Miscor 10-Q 2010 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 3, 2010

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

800 Nave Road SE
Massillon, OH 44646
(Address of principal executive offices/zip code)

Registrant’s telephone number, including area code:(330) 830-3500

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.

þ Yeso 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 Yeso 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 filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

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

o Yesþ 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 12, 2010, there were 11,786,826 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:
Condensed Consolidated Balance Sheets October 3, 2010 (Unaudited) and December 31, 2009		3
Condensed Consolidated Statements of Operations (Unaudited) Three and Nine Months ended October 3, 2010 and October 4, 2009		4
Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months ended October 3, 2010 and October 4, 2009		5
Notes to Condensed Consolidated Financial Statements		6
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
3. Quantitative and Qualitative Disclosures about Market Risk		26
4. Controls and Procedures		26
PART II — OTHER INFORMATION
2. Unregistered Sales of Equity Securities and Use of Proceeds		27
6. Exhibits		27
Signatures		28
EX-31.1
EX-31.2
EX-32

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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)

	October 3			December 31,
	2010			2009
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—		$	—
Accounts receivable, net of allowance for doubtful accounts of $186 and $766, respectively		5,349			4,083
Inventories, net		4,667			5,349
Assets held-for-sale		4,044			15,914
Other current assets		833			261
Total current assets		14,893			25,607
PROPERTY AND EQUIPMENT, net		5,777			7,050
OTHER ASSETS
Goodwill		7,831			7,831
Customer relationships, net		6,633			6,922
Other intangible assets, net		610			643
Deposits and other assets		363			117
Total other assets		15,437			15,513
Total Assets	$	36,107		$	48,170
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Revolving credit line, net of discount of $28 and $100, respectively	$	3,566		$	3,207
Current portion of long-term debt		525			430
Current portion of long-term debt, officers and affiliates		4,090			4,600
Accounts payable		3,770			2,549
Liabilities of held-for-sale operations		1,183			9,581
Accrued expenses and other current liabilities		1,015			1,636
Total current liabilities		14,149			22,003
LONG-TERM LIABILITIES
Long-term debt		1,082			2,003
Long-term debt, officers and affiliates		1,989			2,418
Total long-term liabilities		3,071			4,421
Total liabilities		17,220			26,424
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; 11,785,826 and 11,801,326 shares issued and outstanding, respectively		50,920			50,920
Additional paid in capital		8,423			8,452
Accumulated deficit		(40,456	)		(37,626	)
Total stockholders’ equity		18,887			21,746
Total Liabilities and Stockholders’ Equity	$	36,107		$	48,170

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

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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 3, 2010			October 4, 2009			October 3, 2010			October 4, 2009
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
				(Restated)						(Restated)
REVENUES
Product sales	$	1,514		$	963		$	3,964		$	3,211
Service revenue		6,449			6,589			21,134			21,550
Total Revenues		7,963			7,552			25,098			24,761
COST OF REVENUES
Cost of product sales		1,157			905			2,941			2,562
Cost of service revenue		5,553			6,016			18,004			20,227
Total Cost of Revenues		6,710			6,921			20,945			22,789
GROSS PROFIT		1,253			631			4,153			1,972
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		2,104			2,185			6,601			8,533
LOSS FROM OPERATIONS		(851	)		(1,554	)		(2,448	)		(6,561	)
OTHER (INCOME) EXPENSE
Interest expense		233			369			646			775
Other (income) expense		(48	)		130			(38	)		(475	)
		185			499			608			300
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES		(1,036	)		(2,053	)		(3,056	)		(6,861	)
Income tax expense		—			—			—			—
LOSS FROM CONTINUING OPERATIONS		(1,036	)		(2,053	)		(3,056	)		(6,861	)
INCOME LOSS FROM DISCOUNTINUED OPERATIONS		34			(2,424	)		227			(3,585	)
(See Note C, Discontinued and Held-for-Sale Operations)
NET LOSS	$	(1,002	)	$	(4,477	)	$	(2,829	)	$	(10,446	)
BASIC AND DILUTED LOSS PER COMMON SHARE
From continuing operations	$	(0.09	)	$	(0.18	)	$	(0.26	)	$	(0.59	)
From discontinued operations		0.00			(0.20	)		0.02			(0.30	)
BASIC AND DILUTED LOSS PER COMMON SHARE	$	(0.09	)	$	(0.38	)	$	(0.24	)	$	(0.89	)
WIEGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		11,785,826			11,784,490			11,788,945			11,764,823

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

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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 3, 2010			October 4, 2009
	(Unaudited)			(Unaudited)
				(Restated)
OPERATING ACTIVITIES
Net loss	$	(2,829	)	$	(10,446	)
Adjustments to reconcile net loss to net cash provided (utilized) by operating activities:
Depreciation and amortization		1,430			2,315
Goodwill impairment		—			2,500
Bad Debts		87			169
Inventory reserves		27			111
Loss on sale of equipment		12			—
Gain on disposal of discontinued operations		(314	)		—
Amortization of stock-based compensation plans		(29	)		56
Amortization of debt issuance costs and debt discount		107			3
Unrealized gain on conversion option		(18	)		(484	)
Changes in:
Accounts receivable		(564	)		8,992
Inventories		961			4,076
Prepaid expenses and other current assets		(274	)		7
Deposits and other non-current assets		28			193
Accounts payable		1,592			(3,443	)
Accrued expenses and other current liabilities		(589	)		(1,178	)
Net cash provided (utilized) by operating activities		(373	)		2,871
INVESTING ACTIVITIES
Proceeds from disposal of discontinued operations		746			—
Acquisition of property and equipment		—			(609	)
Proceeds from disposal of property and equipment		173			117
Net cash provided (utilized) by investing activities		919			(492	)
FINANCING ACTIVITIES
Payments on capital lease obligations		(46	)		(71	)
Short-term borrowings (repayments), net		293			(2,165	)
Borrowings of long-term debt		19			142
Repayments of long-term debt		(810	)		(397	)
Proceeds from the issuance of shares		—			65
Cash repurchase of restricted stock		(2	)		(5	)
Debt issuance costs		—			(24	)
Net cash utilized by financing activities		(546	)		(2,455	)
DECREASE IN CASH		—			(76	)
Cash, beginning of period		—			76
Cash, end of period	$	—		$	—
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	591		$	596

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

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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 condensed consolidated financial statements of MISCOR Group, Ltd. (the “Company”) as of and for the three and nine months ended October 3, 2010 and October 4, 2009, 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 3, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010. Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 for the most recent disclosure of the Company’s accounting policies.

Negotiations with its lender, Wells Fargo, to extend the loan facility through 2011, to provide management time to complete operational improvements, are underway. The Company has also initiated negotiations to restructure debt held by the former members of 3-D (BDeWees and XGen III) to reduce its short-term debt. Based on our fiscal 2010 budget, and our operating results for the nine months ended October 3, 2010, we believe we will be able to meet the financial covenants required by the senior debt agreement for fiscal 2010. In the event we are unable to attain the results expected, we may have future covenant violations and the lender could claim a default and demand repayment. If we are unsuccessful in extending or replacing our existing senior credit agreement, or if we default and the lender 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 we were unable to repay or refinance the amounts due under the bank credit facilities, the lender could exercise its remedies under the bank credit facilities, including foreclosing on substantially all our assets, which we pledged as collateral to secure our obligations under the bank credit facilities. Prior operating results and the banking environment offer challenges in modifying or establishing a new senior credit facility. Consequently, capital may not be available on acceptable terms, or at all. Nevertheless, the Company’s management believes it will be successful in extending the existing facility. If the Company is unsuccessful in obtaining an extension through 2011, there would be substantial doubt about our ability to continue as a going concern.

Certain amounts from the prior year financial statements have been reclassified to conform to the current year presentation. As a result of the sale or planned sale of the Company’s Construction and Engineering Services operations and Rail Services operations, the financial results associated with these operations were classified as discontinued operations on the Company’s Condensed Consolidated Statement of Operations and held-for-sale on the Condensed Consolidated Balance Sheets (See Note C, Discontinued and Held-for-sale Operations). These reclassifications had no impact on the Company’s Condensed Consolidated Statement of Cash Flows. In addition, the estimated fair value of a conversion option on a note payable as of January 1, 2009 was reclassified from equity to liability, and a corresponding adjustment to fair value at October 4, 2009 was included in other (income) on the Company’s Condensed Consolidated Statement of Operations (See Note E, Derivative Instruments).

NOTE B — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued new accounting guidance on transfers of financial assets (originally issued as FASB Statement 166, and subsequently issued as ASU 2009-16). This new guidance limits the circumstances in which a financial asset may be de-recognized when the transferor has not transferred the entire financial asset or has continuing involvement with the transferred asset. The concept of a qualifying special-purpose entity, which had previously facilitated sale accounting for certain asset transfers, is removed by the new guidance. This new guidance is effective for annual reporting periods beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The adoption of this new guidance by the Company on January 1, 2010 did not have a material impact on its consolidated financial statements.

In June 2009, the FASB issued new accounting guidance (originally issued as FASB Statement 167, and subsequently issued as ASU 2009-17) 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 adoption of this new guidance by the Company on January 1, 2010 did not have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06 “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires additional disclosures relating to recurring or non-recurring fair value measurements by requiring entities to disclose the amounts of significant transfers into and out of level 1 and level 2 fair value measurements and describe the reasons for the transfers.

6

Entities are also required to present separately (on a gross basis, rather than as one net number) information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements for items measured using significant unobservable (level 3) inputs. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for information about the purchases, sales, issuances and settlements in the roll forward of activity in level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this new guidance for level 1 and level 2 fair value measurements on January 1, 2010 did not have a material impact on the Company’s consolidated financial statements. The Company does not expect the adoption of this new guidance for level 3 fair value measurements to have a material impact on its consolidated financial statements.

NOTE C – DISCONTINUED AND HELD-FOR-SALE OPERATIONS

AMP Rail Services Canada, ULC

On December 18, 2009 the Company sold all of the outstanding capital stock of AMP Rail Services Canada, ULC (“AMP Canada”) to 4107730 Canada Inc. (d/b/a Novatech, Inc.) (“Novatech”), one shareholder of which is the former general manager of AMP Canada, for a net sales price of approximately $1,460, net of transaction fees. The proceeds consisted of $1,100 in cash and a $400 note receivable, secured by the machinery and equipment of AMP Canada, offset by transaction fees of approximately $40. A loss on sale of approximately $0.3 million was included in the Consolidated Statement of Operations within Loss from Discontinued Operations for the year ended December 31, 2009. The note bears interest at a rate of 5% per year and requires monthly principal payments of $11 through December, 2012.

The following table provides revenue and pretax loss from the AMP Canada discontinued operations:

	Three Months			Nine Months
	Ended			Ended
	October 4, 2010			October 4, 2010
Revenue from discontinued operations	$	901		$	3,104
Pretax loss from discontinued operations		(122	)		(534	)

Construction and Engineering Services Business

In December 2009, the Company announced its plan to sell its Construction and Engineering Services business (“CES business”), consisting of its Martell Electric, LLC (“Martell Electric”) and Ideal Consolidated, Inc. (“Ideal”) subsidiaries, in order to raise operating capital and focus on its core industrial services operations. As a result, the Company has reported Martell Electric and Ideal as held-for-sale, and adjusted the carrying value of Martell Electric’s and Ideal’s long-lived assets based on the sale agreement. On February 3, 2010, the Company completed the sale of 100 percent of the equity of Martell Electric and Ideal to the Company’s Chairman and former President and CEO, John A. Martell, and his wife, Bonnie M. Martell, for $3,500, consisting of $750 in cash and a $2,750 reduction in the amounts owed under a previously issued $3,000 note, held by Mr. Martell (the “Martell Note”). Under the sale agreement, the purchase price was subject to a working capital adjustment which the Company could satisfy either with cash or by increasing the outstanding principal amount of the Martell Note.

The sale agreement set forth a target working capital range of $2,900-$3,200 at closing. Immediately post-closing, the actual combined working capital for Martell Electric/Ideal was approximately $1,226. During the first half of 2010, the Company recorded working capital adjustments of $(1,654), choosing to satisfy the working capital adjustment by increasing the outstanding principal amount of the Martell Note. These adjustments brought the final sale price to $1,846, comprised of $527 for Ideal and $1,319 for Martell Electric, with the final sale proceeds consisting of a cash payment of $750 and a net reduction of $1,096 in amounts owed under the Martell Note. During the nine months ended October 3, 2010, the Company recognized a pretax gain on sale of $136 from the sale of its CES business, which was included in the Company’s Condensed Consolidated Statement of Operations within Income (Loss) from Discontinued Operations.

Mr. Martell disputes the size of the working capital adjustment, and has requested that the disinterested directors of the Company negotiate to satisfy the working capital adjustment other than through an increase in the outstanding principal balance of the Martell Note. A letter from Mr. Martell to the Company, dated September 3, 2010, purports to accelerate payment of the amount due under the Martell Note. The subordination agreement prohibits payment without Wells Fargo’s prior written consent, which has not been obtained. (See Note I, Related Party Transactions and Note L, Commitments and Contingencies).

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The following table provides revenue and pretax income (loss) from the CES business discontinued operations:

	Three Months Ended				Nine Months Ended
	October 3, 2010		October 4, 2009		October 3, 2010			October 4, 2009
Revenue from discontinued operations	$	—	$	8,987	$	1,721		$	24,377
Pretax income (loss) from discontinued operations		—		651		(171	)		495
Pretax gain on disposal of discontinued operations		—		—		136			—

The assets and liabilities of the CES business classified as held-for-sale operations at February 3, 2010 (date of sale) and December 31, 2009 are summarized as follows:

	February 3, 2010		December 31, 2009
ASSETS
Accounts receivable, net of allowance for doubtful accounts of $210 and $209, respectively	$	5,116	$	6,317
Inventories, net		171		172
Other current assets		2,208		2,325
Total current assets		7,495		8,814
PROPERTY AND EQUIPMENT, net		500		500
Total Assets	$	7,995	$	9,314
LIABLITIES
Accounts payable	$	5,252	$	5,174
Accrued expense and other liabilities		1,033		1,279
Total Liabilities		6,285		6,453
Net Assets	$	1,710	$	2,861

American Motive Power

In December 2009, the Company announced its plan to sell its American Motive Power, Inc. (“AMP”) subsidiary in order to focus on its core industrial services operations. As a result, the Company has reported AMP as held-for-sale, and adjusted the carrying value of AMP’s long-lived assets at December 31, 2009 based on the sale agreement entered into in early 2010. On March 15, 2010, the Company completed the sale of 100 percent of the outstanding capital stock of AMP to LMC Transport, LLC (“LMC”), an unrelated party, in exchange for the assumption of the net liabilities of AMP. During the nine months ended October 3, 2010, the Company recognized a gain on sale of $178 from the sale of AMP, which was included in the Company’s Condensed Consolidated Statement of Operations within Income (Loss) from Discontinued Operations.

The following table provides revenue and pretax loss from the AMP discontinued operations:

	Three Months Ended					Nine Months Ended
	October 3, 2010		October 4, 2009			October 3, 2010			October 4, 2009
Revenue from discontinued operations	$	—	$	619		$	709		$	3,203
Pretax loss from discontinued operations		—		(2,955	)		(241	)		(4,429	)
Pretax gain on disposal of discontinued operations		—		—			178			—

The assets and liabilities of AMP classified as held-for-sale operations at March 8, 2010 (date of sale) and December 31, 2009 are summarized as follows:

	March 8, 2010			December 31, 2009
ASSETS
Accounts receivable, net of allowance for doubtful accounts of $56 and $55, respectively	$	564		$	490
Inventories, net		1,153			1,152
Other current assets		479			723
Total current assets		2,196			2,365
Other assets		—			262
Total Assets	$	2,196		$	2,627
LIABLITIES
Accounts payable	$	683		$	643
Accrued expense and other liabilities		1,691			1,576
Total Liabilities		2,374			2,219
Net Assets	$	(178	)	$	408

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HK Engine Components

In December 2009, the Company announced its plan to sell its HK Engine Components (“HKEC”) subsidiary in order to focus on its core industrial services operations. As a result, the Company has reported HKEC as held-for-sale. The carrying value of the long lived assets of HKEC was adjusted to their estimated fair market value at December 31, 2009 based on the expected selling price of HKEC. Under a letter to intent, the putative buyer has paid $100 in earnest money, but failed to pay another $150 in earnest money, resulting in the loss of its exclusivity.

The following table provides revenue and pretax income from the HKEC discontinued operations:

	Three Months Ended				Nine Months Ended
	October 3, 2010		October 4, 2009		October 3, 2010		October 4, 2009
Revenue from discontinued operations	$	1,941	$	1,836	$	5,985	$	7,326
Pretax income from discontinued operations		34		2		294		888

The assets and liabilities of HKEC classified as held-for-sale operations at October 3, 2010 and December 31, 2009 are summarized as follows:

	October 3, 2010		December 31, 2009
ASSETS
Accounts receivable, net of allowance for doubtful accounts of $81 and $142, respectively	$	931	$	592
Inventories, net		1,786		2,094
Other current assets		92		30
Total current assets		2,809		2,716
PROPERTY AND EQUIPMENT, net		1,235		1,233
Other Assets		—		24
Total Assets	$	4,044	$	3,973
LIABLITIES
Accounts payable	$	901	$	601
Accrued expense and other liabilities		282		308
Total Liabilities		1,183		909
Net Assets	$	2,861	$	3,064

NOTE D – INVENTORY

Inventory consists of the following:

	October 3, 2010			December 31, 2009
Raw materials	$	2,451		$	2,705
Work-in-process		2,339			2,486
Finished goods		622			855
		5,412			6,046
Less: allowance for slow moving and obsolete inventories		(745	)		(697	)
	$	4,667		$	5,349

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At October 3, 2010 and December 31, 2009, inventory, net of allowance for slow moving, totaling $1,786 and $3,418 respectively, was classified as held-for-sale and included in Assets Held for Sale on the Condensed Consolidated Balance Sheets.

NOTE E — DERIVATIVE INSTRUMENTS

Effective January 1, 2009, the Company adopted new accounting guidance which clarified the determination of whether equity-linked instruments (or embedded features), such as our convertible securities and warrants to purchase our common stock, are considered indexed to our own stock, which would require certain treatment under the guidance for accounting for derivative instruments. As a result of adopting the new guidance, a conversion option on a note payable to our Chairman, which was previously treated as equity, has been considered a derivative liability since the beginning of 2009. The Company’s condensed consolidated financial statements for the three and nine months ended October 4, 2009 have been restated to reflect the adoption of this new guidance, which was not incorporated in the condensed consolidated financial statements originally filed for the three and nine months ended October 4, 2009. We do not use derivative instruments for hedging of market risks or for trading or speculative purposes.

The impact of the January 1, 2009 adoption of the new accounting guidance is summarized in the following table:

			Impact of New
			Accounting Guidance
	December 31, 2008		Adoption			January 1, 2009
Long-term debt, officers and affiliates	$	5,000	$	638		$	5,638
Total long-term liabilities		9,635		638			10,273
Total liabilities	$	36,033	$	638		$	36,671
Additional paid in capital		9,056		(638	)		8,418
Total stockholders’ equity	$	42,757	$	(638	)	$	42,119

The estimated fair values of the derivative liabilities are recorded as Long-term debt, officers and affiliates on the Company’s Condensed Consolidated Balance Sheets. Changes in the estimated fair values of the derivative liabilities are recorded in the Company’s Condensed Consolidated Statement of Operations. In February 2010, the note payable to the Company’s Chairman underlying this derivative instrument was exchanged by the Chairman for a new note, and as a result, the conversion option expired. The expiration of the conversion option resulted in the Company recording a gain of $18 in the first quarter of 2010, which was equal to the estimated fair value of the conversion option on January 1, 2010. The effect of marking the derivative liability to its estimated fair value resulted in non-cash income at the end of the Company’s third quarter of 2009 as shown in the table below (in thousands except for per share amounts):

	Three Months Ended						Nine Months Ended
				October 4, 2009						October 4, 2009
	October 4, 2009			(As previously			October 4, 2009			(As previously
	(As restated)			reported)			(As restated)			reported)
Estimated fair value of derivative liability	$	154		$	—		$	154		$	—
Income (expense) resulting from change in value of derivative liability		(71	)		—			484			—
Other income (expense)		(117	)		(46	)		588			104
Net Loss		(4,477	)		(4,406	)		(10,446	)		(10,930	)
Basic and Diluted Loss per Common Share	$	(0.38	)	$	(0.37	)	$	(0.89	)	$	(0.93	)

The Company used a Black-Scholes option pricing model to estimate the fair value of the derivative liability at January 1, 2009 and October 4, 2009, using a weighted average of 713,750 optionable shares along with the following assumptions:

	October 4,			July 5,			April 5,			January 1,
	2009			2009			2009			2009
Expected volatility		47.24	%		47.57	%		47.59	%		47.48	%
Risk-free interest rate		2.22	%		2.43	%		1.87	%		1.72	%
Expected term	5.25 years			5.5 years			5.75 years			6.0 years
Dividend yield		0	%		0	%		0	%		0	%

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NOTE F — GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

We account for goodwill in accordance with ASC 350,Intangibles — Goodwill and Other. 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 third quarter. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of our single reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. We determined the fair value of our reporting unit and compared it to its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test. Step 2 of the goodwill impairment test is performed to measure the impairment loss. Step 2 requires that the implied fair value of the reporting unit goodwill be compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

The Company continues to incur losses from operation and continues to work towards extending or replacing current financing arrangements with both its senior lender and subordinated debt holders. In addition, due to its current liquidity situation, certain of the Company’s suppliers have reduced credit limits, which has had some negative impact on our current revenues. Given these factors, it is possible that the Company may incur impairment charges for goodwill and other intangible assets when it completes its goodwill impairment analysis in the fourth quarter of 2010.

For our annual impairment testing, the Company estimated the fair value of its Magnetech Industrial Services (“MIS”) reporting unit using a discounted cash flow model. Significant estimates and assumptions involving future cash flows, growth rates, and weighted average cost of capital were used in preparing the discounted cash flow model for the MIS reporting unit. For the goodwill testing completed during the fourth quarter of 2009 for its MIS reporting unit, the Company used a cost of capital of 25%, and determined that the calculated fair value exceeded the carrying value by approximately 12%. Accordingly, there was no impairment for this reporting unit. An increase in the discount rate used in the analysis of more than 315 basis points, or a decrease in projected 2010 through 2016 revenue of more than 10%, would have resulted in a determination of impairment for MIS; however, management believes that the discount rate of 25% and the revenue projections used in its cash flow model are reasonable.

Other Intangible Assets

Intangible assets consist of the following:

			October 3 2010							December 31, 2009
	Estimated
	Useful		Gross
	Lives		Carrying		Accumulated					Gross Carrying		Accumulated
	(in Years)		Amount		Amortization			Net		Amount		Amortization			Impairment			Net
Patents and Trademarks		10	$	4	$	(4	)	$	—	$	4	$	(3	)	$	—		$	1
Mutual Services Agreement		1		—		—			—		100		(100	)		—			—
Technical Library		20		700		(99	)		601		700		(73	)		—			627
Customer Relationships		15-20		7,722		(1,088	)		6,634		9,592		(1,044	)		(1,626	)		6,922
Non-Compete Agreements		3		17		(9	)		8		807		(518	)		(274	)		15
Total			$	8,443	$	(1,200	)	$	7,243	$	11,203	$	(1,738	)	$	(1,900	)	$	7,565

The estimated future amortization expense related to intangible assets for the periods subsequent to October 3, 2010 on a calendar year basis is as follows:

Year Ending
December 31
2010	$	107
2011		428
2012		421
2013		421
2014		421
Thereafter		5,445
Total	$	7,243

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NOTE G — 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. 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 $3,594 and $3,307 at October 3, 2010 and December 31, 2009. As of October 3, 2010 and December 31, 2009 there was $369 and $1,270 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 0.29% at October 3, 2010) 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 alter 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 originally required monthly principal payments of $10, plus interest, beginning on June 1, 2008, the first day of the month following receipt of the advance. As a result of the Sixth Amendment to the Credit Facility, as described below, the Company is required to make additional weekly principal payments of $10 on the real estate term note. The outstanding balance under the real estate term note as of October 3, 2010 and December 31, 2009 was $221 and $809. 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. Effective June 1, 2009 the interest rate on the real estate term note was increased to the Daily Three Month LIBOR (approximately 0.29% at October 3, 2010) 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) 85% of certain eligible trade accounts receivable less anyreserves established by Wells Fargo from time to time and (2) $5,800 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, among other things, 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 original maturity date of the note was June 1, 2012 and is payable in monthly installments of $21 plus interest at the bank’s prime rate beginning June 1, 2008. The outstanding balance under the equipment term note as of October 3, 2010 and December 31, 2009 was $371 and $580. 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

12

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 0.29% at October 3, 2010) 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 $4 and $11 for the three and nine months ended October 3, 2010 and $29 and $37 for the three and nine months ended October 4, 2009. Net debt issue costs at October 3, 2010 and December 31, 2009 was $4 and $14. 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 $28 and $73 for the three and nine months ended October 3, 2010 and $143 and $171 for the three and nine months ended October 4, 2009. Net debt discount at October 3, 2010 and December 31, 2009 was $28 and $100.

Interest expense under the Wells Fargo Credit facility, excluding amortization of debt issue costs and accretion of debt discount, was $94 and $290 for the three and nine months ended October 3, 2010 and $153 and $392 for the three and nine months ended October 4, 2009.

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 $2,079, 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. The notes with BDeWees, Inc. and XGen III, Ltd are due on November 30, 2010. The Company is currently renegotiating terms with these two note holders.

Default and Waiver Agreements

The Wells Fargo notes contain certain financial covenants, including limits on capital expenditures, requirements for minimum book net worth, and minimum EBITDA.

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%. 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

• 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 Chairman and former 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 in additional capital by August 31, 2009 through subordinated debt, asset sales or additional cash equity

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• 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

• 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.

On January 14, 2010 the Company and Wells Fargo executed a Sixth Amendment to the Credit Agreement (the “Sixth Amendment”). The Sixth Amendment amended the Credit Agreement in the following respects:

• Consented to the Company’s planned sale of its CES Business;

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

• Required additional weekly principal payments of $10 on the real estate term note; and

• Extended until January 27, 2010, and reduced to $1,000 the previously agreed upon requirement for the Company to raise $2,000 additional capital through subordinated debt, asset sales, or additional cash equity.

On February 9, 2010 the Company received a letter agreement from Wells Fargo which amended the Credit Agreement as follows:

• Revised the terms of Wells Fargo’s consent to the sale of the Company’s CES Business; and

• Extended until February 19, 2010 the previously agreed upon requirement for the Company to raise $1,000 additional capital through subordinated debt, asset sales, or additional cash equity.

On April 15, 2010 the Company and Wells Fargo executed a Seventh Amendment to the Credit Agreement (the “Seventh Amendment”). The Seventh Amendment amended the Credit Agreement in the following respects:

• Waived the Company’s noncompliance with the minimum book net worth and maximum capital expenditures from working capital covenants for the year ending December 31, 2009;

• Adjusted the minimum book net worth covenant to $21,500 as of December 31, 2009;

• Eliminated the automatic renewal of our revolving credit line in January, 2011;

• Adjusted the allowable capital expenditures for the year ending December 31, 2010 to a maximum of $500;

• Incorporated a monthly minimum EBITDA covenant commencing in April, 2010; and

• Eliminated the previously agreed upon requirement for the Company to raise $1,000 additional capital through subordinated debt, asset sales, or additional cash equity.

In connection with the Seventh Amendment, the Company agreed to pay Wells Fargo an accommodation fee equal to $75, $25 of which is payable on the date of the execution of the Seventh Amendment with $25 due within 30 days and $25 due within 60 days.

NOTE H — DEBT

Long-term debt

14

Long-term debt consists of the following:

	October 3,		December 31,
	2010		2009
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 3, 2010 and December 31, 2009) 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 3, 2010 and December 31, 2009) 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 $5 beginning April 1, 2010, with outstanding balance payable at maturity date of February 28, 2012, plus interest at the greater of 5% or the prime rate (3.25% at October 3, 2010 and December 31, 2009) plus 2%, secured by a subordinated interest in substantially all assets owned by the Company		2,079		—
Convertible Note payable to Officer, payable in monthly installments of $50 beginning February 1, 2010, plus interest at prime rate (3.25% at December 31, 2009) 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
Liability for conversion option on note payable to Officer (See Note E, Derivative Instruments)		—		18
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 (0.29% at October 3, 2010) plus 8.25% beginning June 1, 2009, secured by certain real estate (see Note G, Senior Credit Facility)		221		809
Note payable to bank in monthly installments of $21 through May 2012, plus interest at prime rate 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 (0.29% at October 3, 2010) plus 8.25% beginning June 1, 2009, secured by inventory and substantially all machinery and equipment (see Note G, Senior Credit Facility)		371		580
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		129		147
Notes payable in monthly installments of $1 through April 2014, without interest, secured by certain equipment.		—		136
Capital lease obligations		1,015		1,044
		7,815		9,734
Less: current portion		4,643		5,097
	$	3,172	$	4,637

At October 3, 2010 and December 31, 2009, debt totaling $129 and $283, respectively, was classified as held-for-sale, including $28 and $67, respectively, classified as current and $101 and $216, respectively, classified as long term.

Aggregate maturities of long-term debt for the periods subsequent to October 3, 2010 on a calendar year basis are as follows:

Years Ending December 31,	Amount
2010	$	4,349
2011		460
2012		2,073
2013		906
2014		27
Thereafter		—
	$	7,815

15

Following is a summary of interest expense for the three and nine months ended October 3, 2010 and October 4, 2009:

	Three Months Ended				Nine Months Ended
	October 3,		October 4,		October 3,		October 4,
	2010		2009		2010		2009
Interest expense on principal	$	204	$	250	$	570	$	704
Amortization of debt issue costs		4		29		11		37
Amortization of debt discount - revolving notes payable		28		143		73		171
	$	236	$	422	$	654	$	912

For the three and nine months ended October 3, 2010, interest expense of $3 and $7 was attributable to the Company’s discontinued operations and recorded within Income (Loss) from Discontinued Operations on the Condensed Consolidated Statements of Operations. For the three and nine months ended October 4, 2009, interest expense of $53 and $137 was attributable to the Company’s discontinued operations and recorded within Income (Loss) from Discontinued Operations on the Condensed Consolidated Statements of Operations.

NOTE I — RELATED PARTY TRANSACTIONS

Long-term debt, officers and affiliates

On February 3, 2010 a note payable to the Company’s Chairman and former President and CEO in the original principal amount of $3,000, originally issued January 1, 2004, was exchanged for a new note in the original principal amount of $425 in conjunction with the sale of the Company’s CES business to its Chairman (the “Martell Note”). The principal amount of the Martell Note was subsequently increased to $2,079 as a result of the working capital adjustment according to the terms of the sale agreement for the Company’s CES business. The Martell Note bears interest at the greater of 5% or the prime rate (3.25% at October 3, 2010) plus 2%, and requires monthly principal payments of $5, subject to the approval of Wells Fargo, beginning April 1, 2010 with all remaining outstanding principal and any unpaid accrued interest due on February 28, 2012. As of October 3, 2010, no principal payments had been made on the Martell Note. The Martell Note is secured by certain personal property of the Company, subject to a subordination agreement that subordinates the obligations of the Company under this note to the Wells Fargo credit facility. (See Note C, Discontinued and Held-for-Sale Operations, Note G, Senior Credit Facility and Note H, Debt).

The original note payable to the Company’s Chairman had a balance of $3,000 at December 31, 2009. Interest was 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 connection with the Wells Fargo senior credit facility waiver and amendment to defer payment of interest and principal on the note (see Note G, Senior Credit Facility). Interest on the note continued to accrue monthly. Under the terms of the note, principal payments were due monthly in the amount of $50 beginning February 1, 2010. However, the subordination agreement prohibits principal and interest payments as long as there was an outstanding balance on the senior credit facility. Wells Fargo has permitted the Company to make interest payments.

The original note also included a conversion option whereby outstanding principal and accrued interest under the note could be converted to common stock at a price of $2.50 per share at any time at the election of the Company’s Chairman. This conversion option expired when the original note was exchanged for the Martell Note in conjunction with the sale of the Company’s CES business on February 3, 2010.

Interest expense on the notes was $41 and $78 for the three and nine months ended October 3, 2010 and $38 and $107 for the three and nine months ended October 4, 2009.

The Company is indebted to the former members of 3-D, one of whom is the former President of Magnetech Industrial Services, Inc. (“MIS”), for a note payable with a balance of $2,000 at October 3, 2010 and December 31, 2009 (see Note G, Senior Credit Facility and Note H, Debt). Interest is payable monthly at prime. Interest expense on the note was $17 and $49 for the three and nine months ended October 3, 2010 and $11 and $44 for the three and nine months ended October 4, 2009. The note matures on November 30, 2010. The

16

Company has initiated negotiations to restructure this note, which is subject to a subordination agreement prohibiting the exercise of remedies without the consent of Wells Fargo.

Leases

The Company leases its South Bend, Indiana; Hammond, Indiana; and Boardman, Ohio facilities from its Chairman of the Board and stockholder. Total rent expense under these agreements was approximately $73 and $219 for the three and nine months ended October 3, 2010 and $71 and $222 for the three and nine months ended October 4, 2009. The lease for the Hammond, Indiana facility expired on August 3, 2010. Currently, the Company is in negotiations to renew this lease. Until then the lease is month-to-month.

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 approximately $40 and $119 for the three and nine months ended October 3, 2010 and approximately $39 and $117 for the three and nine months ended October 4, 2009.

The Company leased a facility in South Bend for the electrical contracting business from a limited liability company owned by the adult children of its Chairman of the Board and stockholder. Rent expense under this agreement was approximately $0 and $7 for the three and nine months ended October 3, 2010 and approximately $22 and $67 for the three and nine months ended October 4, 2009. This lease was included in the sale of the Company’s CES business on February 3, 2010, and, as of that date, is no longer an obligation of the Company.

The Company leases a facility in Massillon, Ohio from a partnership, one partner of which is a former officer of MIS, under an agreement expiring in November 2017. Rent expense under the lease was approximately $135 and $405 for the three and nine months ended October 3, 2010 and October 4, 2009.

NOTE J — LOSS PER SHARE

The Company accounts for loss per common share under the provisions of ASC 260,Earnings Per Share, which requires a dual presentation of basic and diluted loss per common share. Basic 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 loss per common share is computed assuming the conversion of common stock equivalents, when dilutive.

For the three months ended October 3, 2010, the Company’s common stock equivalents, consisting of warrants to purchase 308,197 shares of common stock and options to purchase a weighted average of 40,226 shares of common stock issued to employees under the 2005 Stock Option Plan, were not included in computing diluted loss per share because the effect of including the warrants and options would have been anti-dilutive. For the nine months ended October 3, 2010, the Company’s common stock equivalents, consisting of warrants to purchase a weighted average of 308,364 shares of common stock and options to purchase a weighted average of 62,463 shares of common stock issued to employees under the 2005 Stock Option Plan, were not included in computing diluted loss per share because the effect of including the warrants and options would have been anti-dilutive.

For the three and nine months ended October 4, 2009, the Company’s common stock equivalents, consisting of 1,200,000 potential shares of common stock related to convertible subordinated debt securities, warrants to purchase 310,254 shares of common stock and options to purchase 55,700 shares of common stock issued to employees under the 2005 Stock Option Plan were not included in computing diluted loss per share because the effect of including the warrants and options would have been anti-dilutive.

NOTE K — 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 3, 2010 and December 31, 2009, approximately 26% and 12%, respectively, of gross accounts receivable were due from entities in the steel, metal working and scrap industries, and approximately 18% and 18%, respectively, of gross receivables were due from entities in the rail industry. No customers accounted for 10% or more of gross accounts receivable at October 3, 2010. One customer, of the Construction and Engineering Services segment, accounted for approximately 10% of gross accounts receivable at December 31, 2009. One customer accounted for 10% or more of revenue from continuing operations for the three or nine months ended October 3, 2010 and no customer accounted for 10% or more of revenue from continuing operations for the three or nine months ended October 4, 2009.

NOTE L — COMMITMENTS AND CONTINGENCIES

Collective bargaining agreements

At October 3, 2010 and December 31, 2009, approximately 13% and 34% respectively, of the Company’s employees were covered by collective bargaining agreements.

17

Warranty reserves

The Company warrants workmanship after the sale of its products and services, generally for a period of one year. An accrual for warranty costs is recorded based upon the historical level of warranty claims and management’s estimates of future costs.

Product warranty activity for the three months and nine months ended October 3, 2010 and October 4, 2009 is as follows:

	Three Months			Three Months		Nine Months			Nine Months
	ended October 3,			ended October 4,		ended October 3,			ended October 4,
	2010			2009		2010			2009
Balance at beginning of period	$	281		$	480	$	394		$	589
Warranty claims paid		(15	)		—		(51	)		(152	)
Warranty expense		39			21		112			64
Other1		—			—		(150	)		—
Balance at end of period	$	305		$	501	$	305		$	501

¹ Warranty reserve for AMP subsidiary divested in February, 2010.

Employment Agreements

On September 30, 2005, the Company entered into an employment agreement with its Chairman and, at that time, President and CEO John A. Martell. The agreement was for an initial three-year term, subject to earlier termination as provided in the agreement. Effective January 1, 2010, the agreement automatically renewed for a one-year period. At each year-end, the agreement will again automatically renew for successive one-year periods unless either party, at least three months before the end of the initial term or any renewal term, requests termination or renegotiation of the agreement. The employment agreement provides for certain benefits to the executive if employment is terminated by the Company for cause, by the executive with good reason, or due to death or disability. The benefits include continuation of a multiple of the executive’s base salary for three years, any earned but unpaid profit-sharing or incentive bonus, and company-paid health insurance for one year. On February 3, 2010 this employment agreement was modified in relation to the sale of the Company’s CES business to remove non-compete and non-solicitation clauses from the agreement.

On June 18, 2010, the Company entered into an employment agreement with its newly appointed President and CEO Michael P. Moore. The agreement was for an initial one-year term, subject to earlier termination as provided in the agreement. At each year-end, the agreement will automatically renew for successive one-year periods unless either party, at least three months before the end of the initial term or any renewal term, requests termination or renegotiation of the agreement. The employment agreement provides for certain benefits to the executive if employment is terminated by the Company for cause, by the executive with good reason, or due to death or disability. The benefits include continuation of the executive’s base salary for six months, any earned but unpaid profit-sharing or incentive bonus, and company-paid health insurance for six months.

Novatech Note Receivable

In December 2009, as part of the sale of AMP Canada, the purchaser of AMP Canada issued a promissory note for $400, with monthly payments of $12, to AMP. Proceeds from this note were assigned by AMP, with the consent of Novatech, to Wells Fargo Bank, and applied to the MISCOR credit facility, specifically the real estate term loan. Following the sale of AMP by the Company, Novatech suspended payments to the Company, claiming payment was due to the purchaser of AMP. Subsequently, Wells Fargo Bank provided Novatech with notice of default. Wells Fargo Bank has not yet determined what additional actions will be taken. MISCOR has continued to make the monthly payments of $12 as required by the note assignment. Management expects to recover the full amount of the note receivable, and accordingly, no reserve has been recorded against the note.

Construction and Engineering Services Working Capital Adjustment

Subsequent to agreement of the working capital adjustment related to the sale of our Construction and Engineering Services businesses, the purchasers initiated discussions with the Company’s disinterested directors about restructuring payment of the working capital adjustment. Specifically, the purchasers are requesting that all or part of the working capital adjustment be paid in cash, which would require the consent of the Company’s senior lender, Wells Fargo Bank. MISCOR had elected, as provided for under the purchase agreement, to apply the full amount of the working capital adjustment to the note. The purchaser Wells Fargo and the Company’s interested directors have not yet reached an agreement on restructuring payment of the working capital adjustment.

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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 M — 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.

Note Receivable and Debt

As of October 3, 2010 and December 31, 2009, market rates on similar notes for similar terms and remaining maturities are used to estimate the fair value of existing notes receivable at the present value of expected cash flows. At October 3, 2010 and December 31, 2009, the fair value of the note receivable, with a carrying value of $379 and $390, respectively, is estimated at $379 and $390, respectively, and is based on the estimated future cash flows discounted at terms at which the Company estimates the note would be issued at utilizing current market rates.

As of October 3, 2010 and December 31, 2009, rates currently available to us for long term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing borrowings at the present value of expected cash flows. As of October 3, 2010 and December 31, 2009, the fair value of debt differed from the carrying amount due to favorable interest terms on the notes with the former members of 3-D and the Company’s Chairman. At October 3, 2010 and December 31, 2009 the aggregate fair value of debt, with an aggregate carrying value of $10,401 and $11,879, respectively, is estimated at $10,533 and $12,597, respectively, and is based on the estimated future cash flows discounted at terms at which the Company estimates it could borrow such funds from unrelated parties.

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

          SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

	Nine Months Ended
	October 3,		October 4,
	2010		2009
Issuance of restricted stock	$	—	$	5
Reduction of note payable in conjunction with sale of CES business	$	1,096	$	—
Expiration of conversion option	$	18	$	484
Equipment acquired through capital lease obligation	$	—	$	146

NOTE O — MANAGEMENT PLAN

In 2009 the Company’s Board of Directors approved a restructuring plan, publicly announced on December 23, 2009, which included the Company’s sale of its Montreal-based rail subsidiary, its intent to divest its remaining Rail Services and Construction Services subsidiaries to allow MISCOR to concentrate on industrial and utility services as the refocused vision for the Company, and the relocation of its corporate headquarters to Massillon, OH. Despite operating losses in the three and nine months ended October 3, 2010 gross margins have improved and SG&A costs have been reduced, directly reflecting cost reduction efforts and restructuring activities. Continued focus on margin improvement is required to achieve profitability, with specific actions to be developed by the Company’s newly appointed President and CEO, to be implemented in the second half of 2010. Through October 3, 2010, the Company has completed its planned relocation of its headquarters to Massillon, OH and the divestitures of its CES businesses and two of the three operating units of its Rail Services business. These restructuring activities have resulted in a reduction of the Company’s working capital requirements, and have allowed management to focus on and devote appropriate resources to its Industrial Services businesses.

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NOTE P — SUBSEQUENT EVENTS

We are continuing to assess the strategic fit of our various businesses and are exploring a number of strategic alternatives to address liquidity and market opportunities.

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

Overview

We provide electro-mechanical repair and maintenance solutions to industrial customers primarily in the United States. Our services include repair, maintenance and remanufacturing of electric motors for the steel, rail, and renewable energy industries from five locations in the Midwest and California; repair and manufacture of industrial lifting magnets for the steel and scrap industries from two locations in the Midwest; and manufacturing and remanufacturing of power assemblies, engine parts and other components related to large diesel engines from two locations on the East Coast.

The severity and extended nature of the recent economic decline resulted in a steep decline in demand for products and services in the industries that we support. In 2009 and 2010 we undertook a number of actions to reduce our fixed costs and increase operating margins. We suspended non-essential cash expenditures and severely reduced capital expenditures. These efforts were an endeavor to align our operating costs to the decline in sales and respond to debt service and supplier demands.

In December 2009 we announced a restructuring plan in response to the economic issues and banking environment. This plan established a focus on our industrial services businesses providing repair and maintenance services for electric motors and electric magnets, with the intent to divest our other operations, including our operations that specialize in the manufacturing and remanufacturing of diesel engine components, our operations specializing in the repair and remanufacture of locomotives, and our construction and engineering services business.

The restructuring plan also included relocating our corporate offices to Massillon, Ohio in order to more centrally locate our management team within our operational area and reduce selling, general and administrative expenses. Relocation of our corporate offices to Massillon, Ohio was completed in the second quarter of 2010. With relocation of our corporate offices, on June 18, 2010, the Company appointed President and CEO Michael P. Moore. Our previous President and CEO, John A. Martell, remains as non-executive Chairman of MISCOR. We have divested the construction and engineering business as well as two of our three subsidiaries specializing in the repair and remanufacturing of locomotives. We plan to complete the divestiture of our diesel engine components subsidiary during our 2010 fiscal year.

Revenues from our continuing operations in the nine months ended October 3, 2010 increased slightly more than 1% from the nine months ended October 4, 2009, reflecting increased service demand. Gross profit increased with lower direct costs and overhead reduction efforts. Cost reduction initiatives were realized in SG&A with a reduction of approximately 23% compared to the first three quarters of 2009. Consequently, the first nine months of 2010 as compared to the first nine months of 2009 realized improved operating results. Divestiture of our construction and engineering services business and American Motive Power subsidiary reduced our past due accounts payable by more than $3.2 million, providing a much needed reduction in cash demands and helping our liquidity. While neither divestiture resulted in significant additional cash, the reduction in debt and other obligations was important, and is expected to help us enhance and grow our capabilities in our industrial services business. While we continue to manage our past due accounts payable, certain suppliers continue to place us on credit hold or cash in advance terms. These restrictions impacted our sales and operating margins in 2009, and continue to have an impact in 2010, although the impact has been reduced.

Negotiations with its lender, Wells Fargo, to extend the loan facility through 2011, to provide management time to complete operational improvements, are underway. The Company has also initiated negotiations to restructure debt held by the former members of 3-D (BDeWees and XGen III) to reduce its short-term liabilities. Based on our fiscal 2010 budget, and our operating results for the nine months ended October 3, 2010, we believe we will be able to meet the financial covenants required by the senior debt agreement for fiscal 2010. In the event we are unable to attain the results expected, we may have future covenant violations and the lender could claim a default and demand repayment. If we are unsuccessful in extending or replacing our existing senior credit agreement, or if we default and the lender 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 we were unable to repay or refinance the amounts due under the bank credit facilities, the lender could exercise its remedies under the bank credit facilities, including foreclosing on substantially all our assets, which we pledged as collateral to secure our obligations under the bank credit facilities. Prior operating results and the banking environment offer challenges in modifying or establishing a new senior credit facility. Consequently, capital may not be available on acceptable terms, or at all. Nevertheless, the Company’s management believes it will be successful in the extending the existing facility. If the Company is unsuccessful in obtaining an extension through 2011, there would be substantial doubt about our ability to continue as a going concern.

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We are continuing to assess the strategic fit of our various businesses and are exploring a number of strategic alternatives to address liquidity and market opportunities.

Recent Developments

Not applicable.

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 3, 2010 include our accounts and those of our wholly-owned subsidiaries, Magnetech Industrial Services, Inc., and HK Engine Components, LLC through October 3, 2010, Martell Electric, LLC and Ideal Consolidated, Inc. through February 3, 2010, and American Motive Power, Inc. (“AMP”) through March 8, 2010. The consolidated financial statements for the three and nine months ended October 4, 2009 include our accounts and those of our wholly-owned subsidiaries, Magnetech Industrial Services, Inc., HK Engine Components, LLC, Martell Electric, LLC, Ideal Consolidated, Inc., and American Motive Power, Inc. (“AMP”). 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 consists primarily of product sales and service of industrial magnets and electric motors, and sales of diesel engine components. 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.

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.

Discontinued operations and assets and liabilities held-for-sale.For those businesses where we have committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. The fair values have been estimated using accepted purchase agreements or expected selling price based on consultations with third parties. Depreciation and amortization expense is not recorded on assets of businesses to be divested once they are classified as held-for-sale.

Businesses to be divested are classified in the Condensed Consolidated Financial Statements as either discontinued operations or held-for-sale. For businesses classified as discontinued operations, the balance sheet amounts and results of operations are reclassified from their historical presentation to assets and liabilities of operations held-for-sale on the Condensed Consolidated Balance Sheets and to discontinued operations on the Condensed Consolidated Statement of Operations for all periods presented. The gains or losses associated with these divested businesses are recorded within discontinued operations on the Condensed Consolidated Statement Operations. We do not expect any significant continuing involvement with these businesses following their divestiture, and these businesses have been disposed of or are expected to be disposed of within one year.

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 period. Diluted earnings (loss) per common share is computed assuming the conversion of common stock equivalents, when dilutive.

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Segment information. Through December 31, 2009 we operated in three segments, Industrial Services, Construction and Engineering Services, and Rail Services. In December 2009, we announced an overall restructuring plan, which included the divestiture of our subsidiaries in the Rail Services and Construction and Engineering Services (“CES”) segments in order to align our operations with its long-term vision and allow the Company to focus on industrial and utility services. In February of 2010 we completed the divestiture of our CES businesses, and in December 2009 and March 2010 we completed the divestitures of two of our three Rail Services businesses. Following these divestitures our continuing businesses have operated in one segment, the former Industrial Services segment. We report the financial results of our remaining Rail Services business as discontinued operations on the Condensed Consolidated Statement of Operations and as held for sale on the Condensed Consolidated Balance Sheets.

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. 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.

For our annual impairment test performed as of December 31, 2009, we estimated the fair value of our Magnetech Industrial Services (“MIS”) reporting unit using a discounted cash flow model. Significant estimates and assumptions involving future cash flows, growth rates, and weighted average cost of capital were used in preparing the discounted cash flow model for the MIS reporting unit. For the goodwill testing completed during the fourth quarter of 2009 for its MIS reporting unit we used a cost of capital of 25%, and determined that the calculated fair value exceeded the carrying value by approximately 12%. Accordingly, there was not impairment for this reporting unit. An increase in the discount rate used in the analysis of more than 315 basis points, or a decrease in projected 2010 through 2016 revenue of more than 10% would have resulted in a determination of impairment for MIS; however, management believes that the discount rate of 25% and the revenue projections used in its cash flow model are reasonable.

Other intangible assets consisting mainly of customer relationships and a technical library were all determined to have a definite life and are amortized over the estimated useful 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.

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.

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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.

Recent accounting pronouncements

In June 2009, the FASB issued new accounting guidance on transfers of financial assets (originally issued as FASB Statement 166, and subsequently issued as ASU 2009-16). This new guidance limits the circumstances in which a financial asset may be de-recognized when the transferor has not transferred the entire financial asset or has continuing involvement with the transferred asset. The concept of a qualifying special-purpose entity, which had previously facilitated sale accounting for certain asset transfers, is removed by the new guidance. This new guidance is effective for annual reporting periods beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Our adoption of this new guidance on January 1, 2010 did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued new accounting guidance (originally issued as FASB Statement 167, and subsequently issued as ASU 2009-17) 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. Our adoption of this new guidance on January 1, 2010 did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06 “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires additional disclosures relating to recurring or non-recurring fair value measurements by requiring entities to disclose the amounts of significant transfers into and out of level 1 and level 2 fair value measurements and describe the reasons for the transfers. Entities are also required to present separately (on a gross basis, rather than as one net number) information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements for items measured using significant unobservable (level 3) inputs. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for information about the purchases, sales, issuances and settlements in the roll forward of activity in level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Our adoption of this new guidance for level 1 and level 2 fair value measurements on January 1, 2010 did not have a material impact on our consolidated financial statements. We do not expect the adoption of this new guidance for level 3 fair value measurements to have a material impact on our consolidated financial statements.

Results of Operations

Three Months Ended October 3, 2010 Compared to Three Months Ended October 4, 2009

Revenues. Revenues from continuing operations increased by $0.4 million or 5% to $7.9 million for the three months ended October 3, 2010 from $7.5 million for the three months ended October 4, 2009. The increase in revenue is generally related to an improved economic environment for our customers, which has created an increase in demand for our products and services, and completion of one large project in Alaska.

Gross Profit.Total gross profit for the three months ended October 3, 2010 was $1.3 million or 16% of revenues from continuing operations compared to $0.6 million or 8% of revenues from continuing operations for the three months ended October 4, 2009. The increase of $0.7 million or 99% was due to decreased labor and overhead costs mainly as a result of staff reductions and cost reduction actions.

Selling, General and Administrative Expenses. Selling, general and administrative expenses related to continuing operations were $2.1 million for the three months ended October 3, 2010 compared to $2.2 million for the three months ended October 4, 2009, reflecting reduced selling expense and cost reduction efforts at our Corporate headquarters, which consisted primarily of headcount reductions.

Interest Expense and Other Income. Interest expense attributable to continuing operations decreased for the three months ended October 3, 2010 from the three months ended October 4, 2009 mainly due to decreases in our total debts. Our Wells Fargo credit facility and the note payable to our Chairman together, constituted approximately 55% and 60% of our outstanding debt at October 3, 2010 and October 4, 2009. Overall interest expense decreased for the three months ended October 3, 2010 from the three months ended October 4, 2009 mainly

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due to an approximately 23% decrease in overall debt levels. The impact on interest expense due to the decrease in debt was partially offset by increases in the interest rates paid on the Wells Fargo credit facility as well as on our outstanding obligation to our Chairman, John A. Martell. Other (income) expense improved by $0.2 million for the three months ending October 3, 2010 when compared to the three months ending October 4, 2009, due to the expense resulting from change in value of derivative liability as of October 4, 2009.

Provision for Income Taxes. We have experienced net operating losses in each year since we commenced operations. 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.

Loss from Continuing Operations.Loss from continuing operations decreased by $1.0 million or 50% to $(1.0) million for the three months ended October 3, 2010 from $(2.0) million for the three months ended October 4, 2009. The decrease in loss from continuing operations is attributable to a $0.6 million increase in gross profit along with a $0.1 million decrease in selling, general and administrative expenses, and a combined $0.3 million decrease in interest expense and other expenses.

Income (Loss) from Discontinued Operations.We recorded income from discontinued operations of $0.1 million for the three months ended October 3, 2010 compared to a loss of $2.4 million for the three months ended October 4, 2009. The decrease of $2.5 million is due to a decrease of $3.1 million in operating loss for our AMP subsidiary for the three months ended October 3, 2010 as compared with the three months ended October 4, 2009. The elimination of the operating loss from our AMP subsidiary was partially offset by a $0.5 million decrease in operating income for our Construction and Engineering services businesses for the three months ended October 3, 2010 as compared with the three months ended October 4, 2009 along with a loss on sale of $0.1 million recorded during the three months ended October 3, 2010 related to a working capital adjustment for the sale of our Construction and Engineering Services businesses.

Net Loss.Net loss for the three months ended October 3, 2010 was $1.0 million compared to a net loss of $4.5 million for the three months ended October 4, 2009. The $3.5 million decrease was mainly due in part to operational improvements noted above and the impact of the divestiture of our American Motive Power and AMP Canada subsidiaries.

Nine Months Ended October 3, 2010 Compared to Nine Months Ended October 4, 2009

Revenues. Revenues from continuing operations for the nine months ended October 3, 2010 increased by $0.3 million, or 1.4%, compared to the nine months ended October 4, 2009.

Gross Profit.Total gross profit for the nine months ended October 3, 2010 was $4.2 million or 17% of revenues from continuing operations compared to $2.0 million or 8% of revenues from continuing operations for the nine months ended October 4, 2009. The increase of $2.2 million or 111% was due to lower material and labor costs and a decrease in unabsorbed overhead costs. The most significant reduction was in overhead costs reflecting staff reductions and cost reduction efforts.

Selling, General and Administrative Expenses. Selling, general and administrative expenses related to continuing operations were $6.6 million for the nine months ended October 3, 2010 compared to $8.5 million for the nine months ended October 4, 2009, reflecting reduced selling expense and cost reduction efforts at our corporate headquarters, principally staff reductions.

Interest Expense and Other Income. Interest expense attributable to continuing operations decreased for the nine months ended October 3, 2010 from the nine months ended October 4, 2009 mainly due to decreases in our total debt. Our Wells Fargo credit facility and the note payable to our Chairman together, constituted approximately 55% and 60% of our outstanding debt at October 3, 2010 and October 4, 2009, respectively. Overall interest expense decreased for the nine months ended October 3, 2010 from the nine months ended October 4, 2009 mainly due to an approximately 23% decrease in overall debt levels. The impact on interest expense due to the decrease in debt was partially offset by increases in the interest rates paid on the Wells Fargo credit facility as well as on our outstanding obligation to our Chairman, John A. Martell. Other income decreased by $0.4 million at October 3, 2010 when compared October 4, 2009. This is due to the income resulting from change in value of derivative liability.

Provision for Income Taxes. We have experienced net operating losses in each year since we commenced operations. 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.

Loss from Continuing Operations.Loss from continuing operations decreased by $3.8 million or 55% to $(3.1) million for the nine months ended October 3, 2010 from $(6.9) million for the nine months ended October 4, 2009. The decrease in loss from continuing operations is attributable to a $2.2 million increase in gross profit along with a $1.9 million decrease in selling, general and administrative expenses, as discussed in the gross profit and selling, general and administrative expenses sections above, and offset by an increase in other expense by $0.3 million.

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Income (Loss) from Discontinued Operations.We recorded income from discontinued operations of $0.2 million for the nine months ended October 3, 2010 compared to a loss of $3.6 million for the nine months ended October 4, 2009. This decrease of $3.8 million is due to a decrease of $4.3 million in operating loss for our AMP subsidiary for the nine months ended October 3, 2010 as compared with the nine months ended October 4, 2009 along with a gain on sale of $0.2 million recorded during the nine months ended October 3, 2010 related to the sale of our American Motive Power, Inc. subsidiary and our Construction and Engineering Services businesses. These increases were partially offset by a decrease of $0.5 million and $0.2 million in operating income for our HKEC and Construction and Engineering Services subsidiaries for the nine months ended October 3, 2010 compared with the nine months ended October 4, 2009.

Net Loss.Net loss for the nine months ended October 3, 2010 was $2.8 million compared to a net loss of $10.4 million for the nine months ended October 4, 2009. The $7.6 million decrease was mainly due in part to operational improvements noted above and the impact of the divestiture of our American Motive Power and AMP Canada subsidiaries.

Liquidity and Capital Resources

On January 14, 2010 the Company and Wells Fargo executed a Sixth Amendment to the Credit Agreement (the “Sixth Amendment”). The Sixth Amendment amended the Credit Agreement in the following respects:

• Consented to the Company’s planned sale of its CES Business;

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

• Required additional weekly principal payments of $10,000 on the real estate term note; and

• Extended until January 27, 2010, and reduced to $1 million the previously agreed upon requirement for the Company to raise $2 million additional capital through subordinated debt, asset sales, or additional cash equity.

On February 14, 2010 the Company signed a letter agreement with Wells Fargo which amended the Credit Agreement as follows:

• Revised the terms of Wells Fargo’s consent to the sale of the Company’s CES Business; and

• Extended until February 19, 2010 the previously agreed upon requirement for the Company to raise $1 million additional capital through subordinated debt, asset sales, or additional cash equity.

On April 15, 2010 the Company and Wells Fargo executed a Seventh Amendment to the Credit Agreement (the “Seventh Amendment”). The Seventh Amendment amended the Credit Agreement in the following respects:

• Waived the Company’s noncompliance with the minimum book net worth and maximum capital expenditures from working capital covenants for the year ending December 31, 2009;

• Adjusted the minimum book net worth covenant to $21.5 million as of December 31, 2009;

• Adjusted the allowable capital expenditures for the year ending December 31, 2010 to a maximum of $500,000;

• Eliminated the automatic renewal of our revolving credit line in January, 2011;

• Incorporated a monthly minimum EBITDA covenant commencing in April, 2010; and

• Eliminated the previously agreed upon requirement for the Company to raise $1 million additional capital through subordinated debt, asset sales, or additional cash equity.

In connection with the Seventh Amendment, the Company agreed to pay Wells Fargo an accommodation fee equal to $75,000, $25,000 of which is payable on the date of the execution of the Seventh Amendment with $25,000 due within 30 days and $25,000 due within 60 days.

At October 3, 2010 we had approximately $0.4 million of availability on our line of credit. At October 3, 2010 we had approximately $0.7 million of working capital, a decrease of $2.9 million as compared to December 31, 2009. This decrease is attributable to the divestitures of our Martell Electric, Ideal Consolidated and American Motive Power subsidiaries. Our working capital reflects the November, 2010 maturity of $4 million of related party debt that is subordinated to our senior credit facility, as well as the assets and liabilities of our HKEC subsidiary, which are classified as held for sale and included in current assets and current liabilities. The Company is in negotiations to restructure debt held by the former members of 3-D (BDeWees and XGen III) to further improve its working capital. Accelerated term debt repayments required by previous bank amendments and the inability to use inventory as collateral under our asset-based lending agreement constrains working capital and our ability to meet the immediate cash needs of the Company.

Certain of our trade accounts payable are extended beyond the terms acceptable to the vendor. 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 resulted in the loss of sales orders, and future delays may have an adverse affect on our business.

We continue our efforts to enhance our future cash flows. These improvements include efforts to collect accounts receivable at a faster rate, decrease inventory levels, improve operating margins, review alternative financing sources, and negotiate extended terms with our vendors.

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As of October 3, 2010, 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, 2009.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. 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.

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 3, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 3, 2010, 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 3, 2010, 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 3, 2010, 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
10.1	Secured Promissory Note dated February 3, 2010, among John A. Martell and the registrant (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.2	Sixth Amendment to Credit and Security Agreement dated January 14, 2010, among Wells Fargo Bank, the registrant and certain subsidiaries of the registrant (incorporated by reference to Exhibit 10.1 of the registrant’s Current Report or Form 8-K filed January 21, 2010)
10.3	Letter Agreement dated September 8, 2009, among Wells Fargo Bank, the registrant and certain subsidiaries of the registrant, acknowledged and agreed to by the registrant and such subsidiaries on September 16, 2009 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on September 21, 2009)
10.4	Consent and release by Wells Fargo Bank, National Association, dated March 15, 2010 (incorporated by reference to Exhibit 10.10 to the registrant’s Current Report on form 8-K filed on March 15, 2010)
10.5	Letter Agreement dated February 9, 2010, among Wells Fargo Bank, the registrant and certain subsidiaries of the registrant (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.6	Seventh Amendment to Credit and Security Agreement and Limited Waiver of Defaults dated April 15, 2010, among Wells Fargo Bank, the registrant and certain subsidiaries of the registrant (incorporated by reference to Exhibit 10.56i to the registrant’s Annual Report on Form 10-K filed on April 15, 2010)
10.7	Purchase Agreement dated February 3, 2010, among John A. Martell and Bonnie Martell and the registrant (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.8	Lender’s Receipt and Acknowledgement dated February 3, 2010, among John A. Martell and the registrant (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.9	Security Agreement dated February 3, 2010, among Magnetech Industrial Services, Inc. and the registrant (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.10	Indemnification Agreement dated February 3, 2010, among John A. Martell and Bonnie Martell and the registrant (incorporated by reference to Exhibit 10.5 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.11	Amendment No. 1 to Employment Agreement dated February 3, 2010, among John A. Martell and the registrant (incorporated by reference to Exhibit 10.6 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.12	AMP Stock Purchase Agreement dated March 8, 2010, between LMC Transport, LLC, and the registrant (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on form 8-K filed on March 15, 2010)
10.13	Release of Tenant Guaranty made by Dansville Properties, LLC, in favor of the registrant and certain of its affiliates (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on form 8-K filed on March 15, 2010)
10.14	Release of Landlord Guaranty made by American Motive Power, Inc. in favor of Lawrence Mehlenbacher (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on form 8-K filed on March 15, 2010)
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 15, 2010	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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