Miscor 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended October 4, 2009 or
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 000-52380

MISCOR GROUP, LTD.

(Exact name of registrant as specified in its charter)

Indiana	20-0995245
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1125 South Walnut Street

South Bend, Indiana 46619

(Address of principal executive offices/zip code)

Registrant’s telephone number, including area code:  (574) 234-8131

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

x Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o  Yes  o   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer    o (Do not check if a smaller reporting company)	Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of November 19, 2009, there were 11,801,326 shares outstanding of the issuer’s Common Stock, without par value.

MISCOR GROUP, LTD.

INDEX TO FORM 10-Q

Item		Page
Number		Number
PART I - FINANCIAL INFORMATION
1.	Financial Statements:	3
	Condensed Consolidated Balance Sheets October 4, 2009 (Unaudited) and December 31, 2008	3
	Condensed Consolidated Statements of Operations (Unaudited) Three and Nine Months ended October 4, 2009 and September 28, 2008	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months ended October 4, 2009 and September 28, 2008	5
	Notes to Condensed Consolidated Financial Statements	6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
3.	Quantitative and Qualitative Disclosures about Market Risk	28
4T.	Controls and Procedures	29
PART II - OTHER INFORMATION
2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
6.	Exhibits	30
	Signatures	31

2

PART I - FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

MISCOR GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
ASSETS
	October 4,			December 31,
	2009			2008
	(Unaudited)
CURRENT ASSETS
Cash	$	–		$	76
Accounts receivable, net of allowance for doubtful accounts of $943 and $864, respectively		14,388			23,549
Inventories, net		9,620			13,807
Prepaid expenses		807			738
Other current assets		3,097			3,173
Total current assets		27,912			41,343
PROPERTY AND EQUIPMENT, net		12,585			13,812
OTHER ASSETS
Deposits and other assets		199			392
Goodwill		10,466			12,966
Customer relationships, net		8,676			9,059
Other intangible assets, net		994			1,218
Total other assets		20,335			23,635
Total Assets	$	60,832		$	78,790
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit line, net of discount of $120 and $117, respectively	$	5,151		$	7,343
Current portion of long-term debt		951			487
Accounts payable		8,775			12,218
Accrued expenses and other current liabilities		5,002			6,180
Total current liabilities		19,879			26,228
LONG TERM LIABILITIES
Long-term debt		4,465			4,805
Long-term debt, Officers		4,550			5,000
Total long-term liabilities		9,015			9,805
Total liabilities		28,894			36,033
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 800,000 shares authorized; no shares issued and outstanding		–			–
Common stock, no par value; 30,000,000 shares authorized; 11,804,628 and 11,748,448 shares issued and outstanding, respectively		50,920			50,859
Additional paid in capital		9,107			9,056
Accumulated deficit		(28,089	)		(17,158	)
Total Stockholders' equity		31,938			42,757
Total Liabilities and Stockholders' Equity	$	60,832		$	78,790

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

3

MISCOR GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

	For the Three Months Ended					For the Nine Months Ended
	October 4,			September 28,		October 4,			September 28,
	2009			2008		2009			2008
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Revenues
Product Sales	$	2,799		$	6,150	$	10,537		$	18,771
Service Revenue		17,038			25,353		52,130			73,017
Total Revenues		19,837			31,503		62,667			91,788
Cost of Revenues
Cost of Product Sales		2,474			5,656		8,031			15,248
Cost of Service Revenue		15,555			20,834		49,673			61,715
Total Cost of Revenues		18,029			26,490		57,704			76,963
Gross Profit		1,808			5,013		4,963			14,825
Selling, General and Administrative Expenses		3,246			4,334		12,585			12,401
Goodwill Impairment		2,500			-		2,500			-
Income (Loss) From Operations		(3,938	)		679		(10,122	)		2,424
Other (Income) Expense
Interest Expense		422			198		912			693
Other (Income) Expense		46			-		(104	)		(42	)
		468			198		808			651
Income Before Taxes		(4,406	)		481		(10,930	)		1,773
Income Tax Expense		-			10		-			236
NET INCOME (LOSS)	$	(4,406	)	$	471	$	(10,930	)	$	1,537
Basic and Diluted Earnings (Loss) per Common Share	$	(0.37	)	$	0.04	$	(0.93	)	$	0.13
Weighted Average Number of Common Shares Outstanding
Basic		11,784,490			11,731,394		11,764,823			11,616,370
Diluted		11,784,490			12,988,391		11,764,823			12,915,610

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

4

 

MISCOR GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share and per share data)
	For the Nine Months Ended
	October 4,			September 28,
	2009			2008
	(Unaudited)			(Unaudited)
OPERATING ACTIVITIES
Net cash provided (utilized) by operating activities	$	2,871		$	(768	)
INVESTING ACTIVITIES
Acquisition of business assets, net of cash acquired		-			(8,041	)
Acquisition of property and equipment		(609	)		(1,863	)
Proceeds from disposal of property and equipment		117			143
Net cash utilized by investing activities		(492	)		(9,761	)
FINANCING ACTIVITIES
Payments on capital lease obligations		(71	)		(39	)
Short term borrowings (repayments), net		(2,165	)		5,763
Borrowings of long-term debt		142			2,389
Repayments of long-term debt		(397	)		(440	)
Proceeds from the issuance of shares and exercise of warrants		65			94
Cash repurchase of restricted stock		(5	)		-
Debt issuance costs		(24	)		(45	)
Net cash provided by (utilized in) financing activities		(2,455	)		7,722
DECREASE IN CASH		(76	)		(2,807	)
Cash, beginning of period		76			2,807
Cash, end of period	$	-		$	-
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	596		$	587

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

5

MISCOR GROUP, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts in thousands, except share and per share data)

NOTE A - BASIS OF PRESENTATION

The unaudited interim consolidated financial statements of MISCOR Group, Ltd. (the “Company”) as of and for the three and nine months ended October 4, 2009 and September 28, 2008, have been prepared in accordance with generally accepted accounting principles for interim information and the rules and regulations of the Securities and Exchange Commission for interim financial information.  Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of the Company’s management, all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair statement have been included.  The results for the nine months ended October 4, 2009 are not necessarily indicative of the results to be expected for the year ending December 31, 2009.  Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for the most recent disclosure of the Company’s accounting policies.

As discussed in Note F – Senior Credit Facility, on September 16, 2009 the Company and Wells Fargo executed a Fifth Amendment to the Credit Agreement (the “Fifth Amendment”).  The Fifth Amendment amended the Credit Agreement to, among other things, extend until October 31, 2009 the previously agreed upon requirement for the Company to raise $2,000 in additional capital through subordinated debt, asset sales, or additional cash equity.  As of November 23, 2009, the Company has not succeeded in raising all of the $2,000 of additional capital that the Credit Agreement, as amended by the Fifth Amendment, required the Company to raise by October 31, 2009.  Wells Fargo has not declared an event of default under the Credit Agreement as a result of the failure to raise all of the additional required capital.  The Company is continuing discussions with Wells Fargo regarding an extension of the requirement to raise additional capital or other arrangements under which Wells Fargo would refrain from exercising their rights under the bank credit facilities as a result of the above-mentioned failure to raise additional capital.  While the Company is optimistic that an agreement can be reached to extend the due date of the requirement to raise additional capital, there can be no assurances that the Company will be able to obtain an extension or obtain other relief from Wells Fargo.  If Wells Fargo demands immediate repayment of the Company’s outstanding borrowings under the bank credit facilities, the Company does not currently have means to repay or refinance the amounts that would be due.  If demanded and if the Company was unable to repay or refinance the amounts due under the bank credit facilities, Wells Fargo could exercise its remedies under the bank credit facilities, including foreclosing on substantially all of the Company’s assets, which the Company pledged as collateral to secure its obligations under the bank credit facilities.  If Wells Fargo were to exercise its remedies and foreclose on the Company’s assets, there would be substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements have been prepared assuming the Company is a going concern and do not reflect any adjustments that may arise from this uncertainty.

Certain amounts from the prior year financial statements have been reclassified to conform to the current year presentation.   Deferred compensation was reclassified to Additional paid in capital on the condensed consolidated balance sheets.  This reclassification had no effect on the Company’s consolidated statements of operations or cash flows.

NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS

In April 2009, the FASB issued new accounting guidance on fair value measurements.  The new guidance impacts certain aspects of fair value measurement and related disclosures.  The new guidance was effective beginning in the second quarter of 2009.  The adoption of  this new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued new accounting guidance entitled The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162 (“ASC”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP.  The new guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of this guidance has changed how we reference various elements of GAAP when preparing our financial statement disclosures, but did not have an impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued new accounting guidance on consolidation of variable interest entities, which include:  (1) the elimination of the exemption for qualifying special purpose entities; (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity.  The new guidance is effective for fiscal years beginning after November 15, 2009, and for interim periods within that first annual reporting period.  The Company is currently evaluating the impact that the adoption of this new guidance may have on its consolidated financial statements.

In May 2009, the FASB issued new accounting guidance on subsequent events.  The objective of this guidance is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This new accounting guidance was effective for interim and annual periods after June 15, 2009.  The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, “Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. ASU 2009-05 is effective for reporting periods (including interim periods) beginning after August 26, 2009. The Company is currently evaluating the impact that the adoption of ASU 2009-05 will have on its consolidated financial statements.

In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method.  ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2009-13 will have on its consolidated financial statements.

6

NOTE C - EARNINGS (LOSS) PER SHARE

For the three and nine months ended October 4, 2009, 1,200,000 potential shares of common stock related to convertible subordinated debt securities were excluded from the computation of diluted loss per share because the impact would have been anti-dilutive.  In addition, the Company’s common stock equivalents, consisting of warrants to purchase 310,254 shares of common stock and options to purchase 52,700 shares of common stock issued to employees under the 2005 Stock Option Plan, were excluded from the computation of diluted loss per share because the warrants’ and options’ exercise prices were greater than the average market price of the common shares during the three and nine months ended October 4, 2009, or the effect of including the warrants and options would have been anti-dilutive.

Components of basic and diluted earnings per share were as follows:

	Three Months Ended					Nine Months Ended
	October 4, 2009			September 28, 2008		October 4, 2009			September 28, 2008
Net income/(loss) available for common stockholders used in basic earnings per share	$	(4,406	)	$	471	$	(10,930	)	$	1,537
Interest on convertible debt		-			30		-			102
Net income/(loss) available for common stockholders after assumed conversion of diluted securities	$	(4,406	)	$	501		(10,930	)	$	1,639
Weighted average outstanding shares of common stock		11,784,490			11,731,394		11,764,823			11,616,370
Dilutive effect of  stock options and warrants		-			56,997		-			99,240
Dilutive effect of convertible debt		-			1,200,000		-			1,200,000
Weighted average outstanding shares of common stock and common stock equivalents		11,784,490			12,988,391		11,764,823			12,915,610
Earnings/(loss) per share:
Basic	$	(0.37	)	$	0.04		(0.93	)	$	0.13
Diluted	$	(0.37	)	$	0.04		(0.93	)	$	0.13

NOTE D - INVENTORY

Inventory consists of the following:

	October 4,			December 31,
	2009			2008
Raw materials	$	5,646		$	6,738
Work-in-process		2,882			5,221
Finished goods		2,319			2,964
	$	10,847		$	14,923
Less: allowance for slow moving and obsolete inventories		(1,227	)		(1,116	)
	$	9,620		$	13,807

7

NOTE E – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Goodwill is assigned to reporting units within the company based on the operating and economic characteristics and the management of the various operating segments and components within those operating segments.

The amounts assigned to the various reporting units within the company are as follows:

	Magnetech Industrial Services		American Motive Power			Ideal Consolidated		Total
Balances as of January 1, 2008	$	7,370	$	-		$	633	$	8,003
Goodwill Acquired During the Year		461		5,377			-		5,838
Settlements and Adjustments		-		-			12		12
Impairment Charge		-		(887	)		-		(887	)
Balances as of December 31, 2008		7,831		4,490			645		12,966
Impairment Charge		-		(2,500	)		-		(2,500	)
Balances as of October 4, 2009	$	7,831	$	1,990		$	645	$	10,466

The Company evaluates its goodwill for impairment by comparing each individual reporting unit’s carrying amount of net assets, including goodwill, to their fair value at least annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

During the third quarter of 2009 the Company performed an interim evaluation of the goodwill of its American Motive Power (“AMP”) and Magnetech Industrial Services (“MIS”) reporting units for impairment, due to a significant decline in revenue and operating results experienced by the two reporting units.  As a result of the completion of step one of the interim analysis and test for impairment of goodwill it was determined that goodwill related to the Company’s AMP reporting unit, a component of our Rail Services segment, was impaired.  As a result, an estimated goodwill impairment charge of $2,500 was recorded in the Company’s consolidated statement of operations for the quarter ended October 4, 2009.  This represents a write down of goodwill in the amount of the excess of the previous carrying value of goodwill over the implied fair value of goodwill.  The fair value of AMP was estimated to be approximately equal to the expected selling price of AMP obtained from the completion and distribution of an offering memorandum for the sale of the Company’s rail division.  Management determined that this valuation approach provided a more refined estimate of the fair value of the AMP reporting unit as compared to a discounted cash flow model, which had been used in previous impairment tests.  The Company has not yet completed step two of its analysis, but it is anticipated that step two will be completed during the fourth quarter of 2009, at which time any required adjustments to the Company’s estimates will be recorded.  The amount of the impairment charge recognized may change as a result of the Company’s completion of step two.

The fair value of the Company’s MIS reporting unit was estimated using a discounted cash flow model.  Significant estimates and assumptions were used in preparing the discounted cash flow model.  These estimates and assumptions involve future cash flows, growth rates, and weighted average cost of capital.  The cost of capital for goodwill impairment testing for the MIS reporting unit was estimated at 15%, and included a risk premium of 8%.  The Company found that there was not impairment for its MIS reporting unit.

The Company’s Ideal Consolidated reporting unit was not tested for goodwill impairment during the third quarter of 2009 since its revenue and operating results have not changed significantly from the fourth quarter of 2008, when the Company last completed its annual test for goodwill impairment.

Determining the fair value of a reporting unit is a matter of judgment and often involves the use of significant estimates and assumptions. The use of different assumptions would increase or decrease the estimated fair values of the reporting units and could increase or decrease an impairment charge. If the use of these assets or the projections of future cash flows change in the future, the Company may be required to record additional impairment charges. An erosion of future business results in any of the Company’s reporting units could create impairment in goodwill or other long-lived assets and require a significant impairment charge in future periods.

8

NOTE E – GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)

The Company has three reporting segments, the Industrial Services segment, the Construction and Engineering Services segment and the Rail Services segment.  The following table summarizes the components of goodwill by reporting segment:

	Industrial Services		Construction and Engineering Services		Rail Services			Total
Balances as of January 1, 2008	$	7,370	$	633	$	-		$	8,003
Goodwill Acquired During the Year		461		-		5,377			5,838
Settlements and Adjustments		-		12		-			12
Impairment Charge		-		-		(887	)		(887	)
Balances as of December 31, 2008		7,831		645		4,490			12,966
Impairment Charge		-		-		(2,500	)		(2,500	)
Balances as of October 4, 2009	$	7,831	$	645	$	1,990		$	10,466

Other Intangible Assets

Intangible assets consist of the following:

			October 4, 2009							December 31, 2008
	Estimated Useful Lives (in Years)		Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Patents and Trademarks		10	$	4	$	(3	)	$	1	$	4	$	(3	)	$	1
Mutual Services Agreement		1		100		(100	)		-		100		(100	)		-
Technical Library		20		700		(65	)		635		700		(38	)		662
Customer Relationships		15-20		9,592		(916	)		8,676		9,592		(533	)		9,059
Non-Compete Agreements		3		807		(449	)		358		807		(252	)		555
Total			$	11,203	$	(1,533	)	$	9,670	$	11,203	$	(926	)	$	10,277

Although the Company has a recent history of operating losses, management has determined that its other intangible assets are expected to provide adequate cash flows to demonstrate the recoverability of its reported carrying values.  As a result, no impairment charges were recognized for the nine months ended October 4, 2009 or September 28, 2008.

The estimated future amortization expense related to intangible assets for the periods subsequent to October 4, 2009 on a calendar year basis is as follows:

Years Ending December 31,
2009	$	202
2010		818
2011		563
2012		546
2013		546
Thereafter		6,995
Total	$	9,670

9

NOTE F – SENIOR CREDIT FACILITY

On January 14, 2008, the Company entered into a credit facility with Wells Fargo Bank, National Association (“Wells Fargo”).  The credit facility was originally comprised of a 10 year $1,250 real estate term note and a $13,750 revolving note.

On January 16, 2008, MISCOR borrowed $7,500 under the revolving note and used the net proceeds of the loan for working capital and to acquire all of the outstanding shares of common stock of American Motive Power, Inc.  The original maturity date of the note is January 1, 2011, at which time the note will automatically renew for one-year periods until terminated.  The note is secured by (1) a first priority lien on the assets of the Company; (2) a mortgage on certain real property; and (3) the pledge of the equity interests in MISCOR’s subsidiaries.  From its inception through December 31, 2008, the revolving note bore interest at an annual rate of either (i) the Prime Rate, or (ii) Wells Fargo’s LIBOR rate plus 2.8%, depending on the nature of the advance.  Interest is payable monthly, in arrears, under the revolving note beginning on February 1, 2008.  The outstanding balance on the revolving note was $5,271 and $7,460 at October 4, 2009 and December 31, 2008.  As of October 4, 2009 and December 31, 2008 there was $395 and $1,707 available under the revolving credit line. Effective January 1, 2009, the interest rate on the revolving credit line was increased to the bank’s prime rate plus 3% as a result of the default notice as described below.  Effective April 14, 2009, the interest rate on the revolving credit line was reset to the Daily Three Month LIBOR plus 5.25%, as a result of the Fourth Amendment to the Credit Facility as described below.  Effective June 1, 2009, the interest rate on the revolving credit line was reset to the Daily Three Month LIBOR (approximately 0.28% at October 4, 2009) plus 8.25%, as a result of the second Fourth Amendment to the Credit Facility as described below.

The provisions of the revolving note include a lock-box agreement and also allow Wells Fargo, in its reasonable credit judgment, to assess additional reserves against, or reduce the advance rate against accounts receivable used in the borrowing base calculation.  Based on further analysis of the terms of the revolving note, there are certain provisions that could potentially be interpreted as a subjective acceleration clause. More specifically, Wells Fargo, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation or reduce the advance rate against accounts receivable to account for changes in the nature of the Company’s business that alters the underlying value of the collateral. The reserve requirements may result in an overadvance borrowing position that could require an accelerated repayment of the overadvance portion.  The Company does not anticipate any changes in its business practices that would result in any material adjustments to the borrowing base calculation. However, management cannot be certain that additional reserves will not be assessed by Wells Fargo to the borrowing base calculation. As a result, the Company classifies borrowings under the revolving note as a short-term obligation.

The real estate term note originally bore interest at an annual rate equal to the rate of interest most recently announced by Wells Fargo at its principal office as its prime rate (the “Prime Rate”), subject to certain minimum annual interest payments.  The real estate term note requires monthly principal payments of $10, plus interest, beginning on June 1, 2008, the first day of the month following receipt of the advance. The outstanding balance under the real estate term note as of October 4, 2009 and December 31, 2008 was $990 and $1,177.  From its inception through December 31, 2008, the real estate term note bore interest at an annual rate equal to the banks prime rate (3.25% at December 31, 2008).  Effective January 1, 2009, the interest rate on the real estate term note was increased to the bank’s prime rate plus 3% as a result of the default notification as described below.  Effective April 14, 2009, the interest rate on the real estate term note was increased to the Daily Three Month LIBOR plus 5.25%, as a result of the first Fourth Amendment to the Credit Facility as described below.  During May 2009, the company made an additional payment of $93 to reduce the outstanding principal balance of the real estate term note as a result of an appraisal of the real estate securing the note, as required by the first Fourth Amendment to the Credit Facility signed on April 14, 2009.  Effective June 1, 2009 the interest rate on the real estate term note was increased to the Daily Three Month LIBOR (approximately 0.28% at October 4, 2009) plus 8.25% as a result of the second Fourth Amendment to the Credit Facility as described below.

The Company may prepay the term notes at any time, subject to certain prepayment penalties.  With respect to the revolving note, the Borrowers may borrow, pay down and re-borrow under the note until the maturity date.  The maximum aggregate principal amount that may be borrowed under the revolving note is the lesser of (1) the sum of 40% of the Company’s eligible construction related trade receivables (reduced to 35% July 22, 2009 and further reduced to 30% effective August 31 or lesser rate as determined by the lender) up to $1,750 (with such amount to be reduced by $50 per week beginning on August 3, 2009) and 85% of certain remaining eligible trade accounts receivable less any reserves established by Wells Fargo from time to time and (2) $11,000 less any reserves established by Wells Fargo.

In April 2008, the Company and Wells Fargo amended the Credit Facility entered into in January 2008. This first amendment revised the formula for the maximum aggregate principal amount that may be borrowed under the revolving note. Specifically, the percentage of a portion of the Company’s eligible construction related trade receivables resulting from time and material services and completed contracts was increased from 40% to 85% and the related borrowings were removed from the $2,000 limitation.

10

The April 2008 amendment also provided a four year equipment term note in the amount of $1,000, secured by substantially all of the machinery and equipment of the Company. The note matures June 1, 2012 and is payable in monthly installments of $21 plus interest at the bank’s prime rate  (3.25% at December 31, 2008) beginning June 1, 2008. The outstanding balance under the equipment term note as of October 4, 2009 and December 31, 2008 was $667 and $854.  Effective January 1, 2009, the interest rate on the machinery and equipment term note was increased to the bank’s prime rate plus 3% as a result of the default notification as described below.  Effective April 14, 2009, the interest rate on the machinery and equipment term note was increased to the Daily Three Month LIBOR  plus 5.25%, as a result of the waiver agreement as described below.  Effective June 1, 2009 the interest rate on the machinery and equipment term note was increased to the Daily Three Month LIBOR (approximately 0.28% at October 4, 2009) plus 8.25% as a result of the second Fourth Amendment to the Credit Facility as described below.

As part of the financing and the related amendments, the Company paid debt issue costs of $69 and is amortizing these costs to interest expense over the remaining term of the financing.   Debt issue costs amortized to interest expense was $29 and $37 for the three and nine months ended October 4, 2009 and $4 and $11 for the three and nine months ended September 28, 2008.  Debt issue costs amortization expense  for the three months ended October 4, 2009 includes an adjustment of $21 to write off a portion of the debt issue costs due to the reduction in the borrowing base as a result of the Second Fourth amendment and the Fifth amendment to the Credit Agreement.  Net debt issue costs at October 4, 2009 and December 31, 2008 was $18 and $31.  The Company also paid fees to Wells Fargo as part of the financing and the related amendments in the amount of $346. These fees were recorded as a debt discount. The Company is accreting this debt discount to interest expense over the term of the credit facility.  Debt discount accreted to interest expense was $143 and $171 for the three and nine months ended October 4, 2009 and $14 and $40 for the three and nine months ended September 28, 2008.  Debt discount accretion for the three months ended October 4, 2009 includes an adjustment of $105 to write off a portion of the debt discount due to the reduction in the borrowing base as a result of the Second Fourth amendment and the Fifth amendment to the Credit Agreement.  Net debt discount at October 4, 2009 and December 31, 2008 was $120 and $117.

Interest expense under the Wells Fargo Credit facility, excluding amortization of debt issue costs and accretion of debt discount, was $153 and $392 for the three and nine months ended October 4, 2009 and $95 and $254 for the three and nine months ended September 28, 2008.

The Company has promissory notes outstanding to BDeWees, Inc., XGen III, Ltd., and John A. Martell, in the original principal amounts of $2,000, $2,000 and $3,000, respectively (together, the “Subordinated Indebtedness”) (See Note I, Related Party Transactions).  Subordination agreements have been executed that subordinate the obligations of the Company under the Subordinated Indebtedness to the Wells Fargo credit facility.

Default and Waiver Agreements

The Wells Fargo notes contain certain financial covenants, including limits on capital expenditures, requirements for minimum book net worth, minimum net income, and minimum debt service coverage ratios.

During the second and third quarters of 2008, the Company exceeded the limits on capital expenditures but received waivers from Wells Fargo for these covenant defaults.  In September 2008, the Company amended the credit facility with Wells Fargo. This second amendment revised the financial covenant limiting capital expenditures, increasing the maximum amount of capital expenditures for 2008 to $2,000, no more than $1,250 of which could be paid for from working capital. The amendment also limited the investment and loans from AMP to AMP Canada to $1,000.

During the fourth quarter of 2008, the Company signed a waiver agreement with Wells Fargo with respect to the Company’s maximum allowable capital spending for 2008.  The agreement increased the amount of allowable capital expenditures during 2008 to $2,750, of which no more than $2,250 could be from working capital.  This amendment also removed the limit on investment and loans from AMP to AMP Canada included in the second amendment signed in September, 2008.

On March 5, 2009, the Company received a default notification from Wells Fargo, due to the violation of a financial covenant regarding minimum net income for the year ended December 31, 2008.  Additionally, the Company was in default of the debt service coverage ratio.  The defaults resulted in an increase in the interest rate on the revolving note, the real estate term note and the machinery and equipment note at the Prime rate plus 3% (6.25% at December 31, 2008).  In addition, due to the covenant violation, Wells Fargo reduced the loan availability on the revolving note related to certain receivable accounts held by Martell Electric and Ideal.  The interest rate increase was made effective retroactively to January 1, 2009 and remained in effect until the default was subsequently waived on April 14, 2009.

On April 14, 2009, the Company and Wells Fargo signed a first Fourth Amendment to the Credit Facility and waiver of the default notification received on March 5, 2009 (the “first Fourth Amendment”).  The amendment and waiver amended the credit facility as follows:

· Waived the Company’s noncompliance with the minimum net income and debt service coverage ratio covenants for the year ended December 31, 2008

· Eliminated the minimum net income and debt service coverage ratio covenants for the year ending December 31, 2009

· Adjusted the minimum book net worth covenant to $38,750 as of December 31, 2009

11

· Incorporated a monthly minimum EBITDA covenant commencing in April, 2009

· Reduced the revolving credit line limit to $11,000 (from $13,750)

· Reset the interest rate on the revolving credit line and term notes to the Daily Three Month LIBOR plus 5.25% effective April 14, 2009

· Suspended interest payments on the Company’s subordinated debt to the Company’s CEO, John A. Martell.

In connection with the first Fourth Amendment, the Company agreed to pay Wells Fargo an accommodation fee equal to $100, payable in installments of $50 on the date of execution of the first Fourth Amendment and $50 in June 2009.

On July 22, 2009, the Company and Wells Fargo executed a second Fourth Amendment to the Credit Agreement (the “second Fourth Amendment”).  The second Fourth Amendment amended the Credit Agreement in the following respects:

· Revised the definition of “Borrowing Base”, resulting in lower available borrowings

· Adjusted the interest rate on the revolving credit line and term notes (defined in the Credit Agreement as the “LIBOR Advance Rate”) to the Daily Three Month LIBOR (0.56% at July 5, 2009) plus 8.25%, effective June 1, 2009

· Lowered the amount of the minimum EBITDA that the Company is required to achieve in future periods

· Requires the Company to raise $2,000,000 in additional capital by August 31, 2009 through subordinated debt, asset sales or additional cash equity

· Lowered eligible progress accounts advance rates by $50 per week commencing August 3, 2009.

· Lowered the special accounts advanced rate to 35% effective July 22, 2009 further reducing it to 30% effective August 31, 2009 or such lesser rate the lender may determine

· Added conditions regarding marketing assets, the validation of the Company’s cash flow forecast and future financial projections

In connection with the second Fourth Amendment, the Company agreed to pay Wells Fargo an accommodation fee equal to $50, payable on the date of execution of the second Fourth Amendment.

On September 16, 2009 the Company and Wells Fargo executed a Fifth Amendment to the Credit Agreement (the “Fifth Amendment”).  The Fifth Amendment amended the Credit Agreement in the following respects:

· Revised the definition of “Borrowing Base”, resulting in lower available borrowings; and

· Extended until October 31, 2009 the previously agreed upon requirement for the Company to raise $2,000 in additional capital through subordinated debt, asset sales, or additional cash equity.

In connection with the Fifth Amendment, the Company agreed to pay Wells Fargo an accommodation fee equal to $25, payable on the date of the execution of the Fifth Amendment.

As of November 23, 2009, the Company has not succeeded in raising all of the $2,000 of additional capital that the Credit Agreement, as amended by the Fifth Amendment, required the Company to raise by October 31, 2009.  Wells Fargo has not declared an event of default under the Credit Agreement as a result of the failure to raise all of the additional required capital.  The Company is continuing discussions with Wells Fargo regarding an extension of the requirement to raise additional capital or other arrangements under which Wells Fargo would refrain from exercising their rights under the bank credit facilities as a result of the above-mentioned failure to raise additional capital.  While the Company is optimistic that an agreement can be reached with Wells Fargo to extend the due date of the requirement to raise additional capital, there can be no assurances that the Company will be able to obtain an extension or obtain other relief from Wells Fargo.  If Wells Fargo demands immediate repayment of the Company’s outstanding borrowings under the bank credit facilities, the Company does not currently have means to repay or refinance the amounts that would be due.  If demanded, and if the Company were unable to repay or refinance the amounts due under the bank credit facilities, Wells Fargo could exercise its remedies under the bank credit facilities, including foreclosing on substantially all the Company’s assets, which the Company pledged as collateral to secure its obligations under the bank credit facilities.  If Wells Fargo were to exercise its remedies and foreclose on the Company’s assets, there would be substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements have been prepared assuming the Company is a going concern and do not reflect any adjustments that may arise from this uncertainty.

While the Company explores asset sales, divestitures and other types of capital raising alternatives in order to reduce indebtedness under the Credit Agreement, there can be no assurance that such activities will be successful or generate cash resources adequate to retire or sufficiently reduce this indebtedness.

12

NOTE G - DEBT

Long-term debt

Long-term debt consists of the following:

	October 4,		December 31,
	2009		2008
Note payable to former  members of 3-D Service, Ltd. (XGen III, Ltd.) due November 30, 2010, plus interest at prime rate (3.25% at October 4, 2009 and December 31, 2008) secured by a subordinated interest in machinery and equipment of 3-D Services, Ltd.	$	2,000	$	2,000
Note payable to former  members of 3-D Service, Ltd. (BDeWees, Inc.) due November 30, 2010, plus interest at prime rate (3.25% at October 4, 2009 and December 31, 2008) secured by a subordinated interest in machinery and equipment of 3-D Services, Ltd.		2,000		2,000
Note payable to Officer, payable in monthly installments of $50 beginning February 1, 2010, plus interest at prime rate (3.25% at October 4, 2009 and December 31, 2008) less 1% through December 31, 2008, interest rate increased to prime plus 1% beginning on January 1, 2009 and was reset to the greater of 5% or prime plus 1% beginning April 14, 2009, secured by a subordinated interest in substantially all assets owned by the Company		3,000		3,000
Note payable to bank in monthly installments of $10 through May 2018, plus interest at prime rate (3.25% at December 31, 2008) through December 31, 2008, increased to prime rate plus 3% through April 13, 2009, reset to Daily Three Month LIBOR plus 5.25%  beginning April 14, 2009, increased to Daily Three Month LIBOR (0.28% at October 4, 2009) plus 8.25% beginning June 1, 2009, secured by certain real estate (see Note F, Senior Credit Facility)		990		1,177
Note payable to bank in monthly installments of $21 through May 2012, plus interest at prime rate (3.25% at December 31, 2008) through December 31, 2008, increased to prime plus 3% through April 13, 2009, reset to Daily Three Month LIBOR plus 5.25% beginning April 14, 2009, increased to Daily Three Month LIBOR (0.28% at October 4, 2009) plus 8.25% beginning June 1, 2009, secured by inventory and substantially all machinery and equipment (see Note F, Senior Credit Facility)		667		854
Note payable to bank in monthly installments of $3 through November 16, 2014, plus interest at 8% secured by a security interest in certain equipment		156		173
Notes payable to bank in monthly principal payments of $1 through June 2009, without interest secured by certain vehicles		-		6
Notes payable in monthly installments of $1 through April 2014, without interest, secured by certain equipment.		72		-
Capital lease obligations		1,081		1,082
		9,966		10,292
Less: current portion		951		487
	$	9,015	$	9,805

13

NOTE G - DEBT (CONTINUED)

Capital Lease Obligations

The Company leases certain equipment under agreements that are classified as capital leases. The following is a summary of capital leases.

	October 4,			December 31,
	2009			2008
Machinery & equipment	$	805		$	774
Vehicles & trailers		84			84
Computer equipment & software		240			240
Furniture & office equipment		91			84
Less accumulated depreciation		(220	)		(108	)
	$	1,000		$	1,074

Minimum future lease payments required under capital leases for the periods subsequent to October 4, 2009 on a calendar year basis are as follows:

Years ending December 31,
2009	$	52
2010		199
2011		178
2012		178
2013 and thereafter		1,056
	$	1,663
Less Imputed Interest		(582	)
Present Value of Net Minimum Lease Payments	$	1,081

Aggregate maturities of long-term debt for the periods subsequent to October 4, 2009 on a calendar year basis are as follows:

Years Ending December 31,	Amount
2009	$	125
2010		5,046
2011		1,084
2012		946
2013		1,628
2014		754
Thereafter		383
	$	9,966

Following is a summary of interest expense for the three and nine months ended October 4, 2009 and September 28, 2008:

	Three Months Ended				Nine Months Ended
	October 4,		September 28,		October 4,		September 28,
	2009		2008		2009		2008
Interest expense on principal	$	250	$	180	$	704	$	587
Amortization of debt issue costs		29		4		37		51
Amortization of debt discount - debentures and revolving notes payable		143		14		171		55
	$	422	$	198	$	912	$	693

14

NOTE H - STOCK BASED COMPENSATION

Equity Incentive Plans

The stock based compensation expense recognized in the Condensed Consolidated Statements of Operations were as follows:

	Three Months Ended				Nine Months Ended
	October 4, 2009		September 28, 2008		October 4, 2009		September 28, 2008
Stock options expense	$	8	$	13	$	32	$	31
Restricted stock expense		7		18		20		37
Employee stock purchase plan expense		7		4		21		13
Total stock-based compensation expense	$	22	$	35	$	73	$	81

At October 4, 2009, the total unrecognized stock options expense and unrecognized restricted stock expense was $64 and $64, respectively, and is expected to be recognized over a weighted average period of 16 months and 12 months, respectively.

The Company grants stock options to certain executives and key employees to acquire shares of the Company’s common stock under the 2005 Stock Option Plan.  These options, which expire in five years, are exercisable in 25% cumulative increments on and after the first four anniversaries of their grant date. At the time of issuance of the stock options, the exercise price was the estimated fair value of the Company’s common stock. The fair value of the Company’s common stock was determined based upon the closing price of the Company’s common stock on the date of grant.

The Company also issues offers to purchase shares of common stock to certain executives and key employees.  The issuance of the restricted stock was intended to lock-up key employees for a three year period.  As a result, the Company is recording compensation expense over the three year restriction period by amortizing deferred compensation on a straight-line basis over the three year period commencing with the date of each offer.

In accordance with our equity incentive plans, we granted the following:

	Three Months Ended				Nine Months Ended
	October 4, 2009		September 28, 2008		October 4, 2009		September 28, 2008
Stock options awarded		-		9,000		8,000		23,200
Weighted average fair value per option	$	-	$	3.60	$	1.23	$	3.67
Weighted average exercise price per option	$	-	$	9.99	$	3.30	$	10.19
Restricted stock awarded		-		4,000		1,500		15,000
Weighted average fair value per share of restricted stock	$	-	$	9.89	$	3.30	$	10.12

The fair value of the options was estimated using the Black-Scholes valuation model.  The Company recorded compensation cost based on the grant date fair value of each award of shares. The total cost of each grant will be recognized over the four year period during which the employees are required to provide services in exchange for the award - the requisite service period.  Key information and assumptions for the awards made during the three and nine months ended October 4, 2009 and September 28, 2008 are as follows:

	Three Months Ended October 4, 2009	Three Months Ended September 28, 2008	Nine Months Ended October 4, 2009	Nine Months Ended September 28, 2008
Expected volatility	-	44.48%	47.41%	43.57%
Risk free interest rate	-	3.00%	1.55%	2.96%
Expected term	-	3.75 years	3.75 years	3.75 years
Vesting period	-	4 Years	4 Years	4 Years
Term	-	5 Years	5 Years	5 Years
Dividend yield	-	0%	0%	0%
Weighted average fair value	$  -	$3.60	$1.23	$3.67

The Company did not award any stock options or restricted stock during the three months ended October 4, 2009.

15

NOTE H - STOCK BASED COMPENSATION (CONTINUED)

Employee Stock Purchase Plan

In December 2006, the Corporation's Board of Directors and stockholders approved the MISCOR Group, Ltd. Employee Stock Purchase Plan (the “ESPP”) under which eligible employees may purchase the Company's common stock at a price per share equal to 90% of the lower of the fair market value of the common stock at the beginning or end of each offering period. Each offering period of the ESPP lasts three months. Participation in the offering may range from 2% to 8% of an employee's base salary (not to exceed $5,000 annually or amounts otherwise allowed under Section 423 of the Internal Revenue Code). Participation may be terminated at any time by the employee, and automatically ends on termination of employment with the Company. A total of 640,000 shares of common stock have been reserved for issuance under the ESPP. The common stock to satisfy the stock purchases under the ESPP will be newly issued shares of common stock.  21,033 shares were purchased under the ESPP during the quarter ended October 4, 2009.  As of October 4, 2009 there were 558,867 shares available for future offerings.

On October 1, 2009 the Company indefinitely suspended its Employee Stock Purchase Plan.

NOTE I - RELATED PARTY TRANSACTIONS

Long-term debt, officers

The Company is indebted to its CEO for a note payable with a balance of $3,000 at October 4, 2009 and December 31, 2008 (See Note F, Senior Credit Facility and Note G, Debt). Interest is payable monthly at prime plus 1%, through April 13, 2009 and 5% or prime plus 1%, whichever is greater, beginning April 14, 2009.  On April 14, 2009, the note was amended in relation to the Wells Fargo senior credit facility waiver and amendment to defer payment of interest and principal on the note (see Note F, Senior Credit Facility).  Interest on the note continues to accrue monthly.  Under the terms of the note, principal payments are due monthly in the amount of $50 beginning February 1, 2010.  However, the Company’s CEO signed a subordination agreement in relation to the senior credit facility with Wells Fargo that prohibits principal and interest payments on this note as long as there is an outstanding balance on the senior credit facility.  Interest expense on the note was $38 and $30 for the three months and $107 and $102 for the nine months ended October 4, 2009 and September 28, 2008.  This note also includes a conversion option whereby outstanding principal and accrued interest under the note may be converted to common stock at a price of $2.50 per share at any time at the election of the Company’s CEO.

 The Company is indebted to the former members of 3-D, one of whom is President of Magnetech Industrial Services, Inc. (“MIS”), for a note payable with a balance of $2,000 at October 4, 2009 and December 31, 2008 (see Note F, Senior Credit Facility and Note G, Debt). Interest is payable monthly at prime.  Interest expense on the note was $11 and $26 for the three months and $44 and $89 for the nine months ended October 4, 2009 and September 28, 2008. The note matures on November 30, 2010.

Leases

The Company leases its South Bend, Indiana; Hammond, Indiana; Mobile, Alabama; and Boardman, Ohio facilities from its Chief Executive Officer and stockholder. Total rent expense under these agreements was approximately $71 and $83 for the three months and $222 and $250 for the nine months ended October 4, 2009 and September 28, 2008.  The lease on the Mobile, Alabama facility expired in the first quarter of 2009 and was not renewed.

The Company leases its Hagerstown, Maryland facility from a partnership of which an officer of the Company’s subsidiary, HK Engine Components, LLC, is a partner. Rent expense under this agreement was $39 for the three months and $117 for the nine months ended October 4, 2009 and September 28, 2008.

The Company leases a facility in South Bend for the electrical contracting business from a limited liability company owned by the adult children of its Chief Executive Officer and stockholder. Rent expense under this agreement was $22 for the three months and $67 for the nine months ended October 4, 2009 and September 28, 2008.

The Company leases a facility in Massillon, Ohio from a partnership, one partner of which is an officer of MIS, under an agreement expiring in November 2017. Rent expense under the lease was $135 for the three months and $405 for the nine months ended October 4, 2009 and September 28, 2008.

NOTE J - CONCENTRATIONS OF CREDIT RISK

The Company grants credit, generally without collateral, to its customers, which are primarily in the steel, metal working, scrap and rail industries. Consequently, the Company is subject to potential credit risk related to changes in economic conditions within those industries. However, management believes that its billing and collection policies are adequate to minimize the potential credit risk. At October 4, 2009 and December 31, 2008, approximately 10% and 9% of gross accounts receivable were due from entities in the steel, metal working and scrap industries, and approximately 24% and 17%, respectively, of gross receivables were due from entities in the railroad industry. One customer, of the Construction and Engineering Services segment, accounted for approximately 13% of gross accounts receivable at October 4, 2009.  Additionally, one customer, of the Construction and Engineering Services segment, accounted for approximately 13% of gross accounts receivable at December 31, 2008.  No single customer accounted for more than 10% of sales for the three and nine months ended October 4, 2009 and September 28, 2008.

16

NOTE K - COMMITMENTS AND CONTINGENCIES

Collective bargaining agreements

At October 4, 2009 and December 31, 2008, approximately 33% and 26%, respectively, of the Company’s employees were covered by collective bargaining agreements.

Potential lawsuits

The Company is involved in disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Company’s financial position or results of operations.

NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses

The carrying amounts of these items are a reasonable estimate of their fair values because of the current maturities of these instruments.

Debt

The fair value of debt is based on the estimated future cash flows discounted at terms at which the Company estimated it could borrow such funds from unrelated parties.  The fair value of debt differs from the carrying amount at October 4, 2009 due to favorable interest terms on debt with its Chief Executive Officer and stockholders.  At October 4, 2009, the aggregate fair value of debt with an aggregate carrying value of $14,036, is estimated at $14,846.  At December 31, 2008, the aggregate fair value of debt, with an aggregate carrying value of $16,670, is estimated at $16,670.

NOTE M - SEGMENT INFORMATION

The Company operates in three segments: Industrial Services, Construction and Engineering Services, and Rail Services.

The Industrial Services segment is primarily engaged in providing maintenance and repair services to the electric motor industry and repairing, remanufacturing and manufacturing industrial lifting magnets for the steel and scrap industries. The Construction and Engineering Services segment provides a wide range of electrical and mechanical contracting services, mainly to industrial, commercial and institutional customers.  The Rail Services Segment rebuilds and repairs locomotives and locomotive engines for the rail industry, and rebuilds and manufactures power assemblies, engine parts, and other components related to large diesel engines for the rail, utilities and offshore drilling industries.

17

NOTE M – SEGMENT INFORMATION (CONTINUED)

The Company evaluates the performance of its business segments based on net income or loss. Corporate administrative and support services for the Company are not allocated to the segments but are presented separately.

Summarized financial information concerning the Company’s reportable segments as of and for the three and nine months ended October 4, 2009 and September 28, 2008 is shown in the following tables:

				Construction											Three Months Ended
				& Engineering								Intersegment			October 4, 2009
2009	Services			Services		Rail Services			Corporate			Eliminations			Consolidated
External revenue:
Product sales	$	963		$	-	$	1,836		$	-		$	-		$	2,799
Service revenue		6,589			8,948		1,501			-			-			17,038
Intersegment revenue:
Product sales		-			-		-			-			-			-
Service revenue		19			32		2			-			(53	)		-
Depreciation Included in Cost of Revenues		302			26		152			-			-			480
Gross profit		631			1,193		(16	)		-			-			1,808
Other depreciation & amortization		108			7		113			33			-			261
Interest expense		54			-		4			364			-			422
Net income (loss)		(770	)		686		(3,059	)		(1,263	)		-			(4,406	)
Total assets		33,036			9,694		17,373			729			-			60,832
Capital expenditures		21			109		20			-						150

2008	Industrial Services		Construction & Engineering Services		Rail Services			Corporate			Intersegment Eliminations			Three Months Ended September 28, 2008 Consolidated
External revenue:
Product sales	$	3,302	$	-	$	2,848		$	-		$	-		$	6,150
Service revenue		11,534		9,331		4,488			-			-			25,353
Intersegment revenue:
Product sales		-		-		-			-			-			-
Service revenue		468		15		534			-			(1,017	)		-
Depreciation Included in Cost of Revenues		289		21		153			-			-			463
Gross profit		3,023		1,378		612			-			-			5,013
Other depreciation & amortization		151		6		110			14			-			281
Interest expense		82		-		3			113			-			198
Net income (loss)		1,114		1,031		(329	)		(1,345	)		-			471
Total assets		41,657		12,086		23,656			1,138			-			78,537
Capital expenditures		58		9		520			88			-			675

18

NOTE M – SEGMENT INFORMATION (CONTINUED)

2009	Industrial Services			Construction  & Engineering Services		Rail Services			Corporate			Intersegment Eliminations			Nine Months Ended October 4, 2009 Consolidated
External revenue:
Product sales	$	3,211		$	-	$	7,326		$	-		$	-		$	10,537
Service revenue		21,551			24,292		6,287			-			-			52,130
Intersegment revenue:
Product sales		-			-		-			-			-			-
Service revenue		100			78		2			-			(180	)		-
Depreciation Included in Cost of Revenues		1,016			66		437			-			-			1,519
Gross profit		1,972			2,239		752			-			-			4,963
Other depreciation & amortization		336			21		341			99			-			797
Interest expense		191			-		13			708			-			912
Net income (loss)		(3,273	)		590		(4,051	)		(4,196	)		-			(10,930	)
Total assets		33,036			9,694		17,373			729			-			60,832
Capital expenditures		93			219		280			17						609

2008	Industrial Services		Construction  & Engineering Services		Rail Services			Corporate			Intersegment Eliminations			Nine Months Ended September 28, 2008 Consolidated
External revenue:
Product sales	$	8,370	$	-	$	10,401		$	-		$	-		$	18,771
Service revenue		35,752		26,011		11,254			-			-			73,017
Intersegment revenue:
Product sales		-		-		-			-			-			-
Service revenue		1,483		65		916			-			(2,464	)		-
Depreciation Included in Cost of Revenues		874		64		409			-			-			1,347
Gross profit		9,232		3,469		2,124			-			-			14,825
Other depreciation & amortization		444		16		313			35			-			808
Interest expense		280		-		28			385			-			693
Net income (loss)		3,441		2,364		(192	)		(4,076	)		-			1,537
Total assets		41,657		12,086		23,656			1,138			-			78,537
Capital expenditures		274		19		1,297			412			-			2,002

19

NOTE N - SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

	Nine Months Ended
	October 4,		September 28,
	2009		2008
Conversion of subordinated debentures	$	-	$	3,234
Issuance of restricted stock	$	5	$	152
Assumption of accounts payable and accrued liabilities in conjunction with asset acquisition	$	-	$	2,549
Issuance of common stock in conjunction with acquisition	$	-	$	3,500
Cashless exercise of warrants	$	-	$	16
Equipment acquired through capital lease obligation	$	146	$	864

NOTE O – SUBSEQUENT EVENTS

The Company has evaluated the period subsequent to October 4, 2009 and through November 23, 2009, the date the financial statements were filed with the SEC, for events that did not exist at the balance sheet date, but arose after that date.

Credit Facility

As discussed in Note F – Senior Credit Facility, on September 16, 2009 the Company and Wells Fargo executed a Fifth Amendment to the Credit Agreement (the “Fifth Amendment”).  The Fifth Amendment amended the Credit Agreement to, among other things, extend until October 31, 2009 the previously agreed upon requirement for the Company to raise $2,000 in additional capital through subordinated debt, asset sales, or additional cash equity.  As of November 23, 2009, the Company has not succeeded in raising all of the $2,000 of additional capital that the Credit Agreement, as amended by the Fifth Amendment, required the Company to raise by October 31, 2009.  Wells Fargo has not declared an event of default under the Credit Agreement as a result of the failure to raise all of the additional required capital.  The Company is continuing discussions with Wells Fargo regarding an extension of the requirement to raise additional capital or other arrangements under which Wells Fargo would refrain from exercising their rights under the bank credit facilities as a result of the above-mentioned failure to raise additional capital.  While the Company is optimistic that an agreement can be reached to extend the due date of the requirement to raise additional capital, there can be no assurances that the Company will be able to obtain an extension or obtain other relief from Wells Fargo.  If Wells Fargo demands immediate repayment of the Company’s outstanding borrowings under the bank credit facilities, the Company does not currently have means to repay or refinance the amounts that would be due.  If demanded and if the Company was unable to repay or refinance the amounts due under the bank credit facilities, Wells Fargo could exercise its remedies under the bank credit facilities, including foreclosing on substantially all the Company’s assets, which the Company pledged as collateral to secure its obligations under the bank credit facilities.  If Wells Fargo were to exercise its remedies and foreclose on the Company’s assets, there would be substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements have been prepared assuming the Company is a going concern and do not reflect any adjustments that may arise from this uncertainty.

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NOTE O – SUBSEQUENT EVENTS (CONTINUED)

Discontinued Operations

In November 2009 the Company formulated a plan to sell its AMP Rail Services Canada, ULC (“AMP Canada”) subsidiary in order to raise additional operating capital.  The Company is currently in negotiations to sell AMP Canada, and expects the sale to be completed during the fourth quarter of 2009.  The carrying amount of the major classes of AMP Canada are shown below.

	October 4, 2009		December 31, 2008
Accounts receivable	$	1,022	$	308
Inventory		187		116
Property, plant and equipment (net of accumulated depreciation of $113 and $21)		485		655
Deposits and other assets		1,468		1,171
Assets of discontinued operations	$	3,162	$	2,250
Accounts payable	$	834	$	576
Accrued expenses and other current liabilities		267		231
Other long term liabilities		-		21
Liabilities of discontinued operations	$	1,101	$	828

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ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We provide electrical and mechanical solutions to industrial, commercial and institutional customers primarily in the United States. We currently operate in three business segments:

· Industrial Services – We provide maintenance and repair services to several industries including electric motor and wind power; repairing, manufacturing, and remanufacturing industrial lifting magnets for the steel and scrap industries.

· Construction and Engineering Services – We provide a wide range of electrical and mechanical contracting services, mainly to industrial, commercial, and institutional customers.

· Rail Services – We manufacture and rebuild power assemblies, engine parts, and other components related to large diesel engines and provide locomotive maintenance, remanufacturing, and repair services for the rail industry.

We evaluate the performance of our business segments based on net income or loss. Corporate administrative and support services for MISCOR are not allocated to the segments but are presented separately.

Recent Developments

On September 16, 2009, the Company and Wells Fargo executed a Fifth Amendment to the Credit Agreement (the “Fifth Amendment”).  The Fifth Amendment amends the Credit Agreement in the following respects:

· Revised the definition of “Borrowing Base,” resulting in lower available borrowings; and  

· Extended until October 31, 2009, the requirement to raise $2,000,000 of additional capital through subordinated debt or equity contributions.

Under the Fifth Amendment, we agreed to pay Wells Fargo an accommodation fee equal to $25,000, payable on the date of execution of the Fifth Amendment.

As of November 23, 2009, we have not succeeded in raising all of the $2,000,000 of additional capital that the Credit Agreement, as amended by the Fifth Amendment, required us to raise by October 31, 2009.  Wells Fargo has not declared an event of default under the Credit Agreement as a result of the failure to raise all of the additional required capital.  We are continuing discussions with Wells Fargo regarding an extension of the requirement to raise additional capital or other arrangements under which Wells Fargo would refrain from exercising their rights under the bank credit facilities as a result of the above-mentioned failure to raise additional capital.  While we are optimistic that an agreement can be reached with Wells Fargo to extend the due date of the requirement to raise additional capital, there can be no assurances that we will be able to obtain an extension or obtain other relief from Wells Fargo.  If Wells Fargo demands immediate repayment of our outstanding borrowings under the bank credit facilities, we do not currently have means to repay or refinance the amounts that would be due.  If demanded, and if we were unable to repay or refinance the amounts due under the bank credit facilities, Wells Fargo could exercise its remedies under the bank credit facilities, including foreclosing on substantially all of our assets, which we pledged as collateral to secure its obligations under the bank credit facilities.  If Wells Fargo were to exercise its remedies and foreclose on our assets, there would be substantial doubt about our ability to continue as a going concern.  Our consolidated financial statements acompanying this quarterly report on Form 10-Q have been prepared assuming the Company is a going concern and do not reflect any adjustments that may arise from this uncertainty.

While we explore asset sales, divestitures and other types of capital raising alternatives in order to reduce indebtedness under the Credit Agreement, there can be no assurance that such activities will be successful or generate cash resources adequate to retire or sufficiently reduce this indebtedness.

Revenues in the quarter were consistent with the prior quarter, with modest improvement realized in our Construction and Engineering Segment.   Initiatives undertaken to mitigate the impact on the Company of the unprecedented deterioration of market conditions realized improved margins and improvement in operating cash flow.   Indirect expenses and SG&A were reduced, not at the same rate as the decline in revenue.  Improving operating results is imperative to realizing needed cash flow.  Working capital management mitigated liquidity pressures  with improved collections of accounts receivable and reductions in inventory.  Wells Fargo imposed reductions in advance rates and line limits reduces the Company’s ability to meet supplier payment commitments.  Supplier payment requirements cannot always be met directly impacting sales and gross margins.

We are continuing to assess the strategic fit of our various businesses and are considering additional divestitures where businesses do not align with our long-term vision.  We will explore a number of strategic alternatives for under-performing or non-strategic businesses including possible divestures.  We generally announce publicly divesture and acquisition transactions only when we have entered into definitive agreements relative to those transactions.

On November 23, 2009, the Company received a notice from the Financial Industry Regulatory Authority ("FINRA") stating that the Company is not current in its SEC reporting obligations because it did not file its Current Report on Form 10-Q for the third quarter of 2009 by the prescribed due date.  The notice also stated that, as a result of that failure, under NASD Rule 6530 the securities of the Company will not be eligible for quotation on the OTC Bulletin Board unless the delinquent filing is received by the SEC by December 18, 2009.  The notice further stated that because of the delinquency, a fifth character "E" was appended to the Company's trading symbol.  The Company believes, however, that because it timely filed with the SEC a Form 12b-25, Notification of Late Filing, with regard to its third quarter Form 10-Q, the Company is current in its SEC reporting obligations. The Company advised the FINRA staff to that effect and requested the staff to remove the fifth character "E" from its trading symbol.  In any event, the Company believes this matter should be resolved with the filing of this Current Report on Form 10-Q on November 23, 2009 with the SEC.

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 Critical Accounting Policies and Estimates

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Principles of consolidation. The consolidated financial statements for the three and nine months ended October 4, 2009 and September 28, 2008 include our accounts and those of our wholly-owned subsidiaries, Magnetech Industrial Services, Inc., Martell Electric, LLC, Ideal Consolidated, Inc.,  HK Engine Components, LLC, American Motive Power, Inc. (“AMP”) and Magnetech Power Services LLC.  All significant intercompany balances and transactions have been eliminated.

Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates are required in accounting for inventory costing, asset valuations, costs to complete and depreciation. Actual results could differ from those estimates.

Revenue recognition. Revenue in our Industrial Services segment consists primarily of product sales and service of industrial magnets, and electric motors. Product sales revenue is recognized when products are shipped and both title and risk of loss transfer to the customer. Service revenue is recognized when all work is completed and the customer’s property is returned. For services to a customer’s property provided at our site, property is considered returned when the customer’s property is shipped back to the customer and risk of loss transfers to the customer. For services to a customer’s property provided at the customer’s site, property is considered returned upon completion of work. We provide for an estimate of doubtful accounts based on specific identification of customer accounts deemed to be uncollectible and historical experience.

Revenues from the Rail Services and Construction and Engineering Services segments are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs to complete for each contract. Costs incurred on contracts in excess of customer billings are recorded as part of other current assets. Amounts billed to customers in excess of costs incurred on contracts are recorded as part of other current liabilities.

Cash Equivalents.  The Company considers all highly liquid investments with maturities of three months or less from the purchase date to be cash equivalents.

Concentration of credit risk.  The Company maintains its cash and cash equivalents primarily in bank deposit accounts.  The Federal Deposit Insurance Corporation insures these balances up to $250,000 per bank. The Company has not experienced any losses on its bank deposits and management believes these deposits do not expose the Company to any significant credit risk.

Earnings per share.  We account for earnings (loss) per common share with a dual presentation of basic and diluted earnings (loss) per common share.  Basic earnings (loss) per common share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the year.  Diluted earnings (loss) per common share is computed assuming the conversion of common stock equivalents, when dilutive.

Foreign Currency Translation.  The assets and liabilities of the Company’s Canadian operations are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date, except for non-monetary assets and liabilities, which are translated using the historical exchange rate. Income and expense accounts are translated into U.S. dollars at the year-to-date average rate of exchange, except for expenses related to those balance sheet accounts that are translated using historical exchange rates.  The impact of foreign currency translation on the Company’s financial statements was not material for the three and nine months ended October 4, 2009 and September 28, 2008.

Segment information.  We report our results using three segments.

Goodwill and Intangibles.  Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net assets at the dates of acquisition. Goodwill, which is not subject to amortization, is tested for impairment annually during the fourth quarter.  We test goodwill and other intangible assets for impairment on an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value. Recoverability of goodwill is evaluated using a two-step process.  The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.  Reporting units are determined based on our operating segments.  The AMP, MIS, and Ideal operating segments, which were also determined to be reporting units, contain goodwill and are thus tested for impairment.  We re-evaluate our reporting units and the goodwill and intangible assets assigned to the reporting units annually, prior to the completion of the impairment testing.  The fair value of our reporting units is determined based upon management’s estimate of future discounted cash flows and other factors. Management’s estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows.

Other intangible assets consisting mainly of customer relationships, a technical library, and non-compete agreements were all determined to have a definite life and are amortized over the shorter of the estimated useful life or contractual life of the these assets, which range from 1 to 20 years.  Intangible assets with definite useful lives are periodically reviewed to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the recoverability of intangible assets is assessed by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets (See Note E, Goodwill and Other Intangible Assets).

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Inventory.  We value inventory at the lower of cost or market. Cost is determined by the first-in, first-out method. We periodically review our inventories and make adjustments as necessary for estimated obsolescence and excess goods. The amount of any markdown is equal to the difference between cost of inventory and the estimated market value based upon assumptions about future demands, selling prices and market conditions.

Property, plant and equipment.  Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the related assets using the straight-line method. Useful lives of property, plant and equipment are as follows:

Buildings	30 years
Leasehold improvements	Shorter of lease term or useful life
Machinery and equipment	5 to 10 years
Vehicles	3 to 5 years
Office and computer equipment	3 to 10 years

Long-lived assets. We assess long-lived assets for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable.

Debt issue costs. We capitalize and amortize costs incurred to secure senior debt financing and revolving notes over the term of the financing, which is three years.   If modifications related to the Company’s revolving note and term notes are made, then the appropriate changes are made to the related debt issue costs.

Advertising costs.  Advertising costs consist mainly of product advertisements and announcements published in trade publications, and are expensed when incurred.

Warranty costs. We warrant workmanship after the sale of our products. We record an accrual for warranty costs based upon the historical level of warranty claims and our management’s estimates of future costs.

 Stock-based compensation.  The cost of all share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based upon their fair values at grant date, or the date of later modification, over the requisite service period. Unrecognized cost (based on the amounts previously disclosed in our pro forma footnote disclosure) related to options vesting after the initial adoption are recognized in the financial statements over the remaining requisite service period.

 The amount of compensation cost recognized includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value.

Results of Operations

Three Months Ended October 4, 2009 Compared to Three Months Ended September 28, 2008

Revenues. Total revenues decreased by $11.7 million or 37% to $19.8 million for the three months ended October 4, 2009 from $31.5 million for the three months ended September 28, 2008. The decrease in revenues resulted from decreases in the Industrial Services (“IS”) segment revenue of $7.3 million or 50%, the Construction and Engineering Services (“CES”) segment revenues of $.4 million or 4%, and the Rail Services (“RS”) segment revenue of $4.0 million or 55%.

The decline in revenue is generally related to the ongoing challenging global economic conditions as well as our continuing liquidity pressures (see liquidity and capital resources section below).   Specifically, the decrease in IS segment revenue resulted from decline in the steel industry and the decrease in RS segment revenue resulted from the decline in the railroad industry.

Gross Profit. Total gross profit for the three months ended October 4, 2009 was $1.8 million or 9.1% of total revenues compared to $5.0 million or 15.9% of total revenues for the three months ended September 28, 2008.  The decrease of $3.2 million or 64% was due to decreased consolidated revenues and the company’s level of fixed costs.  Gross profit on IS segment revenue declined 79%, due mainly to unabsorbed overhead costs.   Gross profit on CES revenue declined 13%, due to and unabsorbed overhead costs.  Gross profit on RS segment revenue declined 102% due to unabsorbed overhead costs.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $3.2 million for the three months ended October 4, 2009 compared to $4.3 million for the three months ended September 28, 2008 reflecting cost reduction efforts.

Interest Expense and Other Income.  Interest expense increased $224 from the three months ended September  28, 2008 to the three months ended October 4, 2009 due to the Wells Fargo amended interest rates.

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Provision for Income Taxes.  We have experienced net operating losses in each year since we commenced operations. In January 2007, an ownership change occurred that will limit the amount of net operating loss that we will be able to use in future periods in accordance with Section 382 of the Internal Revenue Code, as amended. We are uncertain as to whether we will be able to utilize these tax losses before they expire. Accordingly, we provided a valuation allowance for the income tax benefits associated with these net future tax assets that primarily relate to cumulative net operating losses, until such time profitability is reasonably assured and it becomes more likely than not that we will be able to utilize such tax benefits.

Net Income. Net loss for the three months ended October 4, 2009 was $4.4 million compared to net income of $0.5 million for the three months ended September 28, 2008. The $4.9 million decrease was due to the decline in revenues and cost levels as discussed in the revenue, gross profit and selling, general, and administrative sections above, along with a goodwill impairment charge of $2.5 million, discussed in Note E to the condensed consolidated financial statements.

Nine Months Ended October 4, 2009 Compared to Nine Months Ended September 28, 2008

Revenues. Total revenues decreased by $29.1 million or 32% to $62.7 million for the nine months ended October 4, 2009 from $91.8 million for the nine months ended September 28, 2008. The decrease in revenues resulted from decreases in the Industrial Services (“IS”) segment revenue of $19.4 million or 44%, the Construction and Engineering Services (“CES”) segment revenues of $1.7 million or 7%, and the Rail Services (“RS”) segment revenue of $8.0 million or 37%.

The decline in revenue is generally related to the ongoing challenging global economic conditions as well as our continuing liquidity pressures (see liquidity and capital resources section below).   Specifically, the decrease in IS segment revenue resulted from decline in the steel industry and the decrease in RS segment revenue resulted from the decline in the railroad industry.

Gross Profit. Total gross profit in the nine months ended October 4, 2009 was $5.0 million or 7.9% of total revenues compared to $14.8 million or 16.2% of total revenues in the nine months ended September 28, 2008.  The decrease of $9.9 million or 66.7% was due to decreased consolidated revenues and the level of fixed costs.  Gross profit on IS segment revenue declined 79%, due mainly to unabsorbed overhead costs.   Gross profit on CES revenue declined 35%, due to unabsorbed overhead costs.  Gross profit on RS segment revenue declined 65% due to unabsorbed overhead costs.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $12.6 million in the nine months ended October 4, 2009 compared to $12.4 million in the nine months ended September 28, 2008. Costs have been reduced during the nine months ended October 4, 2009; however, the reductions have been offset by fees related to Wells Fargo, a non recurring fee for AMP NY and operations that didn’t exist during the nine months ended September 28, 2008 (AMP Montreal and the Traffic division of Martell Electric, LLC).

Interest Expense and Other Income.  Interest expense and other income increased from the nine months ended September 28, 2008 to the nine months ended October 4, 2009 by $0.2 million due to the Wells Fargo amended interest rates.

Provision for Income Taxes.  We have experienced net operating losses in each year since we commenced operations. In January 2007, an ownership change occurred that will limit the amount of net operating loss that we will be able to use in future periods in accordance with Section 382 of the Internal Revenue Code, as amended. We are uncertain as to whether we will be able to utilize these tax losses before they expire. Accordingly, we provided a valuation allowance for the income tax benefits associated with these net future tax assets that primarily relate to cumulative net operating losses, until such time profitability is reasonably assured and it becomes more likely than not that we will be able to utilize such tax benefits.

Net Income. Net loss in the nine months ended October 4, 2009 was $10.9 million compared to net income of $1.5 million in the nine months ended September 28, 2008. The $12.4 million decrease was due to the decline in revenues and cost levels as discussed in the revenue, gross profit and selling, general, and administrative sections above, as well as a goodwill impairment charge of $2.5 million discussed in Note E to the condensed consolidated financial statements.

Liquidity and Capital Resources

At October 4, 2009, we had approximately $8.0 million of working capital.  Working capital decreased approximately $7.1 million from approximately $15.1 million at December 31, 2008. The decrease in working capital was due mainly to the decrease in accounts receivable, which also resulted in a reduction in the availability of our revolving credit line.  The revolving credit line is an asset-based lending agreement with the availability driven by our accounts receivable balance.  The decrease in accounts receivable resulted mainly from the decline in revenue and improved collection efforts.

Net cash provided by operating activities was $2.9 million for the nine months ended October 4, 2009 and net cash used by operations was $0.8 million for the nine months ended September 28, 2008.  For the nine months ended October 4, 2009, net cash provided by operations resulted from a net loss of $10.9 million, increase in bad debt and inventory reserves of $0.4 million, depreciation and amortization of $4.8 million, decrease in accounts receivable and inventories of $12.7 million, offset by a net decrease in accounts payable and accrued expenses of $4.6 million.  For the nine months ended September 28, 2008, net cash utilized by operations resulted from net income of $1.5 million, increase in bad debt and inventory reserves of $0.5 million and depreciation and amortization of $2.3 million, reduced by net increases in working capital of $5.1 million.

Cash used for investing activities of $0.5 million for the nine months ended October 4, 2009 consisted of acquisitions of fixed assets offset by proceeds from disposal of fixed assets approximating $.1 million.  During the nine months ended September 28, 2008 we used approximately $9.8 million for investing activities, $8.0 million of which was used for our investment in AMP.  The remainder was used for acquisitions of fixed assets.

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We used approximately $2.5 million for financing activities during the nine months ended October 4, 2009, consisting primarily of repayments related to the Wells Fargo credit facility. We generated approximately $7.7 million from financing activities during the nine months ended September 28, 2008, primarily from advances on the Wells Fargo credit facility.

We continue our efforts to improve our processes to enhance our future cash flows. These improvements include efforts to collect accounts receivable at a faster rate, decrease inventory levels, review alternative financing sources, and negotiating extended terms with our vendors.  Certain of our trade accounts payable are extended beyond the terms allowed by the applicable vendors. As a result, certain vendors have placed us on credit hold or require cash in advance which has resulted in delays in the receipt of necessary materials and parts.  Disruptions of this nature have on occasion resulted in delayed shipments and service to our customers and may continue to result in such delays in the future.  These delays may have resulted in the loss of sales orders, and future delays may have an adverse affect on our business.

On January 14, 2008, we entered into a credit facility with Wells Fargo. The credit facility was originally  comprised of a $1.25 million real estate term note and a $13.75 million revolving note. On January 16, 2008, we borrowed $7.5 million under the revolving note and used the net proceeds of the loans for working capital and to acquire all of the outstanding shares of common stock of AMP.

The original maturity date of the Wells Fargo notes is January 1, 2011, at which time the notes will automatically renew for one-year periods until terminated.  The notes are secured by (1) a first priority lien on our assets; (2) a mortgage on certain real property; and (3) the pledge of the equity interests in our subsidiaries. The term note originally bore interest at an annual rate equal to the rate of interest most recently announced by Wells Fargo at its principal office as the Prime Rate, subject to certain minimum annual interest payments. The revolving note originally bore interest at an annual rate of either (i) the Prime Rate, or (ii) Wells Fargo’s LIBOR rate plus 2.8%, depending on the nature of the advance.  Interest is payable monthly, in arrears, under the revolving note beginning on February 1, 2008.  The term note requires monthly principal payments of $10,000, plus interest, beginning on the first day of the month following receipt of the advance. The $1.25 million real estate term note was funded in April 2008.

We have promissory notes outstanding to BDeWees, Inc., XGen III, Ltd., and John A. Martell, our CEO in the original principal amounts of $2.0 million, $2.0 million and $3.0 million, respectively (together, the “Subordinated Indebtedness”).  Subordination agreements have been executed that subordinate our obligations under the Subordinated Indebtedness to the Wells Fargo credit facility.

If we default under our obligations to Wells Fargo, the interest on the outstanding principal balance of each note will increase by 3% until the default is cured or waived.  Other remedies available to Wells Fargo upon an event of default include the right to accelerate the maturity of all obligations, the right to foreclose on the assets securing the obligations, all rights of a secured creditor under applicable law, and other rights set forth in the loan documents.

We may prepay the Wells Fargo term note at any time, subject to certain prepayment penalties.  With respect to the Wells Fargo revolving note, we may borrow, pay down and re-borrow under the note until the maturity date.  The maximum aggregate principal amount that may be borrowed under the revolving note is the lesser of (1) the sum of 40% of our eligible construction related trade receivables up to $2 million and 85% of certain remaining eligible trade accounts receivable less any reserves established by Wells Fargo from time to time, and (2) $13.75 million less any reserves established by Wells Fargo.

In April 2008, we amended the Wells Fargo credit facility entered into in January 2008. This first amendment revised the formula for the maximum aggregate principal amount that may be borrowed under the revolving note. Specifically, the percentage of a portion of the Company’s eligible construction related trade receivables resulting from time and material services and completed contracts was increased from 40% to 85% and the related borrowings were removed from the $2 million limitation. The amendment also provided a four year term note in the amount of $1 million, secured by substantially all of the machinery and equipment of the Company. The note matures June 1, 2012 and is payable in monthly installments of $21,000, plus interest at the bank’s prime rate beginning June 1, 2008.

In September 2008, we further amended our credit facility with Wells Fargo. The second amendment revised a financial covenant which increased the maximum amount of capital expenditures for 2008 to $2 million, no more than $1.25 million of which could be paid from our working capital. The amendment also limited the investment and loans from AMP to AMP Canada to $1 million.

During the fourth quarter of 2008, the Company signed a waiver agreement with Wells Fargo in regards to the Company’s maximum allowable capital spending for 2008.  The agreement increased the amount of allowable capital expenditures during 2008 to $2.75 million, of which no more than $2.25 million could be from working capital.  This amendment also removed the limit on investment and loans from AMP to AMP Canada included in the second amendment signed in September, 2008.

On March 5, 2009, we received a default notification from Wells Fargo, due to the violation of a financial covenant regarding minimum net income for the year ended December 31, 2008.  Additionally, we were in default of the debt service coverage ratio covenant.  The defaults resulted in an increase in the interest rate on the revolving note, the real estate term note and the machinery and equipment note to the Prime rate plus 3%.  In addition, due to the covenant violation, Wells Fargo reduced the loan availability on the revolving note related to certain receivable accounts held by Martell Electric and Ideal.  The interest rate increase was made effective retroactively to January 1, 2009 and remained in effect until the default was subsequently waived on April 14, 2009.

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On April 14, 2009, the Company and Wells Fargo signed a first Fourth Amendment to the Credit Facility and waiver of the default notification received on March 5, 2009.  The amendment and waiver amended the credit facility as follows:

· Waived our noncompliance with the minimum net income and debt service coverage ratio covenants for the year ending December 31, 2008

· Eliminated the minimum net income and debt service coverage ratio covenants for the year ending December 31, 2009

· Adjusted the minimum book net worth covenant to $38.75 million as of December 31, 2009

· Incorporated a monthly minimum EBITDA covenant commencing in April, 2009

· Reduced the revolving credit line limit to $11 million (from $13.75 million)

· Reset the interest rate on the revolving credit line and term notes to the Daily Three Month LIBOR plus 5.25% effective April 14, 2009

· Suspended interest and principal payments on our subordinated debt to our CEO, John A. Martell.

In connection with the first Fourth Amendment signed on April 14, 2009, the Company agreed to pay Wells Fargo an accommodation fee equal to $100,000, payable in installments of $50,000 on the date of the execution of the first Fourth Amendment and $50,000 in June 2009.

On April 14, 2009, our $3.0 million note payable to the CEO was amended whereby monthly principal and interest payments under the note were suspended until February 1, 2010.  Interest will continue to accrue at the new rate of the greater of 5% or the prime rate plus 1%.  All accrued interest on the note will be paid on February 1, 2010, and interest will be paid monthly thereafter.  Monthly principal payments in the amount of $50,000 will commence on February 1, 2010.

On July 22, 2009, the Company and Wells Fargo executed a second Fourth Amendment to the Credit Agreement (the “second Fourth Amendment”).  The second Fourth Amendment amended the Credit Agreement in the following respects:

· Revised the definition of “Borrowing Base”, resulting in lower available borrowings

· Adjusted the interest rate on the revolving credit line and term notes (defined in the Credit Agreement as the “LIBOR Advance Rate”) to the Daily Three Month LIBOR (0.56% at July 5, 2009) plus 8.25%, effective June 1, 2009

· Lowered the amount of the minimum EBITDA that the Company is required to achieve in future periods

· Requires the Company to raise $2 million in additional capital by August 31, 2009 through subordinated debt, asset sales or additional cash equity

· Lowered eligible progress accounts advance rates by $50 per week commencing August 3, 2009.

· Lowered the special accounts advanced rate to 35% effective July 22, 2009 further reducing it to 30% effective August 31, 2009 or such lesser rate the lender may determine

· Added conditions regarding marketing assets, the validation of the Company’s cash flow forecast, and future financial projections

In connection with the second Fourth Amendment, the Company agreed to pay Wells Fargo an accommodation fee equal to $50,000, payable on the date of execution of the second Fourth Amendment.

 On September 16, 2009, the Company and Wells Fargo executed a Fifth Amendment to the Credit Agreement (the “Fifth Amendment”).  The Fifth Amendment amends the Credit Agreement in the following respects:

· · Revised the definition of “Borrowing Base,” resulting in lower available borrowings; and Extended until October 31, 2009, the requirement to raise $2,000,000 of additional capital through subordinated debt or equity contributions.

Under the Fifth Amendment, we agreed to pay Wells Fargo an accommodation fee equal to $25,000, payable on the date of execution of the Fifth Amendment.

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As of November 23, 2009, we have not succeeded in raising all of the $2,000,000 of additional capital that the Credit Agreement, as amended by the Fifth Amendment, required us to raise by October 31, 2009.  Wells Fargo has not declared an event of default under the Credit Agreement as a result of the failure to raise all of the additional required capital.  We are continuing discussions with Wells Fargo regarding an extension of the requirement to raise additional capital or other arrangements under which Wells Fargo would refrain from exercising their rights under the bank credit facilities as a result of the above-mentioned failure to raise additional capital.  While we are optimistic that an agreement can be reached with Wells Fargo to extend the due date of the requirement to raise additional capital, there can be no assurances that we will be able to obtain an extension or obtain other relief from Wells Fargo.  If Wells Fargo demands immediate repayment of our outstanding borrowings under the bank credit facilities, we do not currently have means to repay or refinance the amounts that would be due.  If demanded, and if we were unable to repay or refinance the amounts due under the bank credit facilities, Wells Fargo could exercise its remedies under the bank credit facilities, including foreclosing on substantially all of our assets, which we pledged as collateral to secure its obligations under the bank credit facilities.  If Wells Fargo were to exercise its remedies and foreclose on our assets, there would be substantial doubt about our ability to continue as a going concern.  Our consolidated financial statements acompanying this quarterly report on Form 10-Q have been prepared assuming the Company is a going concern and do not reflect any adjustments that may arise from this uncertainty.

While the Company explores asset sales, divestitures and other types of capital raising alternatives in order to reduce indebtedness under the Credit Agreement prior to expiration of the Amendment, there can be no assurance that such activities will be successful or generate cash resources adequate to retire or sufficiently reduce this indebtedness.

As of October 4, 2009, we did not have any material commitments for capital expenditures.

Discussion of Forward-Looking Statements

Certain matters described in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as other statements contained in this Quarterly Report on Form 10-Q are forward-looking statements, which include any statement that is not an historical fact, such as statements regarding our future operations, future financial position, business strategy, plans and objectives. Without limiting the generality of the foregoing, words such as “may,” “intend,” “expect,” “believe,” “anticipate,” “could,” “estimate” or “plan” or the negative variations of those words or comparable terminology are intended to identify forward-looking statements. A “safe harbor” for forward-looking statements is provided by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of 1995 was adopted to encourage such forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement.

Management based the forward-looking statements largely on its current expectations and perspectives about future events and financial trends that management believes may affect our financial condition, results of operations, business strategies, short-term and long-term business objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, that may cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, including those identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

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ITEM 4T.   CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to ensure that information we are required to disclose in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. Our disclosure controls and procedures also are designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

In order to monitor compliance with this system of controls, our Board of Directors, which performs the audit committee function for the Company, oversees management’s discharge of its financial reporting responsibilities. The Board of Directors meets regularly with the Company’s independent registered public accounting firm, Asher & Company, Ltd., and representatives of management to review accounting, auditing, internal control, and financial reporting matters. The Board of Directors is responsible for the engagement of our independent registered public accounting firm.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures in effect as of October 4, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 4, 2009, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries required to be included in our Exchange Act reports, including this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported as required, and is made known to management, including the Chief Executive Officer and Chief Financial Officer, on a timely basis.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended October 4, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Our Registration Statement on Form S-1 (Reg. No. 333-129354) was declared effective by the Securities and Exchange Commission on May 12, 2006. The registration statement relates to shares of our common stock that may be offered and sold from time to time by the selling shareholders named in the related prospectus and to certain shares issuable upon exercise of warrants and conversion of debt securities. We will not receive any of the proceeds from the sale of the common stock, but we have agreed to bear all expenses (other than direct expenses incurred by the selling shareholders, such as selling commissions, brokerage fees and expenses and transfer taxes) associated with registering such shares under federal and state securities laws. We will receive the exercise price upon exercise of the warrants held by selling shareholders. As of October 4, 2009, we have issued 616,408 shares upon the exercise of warrants, and we have received proceeds of $131,567 that were used for general working capital purposes. Based on information provided by our transfer agent, we believe that some selling shareholders have sold shares pursuant to the offering. However, because many shares are held in “street” name, we are unable to determine the number of shares sold or the identity of the selling shareholders. We have incurred total expenses in connection with the offering of approximately $0.8 million and have received no offering proceeds other than the proceeds received upon the exercise of warrants.

ITEM 6.   EXHIBITS

The following documents are included or incorporated by reference in this Quarterly Report on Form 10-Q:

Exhibit No.	Description
31.1	Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act
31.2	Certification by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act
32	Section 1350 Certifications

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MISCOR GROUP, LTD.
November 23, 2009	By:	/s/ Michael Topa
		Michael Topa
		Chief Financial Officer
		(Signing on behalf of the registrant as Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act
31.2	Certification by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act
32	Section 1350 Certifications