 4.9         | %     | 4.4 | % |   | 3.5 | % |   |

 

No stock options were issued infirst quarter of fiscal 2006.

 

In fiscal year 2005, a total of750,000 options were granted with exercise prices equal to the market price ofthe stock on the grant date.  Theweighted average exercise price was $7.48 and the average fair value of theoptions was $5.04.  In addition, theCompany issued 240,000 shares of restricted stock in fiscal 2005.

 

In fiscal year 2004, a total of1,836,000 options were granted with exercise prices equal to the market priceof the stock on the grant date.  Theweighted average exercise price was $4.58 and the average fair value of theoptions was $2.83.  The Company did notissue any shares of restricted stock in fiscal 2004.

 

Property,Plant and Equipment – Additions and improvement arecapitalized at cost, whereas expenditures for maintenance and repair arecharged to expense as incurred.  Depreciationis provided over the estimated useful lives of the respective assetsprincipally on the straight-line method (machinery and equipment normally fiveto ten years, buildings and improvements normally ten to forty years).

 

9

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Goodwill– In accordance with SFAS No. 142, *Goodwill and OtherIntangible Assets*, the Company reviews the carrying value ofGoodwill at least annually, and more frequently if indicators of potentialimpairment arise, using discounted future cash flow analysis as prescribed inSFAS No. 142.

 

Deferred Financing Costs –Costs incurred to obtain financing are deferred and included in other assets inthe condensed consolidated balance sheets. Deferred financing costs are amortized over the term of the financingfacility.

 

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

 

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

 

RecentAccounting Pronouncements – In May 2005, the FASB issuedSFAS No. 154, *Accounting Changes andError Corrections*, which changes the accounting for and thereporting of voluntary changes in accounting principles.  SFAS No. 154 requires changes inaccounting principles to be applied retrospectively to prior period financialstatements, where practicable, unless specific transition provisions permitalternative transition methods. SFAS No. 154 will be effective in fiscalyears beginning after December 15, 2005. The Company’s adoption of SFAS No. 154is not expected to have a material impact on the Company’s results of operations,financial position or cash flows.

 

InNovember 2004, the FASB issued SFAS No. 151, *InventoryCosts*, which amends the guidance in ARB No. 43, Chapter 4,*Inventory Pricing*. This amendmentclarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material (spoilage). This Statement requiresthat those items be recognized as current-period charges, regardless of whetherthey meet the criteria specified in ARB 43 of “so abnormal”. In addition,this Statement requires that allocation of fixed production overheads to thecosts of conversion be based on normal capacity of the production facilities.SFAS No. 151 is effective for financial statements for fiscal yearsbeginning after June 15, 2005. The Company adopted SFAS No. 151during the three month period ended October 2, 2005, and the adoption didnot have a material impact on the results of operations or the financialposition of the Company.

 

DerivativeFinancial Instruments – The Company periodically uses derivativefinancial instruments to reduce financial market risks. These instruments areused to hedge foreign currency and interest rate market exposures. The Companydoes not use derivative financial instruments for speculative or tradingpurposes.  The accounting policies forthese instruments are based on the Company’s designation of such instruments ashedging transactions. The criteria the Company uses for designating aninstrument as a hedge include the instrument’s effectiveness in risk reductionand the matching of the derivative to the underlying transaction. The resultinggains or losses are accounted for as part of the transactions being hedged,except that losses not expected to be recovered upon the completion of thehedge transaction are expensed.  TheCompany had no derivative financial instruments at October 2, 2005 and July 3,2005.

 

ForeignCurrency Translation - The Company’s foreign entities’accounts are measured using local currency as the functional currency.  Assets and liabilities are translated at theexchange rate in effect at year-end. Revenues and expenses are translated at the rates of exchange prevailingduring the year.  Unrealized translationgains and losses arising from differences in exchange rates from period toperiod are included as a component of accumulated other comprehensive loss instockholders’ equity.

 

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

 

3.             DiscontinuedOperations

 

In thethird quarter of fiscal 2005, the Company committed to a plan to divest itstelecom power business and began marketing the business.  Management determined that the assets andliabilities to be sold constituted a disposal group under SFAS No. 144, *Accounting for the Impairment of Disposal of Long-Lived Assets,*and that all of the “assets held for sale” criteria outlined in SFAS No. 144were met.  The estimated fair value ofthe disposal group at October 2, 2005 is $3.0 million.  Management is currently in negotiations with aprospective buyer and expects the proceeds from the sale to approximate estimatedfair value.  Accordingly, the operatingresults of this business are classified as discontinued operations in theaccompanying condensed consolidated statements of operations and its assets andliabilities are classified as held for sale in the accompanying condensedconsolidated balance sheets for all periods presented.

 

TheCompany also recorded other expenses related to divested businesses asdiscontinued operations, primarily legal fees related to a patent infringementclaim and product liability claims, resulting from indemnification agreementsprovided by the Company upon sale of entities in prior years.  These expenses are reported as “otherdiscontinued operations expense” in the table below.

 

10

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Theresults of discontinued operations are as follows:

 
| ** **                                       | ** ** | **Three Months Ended**    | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|
| ** **                                       | ** ** | **October 2,  2005** | ** ** | **October 3,  2004** | ** ** |
| Net Sales                                        |       | $                         | 3,530      |   | $ | 2,971 |   |
|                                             |       |                      |       |   |   |
| Income (loss)  from telecom business, net of tax |       | $                         | 8          |   | $ | (119 | ) |
| Other  discontinued operations expense           |       | (412                      | )          | (442 | ) |
| Loss from  discontinued operations               |       | $                         | (404       | ) | $ | (561 | ) |

 

TheCompany did not allocate any interest expense to discontinued operations, andno tax benefit was recorded related to discontinued operations for any of theperiods presented.

 

4.             Inventories

 

Inventoriesat October 2, 2005 and July 3, 2005 consist of the following:

 
| ** **                     | ** ** | **October 2,  2005** | ** ** | **July 3,  2005** | ** ** |
|--------------------------------|------------|---------------------------|------------|------------------------|------------|
| Raw materials  and stock parts |       | $                         | 27,053     |                   | $          | 30,257 |   |
| Work-in-process                |       | 13,704                    |       | 9,452                  |       |
| Finished goods                 |       | 10,637                    |       | 10,241                 |       |
|                           |       | $                         | 51,394     |                   | $          | 49,950 |   |

 

5.                                       Commitmentsand Contingencies

 

*Litigation – Product Liability*

 

TheCompany has settled or otherwise resolved all of the product liability lawsuitsassociated with its discontinued business operations and believes that any newclaims associated with discontinued operations would either qualify as anassumed liability, as defined in the various purchase agreements related to thesale of those businesses, or would be barred by an applicable statute oflimitations.  The Company is a namedparty in two product liability lawsuits related to the Telemotive IndustrialControls business acquired in December 2002 through the purchase of thestock of MXT Holdings, Inc.  TheCompany tendered both claims to the insurance companies that provided coveragefor MXT Holdings, Inc. against such losses and the tenders were acceptedby the carriers, subject to a reservation of rights.  Management believesthat the insurers will bear all liability, if any, with respect to bothcases and that the proceedings, individually or in the aggregate, will nothave a material adverse effect on the Company’s results of operations orfinancial position.

 

TheCompany has been named, along with multiple other defendants, in asbestos-relatedlawsuits associated with business operations previously acquired by theCompany, but which are no longer owned. During the Company’s ownership, none ofthe businesses produced or sold asbestos-containing products. With respect tothese claims, the Company is either contractually indemnified against liabilityfor asbestos-related claims or believes that it has no liability for suchclaims. The Company aggressively seeks dismissal from these proceedings, andhas also tendered the defense of these cases to the insurers of the previouslyacquired businesses and is awaiting their response.  The Company has also filed a late claim inthe amount of $2.5 million in the Federal-Mogul bankruptcy proceedings torecover attorney’s fee paid for the defense of these claims, which the Companybelieves is an obligation of Federal Mogul although the claim is subject tochallenge.  Management does not believe the asbestos proceedings,individually or in the aggregate, will have a material adverse effect on itsfinancial position or results of operations.

 

*Litigation– Patent Infringement*

 

In April 1998,Ole K. Nilssen filed a lawsuit in the U.S. District Court for the NorthernDistrict of Illinois alleging infringement by the Company of seven of hispatents pertaining to electronic ballast technology, and seeking unspecifieddamages and injunctive relief to preclude the Company from making, using orselling products allegedly infringing his patents. In April 2003, Nilssen’slawsuit against the Company and the Company’s counterclaims against Nilssenwere 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

 

11

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Nilssen$23.4 million was issued on May 3, 2005. Nilssen’s motion to enter theaward as a judgment in U.S. District Court for the Northern District of Illinoisand Magnetek’s counter-motion to vacate the award on grounds that it wasfraudulently obtained are pending in the U.S. District Court for the NorthernDistrict of Illinois.  Magnetek’s requestfor oral argument was granted and the hearing was held on October 19,2005.  The judge is expected to renderhis decision by mail after further consideration.  An unfavorable decision by the Court couldresult in payment of the award to Nilssen, which would have a material adverseeffect on the Company’s cash flows during fiscal 2006.

 

In June 2001,the Company sold its lighting business to Universal Lighting Technologies, Inc.(“ULT”), and agreed to provide a limited indemnification against certain claimsof infringement that Nilssen might allege against ULT. In February 2003,Nilssen filed a lawsuit in the U.S. District Court for the Northern District ofIllinois alleging infringement by ULT of twenty-nine of his patents pertainingto electronic ballast technology, and seeking unspecified damages andinjunctive relief to preclude ULT from making, using or selling productsallegedly infringing his patents. ULT made a claim for indemnification, whichthe Company accepted, subject to the limitations set forth in the saleagreement.  Meanwhile, a response wasfiled denying that the products infringe any valid patent and assertingaffirmative defenses, as well as a counterclaim for a judicial declaration thatthe patents are unenforceable and invalid. The case is now pending in theCentral District of Tennessee.  As of thedate of this report, Nilssen has voluntarily dismissed all but four of thepatents from the lawsuit and requests for re-examination of two of the remainingpatents by the Patent and Trademark Office have been accepted.  A motion for summary judgment that variousclaims of the patents at issue are invalid and that the accused ULT products donot infringe a claim of one of the patents was filed on November 1, 2005.  A hearing date has not yet been set.  The Company will continue to aggressivelydefend the claims against ULT while the re-examinations and the motion forsummary judgment are pending; however, a decision in the lawsuit that isultimately unfavorable to ULT could have a material adverse effect on theCompany’s financial position, cash flows and results of operations as a resultof its indemnification obligations.

 

*Environmental*

 

Fromtime to time, Magnetek has taken action to bring certain facilities associatedwith previously owned businesses into compliance with applicable environmentallaws and regulations. Upon the subsequent sale of certain businesses, theCompany agreed to indemnify the buyers against environmental claims associatedwith the divested operations, subject to certain conditions and limitations.Remediation activities, including those related to the Company’sindemnification obligations, did not involve material expenditures during thefirst quarter of fiscal year 2006 and are not expected to result in materialexpenditures for the remainder of fiscal 2006.

 

Magnetekhas also been identified by the United States Environmental Protection Agencyand certain state agencies as a potentially responsible party for cleanup costsassociated with alleged past waste disposal practices at several previouslyowned facilities and offsite locations. Its remediation activities as apotentially responsible party were not material during the first quarter offiscal year 2006 and are not expected to be material during the secondquarter.  Although the materiality offuture expenditures for environmental activities may be affected by the leveland type of contamination, the extent and nature of cleanup activities requiredby governmental authorities, the nature of the Company’s alleged connection tothe contaminated sites, the number and financial resources of other potentiallyresponsible parties, the availability of indemnification rights against thirdparties and the identification of additional contaminated sites, the Company’sestimated share of liability, if any, for environmental remediation, includingits indemnification obligations, is not expected to be material.

 

*Environmental - Century Electric (McMinnville, Tennessee)*

 

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

 

12

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

 

In1986, the Company acquired the stock of Universal Manufacturing Company (“Universal”)from a predecessor of Fruit of the Loom (“FOL”), and the predecessor agreed toindemnify the Company against certain environmental liabilities arising frompre-acquisition activities at a facility in Bridgeport, Connecticut.Environmental liabilities covered by the indemnification agreement includecompletion of additional cleanup activities, if any, at the Bridgeport facility(sold in connection with the sale of the transformer business in June 2001)and defense and indemnification against liability for potential response costsrelated to offsite disposal locations. FOL, the successor to Universal’sindemnification obligation, filed a petition for Reorganization under Chapter11 of the Bankruptcy Code in 1999 and the Company filed a proof of claim in theproceeding for obligations related to the environmental indemnificationagreement. The Company believes that FOL had substantially completed theclean-up obligations required by the indemnification agreement prior to thebankruptcy filing. In November 2001, the Company and FOL entered into anagreement involving the allocation of certain potential tax credits andMagnetek withdrew its claims in the bankruptcy proceeding. FOL’s obligation tothe state of Connecticut was not discharged in the reorganization proceeding.FOL’s inability to satisfy its remaining obligations related to the Bridgeportfacility and any offsite disposal locations, or the discovery of additionalenvironmental contamination at the Bridgeport facility could have a materialadverse effect on the Company’s financial position or results of operations.

 

6.             ComprehensiveIncome (Loss)

 

Forthe fiscal quarters ended October 2, 2005 and October 3, 2004,comprehensive income (loss) consisted of the following:

 
| ** **                       | ** ** | **Three Months Ended**    | ** ** |
|----------------------------------|------------|---------------------------|------------|
| ** **                       | ** ** | **October 2,  2005** | ** ** | **October 3,  2004** | ** ** |
| ** **                       | ** ** | ** **                | ** ** | **(restated)** | ** ** |
| Net income  (loss)               |       | $                         | (1,054     | ) | $ | 540 |   |
| Currency  translation adjustment |       | 842                       |       | 1,875 |   |
| Comprehensive  income (loss)     |       | $                         | (212       | ) | $ | 2,415 |   |

 

7.                                       Earnings(Loss) Per Share

 

The following table setsforth the computation of basic and diluted earnings (loss) per share for thethree months ended October 2, 2005 and October 3, 2004:

 
| ** **                                              | ** ** | **Three Months Ended**    | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|
| ** **                                              | ** ** | **October 2,  2005** | ** ** | **October 3,  2004** | ** ** |
| ** **                                              | ** ** | ** **                | ** ** | **(restated)** | ** ** |
| Numerator:                                              |       |                      |       |   |   |
| Net income (loss) from continuing operations            |       | $                         | (650       | ) | $ | 1,101 |   |
| Loss from discontinued operations                       |       | (404                      | )          | (561 | ) |
| Net income (loss)                                       |       | $                         | (1,054     | ) | $ | 540 |   |
|                                                    |       |                      |       |   |   |
| Denominator:                                            |       |                      |       |   |   |
| Weighted average shares for basic earnings per share    |       | 28,868                    |       | 28,501 |   |
| Add dilutive effective of stock options outstanding     |       | —                    |       | 751 |   |
| Weighted average shares for diluted earnings per  share |       | 28,868                    |       | 29,252 |   |
|                                                    |       |                      |       |   |   |
| Basic &  Diluted:                              |       |                      |       |   |   |
| Net income  (loss) per share from continuing operations |       | $                         | (0.02      | ) | $ | 0.04 |   |
| Loss per share  from discontinued operations            |       | $                         | (0.02      | ) | $ | (0.02 | ) |
| Net income  (loss) per share                            |       | $                         | (0.04      | ) | $ | 0.02 |   |

 

13

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Dueto the net loss for the three months ended October 2, 2005, the effect of0.3 million shares of stock options was excluded from the calculations ofdiluted loss per share, as their impact would be anti-dilutive. Similarly, the dilutive effect of stock options outstanding was not included inthe calculation of diluted loss per share from discontinued operations for thethree months ended October 3, 2004, as inclusion of these shares would beanti-dilutive.

 

8.             Warranties

 

The Company offers warranties for certainproducts that it manufactures, with the warranty term generally ranging fromone to two years.  Warranty reserves areestablished for costs expected to be incurred after the sale and delivery ofproducts under warranty, based mainly on known product failures and historicalexperience.  Actual repair costs incurredfor products under warranty are charged against the established reserve balanceas incurred.  Changes in the warrantyreserve for the three month periods ended October 2, 2005 and October 3,2004 were as follows:

 
| ** **                                            | ** ** | **Three Months Ended**    | ** ** |
|-------------------------------------------------------|------------|---------------------------|------------|
| ** **                                            | ** ** | **October 2,  2005** | ** ** | **October 3,  2004** | ** ** |
| Balance,  beginning of fiscal year                    |       | $                         | 315        |   | $ | 204 |   |
| Additions  charged to earnings for product warranties |       | 108                       |       | 28 |   |
| Use of reserve  for warranty obligations              |       | (126                      | )          | — |   |
| Balance, end of  period                               |       | $                         | 297        |   | $ | 232 |   |

 

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

 

9.             RestructuringCosts

 

TheCompany began restructuring activities during the second quarter of fiscal2004, which included a workforce reduction of approximately 200 positions inEurope and the relocation of those positions to lower cost facilities inEastern Europe and China.  The Company completed these restructuringactivities in fiscal 2005, and as a result, did not incur any costs related tothese activities in the three month period ended October 2, 2005.  TheCompany incurred $0.1 million of restructuring costs during the three monthperiod ended October 3, 2004, which are included in selling, general andadministrative expense in the accompanying condensed consolidated statements ofoperations.

 

In thefourth quarter of fiscal 2004, the Company began the consolidation of itsGlendale Heights, IL operation into its Menomonee Falls, WI facility.  The Company completed these restructuringactivities by the end of fiscal 2005, and as a result, did not incur any costsrelated to these activities in the three month period ended October 2,2005.  Costs incurred in the three monthperiod ended October 3, 2004 were $0.4 million, of which $0.2 million wereincluded in cost of goods sold and $0.2 were included in selling, general andadministrative expense in the accompanying condensed consolidated statements ofoperations.

 

10.           Stock-BasedCompensation Plans

 

TheCompany has two stock option plans (the “Plans”), one of which provides for theissuance of both incentive stock options (under Section 422A of theInternal Revenue Code of 1986) and non-qualified stock options atexercise prices not less than the fair market value at the date of grant, andone of which only provides for the issuance of non-qualified stockoptions at exercise prices not less than the fair market value at the date ofgrant. One of the Plans also provides for the issuance of stock appreciationrights, restricted stock, incentive bonuses and incentive stock units. Thetotal number of shares of the Company’s common stock authorized to be issuedupon exercise of the stock options and other stock rights under the Plans is2,100,000.  Options granted under thesePlans vest in equal annual installments of two, three or four years.

 

The accompanying condensed consolidated statement ofoperations for the three months ended October 2, 2005, includes compensationexpense related to all stock-based awards of $0.1 million (see Note 2 of Notesto Condensed Consolidated Financial Statements).  The three-month period ended October 3, 2004,does not include any compensation expense related to stock-based awards, as theCompany was accounting for stock-based compensation using the intrinsic-valuemethod under APB No. 25, which permitted footnote disclosure only of the impactof stock-based awards on a pro forma basis.  The pro forma expense related to stock-based awards was $1.2 million forthe three months ended October 3, 2004.

 

14

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Asummary of certain information with respect to options under the Plans follows:

 
| **Stock  Option Activty - Quarter ended October 2, 2005:** | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise  Price** | ** ** | **Aggregate**

**Intrinsic  Value  ($000s)** | ** ** |
|------------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|----------------------------------------------|------------|
| Options outstanding, July 3, 2005                          |       | 8,178,294  |       | $                                     | 8.77       |                                         |       |   |
| Options granted                                            |       | —     |       |                                  |       |                                         |       |
| Options exercised                                          |       | —     |       |                                  |       |                                         |       |
| Options cancelled                                          |       | (334,667   | )          | $                                     | 9.82       |                                         |       |   |
| Options outstanding, October 2, 2005                       |       | 7,843,627  |       | $                                     | 8.73       |                                         | $          | 35 |   |
| Exercisable options                                        |       | 7,783,627  |       | $                                     | 8.76       |                                         | $          | 18 |   |
|                                                            |            |            |            |                                       |            |                                              |            |  |  |  |

 

As of October 2, 2005, there was $0.1 million of totalunrecognized compensation cost related to nonvested stock option awards grantedunder the Plans.  This cost is expectedto be recognized over a weighted-average period of 1.25 years.

 

Thefollowing table provides information regarding exercisable and outstandingoptions as of October 2, 2005.

 
| ** **                            | ** ** | **Exercisable**          | ** ** | **Outstanding**                                    | ** ** |
|---------------------------------------|------------|--------------------------|------------|----------------------------------------------------|------------|
| **Range of exercise price per share** | ** ** | **Options  exercisable** | ** ** | **Weighted  Average  exercise  price per   share** | ** ** | **Weighted  average  remaining  contractual  life (years)** | ** ** | **Options  outstanding** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Weighted  average  remaining  contractual  life (years)** | ** ** |
|                                  |       |                     |       |                                               |       |   |   |   |   |   |   |   |   |
| Under $5.00                           |       | 1,677,168                |       | $                                                  | 3.90       |   | 7.77 |   | 1,714,668 |   | $ | 3.87 |   | 7.81 |   |
| $5.00 - $10.00                        |       | 3,799,300                |       | 7.80                                               |       | 5.99 |   | 3,821,800 |   | 7.80 |   | 6.01 |   |
| $10.00 - $15.00                       |       | 1,319,065                |       | 11.47                                              |       | 5.25 |   | 1,319,065 |   | 11.47 |   | 5.25 |   |
| Over $15.00                           |       | 988,094                  |       | 17.07                                              |       | 2.75 |   | 988,094 |   | 17.07 |   | 2.75 |   |
| Total                                 |       | 7,783,627                |       | $                                                  | 8.76       |   | 5.84 |   | 7,843,627 |   | $ | 8.73 |   | 5.87 |   |

 

The following table provides information regardingnonvested stock activity:

 
| **Nonvested  Shares**        | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Nonvested at July 3, 2005    |       | —     |       |                                           |       |
| Granted                      |       | 500,000    |       | $                                              | 2.77       |   |
| Vested                       |       | —     |       |                                           |       |
| Forfeited                    |       | —     |       |                                           |       |
| Nonvested at October 2, 2005 |       | 500,000    |       | $                                              | 2.77       |   |

 

As of October 2, 2005, there was $1.3 million of totalunrecognized compensation cost related to nonvested restricted stock arrangementsgranted under the Plans.  This cost isexpected to be recognized over a weighted-average period of 3.25 years.

 

11.           PensionExpense

 

Forthe three-month periods ended October 2, 2005 and October 3, 2004,pension expense related to the Company’s defined benefit pension plan consistedof the following:

 
| ** **                       | ** ** | **Three Months Ended**    | ** ** |
|----------------------------------|------------|---------------------------|------------|
| ** **                       | ** ** | **October 2,  2005** | ** ** | **October 3,  2004** | ** ** |
| Interest Cost                    |       | $                         | 2,440      |   | $ | 2,539 |   |
| Expected return  on plan assets  |       | (2,552                    | )          | (2,939 | ) |
| Recognized net  actuarial losses |       | 1,062                     |       | 721 |   |
|                             |       |                      |       |   |   |
| Total net  pension expense       |       | $                         | 950        |   | $ | 321 |   |

 

Pension expense isincluded in selling, general and administrative expense in the accompanyingcondensed consolidated statements of operations.

 

12.           IncomeTaxes

 

Since fiscal 2002 the Company has providedvaluation reserves against its U.S. deferred tax assets that result in a zeronet deferred tax position (net deferred assets equal to deferred taxliabilities).  In its 2005 fiscalyear-end review of its tax accounts, the Company determined that a portion ofits deferred tax liability related to tax-deductible amortization of goodwillthat is no longer amortized for financial reporting purposes. Under applicableaccounting rules, such deferred tax liabilities are considered to have anindefinite life and are therefore ineligible to be considered as a source offuture taxable income in assessing the realization of deferred tax assets.

 

The Company has determined that suchdeferred tax liabilities existed at July 3, 2005, and therefore increased itsvaluation allowance for deferred tax assets and the related provision forincome taxes for fiscal year 2005 by $1.6 million. The Company furtherdetermined that the increased provision for income taxes should have beenrecorded on a pro-rata basis throughout fiscal year 2005, and as a result, theCompany has restated its quarterly results for fiscal 2005.  The impact of this restatement on the threemonths ended October 3, 2004 was an increase in the Company’s valuation allowancefor deferred tax assets and related provision for income taxes of $0.4million.  Similarly, the Company’s taxprovision of $1.0 million for the three months ended October 2, 2005 alsoincluded an amount of $0.4 million to increase the Company’s valuationallowance for deferred tax assets related to tax-deductible amortization ofgoodwill.   The remaining tax provisionof $0.6 million for the three months ended October 2, 2005 was comprised ofincome taxes of the Company’s foreign subsidiaries.  

 

13.           BankBorrowing Arrangements

 

At July 3, 2005, the Company had an asset basedcredit agreement (“Credit Agreement”) for North American operations with BankOne.   Available borrowings under theCredit Agreement were determined by a borrowing base formula as defined in theagreement, based primarily on the levels of domestic accounts receivable andinventory.  The facility also supportedthe issuance of letters of credit.  Borrowingsunder the Credit Agreement were secured by substantially all of the Company’sNorth American assets and bore interest at the bank’s prime lending rate plus 1%,or, at the Company’s option, the London Interbank Offering Rate (LIBOR) plus 3.25%.  

 

The Company was in violation of certaincovenants at July 3, 2005, and in July 2005, in exchange for a waiver ofcertain covenant defaults and the lender's willingness to continue to extendcredit under the agreement, the Company agreed to a permanent reduction in theaggregate lending commitment to $7.5 million and a change in the facilitytermination date from July 15, 2006 to September 30, 2005.  The Company also agreed to use its bestefforts to obtain financing from other sources that would enable the Company tofully repay all indebtedness under the agreement.

 

OnSeptember 30, 2005, the Company entered into an agreement with Ableco, Inc.providing for an $18 million term loan (“Term Loan”) and an agreement withWells Fargo Foothill, Inc. providing for a $13 million Revolving CreditFacility (“Revolving Loan”).  Borrowingsunder the Term Loan bear interest at the lender’s reference rate plus 5%, or,at the Company’s option, 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 beginning in September,2006.  Borrowings under the RevolvingLoan bear interest at the bank’s prime lending rate plus 2.5% or, at theCompany’s option, LIBOR plus 4%.  Borrowingsunder the Revolving Loan are determined by a borrowing base formula as definedin the agreement, based on the level of eligible domestic accounts receivableand inventory.  The Revolving Loanfacility also supports the issuance of letters of credit.  Borrowings under the Term Loan and RevolvingLoan are secured by substantially all of the Company’s domestic assets.  The Company used the proceeds from theRevolving Loan to fully repay all outstanding obligations under its previousfinancing agreement with Bank One, which expired on September 30, 2005.  At October 2, 2005, the Company had $3.8million of borrowings outstanding under the Revolving Loan and had noborrowings outstanding under the Term Loan.

 

The Company’s European subsidiarymaintains revolving borrowing arrangements with local banks, primarily tosupport working capital needs. Available borrowings under these arrangementsaggregate approximately Euro 20.0 million depending in part upon levels ofaccounts receivable, and bear interest at various rates ranging from 3% to8%.  In addition, the Company’s Europeansubsidiary has an agreement with a European bank to provide borrowings securedby the subsidiary’s land and building. Borrowings under this agreement bear interest at EURIBOR plus 1.5%.  The initial commitment to lend under thisagreement was Euro 7.0 million, and the commitment has been reduced ratably ona quarterly basis beginning March 31, 2004 and ending September 30, 2013.  The Company’s European subsidiary also hascertain long-term notes and capital leases outstanding related mainly toequipment purchases.  AtOctober 2, 2005, the Company had $21.1 million of borrowings outstanding under allEuropean borrowing arrangements.

 

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

 

Restatementof Fiscal 2005 Interim Periods and Reclassification

 

As stated in Note 2 of Notes to ConsolidatedFinancial Statements, we have restated our financial statements for the interimperiods of fiscal 2005 with respect to accounting for income taxes.

 

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Since fiscal 2002 we have provided valuationreserves against our U.S. deferred tax assets that result in a zero netdeferred tax position (net deferred assets equal to deferred tax liabilities).  In our 2005 fiscal year-end review of our taxaccounts, we determined that a portion of our deferred tax liability related totax-deductible amortization of goodwill that is no longer amortized forfinancial reporting purposes. Under applicable accounting rules, such deferredtax liabilities are considered to have an indefinite life and are thereforeineligible to be considered as a source of future taxable income in assessingthe realization of deferred tax assets.

 

We determined that such deferred tax liabilitiesexisted at July 3, 2005, and therefore increased our valuation allowancefor deferred tax assets and the related provision for income taxes for fiscalyear 2005 by $1.6 million. We further determined that the increased provisionfor income taxes should have been recorded on a pro-rata basis throughoutfiscal year 2005, and as a result, we have restated our quarterly results forfiscal 2005.  The impact of thisrestatement on the three months ended October 3, 2004 was an increase in ourvaluation allowance for deferred tax assets and related provision for incometaxes of $0.4 million.  The restatementdid not have a material impact on our financial position as of October 3,2004, and had no impact on our cash flows for the restated period then ended.

 

Duringfiscal year 2005, we reclassified the assets and liabilities of our telecom powerbusiness as held for sale, and the results of operations of this business asdiscontinued operations (see Note 3 of Notes to Condensed ConsolidatedFinancial Statements).  We also recordedother expenses related to divested businesses as discontinued operations,including certain expenses for patent infringement claims, product liabilityclaims, environmental issues, and asbestos claims.  Prior period amounts related to the telecombusiness or other divested businesses have been reclassified in theaccompanying condensed consolidated financial statements in order to conform tothe current year presentation.  All ofthese issues relate to businesses we no longer own and most relate toindemnification agreements we provided when we divested those businesses.

 

Overview

 

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

 

Ourpower control systems consist primarily of programmable motion control andpower conditioning systems used in the following applications:  cranes and hoists; elevators; fuel cell, windand photovoltaic markets; street light monitoring and control; and utility gridmonitoring.

 

Ourembedded power control products, which are sold primarily to original equipmentmanufacturers for installation in their products, include: AC-to-DC switchingpower supplies, AC-to-DC rectifiers and battery chargers, DC to-DC powerconverters, DC-to-AC power inverters and peripheral componentinterconnects.  These products are used primarily in telecommunications(telecom), data processing and storage, digital imaging, semiconductorprocessing and testing equipment, medical instrumentation and home appliances.

 

Thepast several years have been challenging in our served markets, and have beencharacterized by fluctuating demand in our traditional telecommunications and informationtechnology markets (embedded power products), stable to growing demand in ourtraditional systems markets (crane & hoist and elevators), andincreased interest in our alternative energy and utility products, althoughthese products are not yet contributing significantly to our sales.  At the same time, our operating results havebeen negatively impacted by losses in our telecom power business, assetimpairment charges, and other expenses related to businesses we no longer own,including a $22 million charge in fiscal 2005 (net of amounts previouslyrecorded of $1.4 million) for a patent infringement arbitration award (seeNote 5 of Notes to Condensed Consolidated Financial Statements).  In response to these circumstances, withinthe past year we decided to divest our telecom power business, have completedrestructuring actions in both North America and Europe, doubled our productioncapacity in China, increased our investment in research and development (“R&D”)spending on new products, and obtained new financing agreements to improve ourliquidity.  As a result, we enteredfiscal 2006 focused on increasing revenue, introducing new products, reducingcosts and improving cash flow and profitability.

 

Continuing Operations

 

For the first half of fiscal 2005, demand incertain of our key markets, primarily equipment for information technology andtelecommunications, was strong, however we began to see a slowdown in thesecond half of fiscal 2005 which continued into our first quarter of fiscal2006, ended October 2, 2005.  Sales inthe first quarter of fiscal 2006 were $56.5 million, a

 

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decrease of nearly 15% from sales of $66.2million in the first quarter of fiscal 2005. The decline was mainly due to weakness in embedded power products for telecommunicationsmarkets relative to the prior year.  Inaddition, the first quarter of fiscal 2005 contained fourteen weeks compared tothirteen weeks in the first quarter of fiscal 2006.

 

First-quarterfiscal 2006 bookings (new orders received) were $56.6 million, roughly equal tosales for the period, and our backlog as of October 2, 2005 was $61.4million.  Bookings for the first quarterof fiscal 2005 were $67.5 million and our backlog as of October 3, 2004was $76.7 million.  The decline in bookings versus the prior year isprimarily related to a decline in bookings for embedded power products. Wecontinue to focus on gaining share in systems markets and on new productintroductions in industrial, transportation, utility, and alternative energymarkets, and our future sales growth is largely dependent on the success of thisstrategy.  As a result, we expect modest revenue growth throughout fiscal2006.

 

Gross profit in the first quarter of fiscal 2006was $14.5 million, down from $16.1 million in the first quarter of fiscal2005.  However, gross profit as apercentage of sales increased from 24.3% in the first quarter of fiscal 2005 to25.6% in the first quarter of fiscal 2006, a four-year high.  The gross profit percentage improvement isattributed to cost reductions from restructuring actions and our operations inChina, as well as improved sales mix.

 

OurR&D expense was $3.5 million in the first quarter of fiscal 2006,comparable to our R&D expense in the same period one year ago.  We continue to invest in developing newproducts for existing and new markets, including alternative energy productsfor solar and wind applications and monitoring and control systems for utilitymarkets.  Selling, general andadministrative (“SG&A”) expense was $9.9 million in the first quarter offiscal 2006 compared to $10.5 million in the first quarter of fiscal 2005,mainly due to reduced volume-related selling expenses, the additional week ofoperating expenses in the first quarter of fiscal 2005, and the absence ofrestructuring costs in fiscal 2006, partially offset by higher pension expense,which increased by $0.6 million.  Ourfuture annual pension expense will depend on future interest rate levels,values in equity and fixed income markets, and contributions we may elect tomake to the plan.

 

Mainlyas a result of decreased sales and the resulting lower gross profit, our incomefrom operations decreased to $1.0 million in the first quarter of fiscal 2006; incomefrom operations was $2.1 in the first quarter of fiscal 2005.  Our net loss from continuing operations inthe first quarter of fiscal 2006 was $0.7 million, or $0.02 per share, and reflectsthe accelerated write-off of deferred financing charges under our previous bankagreement of $0.4 million, as well as a provision for income taxes of $1.0million.  In the first quarter of fiscal2005 we achieved a net income of $1.1 million, or $0.04 per share, due mainlyto the higher sales volume and gross profit in that period.

 

##### **We consumed $1.9 million incash from operating activities in the first quarter of fiscal 2006.  Capital expenditures in the first quarter of fiscal2006 were $1.2 million, while depreciation expense was $2.3 million.  Our total long-term debt decreased during thefirst quarter of fiscal 2006 by $0.3 million to $24.9 million, however our cashbalances decreased from $6.9 million at July 3, 2005, to $2.2 million at October 2,2005, as vendor payments in the first quarter of fiscal 2006 resulted in areduction in accounts payable balances of $4.7 million as compared to July 3,2005.**

##### ** **

##### **In September 2005, weentered into agreement with lenders providing for an $18 million term loan anda $13 million revolving credit facility, expanding our credit facilities forgreater operating flexibility.  Thisincreased availability may be used in part to satisfy the Nilssen arbitration awardin the event we are required to pay the award (see Note 5 of Notes to CondensedConsolidated Financial Statements).**

##### ** **

We willcontinue to focus our development, marketing and selling capabilities on highermargin systems applications and markets. Our efforts to improve margins include manufacturing cost reductionprograms, most notably a continued shift of our manufacturing to China, andselected outsourcing.  We plan to furtherconsolidate administrative operations and functions in fiscal 2006; however,future sustained profitability is highly dependent upon improvement in revenuesand gross margins, successful implementation of our strategy to penetratehigher margin markets, a shift in our sales mix to proportionately higher salesof systems, and favorable outcomes in certain legal matters, primarily thepatent infringement claims (see Note 5 of Notes to Consolidated FinancialStatements).

 

##### **Discontinued Operations**

##### ** **

Our telecom power business continued to generatelosses throughout fiscal 2005, and as a result, in the third quarter of fiscal2005, we committed to a plan to divest this business.  We are currently in negotiations withprospective buyers, and we will account for our telecom power system businessas assets held for sale and the operating results of this business as discontinuedoperations until it is divested.  Inaddition, we have certain other legacy costs related to business we havepreviously divested which we are recording as discontinued operations (see Note3 of Notes to Condensed Consolidated Financial Statements).

 

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Critical Accounting Policies

 

Thefollowing discussion and analysis of our financial condition and results ofoperations is based upon our condensed consolidated financial statements.  In preparing financial statements inconformity with accounting principles generally accepted in the United States,we must make estimates and assumptions that affect the reported amount ofassets and liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities at the date of our financial statements.  Such estimates are based upon historicalexperience and other assumptions believed to be reasonable given known circumstances.  Actual results could differ from thoseestimates.  On an ongoing basis, weevaluate and update our estimates, including those related to accounting forinventories, goodwill, pension benefits and reserves for litigation andenvironmental issues.  We consider thefollowing policies critical to understanding our financial position and resultsof operations.

 

*Accounts Receivable*

 

Accountsreceivable represent amounts due from customers in the ordinary course ofbusiness.  We are subject to losses fromuncollectible receivables in excess of our allowances.  We maintain allowances for doubtful accountsfor estimated losses from customers’ inability to make required payments.  In order to estimate the appropriate level ofthis allowance, we analyze historical bad debts, customer concentrations,current customer creditworthiness, current economic trends and changes incustomer payment patterns.  Our totalallowance includes a specific allowance based on identification of customerswhere we feel full payment is in doubt, as well as a general allowancecalculated based on our historical losses on accounts receivable as apercentage of historical sales.  Webelieve that our methodology has been effective in accurately quantifying ourallowance for doubtful accounts and do not anticipate changing our methodologyin the future.  However, if the financialconditions of any of our customers were to deteriorate and impair their abilityto make payments, additional allowances may be required in future periods.  We believe that all appropriate allowances havebeen provided.

 

*Inventories*

 

Ourinventories 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.  We identify potentially obsolete and excessinventory by evaluating overall inventory levels in relation to expected futurerequirements and market conditions, and provisions for excess and obsoleteinventory and inventory valuation are recorded accordingly.  Items with no usage for the past twelvemonths and no expected future usage are considered obsolete, and are disposedof or fully reserved.  Reserves forexcess inventory are determined based upon historical and anticipated usage ascompared to quantities on hand.  Excessinventory is defined as inventory items with on-hand quantities in excess ofone year’s usage and specified percentages are applied to the excess inventoryvalue in determining the reserve.  Ourreserve for excess and obsolete inventory has ranged from 9% to 10% of grossinventory value during the fiscal years 2005 and 2006.  Our assumptions have not changedsignificantly in the past, and we believe they are not likely to change in the foreseeablefuture.  We feel that our assumptionsregarding inventory valuation have been accurate in the past, with theexception of an unexpected significant decline in demand in our telecombusiness in fiscal 2003, which resulted in a charge to discontinued operationsof $4.7 million to increase our inventory reserves.

 

*Long-LivedAssets and Goodwill*

 

We periodically evaluate the recoverability ofour long-lived assets, including property, plant and equipment.  Impairment charges are recorded in operatingresults when the undiscounted future expected cash flows derived from an assetare less than the carrying value of the asset.

 

We arerequired to perform annual impairment tests of our goodwill, and may berequired to test more frequently in certain circumstances.  We have elected to perform our annualimpairment test in the fourth quarter of our fiscal year.  We have identified our power electronics and powersystems 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.

 

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* *

*PensionBenefits*

 

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 assumptions includediscount 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 each year.  Changes in assumptions typically result inactuarial gains or losses that are amortized in accordance with the methodsspecified 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.

 

*Reserves for Contingencies*

 

We periodically record the estimated impacts ofvarious conditions, situations or circumstances involving uncertainoutcomes.  The accounting for such eventsis prescribed under 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.”

 

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 itis probable that the loss has been incurred, given the likelihood of uncertainevents; and (2) that the amount of the loss can be reasonably estimated.

 

Theaccrual of a contingency involves considerable judgment on our part.  We use our internal expertise, and outsideexperts as necessary, to help estimate the probability that a loss has beenincurred and the amount or range of the loss.

 

*Income Taxes*

 

Weoperate in numerous taxing jurisdictions and are subject to a variety of incomeand related taxes. Judgment is required in determining our provision for incometaxes and related tax assets and liabilities. We believe we have reasonablyestimated our tax positions for all jurisdictions for all open tax periods. Itis possible that, upon closure of our tax periods, our final tax liabilitiescould differ from our estimates.

 

Werecord deferred income tax assets in tax jurisdictions where we generate lossesfor income tax purposes.  We also recordvaluation allowances against these deferred tax assets in accordance with SFAS No. 109,“Accounting for Income Taxes”, when, in our judgment, the deferred income taxassets will likely not be realized in the foreseeable future.

 

 

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Results of Operations - Three Months Ended October 2,2005 and October 3, 2004

 

Net Sales and Gross Profit

 

Net sales for the first quarter of fiscal 2006were $56.5 million, a decrease of 15% from the first quarter of fiscal 2005sales of $66.2 million.  The decrease isattributed to lower sales of embedded power supplies of $6.3 million, partiallyoffset by higher sales of systems of $1.4 million, primarily in the materialhandling market.  In addition, the firstquarter of fiscal 2005 contained an additional week (fourteen weeks) comparedto the first quarter of fiscal 2006, resulting in additional sales of $4.7million in the fiscal 2005 first quarter. We expect a modest increase in our second quarter fiscal 2006 revenue, duemainly to seasonal factors.

 

Our fiscal 2006 first quarter gross profit was $14.5million, or 25.6% of sales, versus $16.1 million, or 24.3% of sales, in thefirst quarter of fiscal 2005.  Thereduction in gross profits of $1.6 million from prior year was due to lowersales volumes in fiscal 2006, partially offset by improved product mix with proportionatelygreater sales of higher margin systems, and benefits achieved from therelocation of production to our lower cost operations in China.  The lower sales volume impacted gross profitnegatively by an estimated $2.2 million, while the favorable sales mix and costreductions had a favorable impact of $0.9 million.  Additionally, the first quarter of fiscal2005 gross profit was negatively impacted by $0.3 million related to restructuringcosts associated with plant consolidation in North America and transfer ofproduction from Europe to China.

 

Research and Development, Selling, General andAdministrative

 

R&D expense was $3.5 million, or 6.2% ofsales, in the first quarter of fiscal 2006, comparable to the fiscal 2005 firstquarter amount of $3.5 million, or 5.3% of sales.  We continue to invest in product developmentfor new markets and applications such as alternative energy products for windand solar markets and monitoring and control systems for the utility market.

 

SG&Aexpense was $9.9 million (17.5% of sales) in the first three months of fiscal2006 versus $10.5 million (15.9% of sales) in the first three months of fiscal2005.  This decrease was mainly due to areduction in volume-related selling expenses, one less week of operations inthe first quarter of fiscal 2006 (thirteen weeks) compared to fiscal 2005(fourteen weeks), and the absence of restructuring charges in fiscal 2006, offsetby higher pension expense and audit fees. Our first quarter fiscal 2006 selling expenses were $4.2 million, versus$4.8 million in the first quarter of fiscal 2005, mainly due to decreasedcommission expense and cost reduction actions. The additional week of operating expenses in the first quarter of fiscal2005 increased SG&A by an estimated $0.7 million for the period, andrestructuring expenses included in SG&A in the first quarter of fiscal 2005were $0.3 million.  Our first quarterfiscal 2006 pension expense was $1.0 million compared to a fiscal 2005 firstquarter expense amount of $0.3 million, while our audit fees increased by $0.3million in the first quarter of fiscal 2006.

 

Incomefrom Operations

 

Our operating income for the first quarter offiscal 2006 was $1.0 million compared to income from operations of $2.1 millionfor the first quarter of fiscal 2005.  Thedecrease in operating profit is primarily due to lower sales volumes, whichimpacted gross profits, partially offset by lower spending in SG&A.

 

Interest and Other Expense 

 

Interest expense was $0.3 million in the firstquarter of fiscal 2006, comparable to interest expense of $0.3 million in thefirst quarter of fiscal 2005.  Otherexpense in comprised entirely of amortization of deferred financingamounts.  First-quarter fiscal 2006amortization expense was $0.4 million, up from $0.1 million in the same periodof fiscal 2005, due to the accelerated write-off of deferred financing assetsupon expiration of our previous financing agreement with Bank One at the end ofthe first quarter of fiscal 2006.

 

Loss from Discontinued Operations

 

Ourloss from discontinued operations for the first quarter of fiscal 2006 was $0.4million compared to a loss of $0.6 million for the first quarter of 2005.  The decrease in net loss from the prior yearrelates to improved operating results in our telecom power business, whichgenerated break-even results in the first quarter of fiscal 2006 versus a lossof $0.2 million

 

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in the prior year firstquarter.  Other discontinued operationsexpense of $0.4 million, incurred in the first quarter of both 2006 and 2005, iscomprised of expenses related to divested businesses resulting from indemnificationagreements we provided upon sale of those businesses in prior years.  These expenses are comprised primarily oflegal fees and other costs associated with the Nilssen patent infringementclaim and, in fiscal year 2005, product liability claims.

 

NetIncome (Loss)

 

Ournet loss was $1.1 million in the first quarter of fiscal 2006, compared to netincome of $0.5 million in the first quarter of fiscal 2005.  Despite the net loss in first quarter offiscal 2006, we recorded a tax provision of $1.0 million due to net incomegenerated by our foreign subsidiaries and a $0.4 million non-cash tax provisionrelated to goodwill amortization.  Thetax provision for the first quarter of 2005 was $0.6 million (as restated),which includes the impact of $0.4 million non-cash tax provision related togoodwill amortization.

 

Liquidityand Capital Resources

 

Our cash balance decreased$4.7 million during the first quarter of fiscal 2006, from $6.9 million at July 3,2005 to $2.2 million at October 2, 2005. Our primary uses of cash in the first quarter of fiscal 2006 were forvendor payments, capital expenditures, and payment of fees related to our newfinancing agreements.  Accounts payablebalances decreased $4.8 million in the first quarter of fiscal 2006.  Our capital expenditures were $1.2 million,and we also paid loan origination and legal fees of $1.3 million related to ournew financing agreements.  We have nocurrent requirements or plans for additional major capacity expansion and wecurrently anticipate capital expenditures in fiscal 2006 to be less than $10million.  The expected amount of capitalexpenditures could change depending upon changes in revenue levels, ourfinancial condition and the general economy.

 

At October 2, 2005,total long-term borrowings including current portion were $24.9 million ($21.1million in Europe and $3.8 million in the U.S.) compared to $25.2 million($21.3 million in Europe and $3.9 million in the U.S.) as of July 2,2005.  We were in violation of certaincovenants under our U.S. credit agreement at July 3, 2005, and in July 2005,in exchange for a waiverof certain covenant defaults and the lender’s willingness to continue to extendcredit under our agreement, we agreed to a permanent reduction in the aggregatelending commitment to $7.5 million and a change in the facility terminationdate from July 15, 2006 to September 30, 2005.  We also agreed to use our best efforts toobtain financing from other sources that would enable us to fully repay allindebtedness under the agreement.

 

On September 30,2005, we entered into an agreement with Ableco, Inc. providing for an $18million term loan (“Term Loan”) and an agreement with Wells Fargo Foothill,Inc. providing for a $13 million Revolving Credit Facility (“Revolving Loan”).  Borrowings under the Term Loan bear interestat the lender’s reference rate plus 5%, or, at our option, the London InterbankOffering Rate (LIBOR) plus 7.5%.  Suchrates may be increased by up to one percentage point depending upon the levelof U.S. funded debt to EBITDA as defined in the agreement.  The Term Loan requires quarterly principalpayments of $1 million beginning in September, 2006.  Borrowings under the Revolving Loan bearinterest at the bank’s prime lending rate plus 2.5% percent or, at our option,LIBOR plus 4% percent.  Borrowings underthe Revolving Loan are determined by a borrowing base formula as defined in theagreement, based on the level of eligible domestic accounts receivable andinventory.  The Revolving Loan facilityalso supports the issuance of letters of credit.  Borrowings under the Term Loan and RevolvingLoan are secured by substantially all of our domestic assets. We used theproceeds from the Revolving Loan to fully repay all outstanding obligationsunder our previous financing agreement with Bank One, which expired onSeptember 30, 2005.

 

Our European subsidiarymaintains revolving borrowing arrangements with local banks, primarily tosupport working capital needs. Available borrowings under these arrangementsaggregate approximately Euro 20.0 million depending in part upon levels ofaccounts receivable, and bear interest at various rates ranging from 3% to8%.  In addition, our European subsidiaryhas an agreement with a European bank to provide borrowings secured by thesubsidiary’s land and building. Borrowings under this agreement bear interest at EURIBOR plus 1.5%.  The initial commitment to lend under thisagreement was Euro 7.0 million, and the commitment has been reduced ratably ona quarterly basis beginning March 31, 2004 and ending September 30,2013.  Our European subsidiary also hascertain long-term notes and capital leases outstanding related mainly toequipment purchases.

 

As a result of thedecline in interest rates and stock market equity values over the past severalyears, the accumulated benefit obligation of our defined benefit pension planexceeds plan assets as of October 2, 2005. We did not make any contributions to the plan during fiscal 2005, asnone were mandated.  Based upon currentcontribution credits available under pension funding regulations, actuarialprojections indicate no mandatory contributions to the plan would be requiredthrough fiscal year 2007.  Depending uponchanges in asset values and interest rates, as well as any discretionarycontributions made by us in the interim period, required contributions inperiods subsequent to fiscal 2007 could be significant.

 

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We are subject to certain potentialenvironmental and legal liabilities associated primarily with the pastdivestiture of 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. Nilssenof $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 judgeis expected 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, which would have a material adverse effect on our cashflows during fiscal 2006.  We haveadequate resources to support payment of the award if such a payment isnecessary, however, payment of the award would result in higher outstandingdebt balances and increased interest expense in fiscal 2006.

 

We donot have any off-balance sheet arrangements or variable interest entities as ofOctober 2, 2005.

 

Basedupon current plans and business conditions, we believe that global borrowingcapacity under our various credit facilities, the anticipated sale of ourtelecom power business and internally generated cash flows will be sufficientto fund anticipated operational needs, capital expenditures and other near-termcommitments.

 

Caution Regarding Forward-Looking Statements andRisk Factors

 

Thisdocument, including documents incorporated herein by reference, contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  The words “believe”, “expect”, “estimate”, “anticipate”, “intend”,“may”, “might”, “will”, “would”, “could”, “project”, and “predict”, or similarwords and phrases generally identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertaintieswhich in many cases are beyond our control and which cannot be predicted orquantified.  As a result, future events and actual results could differmaterially from those set forth in, contemplated by, or 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 these documentsto reflect changed assumptions, the occurrence of unanticipated events orchanges to future operating results over time.

 

Ourfuture results of operations and the other forward-looking statements containedin this filing, including this section titled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”, involve a number ofrisks and uncertainties.  In particular, the statements regarding futureeconomic conditions, the recovery in the electronic power industry, our goalsand strategies, new product introductions, penetration of new markets,projections of sales revenues, manufacturing costs and operating costs, pricingof our products and raw materials required to manufacture our products, grossmargin expectations, relocation and outsourcing of production capacity, capitalspending, research and development expenses, the outcome of pending legalproceedings and environmental matters, tax rates, sufficiency of funds to meetour needs including contributions to our defined benefit pension plan, and ourplans for future operations, as well as our assumptions relating to theforegoing, are all subject to risks and uncertainties.

 

A number of factors could cause our actualresults to differ materially from our expectations.  We are subject to allof the business risks facing public companies, including business cycles andtrends in the general economy, financial market conditions, changes in interestrates, demand variations and volatility, potential loss of key personnel, supplychain disruptions, government legislation and regulation, and naturalcauses.  Additional risks and uncertainties include but are not limited toindustry conditions, competitive factors such as technology and pricingpressures, business conditions in the telecommunications and electronicequipment markets, international sales and operations, dependence onsignificant customers, increased material costs, risks and costs associatedwith acquisitions and divestitures, environmental matters and the risk that ourultimate costs of doing business exceed present estimates.  This list of risk factors is notall-inclusive, as other factors and unanticipated events could adversely affectour financial position or results of operations.  Further information on factors that couldaffect our financial results can be found in our Form 10-K filing with theSecurities and Exchange Commission for the year ended July 3, 2005, underthe heading “Risk Factors Affecting the Company’s Financial Outlook”.

 

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**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 since that reported in the our AnnualReport on Form 10-K dated July 3, 2005.  A discussion of our accounting policies forderivative financial instruments is included in the Summary of SignificantAccounting Policies under Note 2 in the Notes to Condensed ConsolidatedFinancial Statements.  We did not haveany outstanding hedge instruments or contracts at October 2, 2005 or July 3,2005.

 

***Interest Rates***

 

Thefair value of our debt was $24.9 million at October 2, 2005, equal to thecarrying value at that date.  The fairvalue of our debt is equal to the borrowings outstanding from domestic andforeign banks and small amounts owed under capital lease arrangements.  For our debt outstanding at October 2,2005, a hypothetical 10% adverse change in interest rates would increase our annualinterest expense by an estimated $0.2 million. Prospectively we expect our interest expense to increase based on higherinterest rates and potentially higher outstanding debt levels under our TermLoan and Revolving Loan (see Liquidity and Capital Resources).

 

***Foreign Currency Exchange Rates***

 

We generally do not enter into foreign exchangecontracts to protect against reductions in value and volatility of future cashflows caused by changes in exchange rates, but we may selectively enter intoforeign exchange contracts to hedge certain exposures in Europe.  Gains and losses on these non-U.S.-currencyinvestments would generally be offset by corresponding losses and gains on therelated hedging instruments, resulting in negligible net exposure.

 

A portion of our products are manufactured inEurope and sold in the U.S.  Many of these sales to U.S. customers aredenominated in U.S. dollars.  As a result, our financial results could be significantlyimpacted by changes in exchange rates, particularly the exchange rate betweenthe U.S. dollar and the Euro.  Our exposure on sales by our Europeansubsidiaries consists of (1) the exposure related to a weakening U.S.dollar for U.S. dollar denominated sales, as most of our European subsidiaries’costs are in Euro; in the event of a weakening U.S. dollar, locally recordedsales in the functional currency (the Euro) are decreased, (2) theexposure related to a weakening U.S. dollar when payment of U.S. dollarreceivables are received from customers, resulting in less local currency thanwas originally recorded at the date of sale, and (3) the exposure thatupon translation of the subsidiaries’ periodic financial statements, aweakening local currency would result in lower reported sales in U.S. dollarsthan if the local currency had been stable relative to the U.S. dollar. In the latter case, operating expenses would also be translated at the loweramount and accordingly, the effect on net income would be mitigated.

 

We had no foreign currency contracts outstandingat October 2, 2005 or July 3, 2005.

 

**Item4 – Controls and Procedures**

 

As required by Section 404 of the Sarbenes Oxley Actof 2002, we continue to test and evaluate our internal control procedures todetermine whether our controls are designed and operating effectively. As ofJuly 3, 2005, we concluded that our disclosure controls and procedures were noteffective because of a material weakness in internal control over financialreporting with respect to accounting for income taxes, resulting from anincorrect application of SFAS No. 109, *Accounting for IncomeTaxes*.

 

As of the date of this filing, we have remediated thismaterial weakness in our internal control over financial reporting with respectto accounting for income taxes. The remedial actions included improvingprocesses and accounting reviews designed to ensure that all relevant personnelinvolved in accounting for income taxes understand and apply tax accounting incompliance with SFAS No. 109.

 

In connection with this Form 10-Q, under thedirection of our Chief Executive Officer and Chief Financial Officer, weevaluated our disclosure controls 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 procedureswere effective as of October 2, 2005, and (ii) no change ininternal control over financial reporting occurred during the quarter ended October 2,2005, that has materially affected, or is reasonably likely to materiallyaffect, such internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1 – Legal Proceedings**

 

In April 1998,Ole K. Nilssen filed a lawsuit in the U.S. District Court for the NorthernDistrict of Illinois alleging infringement by us of seven of his patentspertaining to electronic ballast technology, and seeking unspecified damagesand injunctive relief to preclude us from making, using or selling productsallegedly infringing his patents. In April 2003, Nilssen’s lawsuit againstus and our counterclaims against Nilssen were dismissed with prejudice and bothparties agreed to submit limited issues in dispute to binding arbitrationbefore an arbitrator with a relevant technical background. The arbitrationoccurred in November, 2004 and a decision awarding Nilssen $23.4 million wasissued on May 3, 2005. Nilssen’s motion to enter the award as a judgmentin U.S. District Court for the Northern District of Illinois and our counter-motionto vacate the award on the grounds that it was fraudulently obtained arepending in the U.S. District Court for the Northern District of Illinois.  Our request for oral argument was granted andthe hearing was held on October 19, 2005. The judge is expected to render his decision by mail after furtherconsideration.  An unfavorable decisionby the Court could result in payment of the award to Nilssen, which would havea material adverse effect on our cash flows during fiscal 2006.

 

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In June 2001,we sold our lighting business to Universal Lighting Technologies, Inc. (“ULT”),and agreed to provide a limited indemnification against certain claims ofinfringement that Nilssen might allege against ULT. In February 2003,Nilssen filed a lawsuit in the U.S. District Court for the Northern District ofIllinois alleging infringement by ULT of twenty-nine of his patents pertainingto electronic ballast technology, and seeking unspecified damages andinjunctive relief to preclude ULT from making, using or selling productsallegedly infringing his patents. ULT made a claim for indemnification, which weaccepted, subject to the limitations set forth in the sale agreement.  Meanwhile, a response was filed denying thatthe products infringe any valid patent and asserting affirmative defenses, aswell as a counterclaim for a judicial declaration that the patents areunenforceable and invalid. The case is now pending in the Central Districtof Tennessee.  As of the date of thisreport, Nilssen has voluntarily dismissed all but four of the patents from thelawsuit and requests for re-examination of two of the remaining patents by thePatent and Trademark Office have been accepted. A motion for summary judgment that various claims of the patents atissue are invalid and that the accused ULT products do not infringe a claim ofone of the patents was filed on November 1, 2005.  A hearing date has not yet been set.  We will continue to aggressively defend theclaims against ULT while the re-examinations and the motion for summaryjudgment are pending; however, a decision in the lawsuit that is ultimatelyunfavorable to ULT could have a material adverse effect on our financialposition, cash flows and results of operations as a result of itsindemnification obligations.

 

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

 

There were no unregistered sales ofequity securities and there were no repurchases of equity securities during ourfirst fiscal quarter ended October 2, 2005.

 

**Item 3 –Defaults Upon Senior Securities**

 

None.

 

**Item 4 – Submission of Matters to a Vote ofSecurity Holders**

 

(a)                                    TheAnnual Meeting of Stockholders of the Company was held on November 9,2005.

 

(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

Robert E. Wycoff

 

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

 
| **Nominee**        | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------------|------------|------------|------------|--------------|------------|
|               |       |       |       |         |       |
| Andrew G. Galef    |       | 25,287,305 |       | 447,936      |       |
| Thomas G. Boren    |       | 25,383,690 |       | 351,551      |       |
| Dewain K. Cross    |       | 25,348,139 |       | 387,102      |       |
| Yon Yoon Jorden    |       | 26,612,552 |       | 122,689      |       |
| Paul J. Kofmehl    |       | 25,301,421 |       | 433,820      |       |
| Mitchell I.  Quain |       | 25,617,408 |       | 117,833      |       |
| Robert E. Wycoff   |       | 25,611,322 |       | 123,919      |       |

 

(d)                                   Theappointment of Ernst & Young LLP as the Company’s independentregistered public accounting firm for fiscal 2006 was ratified. The votes castfor and against the appointment, and the votes that abstained are as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** |
|------------|------------|-------------|------------|---------------|------------|
| 25,680,415 |       | 13,449      |       | 41,337        |       |

 

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**Item 5 –Other Information**

 

None.

 

**Item 6 - Exhibits**

 

(a)                                  Indexto Exhibits

 

10.1                   CreditAgreement dated as of September 30, 2005, among the Company, Magnetek ADSPower, Inc., Magnetek Mondel Holding, Inc., and Wells Fargo Foothill, Inc.*

 

10.2                   CreditAgreement dated as of September 30, 2005, among the Company, Magnetek ADSPower, Inc., Magnetek Mondel Holding, Inc., MagneTek NationalElectric Coil, Inc., Magnetek Alternative Energy, Inc., Mondel ULC,and Ableco Finance, LLC.*

 

10.3                   Definitions to Credit Agreements referencedin Exhibits 10.1 and 10.2 above.*

 

10.4                   Formof Non-Qualified Stock Option Agreement Pursuant to the 2004 Stock IncentivePlan of Magnetek, Inc.*

 

10.5                   Formof Restricted Stock Award Agreement Pursuant to the 2004 Stock Incentive Planof Magnetek, Inc.*

 

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

 

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

 

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

 

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*           Filedwith this Report on Form 10-Q.

 

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SIGNATURES

 

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

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

 

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