<PAGE>
DEAR FELLOW STOCKHOLDER:
Shortly after the close of our fiscal year 2000, MagneTek's directors voted
to divest all of the company's remaining electrical equipment product lines,
which include lighting ballasts, magnet wire, capacitors and small
transformers. These product lines, which generated 59 percent of the
company's total revenue in 1999, are accounted for as discontinued operations
in this report.
Why such a sweeping decision? The answer is focus.
As a diversified electrical equipment manufacturer, we addressed many markets
through different channels. In many of these we were considered a component
supplier, which limited our margins and profits. At the same time (since
1991, in fact), we have been developing technical competence in digital power
products that are necessary subsystems in fast-growing, high-value-added
markets such as telecommunications.
Digital power products* provide precise control of electric power in systems
ranging from the utility grid to the internet. MagneTek today ranks among the
world's leading independent manufacturers of digital power products++, and we
are convinced that our strategy, well executed, will enable us to achieve the
following basic goals:
- DOUBLE-DIGIT REVENUE GROWTH;
- DOUBLE-DIGIT OPERATING PROFIT MARGINS;
- DOUBLE-DIGIT CASH FLOW RETURN ON INVESTED CAPITAL.
MagneTek has been gravitating toward this electronic core since 1994, when we
began selling off electrical equipment product lines. In August 1999 we
completed the sale of our motor and generator businesses, and in December
1999 we disposed of our unprofitable European magnetic lighting ballast
operations.
We will use the proceeds from the completion of the sale of our remaining
electrical equipment operations to:
- FINISH BUYING BACK THE 10-MILLION SHARES (30%) OF MAGNETEK STOCK
AUTHORIZED BY THE BOARD IN 1999;
- PAY OFF ALL DEBT OUTSTANDING UNDER OUR EXISTING BANK LINES;
- INCREASE OUR LEVEL OF INVESTMENT IN DIGITAL POWER R&D;
- MAKE ACQUISITIONS THAT ARE CONSISTENT WITH OUR NEW FOCUS.
Before elaborating on our digital power strategy, let's examine MagneTek's
fiscal 2000 results.
Despite the disposal of our unprofitable European ballast business in the second
fiscal quarter, the profitability of the lighting products group deteriorated.
This was mostly due to channel mix issues and price
* THE MAGNETEK FAMILY OF STANDARD, MODIFIED-STANDARD AND
CUSTOM-DESIGNED DIGITAL POWER-PRODUCTS PROVIDE DIGITALLY PROCESSED
ELECTRIC POWER AND CONTROL FUNCTIONS IN SYSTEMS RANGING FROM COMPUTERS
AND TELECOM NETWORKS TO HOME APPLIANCES AND INDUSTRIAL EQUIPMENT:
<TABLE>
<S> <C>
AC-DC SWITCHING POWER SUPPLIES DC-AC POWER INVESTORS
AC-DC RECTIFIERS/BATTERY CHARGERS PERIPHERAL COMPONENT INTERCONNECTS (PCIs)
DC-DC POWER CONVERTERS PROGRAMMABLE POWER SUPPLIES
ENERGY MANAGEMENT SYSTEMS SMART APPLIANCE MODULES (TM)
</TABLE>
3
<PAGE>
erosion, compounded by higher material and freight costs. We increased
lighting's profitability through streamlining operations and initiating the
first industry price increase in four years. But with all of our efforts we
could not figure out a way to achieve the growth, profits and return on
investment we wanted for our stockholders.
Our continuing operations, on the other hand, grew at a double-digit rate
throughout fiscal 2000. Total revenues were up 27% ($294 million vs. $231
million) from 1999. This was due in part to the acquisition during the year
of the EMS Group of companies and Mondel Engineering, which complemented our
digital motion control products.
Profits of these continuing operations also improved against the prior year.
Gross profit was up 54% ($63 million vs. $41 million), and our gross profit
margin increased 380 basis points to 21.5%. Operating income was $6.8 million
and net income was $1.3 million or $.05 per diluted share after including the
company's entire corporate overhead, even though these overhead expenditures
also supported the discontinued operations.
With gains on the disposal of discontinued operations, MagneTek's total net
income in fiscal 2000 amounted to $42.5 million or $1.70 per diluted share
versus $38.5 million or $1.25 per diluted share in fiscal 1999.
We constantly strive to improve the operating performance of our technically
talented company. Our immediate objectives are to:
- Complete the divestiture process by calendar year-end at prices in
excess of net book value.
- Continue to cut operating expenses, and especially corporate overhead.
- Increase R&D investment in innovative, proprietary products that
command greater margins.
- Expand our customer base and channels of distribution.
- Complete a major B2B initiative to enhance our marketing and information
systems.
- Make acquisitions that will augment our growth and profitability in
digital power electronics.
The power and motion control "marketplaces" in which our continuing
operations presently participate are:
- COMMUNICATION/INFORMATION TECHNOLOGY, including telecommunications,
computer and office equipment, and networking equipment.
- INDUSTRIAL/INSTRUMENTATION TECHNOLOGY, including motion controls,
alternative energy interfaces, energy-saving controls for home
appliances and laser applications.
We are continually assessing the growth, profitability and cash-flow
prospects for digital power products in each of these broad markets.
Worldwide consumption of digital power products, which already exceeds $30
billion a year, is projected to top $40 billion by 2004 and expand
exponentially thereafter. Communication/Information Technology (CIT)
applications currently account for about 83% of the total, and
Industrial/Instrumentation Technology (IIT) applications account for another
12%++.
4
<PAGE>
The CIT marketplace for digital power products is now growing 11% annually++,
but "broadband" infrastructure alone (telecom, data-com and networking
equipment) is forecasted to undergo a $10 trillion global buildout over the
next decade.(1)
The average industry operating profit margin on digital power products sold
into this burgeoning marketplace is approximately 10%.++ We intend to exceed
this by focusing on products, such as DC-DC converters and
rectifier/battery-chargers that command above-average margins, and by moving
up the "value chain" into "smart" power supplies, integrated subsystems and
services.
MagneTek's Communication/Information Technology customers include such
industry leaders as AT&T Wireless, Alcatel, Bosch, Bull, Compaq, Comverse,
Ericsson, IBM, Italtel, Kodak, Lucent, MCI, Marconi, Motorola, NBase, Nokia,
Network Appliance, Qwest, Radisys, Redback, Siemens, Teledata, Unisys and
Xerox.
The Industrial/Instrumentation (IIT) marketplace also offers significant
profit potential. Digital power products sold into this sector command
operating profit margins in the 20% range on average for the industry. This
marketplace is growing about 7% annually++ and the growth rate is expected to
accelerate. Further, we plan to assure double-digit growth in IIT through
acquisitions like those we made in fiscal 2000 and early entry into emerging
markets such as fuel cell power conversion where we have a larger installed
base than all of our competitors combined.
Our Industrial/Instrumentation customers include Baxter, Beckman,
Caterpillar, Credence, Electrolux, GE, InFocus, Lam Research, Merloni,
Nixdorf, Siemens (Medical Systems), United Technologies (International Fuel
Cells), Universal Laser Systems, most of the crane and hoist manufacturers in
North America, and all of the world's leading elevator builders.
To repeat what I said before, our three basic goals are:
- DOUBLE-DIGIT REVENUE GROWTH;
- DOUBLE-DIGIT OPERATING PROFIT MARGINS;
- DOUBLE-DIGIT CASH FLOW RETURN ON INVESTED CAPITAL.
What are the chances of our achieving these goals? In terms of things we can
control, it depends on technology, acquisitions and execution.
We certainly are well positioned in technology. Our 200-plus power
electronics engineers and scientists, 38 percent of whom hold Ph.D. or
Masters degrees, excel in:
- MIXED-SIGNAL (ANALOG TO DIGITAL) DESIGN, enabling us to provide total
power solutions to our customers, who specialize in digital design;
- HEAT REDUCTION TECHNOLOGY, resulting in the most compact, reliable,
highest power-density products on the market;
- APPLICATION OF MICROPROCESSORS AND DIGITAL SIGNAL PROCESSORS, allowing
us to create "smart" power products that are programmable and
self-diagnostic.
5
<PAGE>
Regarding external growth, the digital power industry is consolidating, and
we will participate by making acquisitions that:
- LEVERAGE OUR TECHNOLOGY;
- ADD TO OUR PRODUCT LINES;
- STRENGTHEN OUR CHANNELS TO MARKET;
- DEEPEN OUR TALENT POOL.
There are over 250 digital power product manufacturers in North America and
more than 1,000 worldwide. MagneTek currently ranks 13th++ in the industry;
and since we expect to be debt-free following the sale of our remaining
electrical component businesses, this places us in an excellent position to
accelerate growth through acquisitions.
We are taking the steps necessary to assure proper and timely implementation
of our digital power strategy.
- We are adding world-class marketing talent at the corporate level.
- We are structuring the organization into "expertise distinct" marketing
units to optimize our business model.
- We have formed a mergers and acquisitions team to drive the acquisition
process from due diligence through integration.
- We are reviewing and re-qualifying our industry alliances to assure
their effectiveness.
- We are re-energizing our intellectual property portfolio through
aggressive strategic patenting.
- We are structuring an incentive system to reward internal
entrepreneurship, and exploring more effective ways of rewarding valued
employees at all levels.
The potential clearly exists for us to achieve our goals of double-digit
revenue growth, double-digit operating profits and double-digit cash flow
return on invested capital. These goals are not inconsistent with the
performance of other digital power product companies.
I am confident that, with our new strategic focus, we will emerge a much
stronger company with a bright future.
MagneTek's 2000 annual meeting will be held in New York City on November 1st.
At that time, we will present a more comprehensive picture of our digital
power strategy and prospects. I hope you will be able to attend the meeting
in person or access the Webcast on the internet.*
/s/ ANDREW G. GALEF
-----------------------------------------------
Andrew G. Galef
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
SOURCES: ++ MICRO-TECH CONSULTANTS
1. GLOBAL BUSINESS NETWORK
2. HOLT VALUE ASSOCIATES
* MAGNETEK'S FISCAL 2000 STOCKHOLDERS' MEETING WILL BE HELD ON WEDNESDAY,
NOVEMBER 1ST AT 10:00 A.M. EASTERN STANDARD TIME AT THE PENINSULA HOTEL, 700
FIFTH AVENUE AT 55TH STREET, NEW YORK CITY. MEETING AUDIO AND VISUALS WILL BE
WEBCAST SIMULTANEOUSLY ON STREETFUSION (HTTP://WWW.STREETFUSION.COM); THOSE
WITHOUT ACCESS TO INTERNET AUDIO CAN LISTEN TO THE PROCEEDINGS BY PHONING
303/224-6999.
6
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
STATEMENT OF INCOME DATA
FOR THE YEARS ENDED JUNE 30,
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $293,575 $231,339 $244,040 $240,205 $239,588
Income (loss):
Continuing operations 1,282 (24,318) 344 (6,602) (25,275)
Discontinued operations 41,170 62,791 37,532 35,353 (68,889)
Extraordinary item - - - (4,676) -
Net income (loss) 42,452 38,473 37,876 24,075 (94,164)
Per common share--basic:
Income (loss) from continuing
operations before extraordinary
item $ 0.05 $ (0.79) $ 0.01 $ (0.26) $ (1.02)
Net income (loss) $ 1.71 $ 1.25 $ 1.25 $ 0.94 $ (3.81)
Per common share--diluted:
Income (loss) from continuing
operations before extraordinary
item $ 0.05 $ (0.79) $ 0.01 $ (0.26) $ (1.02)
Net income (loss) $ 1.70 $ 1.25 $ 1.25 $ 0.94 $ (3.81)
======================================================================================================================
</TABLE>
IN FISCAL YEARS 1996 THROUGH 1999, THE EFFECT OF CONVERTIBLE SECURITIES AND
EMPLOYEE STOCK OPTIONS ARE ANTI-DILUTIVE AS TO EARNINGS PER SHARE AND ARE
IGNORED IN THE COMPUTATION OF DILUTED EARNINGS PER SHARE IN THOSE PERIODS.
NET INCOME FOR THE YEAR ENDED JUNE 30, 2000 INCLUDES A $35,125 AFTER-TAX
GAIN ON THE SALE OF THE COMPANY'S MOTOR AND EUROPEAN LIGHTING BUSINESS
INCLUDED IN DISCONTINUED OPERATIONS.
NET INCOME FOR THE YEAR ENDED JUNE 30, 1999 INCLUDES A $50,988 AFTER-TAX
GAIN ON THE SALE OF THE COMPANY'S GENERATOR BUSINESS INCLUDED IN
DISCONTINUED OPERATIONS. CONTINUING AND DISCONTINUED OPERATIONS RESULTS IN
FISCAL 1999 INCLUDE CHARGES AGGREGATING $21,564 AND $12,836 RESPECTIVELY,
RELATING TO DOWNSIZING, INVENTORY ADJUSTMENTS, SEVERANCE COSTS AND OTHER
ASSET-WRITEDOWNS.
LOSSES FROM CONTINUING AND DISCONTINUED OPERATIONS FOR THE YEAR ENDED JUNE
30, 1996 INCLUDE PRE-TAX CHARGES AGGREGATING $6,326 AND $73,391
RESPECTIVELY. CHARGES IN FISCAL 1996 REFLECT COSTS ASSOCIATED WITH
REPOSITIONING OPERATIONS PRIMARILY FOR SEVERANCE, TERMINATION BENEFITS,
WARRANTY AND ASSET WRITE-DOWNS RELATED TO FACILITY CLOSURES. ALSO, IN
REVIEW OF THE COMPANY'S DEFERRED TAX ASSET IN ACCORDANCE WITH FASB NO.109,
A $14,700 CHARGE WAS INCURRED IN FISCAL YEAR 1996.
<TABLE>
<CAPTION>
BALANCE SHEET DATA
AS OF JUNE 30,
(AMOUNTS IN THOUSANDS) 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $400,673 $576,220 $595,534 $498,544 $515,800
Long-term debt,
including current portion 64,040 179,181 244,714 236,127 313,729
Common stockholders' equity 184,206 204,885 189,558 102,274 42,116
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
During fiscal year 2000, the Company continued to review its strategic
direction for the express purpose of maximizing shareholder value. These
reviews led us to the conclusion that increased value to shareholders could
be best achieved by focusing all efforts towards "Digital Power Products."
This area includes the Company's power control and motion control product
offerings. The potential for both above average revenue growth and operating
margin performance in this area is far more expansive than any of our other
products and services. Profitable market niches exist, and are growing
rapidly, where competitive advantages are based on technology, reliability
and dependability and not significantly dependent upon economies of scale or
low-cost manufacturing as in electrical products. These niches are clearly
opportunities for our Company due to our current platform of technology and
portfolio of products. While there remain "gaps" in both, these can be
quickly filled and allow us to be a significant market force in targeted
areas. To accelerate this process, the Company will divest its Lighting
Products and Transformer businesses. These divestitures will provide cash for
continued investment in power electronics and focus all of our resources on
our core strengths. In the previous fiscal year, similar decisions were made
to exit the Company's Generator and Motor businesses due to industry
consolidation and other factors that limited our long-term ability to
successfully compete in these markets. The Generator and Motor businesses
were successfully sold for $115 million and $253 million respectively.
Proceeds from these sales were used to repay debt, continue the stock
repurchase program authorized by the Board of Directors in May, 1999, and
selectively acquire businesses to complement the Company's strengths.
MagneTek now operates in a single business segment, Digital Power Products.
Digital Power Products includes electronic converters and rectifiers
generally known as power controls primarily for telecommunications equipment,
data processing, data storage, networking, imaging, power quality, medical
electronics markets and power generation. Digital Power Products also
includes motion control devices that regulate speed for electric motors as
well as communicating to related hardware and software equipment.
YEAR 2000 ISSUE
In fiscal years 1998 and 1999 the Company conveyed its plans and progress in
ensuring that all systems were Year 2000 compliant. As scheduled, the Company
completed remediation and testing for all systems in the last half of fiscal
year 1999. Due to efforts expended, the Company has experienced no
significant disruptions in either critical information or non-information
technology systems. The Company is not aware of any material problems
resulting from Year 2000 issues with products, internal systems or third
party products or services. For the remainder of Year 2000, the Company will
continue to monitor both internal computer applications and those of third
party suppliers and vendors. While the Company does not expect any problems
to occur, should any latent Year 2000 issues arise, they will be addressed
promptly.
RESULTS OF OPERATIONS
NET SALES AND GROSS PROFIT
Net sales for the Company increased to $293.6 million in fiscal 2000 from
$231.3 million in fiscal 1999 and $244.0 million in fiscal 1998. The 27%
increase in revenue levels was primarily due to the effect of the
acquisitions of the EMS Group and Mondel ULC and increased domestic sales for
power control products. The decline in sales from fiscal 1999 versus 1998 of
5% was caused by reduced sales of motion control products and lower reported
revenues from international operations. Gross profits increased to $63.2
million(21.5% of net sales) in fiscal 2000 from $40.9 million (17.7% of net
sales)in fiscal 1999. Increased gross profit levels were primarily a function
of higher revenues. Results in fiscal 1999 include $7.5 million of
repositioning costs (primarily inventory write-downs) which adversely
impacted gross profits. Gross profits were $58.7 million (24.0% of net sales)
in fiscal 1998.
8
<PAGE>
OPERATING EXPENSES
Selling, general and administrative expense (including research and
development expenditures) was $56.4 million (19.2% of net sales) in fiscal
2000 compared to $72.7 million (31.4% of net sales) in fiscal 1999. Fiscal
1999 results included approximately $13 million of fourth quarter charges
related primarily to severance expense, costs associated with vacating
facilities, provisions for accounts receivable and write-offs associated with
software assets. Fiscal 1998 expenses were $54.1 million (22.2% of net sales).
INTEREST AND OTHER EXPENSES
Interest expense was $2.9 million in fiscal 2000 compared to $1.6 million in
fiscal 1999 and $1.9 million in fiscal 1998. Interest expense for the Company
is recorded in conformance with accounting principles that allow the
allocation of interest expense between continuing and discontinued operations
in accordance with EITF 87-24, "Allocation of Interest to Discontinued
Operations." Other expense was $1.9 million in fiscal 2000 compared to $2.6
million in fiscal 1999 and $2.1 million in fiscal 1998.
NET INCOME (LOSS)
In fiscal 2000, the Company recorded net income of $42.5 million or $1.71 per
share (basic) and $1.70 on a diluted basis. Results reflect net income of
$1.3 million from continuing operations, $6.1 million from discontinued
operations and a $35.1 million gain on sale of discontinued businesses (the
Motor and European Lighting businesses of which the Motor business accounted
for all of the gain on sale). Comparable net income for the Company for
fiscal 1999 was $38.5 million, $1.25 per share (basic) and $1.25 on a diluted
basis. Net income in fiscal 1999 reflects a loss of $24.3 million from
continuing operations, net income of $11.8 million from discontinued
operations and a gain on the sale of discontinued businesses (the Generator
business in April of 1999) of $51 million. Fiscal 1998 net income of $37.9
million was $1.25 per share (basic) and $1.25 per share on a diluted basis.
Continuing operations in fiscal 1998 contributed $.3 million of net income
with discontinued operations generating $37.6 million of net income in the
period.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, long term borrowings (including the current portion)
were $64 million, compared to $179 million as of June 30, 1999 and $245
million as of June 30, 1998. The decrease in long term borrowings in fiscal
2000 resulted primarily from repayment with proceeds received from the sale
of the Motor business aggregating $253 million. In fiscal 2000, the Company
also completed the acquisitions of the EMS Group and Mondel ULC for an
aggregate cash payment of $48 million. In fiscal 2000, the Company continued
open market purchases of its common stock, purchasing 7.1 million shares at a
cost of $62 million. The decrease in long term borrowings in fiscal 1999 from
fiscal 1998 resulted primarily from the sale of the Generator business, which
totaled $115 million. In fiscal 1998 the Company made open-market purchases
of approximately 1.6 million shares of its common stock for $17 million.
At June 30, 2000, the Company had an agreement with a group of banks to
borrow up to $200 million under a revolving loan facility through June of
2002. As of June 30, 2000, the Company had approximately $134 million in
available capacity under this agreement. The Company had amended its Bank
Loan Agreement on July 30, 1999 reducing the lending commitment from $350
million to $200 million. The reduced lending commitment occurred as a result
of the $253 million sale of the Company's Motor business in August of 1999 at
which point the Company repaid all outstanding borrowings under its Bank Loan
Agreement.
We believe that internally generated cash flows, along with the Company's
Bank Loan Agreement and access to external capital resources, will be
sufficient to fund near-term commitments and plans.
Cash outflow in connection with repositioning reserves established in fiscal
1999 approximated $7 million in fiscal 2000. The Company may be subject to
certain potential environmental and legal liabilities (see Note 11).
9
<PAGE>
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks in the areas of commodity prices,
foreign exchange and interest rates. To mitigate the effect of such risks,
the Company selectively utilizes specific financial instruments. Hedging
transactions are entered into under Company policies and procedures and
monitored monthly. Company policy clearly prohibits the use of such financial
instruments for trading or speculative purposes. A discussion of the
Company's accounting policies for derivative financial instruments is
included in the Summary of Significant Accounting Policies in the Notes to
the Consolidated Financial Statements.
COMMODITY PRICES
The Company uses within its discontinued operations a significant amount of
copper wire in the production of its products. The price of copper is subject
to fluctuations based upon general economic conditions, labor issues at the
producing mines, the capacity of smelting operations and the availability of
scrap copper. Due to the relatively large content of copper cost in the
Company's product, the Company enters into forward copper futures positions
to act as a hedge against its material purchases. The fair value of the
Company's position in copper is calculated by valuing its futures position at
quoted market prices. Market risk is estimated as the potential loss in fair
value resulting from a hypothetical 10% adverse change in such prices. The
potential loss in fair value of the Company's copper futures position from a
hypothetical 10% decrease in copper prices was $1.3 million at June 30, 2000
and $1.6 million at June 30, 1999.
INTEREST RATES
The fair value of the Company's debt was $64 million and $179 million at June
30, 2000 and June 30, 1999 respectively. The fair value of the Company's debt
is equal to the borrowings outstanding from domestic and foreign banks and
small amounts owed under capital lease arrangements. Prospectively, the
Company does not consider there to be material risk due to changes in the
interest rate structure of borrowing rates applicable to such debt. For the
variable rate debt outstanding at June 30, 2000 and 1999, a hypothetical 10%
adverse change in interest rates would have an unfavorable impact of $.5
million and $1.0 million respectively, on the Company's pre-tax earnings and
cash flows.
FOREIGN CURRENCY EXCHANGE RATES
The Company enters into foreign exchange contracts to hedge certain balance
sheet exposures in Europe and operating cost exposures related to
manufacturing facilities in Mexico. The Company had foreign currency
contracts outstanding of approximately $30.7 million at June 30, 2000 and $39
million at June 30, 1999. Assuming a hypothetical 10% adverse change in
foreign exchange rates, the potential loss in value of the Company's forward
contracts would have been $3.1 million at June 30, 2000 and $3.9 million at
June 30, 1999.
FORWARD-LOOKING INFORMATION
The foregoing risk management discussion and amounts projected, generated
from adverse changes that could occur are forward-looking statements of
market risks assuming that certain adverse market conditions do occur. Actual
results in the future are beyond the control of the Company and may differ
materially from those estimated. The analytical methods used to assess and
mitigate risks in areas discussed should not be considered projections of
future events or losses.
10
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $293,575 $231,339 $244,040
Cost of sales 230,366 190,451 185,387
---------------------------------------------------------------------------------------------------------------------------
Gross profit 63,209 40,888 58,653
Research, sales, general and administrative 56,369 72,679 54,147
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 6,840 (31,791) 4,506
Interest expense 2,907 1,571 1,908
Other expense, net 1,851 2,556 2,054
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
provision (benefit) for income taxes 2,082 (35,918) 544
Provision (benefit) for income taxes 800 (11,600) 200
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 1,282 (24,318) 344
Discontinued operations -
Income from operations (net of taxes) 6,045 11,803 37,532
Gain on disposal (net of taxes) 35,125 50,988 -
---------------------------------------------------------------------------------------------------------------------------
Net income $ 42,452 $ 38,473 $ 37,876
===========================================================================================================================
Per common share basic:
Income (loss) from continuing operations $ 0.05 $ (0.79) $ 0.01
Income from discontinued operations 1.66 2.04 1.24
---------------------------------------------------------------------------------------------------------------------------
Net income $ 1.71 $ 1.25 $ 1.25
===========================================================================================================================
Per common share diluted:
Income (loss) from continuing operations $ 0.05 $ (0.79) $ 0.01
Income from discontinued operations $ 1.65 2.04 1.24
---------------------------------------------------------------------------------------------------------------------------
Net income $ 1.70 $ 1.25 $ 1.25
===========================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
11
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JUNE 30,
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Assets
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 343 $ 5,890
Accounts receivable, less allowance for doubtful accounts of $3,299 in 2000
and $1,564 in 1999 59,468 48,226
Inventories 42,069 40,480
Deferred income taxes 15,644 30,401
Prepaids and other assets 2,243 2,982
---------------------------------------------------------------------------------------------------------------------------
Total current assets 119,767 127,979
---------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land 1,132 1,240
Buildings and improvements 13,125 13,650
Machinery and equipment 73,705 84,264
---------------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization 47,825 51,678
---------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 40,137 47,476
---------------------------------------------------------------------------------------------------------------------------
Net assets of discontinued operations 115,827 308,169
Goodwill, less accumulated amortization of $7,537 in 2000 and $5,769 in 1999 69,458 37,983
Deferred financing costs, intangible and other assets
less accumulated amortization of $24,426 in 2000 and $23,844 in 1999 55,484 54,613
---------------------------------------------------------------------------------------------------------------------------
$ 400,673 $ 576,220
===========================================================================================================================
</TABLE>
12
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JUNE 30,
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 47,973 $ 47,164
Accrued liabilities 30,011 50,813
Current portion of long-term debt 1,732 1,900
---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 79,716 99,877
---------------------------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion 62,308 177,281
Other long-term obligations 41,539 51,038
Deferred income taxes 32,904 43,139
Commitments and contingencies
Stockholders' Equity:
Common stock, $0.01 par value, 100,000,000 shares authorized
23,073,000 and 29,986,000 shares issued and outstanding in 2000 and 1999 231 300
Additional paid-in capital 100,399 160,574
Retained earnings 108,662 66,210
Accumulated other comprehensive loss (25,086) (22,199)
---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 184,206 204,885
---------------------------------------------------------------------------------------------------------------------------
$400,673 $576,220
===========================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
13
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common stock Additional Retained Other
-------------------------------- paid-in Earnings Comprehensive
Shares Amount capital (Deficit) Loss Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 28,259,000 $282 $129,151 $(10,139) $(17,020) $102,274
----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 513,000 5 4,630 - - 4,635
Restricted stock grants 40,000 1 1,215 - - 1,216
Debt conversion 2,472,000 25 38,944 - - 38,969
Share value trust 200,000 2 3,055 - - 3,057
Unearned employee compensation - - (2,960) - - (2,960)
Tax benefit for options exercised - - 2,427 - - 2,427
Net income - - - 37,876 - 37,876
Translation adjustments - - - - 2,064 2,064
Comprehensive income - 1998 - - - - - 39,940
----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 31,484,000 $315 $176,462 $ 27,737 $(14,956) $189,558
----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 108,000 1 985 - - 986
Share value trust - - (1,006) - - (1,006)
Unearned employee compensation - - 911 - - 911
Share repurchase/retirement (1,606,000) (16) (16,916) - - (16,932)
Tax benefit for options exercised - - 138 - - 138
Net income - - - 38,473 - 38,473
Translation adjustments - - - - (7,243) (7,243)
Comprehensive income - 1999 - - - - - 31,230
----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 29,986,000 $300 $160,574 $ 66,210 $(22,199) $204,885
----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 195,000 2 1,730 - - 1,732
Share value trust - - (303) - - (303)
Unearned employee compensation - - 303 - - 303
Share repurchase/retirement (7,108,000) (71) (62,320) - - (62,391)
Tax benefit for options exercised - - 415 - - 415
Net income - - - 42,452 - 42,452
Translation adjustments - - - - (2,887) (2,887)
Comprehensive income - 2000 - - - - - 39,565
----------------------------------------------------------------------------------------------------------------------------------
23,073,000 $231 $100,399 $108,662 $(25,086) $184,206
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
14
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
(AMOUNTS IN THOUSANDS) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 1,282 $ (24,318) $ 344
Adjustments to reconcile income (loss) from continuing operations
to net cash used in operating activities:
Depreciation and amortization 13,338 14,245 11,425
Changes in operating assets and liabilities of continuing operations (21,844) (10,328) (14,876)
----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (8,506) 3,917 (3,451)
----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (7,224) (20,401) (3,107)
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase and investment in companies, net of cash acquired (48,245) - (29,001)
Proceeds from sale of businesses and other assets 255,445 117,177 111
Capital expenditures (8,375) (13,903) (17,162)
Other investments - (499) 3,792
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 198,825 102,775 (42,260)
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings under bank and other long-term obligations - - 48,177
Proceeds from issuance of common stock 1,732 986 4,635
Repurchase of common stock (62,391) (16,932) -
Repayment of bank and other long-term obligations (115,141) (65,533) -
Increase in deferred financing costs (746) - (102)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (176,546) (81,479) 52,710
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 15,055 895 7,343
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from discontinued operations:
Income from discontinued operations 6,045 11,803 37,532
Adjustments to reconcile income to net cash used in
discontinued operations:
Depreciation and amortization 11,208 22,996 26,980
Changes in operating assets and liabilities of discontinued operations (28,750) (8,139) (37,735)
Capital expenditures (9,105) (26,929) (33,804)
----------------------------------------------------------------------------------------------------------------------------------
Net cash used in discontinued operations $ (20,602) $ (269) $ (7,027)
==================================================================================================================================
Net increase (decrease) in cash (5,547) 626 316
Cash at the beginning of the year 5,890 5,264 4,948
----------------------------------------------------------------------------------------------------------------------------------
Cash at the end of the year $ 343 $ 5,890 $ 5,264
==================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE EXPRESSED IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MagneTek, Inc. and
its subsidiaries (the Company). All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's policy is to record and recognize sales only upon shipment.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Additions and improvements are capitalized at cost, whereas expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful lives of the respective assets principally on
the straight-line method (equipment normally five to ten years, buildings
normally ten to forty years).
ACCOUNTING FOR STOCK OPTIONS
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" (APB 25), and related interpretations, in accounting for stock
based awards to employees. Under APB 25, the Company recognizes no compensation
expense with respect to such awards when the exercise price is equal to or
greater than the market price at the date of grant. The Company has adopted the
disclosure-only option under SFAS No. 123.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued, and as amended, is required to be adopted in years
beginning after June 15, 2000. This Statement requires all derivatives to be
recorded on the balance sheet at fair value. This results in the offsetting
changes in fair values or cash flows of both the hedge and the hedged item being
recognized in earnings in the same period. Changes in fair value of derivatives
not meeting the Statement's hedge criteria are included in income. The Company
does not expect the adoption of this Statement to have a significant effect on
its results of operations or financial position.
16
<PAGE>
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to expense as incurred and
aggregated $8,125, $10,959 and $12,982 for the years ended June 30, 2000, 1999,
and 1998, respectively. Research and development costs are classified in the
accompanying Consolidated Statements of Income as operating expenses (after
Gross profit) for all periods presented.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to reduce commodity and
financial market risks. These instruments are used to hedge copper material
purchases, foreign currency and interest rate market exposures.The Company does
not use derivative financial instruments for speculative or trading purposes.
The accounting policies for these instruments are based on the Company's
designation of such instruments as hedging transactions.The criteria the Company
uses for designating an instrument as a hedge include the instrument's
effectiveness in risk reduction and the matching of the derivative to the
underlying transaction. The resulting gains or losses are accounted for as part
of the transactions being hedged, except that losses not expected to be
recovered upon the completion of the hedge transaction are expensed.
DEFERRED FINANCING COSTS, INTANGIBLE AND OTHER ASSETS
Costs incurred to obtain financing are deferred and amortized over the term of
the financing. Amortization expense relating to deferred financing costs was
$582, $708 and $741 for the years ended June 30, 2000, 1999 and 1998,
respectively. Goodwill is being amortized using the straight-line method over a
forty-year period. The Company assesses the recoverability of goodwill based
upon several factors, including management's intention with respect to the
operations to which the goodwill relates and those operations' projected future
income and undiscounted cash flows. Write-downs of goodwill are recognized when
it is determined that the value of such asset has been impaired. Amortization
expense relating to goodwill was $1,768, $874, and $533 for the years ended June
30, 2000, 1999, and 1998, respectively.
INCOME TAXES
Income taxes are provided based upon the results of operations for financial
reporting purposes and include deferred income taxes applicable to timing
differences between financial and taxable income.
Federal income taxes are not provided currently on undistributed earnings of
foreign subsidiaries since the Company presently intends to reinvest any
earnings overseas indefinitely.
EARNINGS PER SHARE
The consolidated financial statements are presented in accordance with SFAS No.
128, "Earnings Per Share." Basic earnings per share are computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share incorporate the incremental shares issuable upon the
assumed exercise of stock options and upon the assumed conversion of the
Company's Convertible Notes in fiscal 1998 as if conversion to common shares had
occurred at the beginning of the fiscal year. Earnings have also been adjusted
for interest expense on the Convertible Notes in fiscal 1998.
FISCAL YEAR
The Company uses a fifty-two, fifty-three week fiscal year which ends on Sunday
nearest June 30. For clarity of presentation, all periods are presented as if
the year ended on June 30. Fiscal year 2000 contained 53 weeks, fiscal years
1999 and 1998 contained 52 weeks each.
17
<PAGE>
2. ACQUISITIONS
On July 23, 1999, the Company purchased the assets of Electric Motor Systems,
Inc., Electromotive Systems, Inc., and EMS/Rosa Automation Engineering, Inc.,
(The EMS Group) for cash of approximately $38.3 million. The Company acquired
assets of approximately $19.8 million and assumed liabilities of $8.1 million.
Costs in excess of net assets acquired approximated $26.6 million and are being
amortized over forty years. The EMS Group manufactures and purchases for
re-sale, adjustable speed drives. On December 16, 1999 the Company purchased the
shares of Mondel ULC, a Nova Scotia unlimited liability company for
approximately $10 million. The Company acquired assets of approximately $2.5
million and assumed liabilities of $.3 million. Costs in excess of net assets
acquired approximated $7.8 million and are also being amortized over forty
years. Mondel ULC manufactures a variety of industrial brakes for the crane and
hoist market. Both acquisitions have been accounted for under the purchase
method of accounting and, accordingly the purchase price has been allocated to
the net assets acquired based upon their estimated fair market values. Both
acquisitions were financed from the Company's revolving credit facility.
Operating results of the EMS Group and Mondel ULC were included in the Company's
consolidated results effective as of the acquisition dates. The following pro
forma information includes the operations of the acquired entities for fiscal
years 2000 and 1999 as if the respective transactions had occurred on the first
day of each of the respective fiscal years.
<TABLE>
<CAPTION>
(pro forma) (pro forma)
2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 296,814 $ 287,448
Income (loss) from continuing operations 1,576 (25,324)
Net income $ 42,746 $ 37,467
Continuing operations
Basic EPS $ 0.06 $ (0.82)
Diluted EPS $ 0.06 $ (0.82)
Net income
Basic EPS $ 1.72 $ 1.22
Diluted EPS $ 1.71 $ 1.22
</TABLE>
The pro forma results of operations do not purport to represent what the
Company's results would have been had such transactions occurred at the
beginning of the periods presented or to project the Company's results of
operations in any future period.
3. DISCONTINUED OPERATIONS
The accompanying financial statements have been re-stated to conform to
discontinued operations treatment for all historical periods. The results of the
Company's electrical products businesses (Generators, Motors, Lighting Products
and Transformers) are included within discontinued operations.
In April, 1999 the Company sold its Generator business to Emerson Electric, and
in August, 1999 the Company sold its Motor business to A. O. Smith. Pre-tax
proceeds received from the sale of the Generator and Motor businesses were $115
million and $253 million respectively. Proceeds from the sales were used to
repay borrowings under the Bank loan agreement, repurchase shares of its common
stock and fund acquisitions made in fiscal year 2000.
On December 23, 1999, the Company sold its European Magnetic Lighting business
to a group including former and current management. Net assets of the Company's
German operations and certain inventory and fixed assets located in Milan, Italy
were included in the transaction. Net proceeds, including the assumption of debt
by the buyers, approximated $2.5 million. In addition, the buyers agreed to
indemnify MagneTek for substantially all past, present and future obligations in
connection with the business' operations in Germany. In connection with the
sale, the Company also announced the closure of its Milan factory.
18
<PAGE>
The Company will divest its Lighting Products and Transformer businesses and
expects to complete the divestitures within one year.
The operating results of discontinued operations are as follows:
<TABLE>
<CAPTION>
Year ended June 30 2000 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 452,274 $ 891,341 $ 953,149
Income before provision for income taxes 9,745 17,403 58,632
Provision for income taxes 3,700 5,600 21,100
-----------------------------------------------------------------------------------------------------
Income from discontinued operations $ 6,045 $ 11,803 $ 37,532
-----------------------------------------------------------------------------------------------------
</TABLE>
A portion of the Company's interest expense has been allocated to discontinued
operations in accordance with EITF 87-24, "Allocation of Interest to
Discontinued Operations." (interest expense allocated to discontinued operations
was $3.3 million in fiscal 2000, $17.3 million in fiscal 1999 and $14.7 million
in fiscal 1998). Taxes have been allocated using the same overall rate incurred
by the Company in each of the fiscal years presented.
Net income for the year ended June 30, 2000 includes a $35,125 (including a tax
benefit of $3,000) gain on the sale of the Company's Motor and European Lighting
business included in discontinued operations. Net income for the year ended June
30, 1999 includes a $50,988 (net of taxes of $24,000) gain on the sale of the
Company's Generator business included in discontinued operations.
4. REPOSITIONING COSTS
During the year ended June 30, 1999, the Company established repositioning
reserves of $34,400 (continuing operations of $21,600 and discontinued
operations of $12,800) associated with downsizing, inventory adjustments,
severance costs and other asset write-downs. In fiscal 2000, the Company had
approximately $7,000 in cash outflows associated with these reserves and $26,400
in non-cash charges. Fiscal year 2000 non-cash activity included the elimination
of $1,800 in reserves established for liabilities associated with certain leases
included in fiscal 1999 repositioning reserves. The Company has eliminated this
liability through the acquisition of a sub-tenant. Remaining repositioning
reserves at June 30, 2000 were approximately $1,000. The Company believes the
remaining reserves are adequate to cover the outstanding liabilities.
5. INVENTORIES
Inventories at June 30, consist of the following:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and stock parts $23,729 $18,111
Work-in-process 8,057 10,890
Finished goods 10,283 11,479
-------------------------------------------------------------------------------------------------
$42,069 $40,480
-------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
6. LONG-TERM DEBT AND BANK BORROWING ARRANGEMENTS
Long-term debt at June 30, consists of the following:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving bank loans $ 58,466 $173,284
Miscellaneous installment notes, capital leases and other obligations at rates
ranging from 4.00 percent to 9.50 percent, due through 2005 5,574 5,897
------------------------------------------------------------------------------------------------------------------
$ 64,040 $179,181
Less current portion 1,732 1,900
------------------------------------------------------------------------------------------------------------------
$ 62,308 $177,281
------------------------------------------------------------------------------------------------------------------
</TABLE>
BANK BORROWING ARRANGEMENTS
At June 30, 2000, the Company had an agreement with a group of banks to lend up
to $200,000 under a revolving loan facility through June, 2002. Borrowings under
the agreement (the "Bank Loan Agreement") bear interest at the bank's prime
lending rate or, at the Company's option, the London Interbank Offered Rate plus
one and one-half percent. These rates may be reduced or increased based on the
level of certain debt-to-cash flow ratios. At June 30, 2000, borrowings under
the Bank Loan Agreement bore interest at a weighted average rate of
approximately 8.4%. The Company is required to pay a commitment fee of .35
percent on unused commitments.
Effective July 30, 1999, the Company amended its Bank Loan Agreement to reduce
the lending commitment from $350,000 to $200,000 to reflect lower borrowing
requirements as a result of proceeds received from the sale of the motor and
generator operations. The Company further amended its Bank Loan Agreement to
adjust covenants to reflect the reclassification of the motor and generator
businesses as discontinued operations and the impact of charges associated with
the Company's downsizing program. All other terms and conditions remain
substantially the same. Borrowings under the Bank Loan Agreement are secured by
domestic accounts receivable and inventories and by stock of certain of the
Company's subsidiaries. The Bank Loan Agreement contains certain provisions and
covenants which, among other things, restrict the payment of cash dividends on
common stock, limit the amount of future indebtedness and require the Company to
maintain specified levels of net worth and cash flow.
The Company's European subsidiary has certain limited local borrowing
arrangements to finance working capital needs. The borrowings under these
arrangements are secured by accounts receivable and inventories of the
subsidiary. The Company has provided parent guarantees to the local banks which
provide the related financing.
Aggregate principal maturities on long-term debt outstanding at June 30, 2000
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------------------------------------------------
<S> <C>
2001 $ 1,732
2002 58,385
2003 1,117
2004 805
2005 644
Thereafter 1,357
-------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Income (loss) from continuing operations $ 1,282 $ (24,318) $ 344
Income from discontinued operations 6,045 11,803 37,532
Gain on sale of discontinued businesses (net of taxes) 35,125 50,988 -
-------------------------------------------------------------------------------------------------------------------------------
Net income $ 42,452 $ 38,473 $ 37,876
Weighted average shares for basic earnings per share 24,862 30,774 30,417
Basic earnings per share:
Income (loss) from continuing operations $ 0.05 $ (0.79) $ 0.01
Income from discontinued operations 0.25 0.38 1.24
Gain on sale of discontinued businesses (net of taxes) 1.41 1.66 -
-------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.71 $ 1.25 $ 1.25
Diluted earnings per share:
Income (loss) from continuing operations $ 1,282 $ (24,318) $ 344
Income from discontinued operations 6,045 11,803 37,532
Gain on sale of discontinued businesses (net of taxes) 35,125 50,988 -
Interest savings on convertible debt to equity - - *
-------------------------------------------------------------------------------------------------------------------------------
Net income $ 42,452 $ 38,473 $ 37,876
Weighted average shares for basic earnings per share 24,862 30,774 30,417
Effect of dilutive stock options 85 * *
Effect of convertible debt to equity - - *
-------------------------------------------------------------------------------------------------------------------------------
Weighted average shares for diluted earnings per share 24,947 30,774 30,417
Diluted earnings per share:
Income (loss) from continuing operations $ 0.05 $ (0.79) $ 0.01
Income from discontinued operations 0.24 0.38 1.24
Gain on sale of discontinued businesses (net of taxes) 1.41 1.66 -
-------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.70 $ 1.25 $ 1.25
</TABLE>
*IN FISCAL YEARS 1999 AND 1998, THE EFFECT OF CONVERTIBLE SECURITIES AND
EMPLOYEE STOCK OPTIONS ARE ANTI-DILUTIVE AS TO EARNINGS PER SHARE AND ARE
IGNORED IN THE COMPUTATION OF THE DILUTIVE EARNING PER SHARE IN THOSE
PERIODS.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments such as cash, annuity
contracts and borrowings under revolving credit agreements approximate their
fair values. At June 30, 2000, the Company had foreign exchange forward
contracts, which if liquidated would result in an approximate gain of $286.
21
<PAGE>
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into futures contracts to provide an economic hedge against
fluctuations in copper prices. Gains and losses are recorded in cost of sales as
the related materials are purchased. The Company also uses certain foreign
exchange contracts to minimize its risk of loss from fluctuations in exchange
rates. These contracts relate to hedging peso fluctuations as the Company has
significant Mexican manufacturing operations and lira contracts to hedge against
positions of significant foreign currency receivables. Gains and losses from
these transactions are recorded in cost of sales as the contracts are
liquidated. Due to significantly lower debt levels, the Company liquidated all
interest rate swaps in fiscal year 2000. The Company does not use derivative
financial instruments for speculative or trading purposes.
Outstanding notional amounts for derivative financial instruments at fiscal
year-ends were as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps $ - $100,000
Currency forward contracts 30,739 38,508
Copper forward contracts 12,887 15,988
Aluminum forward contracts 978 -
----------------------------------------------------------------------------------------
</TABLE>
As of June 30, 2000 the Company had approximately 16 million pounds of copper
under futures contracts with an average cost per pound of $0.83. Copper under
contract represents 74% of the Company's fiscal 2001 estimated requirements and
no contract extends beyond the end of fiscal year 2001. At the end of fiscal
2000, the Company had approximately one million pounds of aluminum under futures
contracts at an average cost per pound of $0.74. Aluminum under contract
represents approximately 62% of the Company's fiscal 2001 requirements and no
contract extends beyond fiscal 2001. The Company has purchased forward contracts
equal to 53% of its peso requirements for fiscal 2001 at an average rate of 10.3
pesos to the dollar. No contracts extend beyond the end of fiscal 2001.
Unrealized gains as of June 30, 2000 on copper, pesos, and lira were not
material to the Company. Hedging activities related to copper and peso contracts
are specific to discontinued operations and activity will cease in this area
when these operations are divested.
10. INCOME TAXES
Income tax expense (benefit) is allocated in the financial statements as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) attributable to continuing operations $ 800 $(11,600) $ 200
Discontinued operations 700 29,600 21,100
--------------------------------------------------------------------------------------------------------------------------
Total $ 1,500 $ 18,000 $21,300
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
The expense for income taxes applicable to continuing operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(7,167) $(18,766) $ 85
State 855 1,001 19
Foreign 2,590 (758) 119
Deferred:
Federal 4,765 4,168 (28)
State and Foreign (243) 2,755 5
--------------------------------------------------------------------------------------------------------------------------
$ 800 $(11,600) $ 200
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
A reconciliation of the Company's effective tax rate to the statutory Federal
tax rate for income from continuing operations is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30 Amount % Amount % Amount %
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) computed at the statutory rate $ 729 35.0 $(12,621) 35.0 $190 35.0
State income taxes, net of federal benefit 556 26.4 (16) - 21 3.8
Foreign tax rates in excess of federal statutory rate (1,607) (76.4) 3,197 (8.9) 61 11.2
Decrease in valuation allowance for
deferred tax assets - - (18,176) 50.4 (92) (16.8)
Provision for additional taxes 1,056 50.2 15,680 (43.6) 12 2.3
Other--net 66 2.8 336 (0.9) 8 1.5
------------------------------------------------------------------------------------------------------------------------------
$ 800 38.0 $(11,600) 32.0 $200 37.0
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Income (loss) before provision for income taxes of the Company's foreign
subsidiaries was approximately $9,812, $(1,239) and $6,847 for the years
ended June 30, 2000, 1999 and 1998.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets for continuing operations as
of June 30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization (including differences in the basis of acquired assets) $33,057 $46,524
Prepaid pension asset 13,732 12,644
----------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 46,789 59,168
----------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Postretirement medical benefit obligation 13,885 17,329
Warranty reserves 4,072 12,598
Inventory and other reserves (including restructuring) 11,572 16,503
----------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 29,529 46,430
----------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $17,260 $12,738
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has determined that as of June 30, 2000 it is more likely than not,
that the deferred tax asset will be realized. Therefore, no valuation allowance
is necessary.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and machinery and equipment primarily
under operating lease arrangements. Future minimum rental payments under
noncancelable operating leases as of June 30, 2000 total $29,429 and are payable
in future fiscal years as follows: $5,710 in 2001; $4,856 in 2002; $3,362 in
2003; $2,424 in 2004; $2,404 in 2005 and $10,673 thereafter.
Rent expense for the years ended June 30, 2000, 1999 and 1998, was $3,861,
$3,915 and $2,588, respectively.
23
<PAGE>
LITIGATION--PRODUCT LIABILITY
The Company is a party to a number of product liability lawsuits, many of which
involve fires allegedly caused by defective ballasts. All of these cases are
being defended by the Company, and management believes that its insurers will
bear all liability, except for applicable deductibles, and that none of these
proceedings individually or in the aggregate will have a material effect on the
Company.
LITIGATION--PATENT
In April 1998, Ole K. Nilssen filed a lawsuit in the U.S. District Court for the
Northern District of Illinois alleging the Company is infringing seven of his
patents pertaining to electronic ballast technology. The plaintiff seeks an
unspecified amount of damages and an injunction to preclude the Company from
making, using or selling those products allegedly infringing his patents. The
Company denies that it has infringed, or is infringing, any of the plaintiff's
patents, and has asserted several affirmative defenses. The Company also filed a
counterclaim seeking judicial declaration that it is not infringing (and has not
infringed) the patents asserted by the plaintiff, and that such asserted patents
are invalid. The Company intends to defend this matter vigorously. At this stage
of the litigation, it is difficult to predict the outcome of the foregoing legal
proceeding. However, management of the Company does not believe that the
financial impact of such litigation will be material.
ENVIRONMENTAL MATTERS--GENERAL
The Company has from time to time discovered contamination by hazardous
substances at certain of its facilities. In response to such a discovery, the
Company conducts remediation activities to bring the facility into compliance
with applicable laws and regulations. The Company's remediation activities for
fiscal 2000 did not entail material expenditures, and its remediation activities
for fiscal 2001 are not expected to entail material expenditures. Future
remediation of contaminated areas could entail material expenditures, depending
upon the extent and nature of the contamination, the cleanup measures employed
and the concurrence of governmental authorities.
ENVIRONMENTAL MATTERS--MCMINNVILLE, TENNESSEE
Prior to its purchase by the Company in 1986, Century Electric, Inc. ("Century
Electric") acquired a business from Gould Inc. ("Gould") in May 1983 which
included a leasehold interest in a fractional horsepower electric motor
manufacturing facility located in McMinnville, Tennessee. In connection with
this acquisition, 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 PCBs at the
McMinnville facility (the "1983 Indemnity"). Investigation has revealed the
presence of PCBs and other substances, including solvents, in portions of the
soil and in the groundwater underlying the facility and in certain offsite soil,
sediment and biota samples. Century Electric has kept the Tennessee Department
of Environment and Conservation, Division of Superfund, apprised of test results
from the investigation. The McMinnville plant has been listed as a Tennessee
Inactive Hazardous Substance Site, a report on that site has been presented to
the Tennessee legislature, and community officials and plant employees have been
notified of the presence of contaminants as above described. In 1995, Gould
completed an interim remedial measure of excavating and disposing onsite soil
containing PCBs. Gould also conducted preliminary investigation and cleanup of
certain onsite and offsite contamination. The cost of any further investigation
and cleanup of onsite and offsite contamination cannot presently be determined.
The Company recently sold its leasehold interest in the McMinnville plant and
believes that the costs for further onsite and offsite cleanup (including
ancillary costs) are covered by the 1983 Indemnity. 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.
24
<PAGE>
ENVIRONMENTAL MATTERS -- EFFECT OF FRUIT OF THE LOOM BANKRUPTCY
A company obligated to indemnify MagneTek against certain environmental
liabilities, Fruit of the Loom, Inc. ("FOL"), has filed a petition for
Reorganization under Chapter 11 of the Bankruptcy Code. MagneTek acquired the
stock of Universal Manufacturing Company ("Universal") from a predecessor of
FOL. In connection with that acquisition, the predecessor of FOL indemnified
MagneTek against certain environmental liabilities arising from Universal's
pre-acquisition activities. Environmental liabilities covered by the FOL
indemnity include completion of additional cleanup activities (if any) at
MagneTek's Bridgeport, Connecticut facility, and defense and indemnity of
MagneTek concerning offsite disposal locations where MagneTek may have a share
of potential response costs. MagneTek has filed a proof of claim in FOL's
bankruptcy proceeding for matters governed by the FOL environmental indemnity.
ENVIRONMENTAL MATTERS--OFFSITE LOCATIONS
The Company has 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 offsite
locations. Based on the nature of its alleged connections to those sites, the
volume and the nature of the alleged contaminants, anticipated cleanup costs,
the number of parties participating, any available indemnification rights and
the ability of other liable parties to pay their shares, the Company's estimated
share in liability (if any) at the offsite facilities is not expected to be
material. It is possible that the Company's actual expenditures at those sites
may be less or greater than currently anticipated, and that the Company will be
named as a potentially responsible party in the future with respect to other
sites.
ENVIRONMENTAL MATTERS--INDEMNIFICATION OBLIGATIONS FROM DIVESTITURES
In selling certain business operations, the Company from time to time has
agreed, subject to various conditions and limitations, to indemnify buyers with
respect to environmental liabilities associated with the divested operations.
The Company's indemnification obligations pursuant to such agreements did not
entail material expenditures for fiscal 2000, and its indemnification
obligations for fiscal 2001 are not expected to entail material expenditures.
Future expenditures pursuant to such agreements could be material, depending
upon the nature of any future asserted claims subject to indemnification.
LETTERS OF CREDIT
The Company had approximately $11,816 of outstanding letters of credit as of
June 30, 2000. The Company may issue up to $40,000 of letters of credit under
the Bank Loan Agreement.
12. STOCK OPTION AGREEMENTS
The Company has three stock option plans (the "Plans"), two of which provide for
the issuance of both incentive stock options (under Section 422A of the Internal
Revenue Code of 1986) and non-qualified stock options at exercise prices not
less than the fair market value at the date of grant, and one of which only
provides for the issuance of non-qualified stock options at exercise prices not
less than the fair market value at the date of grant. One of the Plans also
provides for the issuance of stock appreciation rights, restricted stock,
unrestricted stock, restricted stock rights and performance units and one of the
Plans also provides for the issuance of incentive bonuses and incentive stock.
The total number of shares of the Company's common stock authorized to be issued
upon exercise of the stock options and other stock rights under the Plans is
4,000,000. Options granted under two of the Plans vest in three or four equal
annual installments, and options under the third Plan vest in two equal annual
installments.
25
<PAGE>
A summary of certain information with respect to options under the Plans
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 2000 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, beginning of year 4,729,325 4,346,621 3,650,485
Options granted 1,958,568 1,065,773 1,605,424
Options exercised (195,528) (108,129) (512,534)
Weighted average exercise price $ 8.86 $ 9.06 $ 9.95
---------------------------------------------------------------------------------------------------
Options cancelled (1,853,456) (574,940) (396,754)
---------------------------------------------------------------------------------------------------
Options outstanding, end of year 4,638,909 4,729,325 4,346,621
Weighted average price $ 12.29 $ 14.19 $ 14.08
---------------------------------------------------------------------------------------------------
Exercisable options 2,456,295 3,037,261 1,964,593
---------------------------------------------------------------------------------------------------
</TABLE>
The following table provides information regarding exercisable and outstanding
options as of June 30, 2000.
<TABLE>
<CAPTION>
Exercisable Outstanding
---------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise remaining
Options price Options price contractual
RANGE OF EXERCISE PRICE PER SHARE exercisable per share outstanding per share life (years)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Under $10.00 488,702 $ 8.76 2,145,702 $ 8.83 8.22
$10.00-$12.50 185,785 10.19 185,785 10.19 4.99
$12.51-$15.00 639,965 13.52 957,563 13.43 5.90
Over $15.00 1,141,843 17.36 1,349,859 17.27 5.67
-------------------------------------------------------------------------------------------------------------------
Total 2,456,295 $14.10 4,638,909 $12.29 6.87
-------------------------------------------------------------------------------------------------------------------
</TABLE>
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25) in accounting for stock-based awards to employees. Under
APB 25, the Company generally recognizes no compensation expense with respect to
such awards.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for awards granted in fiscal years after December
31, 1994 as if the Company had accounted for its stock-based awards to employees
under the fair value method of SFAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair
26
<PAGE>
value of its stock-based awards to employees. The fair value of the Company's
stock-based awards to employees was estimated assuming no expected dividends
and the following assumptions:
<TABLE>
<CAPTION>
Options
--------------------------------
2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life (years) 5.6 5.3 5.1
Expected stock price volatility 39.1% 38.0% 37.0%
Risk-free interest rate 6.1% 5.4% 6.0%
-----------------------------------------------------------------------------
</TABLE>
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT PER SHARE AMOUNTS) 2000 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income--as reported $ 42,452 $ 38,473 $ 37,876
Net income--pro forma $ 41,750 $ 34,644 $ 34,597
Basic net income per share--as reported $ 1.71 $ 1.25 $ 1.25
Basic net income per share--pro forma $ 1.68 $ 1.18 $ 1.17
Diluted net income per share--as reported $ 1.70 $ 1.25 $ 1.25
Diluted net income per share--pro forma $ 1.67 $ 1.15 $ 1.12
----------------------------------------------------------------------------------------------------------
</TABLE>
Because SFAS 123 is applicable only to awards granted subsequent to fiscal years
beginning after December 31, 1994, its pro forma effect has not been fully
reflected until approximately 1999. In fiscal year 1998 a total of 1,605,424
options were granted with exercise prices equal to the market price of the stock
on the grant date. The weighted average exercise price and weighted average fair
value of these options were $17.56 and $7.49, respectively. In fiscal year 1999
a total of 1,605,773 options were granted with exercise prices equal to the
market price of the stock on the grant date. The weighted average exercise price
was $14.07 and the average fair value of these options were $6.06. In fiscal
year 2000, a total of 1,958,568 options were granted with exercise prices equal
to the market price of the stock in the grant date. The weighted average
exercise price was $9.07 and the average fair value of these options were $4.02.
The Company has granted stock appreciation rights (SARs) to certain of its
directors under director incentive compensation plans. As of June 30, 2000 SARs
with respect to 4,000 shares, with a weighted average exercise price of $14.92
were outstanding under these plans.
27
<PAGE>
13. EMPLOYEE BENEFIT PLANS
Benefit obligations, at year-end, fair value of plan assets and prepaid
(accrued) benefit costs for the years ended June 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $169,243 $175,776 $ 24,147 $ 23,748
Service cost 2,024 5,125 9 98
Interest cost 10,388 11,873 1,157 1,769
Plan participants' contributions 110 107 1,029 896
Amendments 1,490 - (5,752) -
Actuarial (gain)/loss (5,894) (15,563) (3,779) 2,447
Curtailment (gain)/loss (84) - - (1,105)
Settlement (gain)/loss (29,118) - (1,447) -
Benefits paid (8,971) (8,075) (2,660) (3,706)
---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $139,188 $169,243 $ 12,704 $ 24,147
Change in Plan Assets
Fair value of plan assets at beginning of year $189,010 $189,604 - -
Actual return on plan assets (3,533) 1,374 - -
Employer contributions 1,865 6,000 1,631 2,810
Plan participants' contributions 110 107 1,029 896
Benefits paid (8,971) (8,075) (2,660) (3,706)
Settlements (30,061) - - -
---------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $148,420 $189,010 - -
Funded status $ 9,232 $ 19,767 $ (12,704) $ (24,147)
Unrecognized transition amount (525) (968) - -
Unrecognized net actuarial (gain)/loss 24,955 13,628 (16,949) (15,797)
Unrecognized prior service cost 1,638 78 (6,041) (4,604)
---------------------------------------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit cost $ 35,300 $ 32,505 $ (35,694) $ (44,548)
Weighted-Average Assumptions as of June 30
Discount rate 8.00% 7.50% 8.00% 7.50%
Expected return on plan assets 9.50% 9.50% N/A N/A
Rate of compensation increase 5.75% 5.50% N/A N/A
</TABLE>
For measurement purposes, a 6.75% annual rate of increase in the per capita
cost of covered health benefits was assumed for the first eight years and
5.0% thereafter.
Pension plan assets include $6,000 in company stock.
28
<PAGE>
Net periodic postretirement benefit costs (income) for pension and other
benefits for the years ended June 30, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of Net
Periodic Benefit Cost (Income)
Service cost $ 2,024 $ 5,125 $ 4,542 $ 9 $ 98 $ 143
Interest cost 10,388 11,873 11,179 1,157 1,769 1,682
Expected return on plan assets (14,544) (18,182) (15,927) - - -
Amortization of transition amount (268) (322) (322) - - -
Amortization of prior service cost (28) (315) (335) (408) (917) (1,024)
Recognized net actuarial (gain)/loss 208 - - (1,275) (1,140) (1,719)
--------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (2,220) $ (1,821) $ (863) $ (517) $ (190) $ (918)
Curtailment/settlement (gain)/loss 1,290 (40) (24) (6,705) (3,882) (1,337)
--------------------------------------------------------------------------------------------------------------------------------
Net benefit cost $ (930) $ (1,861) $ (887) $ (7,222) $ (4,072) $ (2,255)
</TABLE>
MagneTek recognized a curtailment/settlement gain or loss in each of the
fiscal years resulting from the following:
2000 Fiscal Year: The sale of the Motor Division.
1999 Fiscal Year: The sale of the Generator Division.
1998 Fiscal Year: The closing of the Mendenhall and Huntington facilities.
The health care plans are contributory, with participants' contributions
adjusted annually. The life insurance plans are noncontributory. The accounting
for the health care plans anticipates future cost-sharing changes.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for Fiscal Year
2001:
<TABLE>
<CAPTION>
1-Percentage Point 1-Percentage Point
Increase Decrease
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect of total service and interest cost components
-based on 7.5% discount rate $ 70 $ (80)
Effect on postretirement benefit obligation
-based on 8.0% discount rate $ 0 $ (265)
</TABLE>
The Company has implemented a contribution policy for retiree health coverage
effective January 1, 2000 that essentially removes any incremental cost to the
Company in the event health insurance trend rates exceed five percent.
In addition to the defined benefit retirement plans and health care plans, the
Company contributes to a defined contribution savings plan. Company
contributions were $531, $992 and $1,083 during the plan years ending March
2000, 1999 and 1998, respectively.
<PAGE>
14. RELATED PARTY TRANSACTIONS
The Company has an agreement with the Spectrum Group, Inc. whereby Spectrum will
provide management services to the company through fiscal 2002 at an annual fee
plus certain allocated and out of pocket expenses. The Company's chairman is
also the chairman of Spectrum. The services provided include consultation and
direct management assistance with respect to operations, strategic planning and
other aspects of the business of the Company. Fees and expenses paid to Spectrum
for these services under the agreement amounted to $904, $805 and $772 for the
years ended June 30, 2000, 1999 and 1998, respectively.
During the years ended June 30, 2000, 1999 and 1998, the Company paid
approximately $36, $120 and $270, respectively in fees to charter an aircraft
owned by a company in which the chairman is the principal shareholder.
The Company has retained ING Barings to act as its agent in connection with the
purchase of stock under its 10 million share repurchase program. Commissions
paid to ING Barings during fiscal 2000 amounted to $283. The Company also
engaged ING Barings to evaluate strategic alternatives for its lighting
operation in the fourth quarter of fiscal 2000, pursuant to which ING Barings
was paid a retainer of $100. During the engagement, ING Barings will be
reimbursed for all reasonable expenses and if the lighting business is sold, it
will receive a percentage of the transaction value based on a sliding scale. One
of the Company's directors is a Principal of ING Barings LLC.
15. ACCRUED LIABILITIES
Accrued liabilities consist of the following at June 30:
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Salaries, wages and related items $ 9,513 $ 14,615
General insurance 4,898 5,407
Income taxes 668 14,141
Other 14,932 16,650
---------------------------------------------------------------------------------------------------------------------------
$ 30,011 $ 50,813
===========================================================================================================================
</TABLE>
16. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities of continuing operations follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Increase) decrease in accounts receivable $ 1,382 $ 6,828 $ (5,025)
(Increase) decrease in inventories 7,244 (3,953) 2,346
(Increase) decrease in prepaids and other current assets 847 187 (315)
(Increase) decrease in other operating assets (1,364) 3,177 (19,819)
Increase (decrease) in accounts payable (5,783) (1,550) 6,690
Increase (decrease) in accrued liabilities (29,033) 4,689 7,902
Increase (decrease) in deferred income taxes 7,658 (16,104) (2,411)
Increase (decrease) in other operating liabilities (2,795) (3,602) (4,244)
---------------------------------------------------------------------------------------------------------------------------
$(21,844) $ (10,328) $(14,876)
===========================================================================================================================
Cash paid for interest and income taxes follows:
Interest $ 6,171 $ 18,241 $ 15,938
Income taxes $ 6,967 $ 5,931 $ 8,134
===========================================================================================================================
</TABLE>
30
<PAGE>
17. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company currently operates within a single business segment termed Digital
Power Products. Within the segment there exist two product lines, power control
products and motion control products. The Company sells its products primarily
to large original equipment manufacturers and distributors. The Company performs
ongoing credit evaluations of its customers' financial conditions and generally
requires no collateral. The Company has a single customer whose revenues
represented 16%, 18% and 16% of the Company's total revenues in fiscal years
2000, 1999 and 1998. Outstanding receivables with the Company's largest customer
were 12%, 18% and 12% of the total receivables of the Company as of the year-end
in fiscal years 2000, 1999 and 1998. Beyond the Company's single largest
customer there is no significant concentration of credit risk.
During the year ended June 30, 2000, sales of power control products were
$158,950 and sales of motion control products were $134,625 as compared to power
control products of $150,727 and motion and control products of $80,612 for the
year ended June 30, 1999. Sales of motion control products increased $54,013 in
fiscal 2000 due the acquisition of the EMS Group and Mondel ULC. During the year
ended June 30, 1998, sales of power control products were $150,625 and sales of
motion control products were $93,415.
Information with respect to the Company's foreign subsidiaries follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 75,685 $ 81,349 $ 85,243
Operating income 5,727 4,433 7,241
Identifiable assets 90,322 113,029 115,410
Capital expenditures 5,644 9,734 14,355
Depreciation and amortization 7,731 8,732 7,296
===========================================================================================================================
</TABLE>
Operating income for the foreign subsidiaries does not include any allocation of
corporate costs incurred in the United States. Sales by foreign subsidiaries
include only sales of products that are made to customers outside of the U.S.
The Company's foreign operations outside of Europe are not material. Export
sales from the United States were $5,580, $5,152 and $8,178 in 2000, 1999 and
1998 respectively.
18. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
2000 QUARTER ENDED SEPT. 30 DEC. 31 MAR. 31 JUNE 30
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $71,172 $ 66,681 $ 78,260 $ 77,462
Gross profit 14,470 16,406 17,266 15,067
Provision (benefit) for income taxes 267 339 769 (575)
Income (loss) from continuing operations $ 434 $ 556 $ 1,254 $ (962)
Net income $38,008 $ 4,095 $ 3,664 $ (3,315)
Per common share:
Basic:
Income (loss) from continuing operations $ 0.01 $ 0.02 $ 0.05 $ (0.04)
Net income $ 1.29 $ 0.17 $ 0.16 $ (0.14)
Diluted:
Income (loss)from continuing operations $ 0.01 $ 0.02 $ 0.05 $ (0.04)
Net income $ 1.29 $ 0.17 $ 0.16 $ (0.14)
===========================================================================================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
1999 QUARTER ENDED SEPT. 30 DEC. 31 MAR. 31 JUNE 30
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $53,741 $62,909 $ 57,868 $ 56,821
Gross profit 10,864 11,876 11,200 6,948
Provision (benefit) for income taxes (831) (1,045) (1,186) (8,538)
Income (loss) from continuing operations $(1,767) $(2,222) $ (2,520) $(17,809)
Net income $ 9,017 $ 2,418 $ 4,538 $ 22,500
Per common share:
Basic:
Income (loss) from continuing operations $ (0.06) $ (0.07) $ (0.08) $ (0.58)
Net income $ 0.29 $ 0.08 $ 0.15 $ 0.74
Diluted:
Income (loss) from continuing operations $ (0.06) $ (0.07) $ (0.08) $ (0.58)
Net income $ 0.29 $ 0.08 $ 0.15 $ 0.74
===========================================================================================================================
</TABLE>
32
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MagneTek, Inc.
We have audited the accompanying consolidated balance sheets of MagneTek,
Inc. as of June 30, 2000 and 1999, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MagneTek, Inc.
at June 30, 2000 and 1999 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 2000,
in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Nashville, Tennessee
August 18, 2000
33
