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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x                               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 1, 2007

OR

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

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 No.)

N49 W13650 Campbell Drive
Menomonee Falls, Wisconsin

 

53051

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (262) 783-3500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange

 

 

 

on which registered

 

Common Stock, $.01 par value

 

New York Stock Exchange

 

Preferred Stock Purchase Rights

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the Registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o  No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o  Yes  x  No

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of $5.65, per share as reported by the New York Stock Exchange, on December 31, 2006 (the last business day of the Company’s most recently completed second fiscal quarter), was $166,504,302. Shares of common stock held by each executive officer and director have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the Registrant’s Common Stock, as of August 15, 2007 was 30,188,919 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Magnetek, Inc. 2007 Annual Report for the fiscal year ended July 1, 2007 are incorporated by reference into Part II of this Form 10-K. With the exception of those portions which are expressly incorporated by reference into this Form 10-K, the Magnetek, Inc. 2007 Annual Report is not deemed filed as part of this Form 10-K.

Portions of the Magnetek, Inc. definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended July 1, 2007 are incorporated by reference into Part III of this Form 10-K.

9




MAGNETEK, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 1, 2007

 

Page

 

PART I

 

 

ITEM 1.

DESCRIPTION OF BUSINESS

11

 

ITEM 1A.

RISK FACTORS

16

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

16

 

ITEM 2.

PROPERTIES

16

 

ITEM 3.

LEGAL PROCEEDINGS

16

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

18

 

 

PART II

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

18

 

ITEM 6.

SELECTED FINANCIAL DATA

19

 

ITEM 7.

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

20

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

20

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

20

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

20

 

ITEM 9A.

CONTROLS AND PROCEDURES

20

 

ITEM 9B.

OTHER INFORMATION

22

 

 

PART III

 

 

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

22

 

ITEM 11.

EXECUTIVE COMPENSATION

22

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

22

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

22

 

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

23

 

 

PART IV

 

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

23

 

 

SIGNATURES

27

 

 

The Company uses a 52-53 week fiscal year which ends on the Sunday nearest June 30. Fiscal years 2007 and 2006 contained 52 weeks; fiscal year 2005 contained 53 weeks.

10




PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Magnetek, Inc. (“Magnetek” or “the Company”) is global provider of digital power control systems that are used to control motion and power primarily in material handling, people moving, telecommunications (“telecom”) and energy delivery applications. Magnetek’s products are sold directly or through manufacturers’ representatives to original equipment manufacturers (“OEMs”) for incorporation into their products, to system integrators and value-added resellers for assembly and incorporation into end-user systems, to distributors for resale to OEMs and contractors, and to end-users for repair and replacement purposes. Magnetek operates in a single segment, Digital Power Control Systems. The Company was founded in July 1984 and is listed on the New York Stock Exchange (NYSE: MAG).

During fiscal 2006, management conducted an evaluation of cash raising alternatives intended to enable the Company to address pending debt repayment and pension obligations, as well as provide funds for future growth initiatives. As a result, the Company divested its power electronics business in October, 2006. The Company used the net cash proceeds from the sale of the business to repay all outstanding debt and make a $30 million contribution to its defined benefit pension plan.

During fiscal 2007 the Company relocated both the operations of its telecom power business (from Dallas, Texas) and its corporate headquarters (from Chatsworth, California) to Menomonee Falls, Wisconsin. Management believes these relocations will result in a reduction in corporate administrative expenses and improvement in operating performance in the telecom power business through cost savings and efficiency gains.

Magnetek’s systems consist primarily of programmable motion control and power conditioning systems used in the following applications: overhead cranes and hoists; elevators; wireless telecom; coal mining equipment; and fuel cells and wind turbines. The Company is North America’s largest independent supplier of digital drives, radio controls, software and accessories for industrial cranes and hoists, and is also the largest independent supplier of digital motion control systems for elevators. Customers include most of the industrial crane and hoist companies in North America and the world’s leading elevator builders. Magnetek was the world’s first and is the largest independent builder of power conditioners for commercial stationary fuel cells, its principal customer being United Technologies. Magnetek’s operations are located in North America, predominantly in Menomonee Falls, Wisconsin, the location of the Company’s headquarters.

Product Offerings

Magnetek is a leading provider of innovative power control and delivery systems and solutions for overhead material handling applications used in industries such as: aerospace, automotive, steel, aluminum, paper, logging, mining, ship loading, nuclear power plants, work boats, locomotive yards, and the grain industry. Magnetek’s material handling products include drives, radio remote controls, and braking, collision-avoidance, and electrification subsystems, sold primarily to original equipment manufacturers of overhead cranes and hoists. The Company has a significant market share in North America in alternating current (“AC”) drives and sees revenue growth opportunities in direct current (“DC”) drives for retrofit applications and in wireless remote controls.

Magnetek also designs, builds, sells, and supports elevator application specific drive products and is recognized as a leader for DC high performance elevator drives, as well as AC drives for low and high performance traction elevators. The Company’s elevator product offerings are comprised of highly integrated subsystems and drives used to control motion primarily in high-rise, high speed elevator applications. The Company’s products are sold mainly to elevator OEMs and the Company has a significant share of the available market for DC drives and subsystems used in high-rise elevators for both new and retrofit projects. Magnetek elevator drives currently operate in seventeen of the thirty tallest buildings in the world. The Company believes opportunities for growth exist in available elevator markets through the introduction of new energy-saving product offerings for both DC and AC applications; expanding the breadth of available product offerings to include competitive low-end products for lower performance applications; and using new product offerings to expand geographically, primarily into Asia.

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Magnetek’s telecom product offerings provide reliable backup power primarily for wireless cell sites. The Company provides power systems in climate controlled outdoor enclosures, indoor cabinets, and mobile communications vehicles. These power systems are available with remote/local monitoring and control capabilities using Ethernet connectivity.

Magnetek’s energy delivery product offerings include power inverters for fuel cells and wind turbines, which deliver AC power from these energy sources to the utility power grid. The Company believes there are revenue growth opportunities in the wind market which is growing very rapidly in North America as wind power becomes increasingly competitive from a cost standpoint with more traditional methods of power generation. The Company also provides drives for underground coal mining equipment.

The Company intends to continue to build on its competitive strengths in established material handling and elevator markets and continue to invest in research and development to expand the Company’s product portfolio aimed at penetrating growing and emerging markets for digital power-based systems, such as alternative energy.

Seasonality

Magnetek’s power systems for material handling applications currently represent over 50% of the Company’s annual revenues. Sales of these products tend to follow capital budgeting and spending patterns of the customer base. As a result, Magnetek’s revenues are generally strongest in the second and fourth fiscal quarters, with relatively lower revenues in the first and third fiscal quarters.

Backlog

Magnetek’s backlog as of the end of fiscal 2007 was $19.3 million versus $12.6 million at the end of fiscal 2006. The increase in backlog is primarily due to a $7.2 million order for inverters for the wind market. The Company expects most of the orders in its backlog to be filled during first half of fiscal 2008.

Competition

Magnetek’s primary competitors during fiscal 2007 included: certain divisions of ABB and Emerson Electric Company; KCI/Konecranes, OMRON, Purcell, SatCon, Xantrex and Yaskawa. Some of these companies have substantially greater financial, marketing or other resources, larger product portfolios and/or greater brand recognition than Magnetek.

Competitive Strengths

Management believes that Magnetek benefits most from competitive advantages in the following areas:

Technological Capabilities.   Magnetek emphasizes and leverages its ability to provide custom-designed and customized solutions for power and motion control applications through digital power-electronic technology. The Company’s technical personnel possess substantial expertise in disciplines central to digital power systems and applications. These include analog-to-digital circuit design, thermal management technology, and the application of microprocessors, digital signal processors and software algorithms in the development of “smart” power products.

Customer Relationships.   Magnetek has established long-term relationships with major manufacturers of cranes and hoists, elevators and mining equipment, among others. The Company believes that these relationships have resulted from its reliability and responsiveness, readiness to meet special customer requirements based on innovative technology and application expertise, and the quality and performance of its products.

Product Breadth and Systems Sales Channels.   Magnetek provides a variety of products in each of its major product lines. For material handling customers, Magnetek serves as a “one-stop-shop” providing a full range of crane controls as well as subsystems including radio controls, brakes and electrification. Management believes that Magnetek’s well established network of “Electromotive Systems™” dealers, “Performance Plus” centers and key OEM customers constitute a significant competitive advantage in the North American materials handling marketplace.

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Competitive Weaknesses

Management considers the Company’s primary competitive weaknesses to be its limited size and financial resources. Based upon current plans and business conditions, the Company believes that available cash and short-term investments, borrowing capacity under our revolving credit facility, and internally generated cash flows will be sufficient to fund anticipated operational needs, capital expenditures and other commitments over the next 12 months. However, some of the Company’s competitors have substantially greater financial resources than Magnetek.

Suppliers and Raw Materials

Virtually all materials and components purchased by the Company are available from multiple suppliers. During fiscal 2007, raw material purchases accounted for approximately 69% of the Company’s cost of sales. Production of digital power control systems depends heavily on various electronic components as well as steel and aluminum enclosures and wire harnesses. The Company seeks to obtain competitive pricing on these raw materials by utilizing multiple suppliers and leveraging its total purchasing requirements.

Research and Development

Magnetek’s research and development activities, which are conducted primarily in Menomonee Falls, Wisconsin, are directed toward developing new products, improving existing products and customizing or modifying products to meet customers’ specific needs. Total research and development expenditures were approximately $4.7 million, $4.9 million, and $4.7 million respectively, for the Company’s 2007, 2006 and 2005 fiscal years.

Intellectual Property

Magnetek holds numerous patents, trademarks and copyrights, and believes that it holds or licenses all of the patent, trademark, copyright and other intellectual property rights necessary to conduct its business. The Company generally relies upon patents, copyrights, trademarks and trade secret laws to establish and maintain its proprietary rights in its technology and products. There can be no assurance that any of its patents, trademarks or other intellectual property rights will not be challenged, invalidated or circumvented, or that any rights granted thereunder will provide competitive advantages to the Company. In addition, there can be no assurance that patents will be issued from pending patent applications filed by the Company, or that claims allowed on any future patents will be sufficiently broad to protect Magnetek’s technology. Further, the laws of some foreign countries may not permit the protection of Magnetek’s proprietary rights to the same extent as do the laws of the United States. Although the Company believes the protection afforded by its patents, patent applications, trademarks and copyrights has value, Magnetek’s future success will depend primarily on the innovative skills, technological expertise, research and development and management capabilities of its employees rather than on patent, copyright, and trademark protection.

International Operations

International sales accounted for 12% of Magnetek’s net revenues in fiscal 2007. The Company defines international sales as sales of products manufactured by its facilities outside the U.S. that are sold outside of the U.S., as well as sales of products manufactured in the U.S. to purchasers outside of the U.S.

For the Company’s 2007, 2006, and 2005 fiscal years, revenues derived from domestic sales were $91.7 million, $85.7 million and $71.6 million, respectively, and revenues derived from international sales were $12.1 million, $16.0 million and $14.7 million.

The Company holds assets in the U.S., Canada and the United Kingdom totaling $104.7 million, of which $6.1 million are held in Canada and $1.6 million are in the United Kingdom.

Employee Relations

As of August 1, 2007, the Company had approximately 250 salaried employees and approximately 130 hourly employees, none of whom were covered by collective bargaining agreements with unions. The Company believes that its relationships with its employees are favorable.

13




Available Information

The Company’s Internet address is www.magnetek.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports that are filed by the Company with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge at or through the Company’s website.

Environmental Matters

From time to time, Magnetek has taken action to bring certain facilities associated with previously owned businesses into compliance with applicable environmental laws and regulations. Upon the subsequent sale of certain businesses, the Company agreed to indemnify the buyers against environmental claims associated with the divested operations, subject to certain conditions and limitations. Remediation activities, including those related to the Company’s indemnification obligations, did not involve material expenditures during fiscal years 2007, 2006, or 2005.

The Company has also been identified by the United States Environmental Protection Agency and certain state agencies as a potentially responsible party for cleanup costs associated with alleged past waste disposal practices at several previously owned facilities and offsite locations. Its remediation activities as a potentially responsible party were not material in fiscal years 2007, 2006 and 2005. Although the materiality of future expenditures for environmental activities may be affected by the level and type of contamination, the extent and nature of cleanup activities required by governmental authorities, the nature of the Company’s alleged connection to the contaminated sites, the number and financial resources of other potentially responsible parties, the availability of indemnification rights against third parties and the identification of additional contaminated sites, the Company’s estimated share of liability, if any, for environmental remediation, including its indemnification obligations, is not expected to be material.

Century Electric (McMinnville, Tennessee)

Prior to the Company’s purchase of Century Electric, Inc. (“Century Electric”) in 1986, Century Electric acquired a business from Gould Inc. (“Gould”) in May 1983 that included a leasehold interest in a fractional horsepower electric motor manufacturing facility located in McMinnville, Tennessee. Gould agreed to indemnify Century Electric from and against liabilities and expenses arising out of the handling and cleanup of certain waste materials, including but not limited to cleaning up any polychlorinated biphenyls (“PCBs”) at the McMinnville facility (the “1983 Indemnity”). The presence of PCBs and other substances, including solvents, in the soil and in the groundwater underlying the facility and in certain offsite soil, sediment and biota samples has been identified. The McMinnville plant is listed as a Tennessee Inactive Hazardous Waste Substance Site and plant employees were notified of the presence of contaminants at the facility. Gould has completed an interim remedial excavation and disposal of onsite soil containing PCBs and a preliminary investigation and cleanup of certain onsite and offsite contamination. The Company believes the cost of further investigation and remediation (including ancillary costs) are covered by the 1983 Indemnity. The Company sold its leasehold interest in the McMinnville plant in August 1999 and while the Company believes that Gould will continue to perform substantially under its indemnity obligations, Gould’s substantial failure to perform such obligations could have a material adverse effect on the Company’s financial position, cash flows and results of operations.

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

In 1986, the Company acquired the stock of Universal Manufacturing Company (“Universal”) from a predecessor of Fruit of the Loom (“FOL”), and the predecessor agreed to indemnify the Company against certain environmental liabilities arising from pre-acquisition activities at a facility in Bridgeport, Connecticut. Environmental liabilities covered by the indemnification agreement include completion of additional cleanup activities, if any, at the Bridgeport facility and defense and indemnification against liability for potential response costs related to offsite disposal locations. The Company’s leasehold interest in the Bridgeport facility was assigned to the buyer in connection with the sale of the Company’s transformer business in June 2001. FOL, the successor to the indemnification obligation, filed a petition for Reorganization under Chapter 11 of the Bankruptcy Code in 1999 and the Company filed a proof of claim in the proceeding for obligations related to the environmental indemnification agreement. The Company believes that FOL had

14




substantially completed the clean-up obligations required by the indemnification agreement prior to the bankruptcy filing. In November 2001, the Company and FOL entered into an agreement involving the allocation of certain potential tax benefits and Magnetek withdrew its claims in the bankruptcy proceeding. FOL’s obligation to the state of Connecticut was not discharged in the reorganization proceeding.

In October 2006, the owner of the Bridgeport facility filed a lawsuit in Superior Court, J.D. of Fairfield, Connecticut alleging that the Company is obligated to remediate environmental contamination at the facility. The Company filed a Motion to Stay and Remand the matter to the Connecticut Department of Environmental Protection (“DEP”) on the basis that DEP has primary jurisdiction to determine the need and responsibility for any further remediation. Following the court’s denial of such motion, the Company filed its answer, affirmative defenses and counterclaims. Plaintiff amended its complaint, alleging breach of lease obligations and violation of Connecticut environmental statutory requirements. The case is in discovery. DEP recently requested parties, including the Company, to submit reports summarizing the investigations and remediation performed to date at the site and the proposed additional investigations and remediation necessary to complete those actions at the site. DEP requested additional information from the Company relating to site investigations and remediation. DEP also conducted an on-site inspection at the Bridgeport facility. FOL’s inability to satisfy its remaining obligations related to the Bridgeport facility and any offsite disposal locations, or an unfavorable ruling in the lawsuit with the owner of the Bridgeport facility, or the discovery of additional environmental contamination at the Bridgeport facility could have a material adverse effect on the Company’s financial position, cash flows or results of operations.

Supplemental Information-Executive Officers of the Company

The following table sets forth certain information regarding the current executive officers of the Company.

Name

 

 

 

 

Age

 

 

Position

 

 

 

David P. Reiland

 

 

53

 

 

President and Chief Executive Officer

 

 

Peter M. McCormick

 

 

47

 

 

Executive Vice President and Chief Operating Officer

 

 

Marty J. Schwenner

 

 

46

 

 

Vice President and Chief Financial Officer

 

 

Ryan D. Gile

 

 

38

 

 

Vice President, Controller

 

 

Jolene L. Shellman

 

 

60

 

 

Vice President Legal Affairs and Corporate Secretary

 

 

 

David Reiland has been President and Chief Executive Officer of the Company since November 2006. Prior to that, Mr. Reiland served as an Executive Vice President of the Company and was its Chief Financial Officer since 1988. In 2003, Mr. Reiland assumed temporary responsibility for the Company’s Telecom Power Group during a management restructure. Mr. Reiland has also served as the Controller of the Company from 1986 until 1993 and as Vice President, Finance from 1987 to 1989. Mr. Reiland is a Certified Public Accountant.

Peter McCormick has been Chief Operating Officer of the Company since November 2006 and has been the Executive Vice President responsible for the Company’s Power Control Systems Group since 2002. Prior to that, he served as the President of the Company’s Industrial Controls Group from 1999 until 2002. Since joining the Company in 1996, Mr. McCormick has also served as the Vice President of Operations for the drives group from 1998 until 1999 and as Vice President of the custom products business group from 1996 until 1998.

Marty Schwenner has been Chief Financial Officer of the Company since November 2006. Mr. Schwenner has served as a Vice President of the Company since 2003 and was Controller of the Company from 2002 until November 2006. Mr. Schwenner was Vice President of Finance for the Power Electronic Group from 1998 until 2002. Mr. Schwenner also served as the Chief Financial Officer of the Company’s European Operations from 1992 to 1998 and as Internal Audit Manager from 1991 until 1992. Mr. Schwenner joined Magnetek as an Internal Auditor in 1989. Mr. Schwenner is a Certified Public Accountant and a Certified Internal Auditor.

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Ryan Gile has been Vice President and Controller of the Company since November 2006. Prior to that, Mr. Gile had served as Magnetek’s Vice President of Finance and Business Systems for the Company’s Power Control Systems Group since 2002. Before joining Magnetek, Mr. Gile was a Finance Manager at Rockwell Automation since 1995 and was also a Financial Auditor and Tax Associate at Coopers & Lybrand LLP. Mr. Gile is a Certified Public Accountant.

Jolene Shellman joined the Company on January 3, 2007 as Vice President Legal Affairs and Corporate Secretary. Prior to joining Magnetek, Ms. Shellman was an attorney with Varnum, Riddering, Schmidt & Howlett LLP in its Milwaukee, WI office from 1997 until 2006, and she was self employed as a contract attorney from March 2006 until she joined the Company. From 1979 until 1997, she was Assistant General Counsel and Assistant Secretary at A.O. Smith Corporation and Assistant General Counsel with Tower Automotive, Inc. after it acquired A.O. Smith’s automotive business. She also was House Counsel and Assistant Secretary at Mutual Savings and Loan Association from 1975 to 1979.

ITEM 1A. RISK FACTORS

The information called for by this Item 1A is hereby incorporated by reference to the section of the Company’s 2007 Annual Report entitled “Risk Factors Affecting the Company’s Outlook.”

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Magnetek’s headquarters and each of its manufacturing facilities for the continuing operations of the Company are listed below, each of which is leased.

Location

 

Lease Term

 

Approximate
Size (Sq.Ft.)

 

Principal Use

 

Menomonee Falls, Wisconsin

 

2014

 

 

156,000

 

Power control systems manufacturing and corporate headquarters

 

Mississauga, Canada

 

2011

 

 

18,000

 

Power control systems manufacturing

 

Pittsburgh, Pennsylvania

 

2009

 

 

9,000

 

Power control systems manufacturing

 

Dallas, Texas

 

2012

 

 

5,000

 

Sales office

 

 

The Company believes its facilities are in satisfactory condition and are adequate for its continuing operations.

ITEM 3. LEGAL PROCEEDINGS

Litigation—Product Liability

The Company has settled or otherwise resolved all of the product liability lawsuits associated with its discontinued business operations except for any potential future product liability claims which may arise in connection with the recent sale of the Company’s Power Electronics business. The last remaining limited obligation to defend and indemnify the purchaser of a discontinued business operation (other than Power-One) against new product liability or warranty claims expired in December 2003 and the Company believes that any new claims would either qualify as an assumed liability, as defined in the various purchase agreements, or would be barred by an applicable statute of limitations. The Company is also a named party in two product liability lawsuits related to the Telemotive Industrial Controls business acquired in December 2002 through the purchase of the stock of MXT Holdings, Inc. Both claims pre-dated the acquisition and were tendered to the insurance companies that provided coverage for MXT Holdings, Inc., against such claims and the defense and indemnification has been accepted by the carriers, subject to a reservation of rights. Management believes that the insurers will bear all liability, if any, with respect to both cases and that the proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s results of operations or financial position.

In August 2006, Pamela L. Carney, Administrator of the Estate of Michael J. Carney, filed a lawsuit in the Court of Common Pleas of Westmoreland County, Pennsylvania, against the Company and other defendants, alleging that a

16




product manufactured by the Telemotive Industrial Controls business acquired by the Company in December 2002 contributed to an accident that resulted in the death of Michael J. Carney in August 2004. The claim has been tendered to the Company’s insurance carrier and legal counsel has been retained to represent the Company. Plaintiff’s claim for damages is unknown at this time, but management believes that its insurers will bear all liability in excess of deductible amounts for the claim, if any.

The Company has been named, along with multiple other defendants, in asbestos-related lawsuits associated with business operations previously acquired by the Company, but which are no longer owned. During the Company’s ownership, none of the businesses produced or sold asbestos-containing products. With respect to these claims, the Company is either contractually indemnified against liability for asbestos-related claims or believes that it has no liability for such claims. The Company aggressively seeks dismissal from these proceedings, and has also tendered the defense of these cases to the insurers of the previously acquired businesses. Several insurance carriers have recently filed a declaratory judgment action relating to insurance coverage for such previously acquired businesses, seeking a determination that no coverage is available under the policies. The Company has also filed late claims in the Federal-Mogul bankruptcy proceedings to recover attorney’s fees paid for the defense of these claims. The Company and Federal-Mogul entered into a settlement agreement under which the Company is entitled to receive amounts from a settlement trust established under Federal-Mogul’s reorganization plan and funded by insurance proceeds. The Company is entitled to receive 15% of the first $20 million and 10% of the next $25 million of insurance proceeds, up to a maximum of $5.5 million, in exchange for withdrawing its bankruptcy claims and objections to the reorganization plan and execution of certain releases. The settlement is subject to final approval of the plan by the Bankruptcy Court. There is no guarantee that any amounts will be collected on any insurance policies, and Federal-Mogul and the trust have control over the collection process. Management does not believe the asbestos proceedings, individually or in the aggregate, will have a material adverse effect on its financial position or results of operations.

Litigation—Patent Infringement

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

In February 2003, Nilssen filed a second lawsuit in the U.S. District Court for the Northern District of Illinois alleging infringement by ULT of twenty-nine of his patents pertaining to electronic ballast technology, and seeking unspecified damages and injunctive relief to preclude ULT from making, using or selling products allegedly infringing his patents. ULT made a claim for indemnification, which the Company accepted, subject to the limitations set forth in the sale agreement. The case is now pending in the Middle District of Tennessee. Nilssen voluntarily dismissed all but four of the patents from the lawsuit. The Company denies that the products for which it has an indemnification obligation to ULT infringe any valid patent and responded on behalf of ULT asserting affirmative defenses, as well as a counterclaim for a judicial declaration that the patents are unenforceable and invalid and that the products do not infringe Nilssen’s patents. The case against ULT has been stayed pending Nilssen’s appeal of an unfavorable decision against him in another case that could influence the outcome of his lawsuits against ULT. Oral arguments were heard by the appellate court in July on Nilssen’s

17




appeal. ULT requested a re-examination of the patents at issue by the Patent and Trademark Office (PTO) and the PTO recently rejected claims in two of the patents at issue in the lawsuit against ULT. The Company will continue to aggressively defend the claims against ULT that are subject to defense and indemnification; however, an unfavorable decision could have a material adverse effect on the Company’s financial position, cash flows and results of operations.

Litigation—Breach of Contract

On May 1, 2007, the Company entered into an agreement to settle litigation with Samsung-Electro-Mechanics Co., Ltd. (SEMCO), a Korean corporation, whereby SEMCO agreed to pay the Company the total sum of $2.12 million in four semi-annual installments between June 1, 2007 and December 1, 2007 to resolve a dispute in a development agreement. The net present value of the settlement amount, $2.0 million of income, as well as legal fees of $0.5 million incurred during the fourth quarter of fiscal 2007 related to the settlement, are included in results of discontinued operations in the accompanying consolidated statement of operations for fiscal 2007.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the stockholders of the Company during the quarter ended July 1, 2007.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth the high and low sales prices of the Company’s Common Stock during each quarter of fiscal 2007 and 2006:

 

 

High

 

Low

 

Fiscal Year 2007

 

 

 

 

 

First quarter

 

$3.85

 

$2.63

 

Second quarter

 

5.90

 

3.46

 

Third quarter

 

5.85

 

4.49

 

Fourth quarter

 

5.75

 

4.28

 

Fiscal Year 2006

 

 

 

 

 

First quarter

 

$3.70

 

$2.37

 

Second quarter

 

3.50

 

2.37

 

Third quarter

 

4.10

 

3.03

 

Fourth quarter

 

4.19

 

2.01

 

 

The Company’s Common Stock is listed for trading on the New York Stock Exchange under the ticker symbol “MAG.” As of August 15, 2007 there were 185 record holders of Magnetek’s Common Stock.

Stock Performance Graph—Return to Shareholders

The following Performance Graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 that we make, except to the extent we specifically incorporate this Report.

The following table and line graph compare the cumulative 5-year total return obtained by shareholders of Magnetek, Inc.'s common stock relative to the cumulative total returns of the S&P Smallcap 600 Index and two customized peer groups of companies. The new peer group of four companies includes Regal Beloit Corp., Satcon Technology Corp., Valmont Industries Inc. and Xantrex Technology Inc. The old peer group of five companies includes C&D Technologies Inc, Power-One Inc, Satcon Technology Corp., SL Industries Inc and Vicor Corp. The old peer group represents Magnetek's peers prior to our restructuring which commenced in October 2006; the new group represents our peers after the restructuring, which included the divestiture of our Power Electronics Business to Power-One, Inc. in October 2006.  Our peer group has changed because the Power Electronics Business (which accounted for more than

18




60% of Magnetek's revenue) manufactured embedded electronic power components, whereas our Power Control Systems Business (which accounted for the balance of Magnetek's revenue prior to our restructuring) builds integrated digital power and motion control systems.  Henceforth, therefore, we will use the new peer group for performance comparison.

The table and line graph below assume that an investment of $100 (with reinvestment of all dividends) was made in Magnetek's common stock, in each of the peer groups' common stocks, and in the S&P Smallcap 600 Index on 6/30/2002, and its relative performance is tracked through 6/30/2007.

Company / Index

 

Jun-02

 

Jun-03

 

Jun-04

 

Jun-05

 

Jun-06

 

Jun-07

 

 

Magnetek, Inc.

 

100.00

 

25.66

 

84.24

 

25.96

 

27.27

 

52.02

 

S&P Smallcap 600

 

100.00

 

96.42

 

130.41

 

147.95

 

168.55

 

195.58

 

New Peer Group

 

100.00

 

86.86

 

106.75

 

127.82

 

204.16

 

263.62

 

Old Peer Group

 

100.00

 

103.12

 

160.99

 

103.48

 

109.97

 

80.36

 

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among Magnetek, Inc., S&P Smallcap 600 Index,
A New Peer Group And An Old Peer Group

GRAPHIC

New Peer Group:   Valmont Industries, Xantrex Technology Inc., Satcon Technologies Corp., Regal Beloit Corp.

Old Peer Group:   C&D Technologies Inc., Power-One, Inc., Satcon Technologies Corp., SL Industries, Inc., Vicor Corp.

Magnetek has not paid any cash dividends on its Common Stock and does not anticipate paying cash dividends in the near future. The ability of the Company to pay dividends on its Common Stock is restricted by provisions in the Company’s 2006 bank loan agreement, which provides that the Company may not declare or pay any dividend or make any distribution with respect to its capital stock.

The Company did not repurchase any of its Common Stock during fiscal year 2007. There were no unregistered sales of equity securities during fiscal year 2007.

ITEM 6. SELECTED FINANCIAL DATA

The information called for by this Item 6 is hereby incorporated by reference to the section of the Company’s 2007 Annual Report entitled “Selected Financial Data.”

19




 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information called for by this Item 7 is hereby incorporated by reference to the section of the Company’s 2007 Annual Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by this Item 7A is hereby incorporated by reference to the section of the Company’s 2007 Annual Report entitled “Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information called for by this Item 8 is hereby incorporated by reference to the Company’s Consolidated Financial Statements and the corresponding Report of Independent Registered Public Accounting Firm in the Company’s 2007 Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Magnetek had no disagreements with its independent accountants in fiscal 2007 with respect to accounting and financial disclosure, and has not changed its independent accountants during the two most recent fiscal years.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of July 1, 2007.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial control is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that:

   I.        pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company;

  II.         provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 III.          provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to the reliability of financial reporting and the preparation and presentation of financial statements. Also, projections of any evaluation about the effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

20




Management evaluated the effectiveness of the Company’s internal control over financial reporting as of July 1, 2007. In making this evaluation, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that the Company maintained effective internal control over financial reporting as of July 1, 2007 based on the criteria set forth in Internal Control-Integrated Framework issued by the COSO.

The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting, which is included with this Annual Report on Form 10-K.

(c) Changes in Controls and Procedures

No change in internal control over financial reporting occurred during the period ended July 1, 2007, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Magnetek, Inc.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Magnetek, Inc. did maintain effective internal control over financial reporting as of July 1, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Magnetek, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Magnetek, Inc. maintained effective internal control over financial reporting as of July 1, 2007, is fairly stated, in all material respects, based on the COSO control criteria.

21




We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Magnetek, Inc. as of July 1, 2007 and July 2, 2006 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended July 1, 2007 and our report dated August 17, 2007, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Milwaukee, Wisconsin

 

August 17, 2007

 

 

ITEM 9B. OTHER INFORMATION

No other information is required to be reported for matters not disclosed on Form 8-K during the period ended July 1, 2007.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by this Item 10 is hereby incorporated by reference to the sections of the Company’s 2007 Proxy Statement entitled “Proposal No. 1 – Election of Board of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Supplementary Information – Executive Officers of the Company.”

Supplemental Information-Code of Ethics

The Company has adopted a Code of Ethics for all of its directors and employees that contains portions specifically applicable to executives and officers of the Company, including the Chief Executive Officer, the Chief Financial Officer, the Controller and employees performing financial functions for the Company. The Code of Ethics is posted on Magnetek’s website at www.magnetek.com. A copy of the Code of Ethics is available, without charge, to any shareholder who sends a written request to the Corporate Secretary at N49 W13650 Campbell Drive, Menomonee Falls, Wisconsin 53051. The Company intends to satisfy the disclosure requirements of Form 8-K regarding any amendment to, or waiver from, a provision of the Code of Ethics by posting such information on the Company’s website, at the web address and location specified above.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this Item 11 is hereby incorporated by reference to the section of the Company’s 2007 Proxy Statement entitled “Compensation Discussion and Analysis” and the tables and narrative relating to Executive and Director compensation, “Compensation Committee Interlocks and Insider Participation” and “Report of the Compensation Committee.”

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners and Management

The information called for by this Item 12 is hereby incorporated by reference to the sections of the Company’s 2007 Proxy Statement entitled “Beneficial Ownership of Magnetek, Inc. Common Stock by Directors, Officers and Certain Other Owners,” “Grants of Plan-Based Awards in Fiscal Year Table,” “Outstanding Equity Awards at Fiscal Year End Table” and “Option Exercises and Stock Vested for Fiscal Year Table.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 is hereby incorporated by reference to the sections of the Company’s 2007 Proxy Statement entitled “Relationships and Related Transactions,” “Compensation Committee Interlocks and Insider Participation,” and “Corporate Governance Principles.”

22




ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information called for by this Item 14 is hereby incorporated by reference to the section of the Company’s 2007 Proxy Statement entitled “Proposal No. 2 – Ratification of the Appointment of Independent Registered Public Accounting Firm.”

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Index to Consolidated Financial Statements, Consolidated Financial Statement Schedules and Exhibits:

 

 

Annual Report to
Stockholders Page

 

1.

Consolidated Financial Statements

 

 

 

 

Consolidated Statements of Operations for Years Ended July 1, 2007, July 2, 2006, and July 3, 2005

 

44

 

 

Consolidated Balance Sheets at July 1, 2007 and July 2, 2006

 

45

 

 

Consolidated Statements of Stockholders’ Equity for Years Ended July 1, 2007, July 2, 2006, and July 3, 2005

 

46

 

 

Consolidated Statements of Cash Flows for Years Ended July 1, 2007, July 2, 2006, and July 3, 2005

 

47

 

 

Notes to Consolidated Financial Statements

 

48

 

 

Report of Independent Registered Public Accounting Firm

 

70

 

2.

Consolidated Financial Statement Schedule

 

 

 

 

Schedule II—Valuation and Qualifying Accounts

 

27

 

 

Report of Independent Registered Public Accounting Firm

 

29

 

 

All other financial statement schedules have been omitted because of the absence of conditions under which they are required or applicable, or because the information required is included in the Consolidated Financial Statements and related notes.

3. Exhibit Index

The following exhibits are filed as part of this Annual Report Form 10-K, or are incorporated herein by reference. Where an exhibit is incorporated by reference, the number which precedes the description of the exhibit indicates the documents to which the cross-reference is made.

Exhibit

Note

Description of Exhibit

No.

 

 

3.1

(1)

Restated Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on November 21, 1989.

3.2

(2)

By-laws of the Company, as amended and restated.

4.1

(3)

Registration Rights Agreement, dated as of April 29, 1991, by and among the Company, Andrew G. Galef, Frank Perna, Jr. and the other entities named therein.

4.2

(4)

Registration Rights Agreement, dated as of June 28, 1996, by and between the Company and U.S. Trust Company of California, N.A.

4.3

(18)

Registration Rights Agreement, dated as of June 26, 2002, by and between the Company and U. S. Trust Company N.A.

4.4

(9)

Rights Agreement, dated as of April 30, 2003, by and between the Company and The Bank of New York, as Rights Agent.

4.5

(18)

Agreement for Registration Rights, dated as of September 15, 2003, by and between the Company and SEI Private Trust Company.

4.6

(23)

Registration Rights Agreement, dated as of October 3, 2003, by and between the Company and each B. Riley Investor.

10.1*

(5)

Second Amended and Restated 1989 Incentive Stock Compensation Plan of Magnetek, Inc. (“1989 Plan”).

10.2*

(4)

Amendment No. 1 to 1989 Plan.

23




 

10.3*

(4)

Standard Terms and Conditions Relating to Non-Qualified Stock Options, revised as of July 24, 1996, pertaining to the 1989 Plan.

10.4*

(4)

Form of Non-Qualified Stock Option Agreement Pursuant to the Second Amended and Restated 1989 Incentive Stock Compensation Plan of the Company.

10.5*

(6)

Magnetek, Inc. 1997 Non-Employee Director Stock Option Plan (the “DSOP”).

10.6*

(7)

First Amendment to the DSOP, dated as of July 26, 2000.

10.7*

(3)

1991 Discretionary Director Incentive Compensation Plan of the Company.

10.8*

(8)

1999 Stock Incentive Plan of the Company (the “1999 Plan”).

10.9*

(8)

2000 Employee Stock Plan of the Company (the “2000 Plan”).

10.10*

(8)

Standard Terms and Conditions Relating to Non-Qualified Stock Options, effective as of October 19, 1999, pertaining to the 1999 Plan and the 2000 Plan.

10.11*

(10)

Magnetek, Inc. Amended and Restated Director Compensation and Deferral Investment Plan (the “DDIP”).

10.12*

(19)

Amendment to the DDIP.

10.13*

(11)

Non-Qualified Stock Option Agreement, dated as of January 27, 1997, by and between the Company and David P. Reiland.

10.14*

(25)

2004 Stock Incentive Plan of Magnetek, Inc.

10.15*

(26)

Form of Non-Qualified Stock Option Agreement Pursuant to 2004 Stock Incentive Plan.

10.16*

(26)

Form of Restricted Stock Award Agreement Pursuant to 2004 Stock Incentive Plan.

10.17*

(25)

Second Amendment to the 1997 Non-Employee Director Stock Option Plan of Magnetek, Inc.

10.18*

(24)

Executive Employment Agreement, dated as of May 9, 2005, by and between the Company and Thomas G. Boren.

10.19*

(13)

Change of Control Agreement, dated as of October 20, 1998, by and between Antonio Canova and the Company.

10.20*

(13)

Change of Control Agreement, dated as of October 20, 1998, by and between Alexander Levran and the Company.

10.21*

(13)

Change of Control Agreement, dated as of October 20, 1998, by and between David P. Reiland and the Company.

10.22*

(14)

Change of Control Agreement, dated as of January 30, 2004, by and between Tina McKnight and the Company.

10.23*

(20)

Amended and Restated Change of Control Agreement, dated as of April 30, 2003, by and between Tina McKnight and the Company.

10.24*

(16)

Change of Control Agreement, dated as of December 11, 2002, by and between Peter McCormick and the Company.

10.25*

(18)

Change of Control Agreement, dated as of July 29, 2003, by and between Marty Schwenner and the Company.

10.26*

(27)

Change of Control Agreement, dated as of September 29, 2005, by and between Stephen Torres and the Company.

10.27

(15)

Tax Agreement, dated as of February 12, 1986, by and between the Company and Farley Northwest Industries, Inc.

10.28

(26)

Credit Agreement, dated as of September 30, 2005, by and among the Company, Magnetek ADS Power, Inc., Magnetek Mondel Holding, Inc., and Wells Fargo Foothill, Inc.

10.29

(26)

Financing Agreement, dated as of September 30, 2005, by and among the Company, Magnetek ADS Power, Inc., Magnetek Mondel Holding, Inc., MagneTek National Electric Coil, Inc., Magnetek Alternative Energy, Inc., Mondel ULC, and Ableco Finance, LLC.

10.30

(26)

Definitions to Credit Agreements referenced in Exhibits 10.28 and 10.29 above.

10.31

(28)

First Amendment to Credit Agreement and Waiver, dated as of November 29, 2005, by and among the Company, certain subsidiaries of the Company party thereto, the lenders party thereto and Wells Fargo Foothill, Inc., as administrative agent.

10.32

(28)

Amendment No. 1 to Financing Agreement, dated as of November 29, 2005, by and among the Company, certain subsidiaries of the Company party thereto, the lenders party thereto and Ableco Finance LLC, as collateral agent and administrative agent.

10.33

(29)

Second Amendment to Credit Agreement and Waiver, dated as of April 20, 2006, by and among the Company, certain subsidiaries of the Company party thereto, the lenders party thereto and Wells Fargo Foothill, Inc., as administrative agent.

10.34

(29)

Amendment No. 2 to Financing Agreement, dated as of April 24, 2006, by and among the Company, certain subsidiaries of the Company party thereto, the lenders party thereto and Ableco Finance LLC, as collateral agent and administrative agent.

24




 

10.35

(12)

Lease of Pomaz, Hungary facility.

10.36

(17)

Lease of Menomonee Falls, Wisconsin facility, dated as of July 23, 1999.

10.37

(21)

Contract, dated as of July 10, 2003, for Current Account Credit With Mortgage Lien Pursuant to Article 38 and Subsequent Articles of Legislative Decree No. 385/1993 (Republic of Italy).

10.38

(22)

Joinder Agreement, dated as of April 23, 2004, by and among the Company, SEI Private Trust Company and LaSalle Bank, N.A.

10.39

(30)

Agreement for the Sale of Magnetek, Inc. Power Electronics Group, dated as of September 28, 2006, by and between the Company and Power-One, Inc.

10.40

(30)

Forbearance Agreement, dated as of September 22, 2006, by and among the Company, certain subsidiaries of the Company party thereto, the lenders party thereto and Ableco Finance LLC, as collateral agent and administrative agent.

10.41

(30)

Forbearance Agreement, dated as of September 22, 2006, by and among the Company, certain subsidiaries of the Company party thereto, the lenders party thereto and Wells Fargo Foothill, Inc. as administrative agent.

10.42*

(31)

Amendment No. 2 to the DDIP.

10.43*

(32)

Incentive Bonus Agreement, dated as of January 5, 2007, by and between the Company and David P. Reiland.

10.44*

(32)

Form of Amendment No. 1 to Change of Control Agreement, effective as of January 5, 2007.

10.45

(33)

Settlement Agreement and Release, dated as of May 1, 2007, by and between the Company and Samsung Electro-Mechanics Co.

10.45

(34)

Settlement Agreement, dated as of May 24, 2007, by and among by and among the Company, Magnetek Controls, Inc., Magnetek National Electric Coil, Inc., Federal-Mogul Corporation, Federal-Mogul Products, Inc., and certain other parties thereto.

10.46*

**

First Amendment to the 2004 Stock Incentive Plan.

10.47*

**

Form of Stock Option Agreement for 2004 Stock Incentive Plan.

10.48

(2)

Lease of Second Menomonee Falls, Wisconsin facility, dated as of November 26, 2006.

10.49

(2)

Lease Amendment for Menomonee Falls, Wisconsin facility, dated as of April 5, 2007.

13.1

**

2007 Annual Report.

21.1

**

Subsidiaries of the Registrant as of July 1, 2007.

23.1

**

Consent of Independent Registered Public Accounting Firm.

31.1

**

Certification Pursuant to 15 U.S.C. Section 7241.

31.2

**

Certification Pursuant to 15 U.S.C. Section 7241.

32.1

**

Certifications Pursuant to 18 U.S.C. Section 1350.

 

*

Indicates a management contract or compensatory plan or arrangement.

**

Filed with this Form 10-K.

(1)

Previously filed with the Registration Statement on Form S-3 filed on August 1, 1991, Commission File No. 33-41854, and incorporated herein by this reference.

(2)

Previously filed with Form 8-K filed August 23, 2007 and incorporated herein by this reference.

(3)

Previously filed with Form 10-K for Fiscal Year ended June 30, 1991 and incorporated herein by this reference.

(4)

Previously filed with Form 10-K for Fiscal Year ended June 30, 1996 and incorporated herein by this reference.

(5)

Previously filed with Form 10-Q for quarter ended December 31, 1994 and incorporated herein by this reference.

(6)

Previously filed with the Registration Statement on Form S-8 filed on February 10, 1998, Commission File No. 333-45935, and incorporated herein by this reference.

(7)

Previously filed with Form 10-Q for quarter ended September 30, 2000 and incorporated herein by this reference.

(8)

Previously filed with Form 10-Q/A for quarter ended September 30, 1999 and incorporated herein by this reference.

25




 

(9)

Previously filed with Form 8-K filed May 12, 2003 and incorporated herein by this reference.

(10)

Previously filed with the Registration Statement on Form S-8 filed on February 10, 1998, Commission File No. 333-45939, and incorporated herein by this reference.

(11)

Previously filed with Form 10-Q for quarter ended March 31, 1997 and incorporated herein by this reference.

(12)

Previously filed with Form 10-K for Fiscal Year ended July 2, 2000 and incorporated herein by this reference.

(13)

Previously filed with Form 10-Q for quarter ended December 31, 1998 and incorporated herein by this reference.

(14)

Previously filed with Form 10-Q for quarter ended December 31, 2000 and incorporated herein by this reference.

(15)

Previously filed with Amendment No. 1 to Registration Statement of Form S-1 filed on February 14, 1986, Commission File No. 002-97500, and incorporated herein by this reference.

(16)

Previously filed with Form 10-Q for Quarter ended December 31, 2002 and incorporated herein by this reference.

(17)

Previously filed with Form 10-K for Fiscal Year ended June 27, 1999 and incorporated herein by this reference.

(18)

Previously filed with Form 10-Q for quarter ended September 30, 2003 and incorporated herein by this reference.

(19)

Previously filed with Form 10-Q for quarter ended March 31, 2002 and incorporated herein by this reference.

(20)

Previously filed with Form 10-K for Fiscal Year ended June 30, 2003 and incorporated herein by this reference.

(21)

Previously filed with Registration Statement on Form S-3 filed on November 13, 2003, Commission File No. 333-110460, and incorporated herein by this reference.

(22)

Previously filed with Registration Statement on Form S-3 filed on May 21, 2004, Commission File No. 333-115724, and incorporated herein by this reference.

(23)

Previously filed with Form 8-K dated October 21, 2003 and incorporated herein by this reference.

(24)

Previously filed with Form 8-K dated June 30, 2005 and incorporated herein by this reference.

(25)

Previously filed with Definitive Proxy Statement filed September 22, 2004 and incorporated herein by this reference.

(26)

Previously filed with Form 10-Q for quarter ended October 2, 2005 and incorporated herein by this reference.

(27)

Previously filed with Form 10-K for Fiscal Year ended July 3, 2005 and incorporated herein by this reference.

(28)

Previously filed with Form 8-K filed December 6, 2005 and incorporated herein by this reference.

(29)

Previously filed with Form 8-K filed April 26, 2006 and incorporated herein by this reference.

(30)

Previously filed with Form 10-K for Fiscal Year ended July 2, 2006 and incorporated herein by this reference.

(31)

Previously filed with Definitive Proxy Statement filed September 29, 2006 and incorporated herein by this reference.

(32)

Previously filed with Form 8-K filed January 11, 2007 and incorporated herein by this reference.

(33)

Previously filed with Form 8-K filed May 1, 2007 and incorporated herein by this reference.

(34)

Previously filed with Form 8-K filed June 4, 2007 and incorporated herein by this reference.

 

26




SCHEDULE II

MAGNETEK, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 2, 2005, JULY 2, 2006 AND JULY 1, 2007

(amounts in thousands)

 

 

 

 

Balance at
Beginning of year

 

 

 

Additions charged
to earnings

 

 

 

Deductions from
Allowance

 

 

 

Other

 

 

 

Balance at end of
year

 

July 3, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful receivables

 

 

 

 

$

490

 

 

 

 

 

$

603

 

 

 

 

 

$

(321

)

 

 

 

 

$

1

 

 

 

 

 

$

773

 

 

July2, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful receivables

 

 

 

 

$

773

 

 

 

 

 

$

140

 

 

 

 

 

$

(192

)

 

 

 

 

$

2

 

 

 

 

 

$

723

 

 

July 1, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful receivables

 

 

 

 

$

723

 

 

 

 

 

$

177

 

 

 

 

 

$

(175

)

 

 

 

 

$

1

 

 

 

 

 

$

726

 

 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Menomonee Falls, State of Wisconsin, on the 24th day of August, 2007.

MAGNETEK, INC.

 

(Registrant)

 

 

/s/ DAVID P. REILAND

 

 

David P. Reiland

 

 

Chief Executive Officer

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature

Title

Date

/s/ MITCHELL I. QUAIN

Chairman of the Board of Directors

August 24, 2007

Mitchell I. Quain

/s/ DEWAIN K. CROSS

Director

August 24, 2007

Dewain K. Cross

/s/ YON Y. JORDEN

Director

August 24, 2007

Yon Y. Jorden

/s/ DAVID P. REILAND

Director and Chief Executive Officer

August 24, 2007

David P. Reiland

/s/ MARTY J. SCHWENNER

Vice President and Chief Financial Officer
(Principal Financial Officer)

August 24, 2007

Marty J. Schwenner

/s/ RYAN D. GILE

Vice President and Controller
(Principal Accounting Officer)

August 24, 2007

Ryan D. Gile


 

27




Chief Executive Officer and Chief Financial Officer Certifications

The certifications of Magnetek’s Chief Executive Officer and Chief Financial Officer required under Section 302 and 906 of the Sarbanes-Oxley Act of 2002 have been filed with the Securities and Exchange Commission as Exhibits 31.1, 31.2, and 32.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2007.

Additionally, in November 2006, Magnetek’s Chief Executive Officer filed with the New York Stock Exchange (“NYSE”) the annual certification required to be furnished pursuant to Section 303A.12 of the NYSE Listed Company Manual. The certification confirmed that Magnetek’s Chief Executive Officer was not aware of any violation by Magnetek of the NYSE’s corporate governance listing standards.

28




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Magnetek, Inc.

We have audited the consolidated financial statements of Magnetek, Inc. as of July 1, 2007 and July 2, 2006 and for each of the three years in the period ended July 1, 2007, and have issued our report thereon dated August 17, 2007 (included elsewhere in this Annual Report on Form 10 K). Our audits also included the financial statement schedule listed in Item 15(a) of this Annual Report on Form 10 K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

 

Milwaukee, Wisconsin
August 17, 2007

29




SELECTED FINANCIAL DATA

The selected financial data for Magnetek, Inc. (the “Company” or “Magnetek”) presented below reflect the historical financial results of the Company’s divested power electronics business within discontinued operations for all periods presented, as described in Note 2 of Notes to Consolidated Financial Statements.

Statement of Operations Data

For the years ended
(Amounts in thousands, except per share data)

 

July 1,
2007

 

July 2,
2006

 

July 3,
2005

 

June 27,
2004

 

June 29,
2003

 

Net sales

 

$

103,808

 

$

101,657

 

$

86,346

 

$

79,420

 

$

75,570

 

Gross profit

 

28,927

 

30,137

 

26,337

 

23,176

 

23,021

 

Gross profit %

 

27.9%

 

29.6%

 

30.5%

 

29.2%

 

30.5%

 

Income (loss) from operations

 

$

(3,048

)

$

(3,289

)

$

(5,147

)

$

(6,904

)

$

23,561

 

Net income (loss):

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(5,186

)

$

(7,373

)

$

(6,551

)

$

(12,609

)

$

11,813

 

Discontinued operations

 

(2,806

)

(39,476

)

(20,319

)

(462

)

(47,657

)

Net loss

 

$

(7,992

)

$

(46,849

)

$

(26,870

)

$

(13,071

)

$

(35,844

)

Per common share - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(0.18

)

$

(0.25

)

$

(0.23

)

$

(0.47

)

$

0.50

 

Net loss from discontinued operations

 

$

(0.10

)

$

(1.36

)

$

(0.71

)

$

(0.02

)

$

(2.02

)

Net loss

 

$

(0.27

)

$

(1.62

)

$

(0.94

)

$

(0.48

)

$

(1.52

)

 

Net loss for the fiscal year ended July 2, 2006 includes asset impairment charges of $37.8 million included in discontinued operations.

Net loss for the fiscal year ended July 3, 2005 includes a $22.0 million patent arbitration charge included in discontinued operations.

Net loss for the fiscal year ended June 27, 2004 includes a $6.7 million provision for income taxes to increase the valuation allowance against the Company’s deferred tax assets.

Net loss for the fiscal year ended June 29, 2003 includes a $27.8 million pre-tax gain ($17.2 million after-tax) from termination of the Company’s retiree medical plan; discontinued operations includes after-tax charges of $38.7 million for asset impairment and a $3.3 million after-tax charge for settlement of litigation.

Balance Sheet Data

(Amounts in thousands)

 

July 1,
2007

 

July 2,
2006

 

July 3,
2005

 

June 27,
2004

 

June 29,
2003

 

Total assets

 

$

104,738

 

$

233,026

 

$

229,180

 

$

228,024

 

$

221,326

 

Long-term debt, including current portion

 

32

 

27,455

 

3,980

 

4,295

 

9,250

 

Other long term obligations

 

1,709

 

1,106

 

-

 

-

 

-

 

Pension benefit obligations

 

15,965

 

45,494

 

70,568

 

31,366

 

51,356

 

Stockholders’ equity

 

41,473

 

42,908

 

46,060

 

109,922

 

78,671

 

 

30




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

OVERVIEW

Magnetek, Inc. is global provider of digital power control systems that are used to control motion and power primarily in material handling, elevator, telecommunications (“telecom”) and energy delivery applications. Our systems consist primarily of programmable motion control and power conditioning systems used in the following applications: overhead cranes and hoists; elevators; wireless telecom; coal mining equipment; and fuel cells and wind turbines. We believe that with our technical and productive resources we are well positioned to respond to increasing demand in our served markets. Our operations are located in North America, predominantly in Menomonee Falls, Wisconsin, the location of our Company headquarters.

Our material handling offerings include drives, radio remote controls, and braking, collision-avoidance, and electrification subsystems, sold primarily to original equipment manufacturers (“OEMs”) of overhead cranes and hoists. We have a significant market share in North America in alternating current (“AC”) drives and believe we have growth opportunities in direct current (“DC”) drives for retrofit applications and in wireless remote controls.

Our elevator product offerings are comprised of highly integrated subsystems and drives used to control motion primarily in high-rise, high speed elevator applications. Our products are sold mainly to elevator OEMs and we have a significant share of the available market for DC drives and subsystems used in high-rise elevators for both new and retrofit projects. We believe we have opportunities for growth in available elevator markets by introducing new energy-saving product offerings for both DC and AC applications, expanding the breadth of our product offering to include competitive low-end products for lower performance applications, and using our new product offerings to expand geographically, primarily into Asia.

Our telecom product offerings are focused on providing back-up power for wireless applications. During fiscal year 2005, we reclassified the assets and liabilities of our telecom power business as held for sale, and the results of operations of the business as discontinued operations. During fiscal year 2006, we reached various stages of negotiations with several interested parties, however, we were not able to reach an agreement to sell the business. In October 2006 (fiscal 2007), we decided to retain the business and initiated restructuring actions in order to improve its operating results. We completed the relocation of the manufacturing operations from Dallas, Texas to Menomonee Falls, Wisconsin during the third quarter of fiscal 2007. We are now focused on increasing sales by expanding our customer base and gaining market share in microwave backhaul and mobile power applications, as well as improving operating results through material cost reductions and improvements in manufacturing efficiency.

Our energy delivery product offerings include power inverters for wind turbines, which deliver AC power from multiple generators to the utility power grid. The wind market is growing very rapidly in North America as wind power is becoming increasingly competitive from a cost standpoint with more traditional methods of power generation. We believe our product offerings have us well positioned to take advantage of growth in the wind market and expect sales of inverters for wind applications to be our fastest revenue growth product over the next several years.

During fiscal 2007 we completed the divestiture of our power electronics business, repaid all of our outstanding debt, and made a $30 million contribution to our defined benefit pension plan. We also restructured our management team, reduced our corporate overhead by over $6 million annually and relocated our corporate headquarters as well as our telecom operations to Wisconsin. Our continuing operations returned to profitability during the second half of fiscal 2007.

The decision to divest our power electronics business resulted from our review of cash raising alternatives, completed late in fiscal 2006. Our operating results for the past several years have been negatively impacted by asset impairment and restructuring charges, and other expenses related to businesses we no longer own, including a $22 million charge (net of amounts previously recorded) in fiscal 2005 for a patent infringement arbitration award (see Note 11 of Notes to Consolidated Financial Statements). Early in fiscal 2006, we entered into financing agreements to provide funds for payment of the arbitration award, and placed $22.6 million into an escrow account to satisfy payment of the award in the event our ongoing appeal of the award is not successful. Higher interest expense and costs incurred to obtain these financing agreements negatively impacted our fiscal 2006 cash flows. In addition, scheduled debt repayments and required pension contributions in future periods were expected to negatively impact our future cash flows. As a result,

31




during the fourth quarter of fiscal 2006, we decided to divest our power electronics business to enable us to address these pending obligations as well as provide funds for future growth initiatives. During the fourth quarter of fiscal year 2006, we reclassified the assets and liabilities of the power electronics business as held for sale, and the results of operations of this business as discontinued operations (see Note 2 of Notes to Consolidated Financial Statements).

In October 2006, we sold the power electronics business to Power-One, Inc. (“Power-One”) for $63.5 million in cash (net of closing costs and post-closing adjustments) and the assumption by Power-One of approximately $16 million of Magnetek’s debt (see Note 3 of Notes to Consolidated Financial Statements). We used a portion of the proceeds from the divestiture of the business to repay all of our remaining long-term debt, approximately $29 million, and also made a $30 million contribution to our defined benefit pension plan in December 2006. While the contribution has significantly reduced our funding obligation, additional contributions to our pension plan will be required beginning in April 2008, and could still be significant. We intend to use the remainder of the proceeds from the sale primarily to fund continuing operations.

The divestiture of our power electronics business resulted in a smaller company which compelled us to take actions to reduce our corporate overhead. Accordingly, in November 2006, we downsized certain corporate functions and decided to relocate our corporate headquarters from Chatsworth, California to Wisconsin. As discussed above, we also decided to retain our telecom power business. We completed the consolidation and restructuring of our manufacturing operations and administrative facilities during the third quarter of fiscal 2007. The resulting cost savings, together with a reduction in pension expense from the contribution to our pension plan and lower interest expense from reduced borrowings, enabled our continuing operations to generate net income for the third and fourth quarters of fiscal 2007.

While we are a smaller company following the divestiture of our power electronics business, we are a leader in several of our served markets, our operations are centralized in North America, and we believe we have good growth prospects heading into fiscal 2008. Our sales were $103.8 million in fiscal 2007, and we expect double-digit revenue growth in fiscal 2008; however, our sales growth is dependent on successful introduction of new products for elevator and wind markets. In addition, we may experience a cyclical slowdown in the material handling market, which comprised approximately half of our sales in fiscal 2007. Gross margins in our power control systems business have historically been in the range of upper 20% to 30% and we are targeting this level of gross margin going forward. Gross margin in fiscal 2007 was negatively impacted by restructuring costs in telecom operations and start up expenses related to production of new products. In addition, we will focus on controlling operating expenses and, through utilization of our net operating loss carryforwards for tax purposes, we believe the majority of our reported operating profit can be realized as net income.

Continuing Operations

Demand in certain of our key markets, mainly material handling, was strong during fiscal 2007 and our sales increased to $103.8 million, an increase of 2% from fiscal 2006 sales of $101.7 million. Gross profit as a percentage of sales declined from 29.6% in fiscal 2006 to 27.9% in fiscal 2007, mainly the result of restructuring, relocation costs and related manufacturing efficiency issues in our telecom business, and start up costs to install manufacturing capacity for new product offerings.

Our research and development (“R&D”) expense, including the impact of approximately $0.6 million in restructuring costs, decreased to approximately $4.7 million in fiscal 2007 from $4.9 million in fiscal 2006. We continued to invest in developing new products for existing and new markets, including alternative energy products for wind applications, but also took actions to reduce costs in our corporate R&D function. We intend to continue to invest in R&D going forward, although the rate of growth in R&D investment may slow in fiscal 2008. Fiscal 2007 selling, general and administrative (“SG&A”) expense decreased by $1.3 million compared to fiscal 2006, and at $27.3 million, represents more than 26% of sales. We expect SG&A to decrease in fiscal 2008, as upon the divestiture of our power electronics business, we consolidated administrative offices and implemented cost reduction actions to reduce both payroll costs and pension expense. Our fiscal 2007 general and administrative (“G&A”) expense includes $1.3 million in restructuring charges, mainly severance costs, and also includes a one-time stock compensation charge of $1.1 million related to down-sizing actions. We also contributed to our defined benefit pension plan in fiscal 2007. Under current pension funding regulations, no mandatory contributions are required until April 2008, and required contributions in periods subsequent

32




to fiscal 2008 could be significant (see “Summary of Contractual Obligations and Commitments”). Our future annual pension expense included in our results of operations will depend on future interest rate levels, investment returns in equity and fixed income markets, and the level and timing of contributions we make to the plan.

Capital expenditures in fiscal 2007 were $1.6 million compared to fiscal 2007 depreciation expense of $1.4 million. Our total long-term debt decreased during fiscal 2007 from $27.4 million to zero, as we used proceeds from the divestiture of our power electronics business to repay all of our outstanding debt.

Going into fiscal 2008, we believe that future sustained profitability is dependent upon increased revenues and improvements in gross margins. Improvement in our gross margins is mainly dependent upon a continuing economic expansion, successful introduction of new products at acceptable margins, and improvement in operating performance in our telecom business. Given our current cost structure with reduced operating expenses, the lack of outstanding debt, and the availability of tax loss carryforwards to offset future taxable income, we believe the majority of any incremental gross margin we earn will be realized as net income, and therefore the key driver of increased net income for us is higher gross margins.

Discontinued Operations

The results of our divested power electronics business, as well as certain income and expenses related to other divested businesses, have been classified as discontinued operations in the accompanying consolidated financial statements and footnotes for all periods presented. The assets and liabilities of our divested power electronics business are classified as held for sale in the accompanying consolidated balance sheets as of July 2, 2006.

Our fiscal 2007 loss from discontinued operations was $2.8 million, due mainly to losses incurred by our divested power electronics business of $2.3 million prior to its divestiture in October 2006. In addition, the loss from discontinued operations includes a loss on the sale of our power electronics business of $0.4 million including post-closing purchase price adjustments (see Note 3 of Notes to Consolidated Financial Statements). Costs associated with other previously owned businesses were $1.7 million for fiscal 2007. These costs have historically included charges for an arbitration award in a patent infringement claim and related legal fees, as well as certain expenses for workers’ compensation claims, environmental issues, and asbestos claims (see Note 11 of Notes to Consolidated Financial Statements). All of these issues relate to businesses we no longer own and most relate to indemnification agreements we provided when we divested those businesses. Also included in our fiscal 2007 loss from discontinued operations was $2.0 million of income from the favorable settlement of litigation in a development dispute, partially offset by $0.5 million in legal fees related to the lawsuit and settlement.

Going forward, our discontinued operations will include additional costs we may incur related to businesses no longer owned and may include additional costs above those currently estimated and accrued related to the divestiture of our power electronics business.

RESULTS OF OPERATIONS FOR YEAR ENDED JULY 1, 2007 COMPARED WITH YEAR ENDED JULY 2, 2006

Net Sales and Gross Profit

Net sales increased 2.1% to $103.8 million in fiscal 2007 from $101.7 million in fiscal 2006. The increase in net sales in fiscal 2007 was due primarily to increased sales of material handling systems, $4.8 million, and elevator product, $1.5 million, offset by lower sales in energy systems and telecom markets. Net sales by market were as follows, in millions:

Fiscal Year Ended

 

July 1, 2007

 

July 2, 2006

 

Material handling

 

$

61.8

 

60

%

$

57.0

 

56

%

Elevator motion control

 

19.0

 

18

%

17.5

 

17

%

Telecom power systems

 

16.0

 

15

%

18.6

 

18

%

Energy systems

 

7.0

 

7

%

8.6

 

9

%

Total net sales

 

$

103.8

 

100

%

$

101.7

 

100

%

 

Fiscal 2007 and fiscal 2006 each contained 52 weeks.

33




Gross profit in fiscal 2007 decreased to $28.9 million (27.9% of sales) from $30.1 million (29.6% of sales) in fiscal 2006. The $1.2 million decline in gross profit was due to restructuring costs incurred in relocating our telecom power business of $0.9 million, lower sales volume in telecom and energy systems, $1.0 million, due in part to the lower sales of our residential solar product line, start up costs and manufacturing efficiency issues in telecom and energy systems, and unfavorable sales mix in the elevator market, partially offset by the favorable impact on gross profit of $1.6 million from higher sales of material handling systems.

Operating Expenses

Research and development expense was $4.7 million in fiscal 2007, or 4.5% of sales, compared to $4.9 million, or 4.8% of sales, in fiscal 2006. Fiscal 2007 R&D includes $0.6 million in restructuring costs related to elimination of our corporate R&D function. The decreased spending in R&D expense in fiscal 2007 as compared to fiscal 2006 also reflects the substantial completion of new product development programs for elevator and wind markets. Selling, general and administrative expense was $27.3 million, or 26.3% of sales, in fiscal 2007 compared to $28.6 million, or 28.1% of sales, in fiscal 2006. Selling expenses were $11.1 million, or 10.7% of sales in fiscal 2007 compared to $10.2 million, or 10.0% of sales in fiscal 2006. The increase is mainly due to higher volume-related expenses in fiscal 2007 as compared to fiscal 2006, as well as increased spending on payroll-related costs. G&A expense was $16.2 million in fiscal 2007 compared to $18.4 million in fiscal 2006. The decrease in G&A expense in fiscal 2007 as compared to fiscal 2006 mainly reflects reduced corporate payroll-related costs from restructuring actions, reduced professional fees and lower pension expense. Fiscal 2007 G&A expense includes severance charges of $1.3 million and one-time stock compensation charges of $1.1 million from stock awards, accelerated vesting of stock options and restricted stock for employees and directors no longer employed as a result of downsizing actions. Fiscal 2007 pension expense was $2.0 million compared to $3.7 million in fiscal 2006. The decrease in pension expense was mainly due to a contribution of $30.0 million to our defined benefit pension plan in December 2006, which reduced our pension expense in the second half of fiscal 2007 to $0.3 million.

Loss from Operations

Loss from operations was $3.0 million in fiscal 2007, comparable to a loss from operations of $3.3 million in fiscal 2006. The loss from operations in fiscal 2007 includes the impact of restructuring and relocation of both our telecom power business as well as our corporate administrative functions.

Interest Income and Expense and Other Expense

Interest income was $2.0 million and interest expense was $2.4 million in fiscal 2007. Interest income was $0.7 million and interest expense was $3.2 million in fiscal 2006. The increase in interest income in fiscal 2007 as compared to fiscal 2006 was due to higher cash balances during much of fiscal 2007 and $0.3 million in interest income related to a previous tax settlement.

The decrease in interest expense in fiscal 2007 was mainly due to the repayment of all of our outstanding debt following the divestiture of our power electronics business in October 2006. Fiscal 2007 interest expense includes the write-off of deferred financing assets of $0.7 million from the early retirement of debt. Interest expense in fiscal 2006 reflects interest on outstanding borrowings and deferred financing amortization.

Other expense of $0.4 million in fiscal 2007 is comprised of a prepayment penalty of $0.3 million related to the early repayment of our term loan in October 2006 and a loss of $0.1 million on the sale of our metal fabrication fixed assets and inventory to a third party.

Provision for Income Taxes

Despite the pretax loss of $3.9 million in fiscal 2007 and the pretax loss of $5.8 million in fiscal 2006, we recorded tax provisions in those periods of $1.3 million and $1.5 million respectively, due to non-cash deferred tax provisions related to changes in deferred tax liabilities from goodwill amortization and to a lesser extent, provisions for income taxes on our pretax income in Canada (see Note 10 of Notes to Condensed Consolidated Financial Statements).

34




As of July 1, 2007, our U.S. net operating loss carryforward (“NOL”) was approximately $178 million and our capital loss carryforwards were approximately $31 million. The potential tax benefit of all carryforwards, approximately $98 million, has been fully reserved with a valuation allowance and therefore there is no net tax asset on the consolidated balance sheets related to this asset at July 1, 2007. Our NOL has carryforward periods of 15 to 20 years with expiration dates ranging from 2013 to 2027. Since our balance sheet reflects no benefit of such NOL’s, we anticipate that no federal tax expense (other than alternative minimum tax) would be recorded if and when U.S. taxable income is generated and such carryforwards are utilized.

Loss from Continuing Operations

In fiscal 2007, we recorded a loss from continuing operations of $5.2 million, or a $0.18 loss per share, basic and diluted, compared to a fiscal 2006 loss from continuing operations of $7.4 million, or a $0.25 loss per share on both a basic and diluted basis.

Loss from Discontinued Operations

We recorded a loss from discontinued operations in fiscal 2007 of $2.8 million, or a $0.10 loss per share on both a basic and diluted basis, compared to a loss from discontinued operations in fiscal 2006 of $39.5 million, or a $1.36 loss per share on both a basic and diluted basis. The loss from discontinued operations in fiscal 2007 was comprised of losses in our divested power electronics business of $2.3 million, expenses related to previously divested businesses of $1.7 million, the loss we recorded on the sale of the power electronics business of $0.4 million, and legal fees incurred related to litigation of a development dispute, partially offset by $2.0 million of income from the favorable settlement of the development dispute (see Note 2 of Notes to Consolidated Financial Statements). The loss from discontinued operations in fiscal 2006 was comprised of a goodwill impairment charge of $22.4 million, a charge for the write-off of the net basis of assets held for sale related to reclassification of accumulated currency translation adjustment amounts of $10.6 million related to the planned divestiture of our power electronics business, operating losses in our power electronics business of $2.8 million, and other expenses related to businesses we no longer own, mainly legal fees in the patent infringement claim and environmental issues, as well as asbestos-related legal fees, totaling $3.6 million.

Net Loss

We recorded a net loss in fiscal 2007 of $8.0 million, or a $0.27 loss per share on both a basic and diluted basis, compared to a fiscal 2006 net loss of $46.8 million, or a $1.62 loss per share on both a basic and diluted basis.

RESULTS OF OPERATIONS FOR YEAR ENDED JULY 2, 2006 COMPARED WITH YEAR ENDED JULY 3, 2005

Net Sales and Gross Profit

Net sales increased 17.7% to $101.7 million in fiscal 2006 from $86.3 million in fiscal 2005. The increase in net sales in fiscal 2006 was due primarily to increased sales of telecom power systems, $8.3 million, and material handling systems, $4.5 million. Net sales by market were as follows, in millions:

Fiscal Year Ended

 

July 2, 2006

 

July 3, 2005

 

Material handling

 

$

57.0

 

56

%

$

52.5

 

61

%

Elevator motion control

 

17.5

 

17

%

17.4

 

20

%

Telecom power systems

 

18.6

 

18

%

10.3

 

12

%

Energy systems

 

8.6

 

9

%

6.1

 

7

%

Total net sales

 

$

101.7

 

100

%

$

86.3

 

100

%

 

Fiscal 2006 contained 52 weeks; fiscal 2005 contained 53 weeks.

Gross profit in fiscal 2006 increased to $30.1 million (29.6% of sales) compared to $26.3 million (30.5% of sales) in fiscal 2005. The $3.8 million improvement in gross profit for the year ended July 2, 2006 was mainly due to higher sales volumes to telecom and material handling markets. The reduction in gross profit as a percentage of sales for the year

35




ended July 2, 2006 was due to sales price reductions and product mix in sales to elevator markets, and higher sales of lower margin alternative energy products for photo-voltaic (solar) markets.

Operating Expenses

R&D expense was $4.9 million in fiscal 2006, or 4.8% of sales, compared to $4.7 million, or 5.4% of sales, in fiscal 2005. The increase in R&D expense reflects continued investment in product development for new markets and applications such as power inverters for wind markets. Selling, general and administrative expense was $28.6 million, or 28.1% of sales, in fiscal 2006 compared to $26.8 million, or 31.0% of sales, in fiscal 2005. Selling expenses were $10.2 million, or 10.0% of sales in fiscal 2006 compared to $9.7 million, or 11.3% of sales in fiscal 2005. The increased selling expense in fiscal 2006 reflects higher sales volume as well as increased investment in marketing new products in alternative energy markets. G&A expense was $18.4 million in fiscal 2006 compared to $17.1 million in fiscal 2005. The increase of $1.2 million in G&A expense in fiscal 2006 was due to increased pension expense of $2.3 million, partially offset by lower rent expense of $0.8 million from relocation and consolidation of administrative facilities.

Loss from Operations

Our loss from operations was $3.3 million in fiscal 2006 compared to a loss from operations of $5.1 million in fiscal 2005. The reduction in loss from operations was due mainly to higher sales volume and increased gross profit, partially offset by higher spending in R&D, higher volume-related selling expenses, and higher pension expense.

Interest and Other Income and Expenses

Interest income was $0.7 million in fiscal 2006 compared to $0.1 million in fiscal 2005. Interest expense was $3.2 million in fiscal 2006 compared to $0.5 million in fiscal 2005, and as a result, net interest expense increased $2.1 million in fiscal 2006 compared to fiscal 2005. The increase in net interest expense in fiscal 2006 was due to higher outstanding debt balances, due mainly to borrowings associated with the Nilssen patent arbitration award (see Note 11 of Notes to Consolidated Financial Statements) and higher deferred financing amortization expense. In November 2005, we deposited $22.6 million into escrow to satisfy payment of the award in the event our appeal is not successful. The escrow deposit was funded by our $18.0 million term loan and $4.6 million from our revolving debt facility. The term loan bore interest at a rate of 12.6% while we received interest on the escrow deposit at a rate of 4.7%. As a result, both our reported interest income and expense increased in fiscal 2006 as compared to fiscal 2005.

Deferred financing amortization expense included in interest expense was $0.9 million in fiscal 2006 compared to $0.3 million in fiscal 2005. The increase in deferred financing amortization expense in fiscal 2006 compared to fiscal 2005 was due to costs incurred in obtaining our new credit agreements entered into on September 30, 2005, as well as the write-off of deferred financing costs under our previous credit agreements.

Provision for Income Taxes

We recorded a provision for income taxes of $1.5 million in fiscal 2006, comprised of $1.1 million (non-cash) primarily to increase the deferred tax liability for tax deductible amortization of goodwill and $0.4 million related to our foreign operations. We recorded a provision for income taxes of $1.0 million in fiscal 2005, due to non-cash deferred tax provisions related to changes in deferred tax liabilities from goodwill amortization of $0.9 million and to a lesser extent, provisions for income taxes on our pretax income in Canada.

Loss from Continuing Operations

In fiscal 2006, we recorded a loss from continuing operations of $7.4 million, or a $0.25 loss per share, basic and diluted, compared to a fiscal 2005 loss from continuing operations of $6.6 million, or a $0.23 loss per share on both a basic and diluted basis.

Loss from Discontinued Operations

We recorded a loss from discontinued operations in fiscal 2006 of $39.5 million, or a $1.36 loss per share on both a basic and diluted basis, compared to a loss from discontinued operations in fiscal 2005 of $20.3 million, or a

36




$0.71 loss per share on both a basic and diluted basis. The loss from discontinued operations in fiscal 2006 is comprised of a goodwill impairment charge of $22.4 million (see Note 2 of Notes to Consolidated Financial Statements), a charge for the write-off of the net basis of assets held for sale related to reclassification of accumulated currency translation adjustment amounts of $10.6 million related to the planned divestiture of our power electronics business, operating losses in our power electronics business of $2.8 million, and other expenses related to businesses we no longer own, mainly legal fees in the patent infringement claim and environmental issues, as well as asbestos-related costs, totaling $3.7 million. The loss from discontinued operations in fiscal 2005 is comprised of a charge for an arbitration award related to a patent infringement claim of $22.0 million, and other expenses related to businesses we no longer own, mainly product liability costs, legal fees in the patent infringement claim and asbestos-related costs, totaling $4.7 million, partially offset by operating income in our power electronics business of $6.4 million.

Net Loss

We recorded a net loss in fiscal 2006 of $46.8 million, or a $1.62 loss per share on both a basic and diluted basis, compared to a fiscal 2005 net loss of $26.9 million, or a $0.94 loss per share on both a basic and diluted basis.

Liquidity and Capital Resources

Our cash balance, excluding restricted cash, increased $5.3 million during the 12 months ended July 1, 2007, from $0.1 million at July 2, 2006 to $5.4 million at July 1, 2007. Our primary source of cash during the 12 months ended July 1, 2007 was from the divestiture of our power electronics business. Our primary uses of cash during the same period were for debt repayment and a contribution to our defined benefit pension plan (see below). During the 12 months ended July 1, 2007, our accounts receivable balances increased $3.3 million and inventories increased $3.1 million, while accounts payable increased $4.4 million. We also paid approximately $1.6 million in severance costs during fiscal 2007 related to our corporate downsizing. Our capital expenditures for the year ended July 1, 2007 were $1.6 million and we are in the process of adding capacity for the production of wind inverters. We do not anticipate capital expenditures in fiscal 2008 will exceed $3.0 million. The expected amount of capital expenditures could change depending upon changes in revenue levels, our financial condition and the general economy.

As discussed in Notes 2 and 3 of the Notes to Consolidated Financial Statements, in October, 2006, we sold our power electronics business to Power-One for $63.5 million in cash (net of closing costs of $2.2 million and post-closing adjustments of $2.3 million) and the assumption of approximately $16.0 million in outstanding debt in Europe. We used approximately $29.0 million of the proceeds from the divestiture to repay all borrowings outstanding under our term loan with Ableco Finance LLC (“Ableco”) and revolving credit facility with Wells Fargo Foothill, Inc. (“WFF”) in October 2006. Pursuant to the terms of the loan agreement with Ableco, the agreement was terminated prior to the December 2007 expiration date in exchange for our payment to Ableco of $0.3 million. The revolving credit facility remains in place with availability of $12.1 million at July 1, 2007. We are currently in default under certain covenants of the revolving credit agreement, and we are in the process of obtaining a waiver. There were no borrowings outstanding under the revolving credit facility as of July 1, 2007.

Primarily as a result of the decline in interest rates over the past several years, the accumulated benefit obligation of our defined benefit pension plan currently exceeds plan assets. We used a portion of the proceeds from the divestiture of our power electronics business to contribute $30.0 million to our pension plan in December 2006 and under current funding regulations, actuarial projections indicate no contributions to the plan would be required before April 2008. Future required contributions will depend on future interest rate levels, values in equity and fixed income markets, and the level and timing of interim contributions we may make to the plan, and could still be significant.

We are subject to certain potential environmental and legal liabilities associated primarily with past divestitures (see Note 11 of Notes to Consolidated Financial Statements). In the fourth quarter of fiscal 2005, a decision was rendered in a patent infringement action brought against us by Ole K. Nilssen. In settlement of pending litigation, we agreed to submit the matter to binding arbitration, and in May 2005, the arbitrator awarded damages to Mr. Nilssen of $23.4 million, to be paid within ten days of the award. Nilssen’s counsel filed a motion to enter the award in U.S. District Court for the Northern District of Illinois, and we filed a counter-motion to vacate the award on grounds that it was

37




fraudulently obtained. Our request for oral argument was granted and the hearing was held on October 19, 2005. The judge is expected to render his decision by mail after further consideration. An unfavorable decision by the Court could result in payment of the award of $22.6 million, net of previously paid amounts, to Nilssen, which would have a material adverse effect on our cash flows during the period in which payment would be made. We have adequate resources to support payment of the award if such a payment is necessary, as we currently have $22.9 million of restricted cash in an interest-earning escrow account.

Based upon current plans and business conditions, we believe that available cash balances, borrowing capacity under our revolving credit facility, and internally generated cash flows will be sufficient to fund anticipated operational needs, capital expenditures and other commitments over the next 12 months.

We do not have any off-balance sheet arrangements or variable interest entities as of July 1, 2007.

Summary of Contractual Obligations and Commitments

Future payments due under contractual obligations of the Company’s continuing operations as of July 1, 2007 are as follows (in thousands):

 

 

Less than

 

1 to 3

 

3 to 5

 

More than

 

 

 

 

 

1 Year

 

Years

 

Years

 

5 Years

 

Total

 

Pension funding

 

$

2,680

 

$

20,990

 

$

16,880

 

 

$

7,210

 

 

$

47,760

 

Operating leases

 

3,039

 

5,583

 

4,848

 

 

7,108

 

 

20,578

 

Purchase obligations

 

16,916

 

-

 

-

 

 

-

 

 

16,916

 

Capital lease obligations

 

11

 

21

 

-

 

 

-

 

 

32

 

Total

 

$

22,646

 

$

26,594

 

$

21,728

 

 

$

14,318

 

 

$

85,286

 

 

Pension funding amounts in the table above are based on current regulations and actuarial calculations at July 1, 2007. Actual funding amounts could vary, depending on future interest rate levels and values in equity and fixed-income markets.

The amounts in the table above do not include our aggregate future minimum rentals to be received under noncancelable subleases of $6.4 million as of July 1, 2007.

Critical Accounting Policies

Our accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements. As disclosed in Note 1, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires estimates and judgments by management that affect the reported amount of assets and liabilities, revenues, expenses, and related disclosures. Such estimates are based upon historical experience and other assumptions believed to be reasonable given known circumstances. Actual results could differ from those estimates. On an ongoing basis, we evaluate and update our estimates, and we believe the following discussion addresses our policies which are most critical to understanding our financial position and results of operations, and which require our most complex judgments.

Accounts Receivable

Accounts receivable represent amounts due from customers in the ordinary course of business. We are subject to losses from uncollectible receivables in excess of our allowances. We maintain allowances for doubtful accounts for estimated losses from customers’ inability to make required payments. In order to estimate the appropriate level of this allowance, we analyze historical bad debts, customer concentrations, current customer creditworthiness, current economic trends and changes in customer payment patterns. Our total allowance includes a specific allowance based on identification of customers where we feel full payment is in doubt, as well as a general allowance calculated based on our historical losses on accounts receivable as a percentage of historical sales. We believe that our methodology has been effective in accurately quantifying our allowance for doubtful accounts and do not anticipate changing our methodology in the future.

38




However, if the financial conditions of any of our customers were to deteriorate and impair their ability to make payments, additional allowances may be required in future periods. We believe that all appropriate allowances have been provided.

Inventories

Our inventories 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 excess inventory by evaluating overall inventory levels in relation to expected future requirements and market conditions, and provisions for excess and obsolete inventory and inventory valuation are recorded accordingly. Items with no usage for the past twelve months and no expected future usage are considered obsolete, and are disposed of or fully reserved. Reserves for excess inventory are determined based upon historical and anticipated usage as compared to quantities on hand. Excess inventory is defined as inventory items with on-hand quantities in excess of one year’s usage and specified percentages are applied to the excess inventory value in determining the reserve. Our assumptions have not changed significantly in the past, and are not likely to change in the future. We believe that our assumptions regarding inventory valuation have been accurate in the past.

Long-Lived Assets and Goodwill

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

We are required to perform annual impairment tests of our goodwill, and may be required to test more frequently in certain circumstances. We have elected to perform our annual impairment test in the fourth quarter of our fiscal year. In assessing potential impairment, we make estimates regarding the fair value of the related long-lived assets. No impairments were recognized in long-lived assets or goodwill for the year ended July 1, 2007. For the year ended July 2, 2006, we recorded a goodwill impairment charge of $22.4 million related to our discontinued power electronics business, included in loss from discontinued operations in the consolidated statement of operations for fiscal 2006.

Pension Benefits

We sponsor a defined benefit plan that covers a number of current and former employees in the U.S. The valuation of our pension plan requires the use of assumptions and estimates that attempt to anticipate future events to develop actuarial valuations of expenses, assets and liabilities. These assumptions include discount rates, expected rates of return on plan assets and mortality rates. We consider market conditions, including changes in investment returns and interest rates, in making these assumptions. Our plan assets are comprised mainly of common stock and bond funds. The expected rate of return on plan assets is a long-term assumption and is generally not changed on an annual basis. The expected rate of return on plan assets was 9.0% in fiscal 2007, 2006 and 2005. The discount rate reflects the market for high-quality fixed income debt instruments and is subject to change each year. As of July 1, 2007, the discount rate used to determine the benefit obligation was 6.25% as compared to 6.375% at July 2, 2006. Changes in assumptions typically result in actuarial gains or losses that are amortized in accordance with the methods specified in Statement of Financial Accounting Standard (“SFAS”) No. 87, Employers’ Accounting for Pensions, as Amended. A decrease in the discount rate, as occurred during fiscal 2007, results in an increase to our projected benefit obligation and an actuarial loss, which typically results in increased future pension expense. However, we expect that our future pension expense will be lower than our pension expense over the past several fiscal years due to a $30 million contribution to our pension plan in December 2006, which will result in an increase in our expected return on plan assets in future periods.

Significant differences between our assumptions and actual future investment return or discount rates could have a material impact on our financial position or results of operations and related funding requirements.

39




Reserves for Contingencies

We periodically record the estimated impact of various conditions, situations or circumstances involving uncertain outcomes. The accounting for such events is prescribed under SFAS No. 5, Accounting for Contingencies. SFAS No. 5 defines a contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur.

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

The accrual of a contingency involves considerable judgment and we use our internal expertise and outside experts, as necessary, to help estimate the probability that a loss has been incurred and to assist in determining the amount or range of the loss. In those circumstances where we determined that it was probable that a loss had been incurred, our estimates of the amount of loss have been reasonably accurate.

Income Taxes

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

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

Since fiscal 2002 we have provided valuation reserves against our U.S. deferred tax assets that result in a net deferred tax liability position. A portion of our deferred tax liability relates to tax-deductible amortization of goodwill that is no longer amortized for financial reporting purposes. Under applicable accounting rules, such deferred tax liabilities are considered to have an indefinite life and are therefore ineligible to be considered as a source of future taxable income in assessing the realization of deferred tax assets.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report and Form 10-K, including documents incorporated herein by reference, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe”, “expect”, “estimate”, “anticipate”, “intend”, “may”, “might”, “will”, “would”, “could”, “project” and “predict”, or similar words and phrases generally identify forward-looking statements. Forward-looking statements contained or incorporated by reference in this document, including those set forth in the CEO’s Letter, the section of this Annual Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the section of the Form 10-K entitled “Description of Business” include, but are not limited to, statements regarding projections of revenues, income or loss, capital expenditures, plans for future operations, products or services, legal issues and financing needs or expectations, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties which in many cases are beyond the control of the Company and which cannot be predicted or quantified. As a result, future events and actual results could differ materially from those set forth in, contemplated by, or underlying forward-looking statements. Such risks and uncertainties include, but are not limited to, economic conditions in general, sensitivity to industry conditions, competitive factors such as technology and pricing pressures, business conditions in electronics, telecommunications, industrial equipment and energy markets, international sales and operations, dependence on major customers, increased material costs, risks and costs associated with acquisitions, litigation and environmental matters and the risk that the Company’s ultimate costs of doing business exceed present estimates. A discussion of these and other specific risks is included below under the heading “Risk Factors Affecting the Company’s Outlook.” Forward-looking statements contained in this Annual Report and Form 10-K speak only as of the date of this document or, in the case of any document incorporated by reference, the date of that document. The

40




Company does not have an obligation to publicly update or revise any forward-looking statement contained or incorporated by reference in these documents to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Risk Factors Affecting the Company’s Outlook

Our future results of operations and the other forward-looking statements contained in our Report on Form 10-K and this Annual Report, including this section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” involve a number of risks and uncertainties. In particular, the statements regarding future goals and strategies, new product introductions, penetration of new markets, projections of sales revenues, manufacturing costs and operating costs, pricing of our products and raw materials required to manufacture our products, gross margin expectations, relocation and outsourcing of production capacity, capital spending, research and development expenses, the outcome of pending legal proceedings and environmental matters, tax rates, sufficiency of funds to meet our needs including contributions to our defined benefit pension plan, and our plans for future operations, as well as our assumptions relating to the foregoing, are all subject to risks and uncertainties.

A number of other factors could cause our actual results to differ materially from our expectations. We are subject to all of the business risks facing public companies, including business cycles and trends in the general economy, financial market conditions, demand variations and volatility, potential loss of key personnel, supply chain disruptions, government legislation and regulation, and natural causes. The following list of risk factors is not all-inclusive. Other factors and unanticipated events could adversely affect our financial position or results of operations. We believe that the most significant potential risk factors that could adversely impact us are the following:

Economic Conditions and Demand for our Products

Demand for our products, which impacts our revenue and gross profit, is affected by general business and economic conditions. Demand for our products is also impacted by changes in customer order patterns, such as changes in inventory levels maintained by customers and the timing of customer purchases. If demand in certain of our served markets deteriorates in subsequent periods, our operating results could be adversely affected and operating losses could recur.

Competitive Industry

We operate in an intensely competitive industry characterized by rapid changes in technology, product demand, prices and lead times. Our future profitability depends on our ability to successfully identify and react to these changing trends. Specifically, achievement of our sales and profit goals is dependent in part upon our ability to successfully anticipate product demand, to introduce quality products to meet that demand in a timely manner at competitive prices, to gain acceptance of our products in the marketplace, to achieve cost reductions during the product life cycle and to adapt our existing product platforms in the event of changes in technology. Failure to do so could result in low returns on investment in new products and technologies, a loss of competitive position relative to our peers, obsolete products and technologies, and an adverse impact on our operating results. In addition, price erosion in response to competition in our served markets could have a material impact on our financial position or results of operations.

Dependence on New Products

Our expected growth in sales and profits is in part dependent upon the successful introduction of new products for the elevator and wind markets, acceptance of these new products by customers in those markets, and successful cost reduction efforts related to new products. Any delay in introduction of new products, customer acceptance of new products, or cost reduction actions could have an adverse impact on our financial position or results of operations.

Dependence on Customers and Credit Risk

We rely on several large customers for a significant portion of our sales. While we have taken actions to diversify our customer base, sales to our top three customers represented approximately 16% of our net sales in fiscal 2007. The loss

41




of any such customers or significant decreases in any such customers’ levels of purchases could have an adverse effect on our business. In addition, we are exposed to the credit risk of our customers, including risk of bankruptcy, and are subject to losses from uncollectible accounts receivable. If the financial conditions of any of our customers deteriorates and impairs their ability to make payments, we could incur future write-offs of accounts receivable that could have a material impact on our financial position, results of operations or cash flows.

Reliance on Suppliers

We purchase raw materials and subassemblies used in our products from third-party suppliers, and also purchase finished goods for resale to customers from third party subcontractors. If our suppliers or subcontractors cannot meet their commitments to us in terms of price, delivery, or quality, it may negatively impact our ability to meet our commitments to our customers. This could result in disruption of production, delay in shipments to customers, higher material costs, quality issues with our products and damage to customer relationships. In addition, increases in the cost of raw materials purchased from third party suppliers could negatively impact our gross profit and results of operations.

Competitive Size

We compete with crane and hoist drive manufacturers and drive system integrators, elevator drive manufacturers and control system integrators, mining machinery drive builders, and power inverter builders. The total number of such enterprises with whom we compete directly is believed to be fewer than 100. However, certain of our competitors are significantly larger and have substantially greater resources than us, and some are global in scope, whereas we currently compete primarily in the North American market.

International Business

While international sales currently account for approximately 12% of our revenue, currency exchange rates could impact our results. This is partially a currency translation issue with no economic impact on actual results. However, a fluctuation in exchange rates between a foreign currency and the U.S. dollar can have an economic impact on revenue and profit. Additional weakening in the value of the dollar against other currencies or changes in any of the other risks listed previously could have an adverse effect on our financial position or results of operations.

Restructuring and Outsourcing

We have taken actions to relocate some of our production capacity and may develop action plans regarding additional relocation, consolidation or outsourcing activities in the future. While we believe that these actions will result in a more competitive position and should also increase our gross profits and reduce our operating expenses, there is no guarantee that these plans will succeed. There is also no assurance that the expected cost savings and improvement in gross profits will be realized, and in addition, these actions may result in quality issues or delays in production or shipment to customers that could have an adverse impact on our results of operations. In addition, there is no assurance that any future activities not yet planned would provide any benefits to our operating results, and any such future plans may result in asset impairment charges.

Intellectual Property

We believe that our intellectual property is equal or superior to our competitors’ and we do not know of any new technologies that could cause a shift away from digital power-electronic solutions. However, as a technology-based company we are highly dependent on both patented and proprietary intellectual property. Therefore, major advancements in digital power-electronic technology by competitors or the advent of technologies obviating digital power-electronic solutions could have an adverse effect on our financial position or results of operations.

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

42




Pension Funding Obligations

Current actuarial estimates indicate that we will be required to make significant contributions to our defined benefit pension plan beginning in April 2008. Based upon current projections of our operating results and financial position, we believe that existing cash balances, amounts available under our revolving credit facility, and cash generated from operations will be sufficient to make all required pension contributions. However, if actual future operating results differ significantly from current projections, we may be required to seek additional sources of cash to enable us to fund required contributions under our pension plan.

Legal and Environmental Issues

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

In some cases, we have agreed to provide indemnification against legal and environmental liabilities and potential liabilities associated with operations that we have divested, including certain motor, generator, lighting ballast, transformer, drive and power supply manufacturing operations. If we are required to make payments under such indemnification obligations, such payments could have a material adverse impact on our financial position, results of operations or cash flows. Further, we have been indemnified against potential legal and environmental liabilities and potential liabilities associated with operations that we have acquired, including lighting ballast, transformer, capacitor and crane brake manufacturing operations that were subsequently divested. If not borne by the indemnifiers, such liabilities, if any, could be borne by us and have an adverse effect on our financial position or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risks has changed significantly as a result of the divestiture of our power electronics business in October 2006. Our exposure to interest rate risk decreased significantly, as we have no debt outstanding as of July 1, 2007, and our exposure to foreign currency exchange rates decreased significantly, as the divestiture included the majority of our international operations. We did not have any outstanding hedge instruments or contracts at July 1, 2007 and July 2, 2006.

Interest Rates

The fair value of our debt was effectively zero at July 1, 2007. Our reported debt balance was comprised entirely of capital lease obligations. As a result, at July 1, 2007, a hypothetical 10% adverse change in interest rates would have a negligible impact on our annual interest expense.

Foreign Currency Exchange Rates

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

We had no foreign currency contracts outstanding at July 1, 2007 and July 2, 2006.

43




CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended
(Amounts in thousands, except per share data)

 

July 1,
2007

 

July 2,
2006

 

July 3,
2005

 

Net sales

 

$

103,808

 

$

101,657

 

$

86,346

 

Cost of sales

 

74,881

 

71,520

 

60,009

 

Gross profit

 

28,927

 

30,137

 

26,337

 

Research and development

 

4,689

 

4,871

 

4,691

 

Sales, general and administrative

 

27,286

 

28,555

 

26,793

 

Loss from operations

 

(3,048

)

(3,289

)

(5,147

)

Non operating expense (income):

 

 

 

 

 

 

 

Interest income

 

(1,951

)

(687

)

(138

)

Interest expense

 

2,401

 

3,232

 

513

 

Other expense

 

395

 

 

 

Loss from continuing operations before provision for income taxes

 

(3,893

)

(5,834

)

(5,522

)

Provision for income taxes

 

1,293

 

1,539

 

1,029

 

Loss from continuing operations

 

(5,186

)

(7,373

)

(6,551

)

Loss from discontinued operations, net of taxes

 

(2,806

)

(39,476

)

(20,319

)

Net loss

 

$

(7,992

)

$

(46,849

)

$

(26,870

)

Per common share basic and diluted:

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.18

)

$

(0.25

)

$

(0.23

)

Loss from discontinued operations

 

$

(0.10

)

$

(1.36

)

$

(0.71

)

Net loss

 

$

(0.27

)

$

(1.62

)

$

(0.94

)

Weighted average shares outstanding - basic and diluted

 

29,435

 

28,931

 

28,535

 

 

The accompanying notes are an integral part of these consolidated financial statements.

44




CONSOLIDATED BALANCE SHEETS

As of
(Amounts in thousands)

 

July 1,
2007

 

July 2,
2006

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

5,404

 

$

96

 

Restricted cash

 

22,852

 

22,602

 

Accounts receivable, less allowance for doubtful accounts of $726 in 2007 and $723 in 2006

 

18,104

 

14,765

 

Inventories

 

16,201

 

13,134

 

Deferred income taxes

 

94

 

23

 

Prepaid expenses and other current assets

 

1,806

 

670

 

Assets held for sale

 

-

 

140,549

 

Total current assets

 

64,461

 

191,839

 

Property, plant and equipment:

 

 

 

 

 

Buildings and improvements

 

1,972

 

1,479

 

Machinery and equipment

 

17,800

 

17,101

 

Less accumulated depreciation

 

15,470

 

14,369

 

Net property, plant and equipment

 

4,302

 

4,211

 

Goodwill

 

28,187

 

28,150

 

Other assets

 

7,788

 

8,826

 

Total assets

 

$

104,738

 

$

233,026

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

12,238

 

$

7,862

 

Accrued liabilities

 

7,639

 

7,557

 

Accrued arbitration award

 

22,602

 

22,602

 

Liabilities held for sale

 

-

 

75,933

 

Current portion of long-term debt

 

11

 

27,412

 

Total current liabilities

 

42,490

 

141,366

 

Long-term debt, net of current portion

 

21

 

43

 

Pension benefit obligations, net

 

15,965

 

45,494

 

Other long-term obligations

 

1,709

 

1,106

 

Deferred income taxes

 

3,080

 

2,109

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common stock, $0.01 par value, 100,000 shares authorized; 30,114 and 28,712 shares issued and outstanding in 2007 and 2006

 

301

 

287

 

Additional paid-in capital

 

134,449

 

129,473

 

Accumulated deficit

 

(14,823

)

(6,831

)

Accumulated other comprehensive loss

 

(78,454

)

(80,021

)

Total stockholders’ equity

 

41,473

 

42,908

 

Total liabilities and stockholders’ equity

 

$

104,738

 

$

233,026

 

 

The accompanying notes are an integral part of these consolidated financial statements.

45




CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

Common Stock

 

Additional
Paid-in

 

Retained
Earnings

 

Accumulated
Other
Comprehensive

 

 

 

(Amounts in thousands)

 

Shares

 

Amount

 

Capital

 

(Deficit)

 

Loss

 

Total

 

Balance, June 27, 2004

 

28,492

 

 

$

285

 

 

$

127,692

 

$

66,888

 

 

$

(84,943

)

 

$

109,922

 

Exercise of stock options

 

53

 

 

 

 

172

 

 

 

 

 

172

 

Shares issued

 

3

 

 

 

 

5

 

 

 

 

 

5

 

Employee stock purchase plan

 

6

 

 

 

 

37

 

 

 

 

 

37

 

Stock-based compensation expense

 

 

 

 

 

506

 

 

 

 

 

506

 

Shares issued to trust

 

61

 

 

1

 

 

252

 

 

 

 

 

253

 

Net loss

 

 

 

 

 

 

(26,870

)

 

 

 

(26,870

)

Translation adjustments

 

 

 

 

 

 

 

 

(199

)

 

(199

)

Minimum pension liability

 

 

 

 

 

 

 

 

(37,766

)

 

(37,766

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

(64,835

)

Balance, July 3, 2005

 

28,615

 

 

$

286

 

 

$

128,664

 

$

40,018

 

 

$

(122,908

)

 

$

46,060

 

Exercise of stock options

 

3

 

 

 

 

8

 

 

 

 

 

8

 

Shares issued

 

4

 

 

 

 

13

 

 

 

 

 

13

 

Stock-based compensation expense

 

 

 

 

 

500

 

 

 

 

 

500

 

Shares issued to trust

 

90

 

 

1

 

 

288

 

 

 

 

 

289

 

Net loss

 

 

 

 

 

 

(46,849

)

 

 

 

(46,849

)

Translation adjustments

 

 

 

 

 

 

 

 

3,480

 

 

3,480

 

Reclassification of accumulated translation adjustment to assets held for sale

 

 

 

 

 

 

 

 

10,589

 

 

10,589

 

Minimum pension liability

 

 

 

 

 

 

 

 

28,818

 

 

28,818

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

(3,962

)

Balance, July 2, 2006

 

28,712

 

 

$

287

 

 

$

129,473

 

$

(6,831

)

 

$

(80,021

)

 

$

42,908

 

Exercise of stock options

 

775

 

 

8

 

 

3,013

 

 

 

 

 

3,021

 

Shares issued

 

557

 

 

5

 

 

(5

)

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

1,667

 

 

 

 

 

1,667

 

Shares issued to trust

 

70

 

 

1

 

 

301