FINANCIAL STATEMENTS
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Selected Financial Data 13
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Management's Discussion and Analysis
of Financial Condition and Results of Operations 14
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Consolidated Statements of Income 17
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Consolidated Balance Sheets 18
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Consolidated Statements of Stockholders' Equity 20
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Consolidated Statements of Cash Flows 21
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Notes to Consolidated Financial Statements 22
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Auditors' Letter 39
--------------------------------------------------------------
MagneTek Inc.
SELECTED FINANCIAL DATA
Statement of Income Data
FOR THE YEARS ENDED JUNE 30.
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) 1996** 1995** 1994** 1993 1992
- --------------------------------------------------------------------------------------------------------------
Net sales. . . . . . . . . . . . . $1,161,625 $1,202,536 $1,133,126 $1,119,392 $883,466
Income (loss):
Continuing operations. . . . . . (94,164) 21,496 (16,942) 19,263 14,712
Discontinued operations. . . . . -- (14,400) (28,503) 7,770 10,331
Extraordinary item . . . . . . . -- (4,820) -- -- (2,857)
Cumulative effect of
accounting changes . . . . . . . -- -- -- (48,734) --
Net income (loss). . . . . . . . . (94,164) 2,276 (45,445) (21,701) 22,186
- --------------------------------------------------------------------------------------------------------------
Per common share-primary:
Income (loss) from continuing
operations before extraordinary
item and cumulative effect of
accounting changes . . . . . . . $(3.78) $0.87 $(0.69) $0.78 $0.61
Net income (loss). . . . . . . . $(3.78) $0.09 $(1.84) $(0.87) $0.92
Per common share-fully diluted:
Income (loss) from continuing
operations before extraordinary
item and cumulative effect of
accounting changes . . . . . . . * $0.84 * $0.73 $0.59
Net income (loss). . . . . . . . * * * * $0.90
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
* Per share amounts on a fully diluted basis are omitted as such amounts are
anti-dilutive in relation to primary per share amounts.
** Losses from continuing operations for the years ended June 30, 1996 and 1994
include pretax charges aggregating $79,717 and 33,871. Charges in fiscal 1996
reflect costs associated with repositioning operations primarily for severance,
termination benefits, warranty and asset write-downs related to facility
closures and consolidations. Also, in review of the Company's deferred tax asset
in accordance with FASB No. 109, a $14,700 charge was incurred in fiscal year
1996. Fiscal 1994 restructuring reserves related to costs related to potentially
excess or obsolete inventory, as well as severance and relocation costs related
to the Company's electronic ballast product line. In addition, those reserves
included expenses to relocate and consolidate operating and administrative
locations. Loss from discontinued operations includes after tax charges of
$14,400 and $25,041 for the years ended June 30, 1995 and 1994, respectively,
reflecting estimated losses on disposition.
BALANCE SHEET DATA
AS OF JUNE 30
(AMOUNTS IN THOUSANDS) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
Total assets . . . . . . . . . . . $678,774 $857,168 $931,358 $995,359 $888,668
Long-term debt,
including current portion. . . . . 322,023 448,467 523,779 523,301 428,880
Common stockholders' equity. . . . 41,558 117,278 113,082 163,029 196,463
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
13
MagneTek Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
During the year ended June 30, 1996, the Company completed the divestiture of
its remaining discontinued operations which had been targeted for disposal under
a formal plan adopted by the Company's Board of Directors in July, 1994. The
plan was designed to focus the Company on its core product lines and to reduce
debt. Total net proceeds from the inception of the divestiture program through
June 30, 1996 aggregated over $200 million and were used to repay debt.
Operating results and net assets of the divested businesses through their
disposal date are included as "discontinued operations" in the accompanying
consolidated financial statements. Accordingly, the discussion that follows
concerns only the results of continuing operations (see Note 2 for additional
information about discontinued operations).
The Company currently operates in three business segments: Motors & Controls,
which includes fractional and integral horsepower electric motors, medium
voltage generators and electronic variable speed drives; Lighting Products,
including magnetic and electronic lighting ballasts; and Power Supplies,
including electronic power supplies and small transformer products
For the past four years, MagneTek has experienced substantial profit volatility,
primarily as a result of sales and profit swings in its lighting ballast
business. These swings were due in large part to industry-wide miscalculations
of the growth rate in end-user demand for energy-saving electronic ballasts.
This not only led electronic ballast manufacturers in general to add substantial
capacity but also attracted new competitors, resulting in severe inventory
imbalances and price erosion in the marketplace.
With a market share of over 30% for the past five years, including fiscal 1996,
MagneTek is one of the leading manufacturers of electronic ballasts in the U.S.
However, following an increase of over 40% in fiscal 1995, electronic ballast
sales fell 30% in fiscal 1996, reflecting cuts in utility rebates and federal
budgets as well as deferral of energy upgrades by MagneTek Inc. retail chain
stores. The Company's magnetic ballast sales also declined in fiscal 1996 due to
continuing displacement of magnetic ballasts by electronic ballasts and market
conditions in Europe.
Because of these declines the Company conducted an operations review and, under
its new Chief Executive Officer, identified actions that are expected to
increase future operating flexibility and profitability. Reserves were
established in the fourth quarter of fiscal 1996, reflecting anticipated costs
associated with operational repositioning as well as estimated increases in
warranty and other costs (see Note 2).
Sales of power supply products in fiscal 1996 increased by 28% from fiscal 1995.
Profit margins did not grow as rapidly due to costs associated with continued
high levels of research and development, new product introductions in Europe and
market penetration in the U.S.
A continued strong economy in the U.S. resulted in overall sales growth in the
Company's motor, generator and drive products throughout most of fiscal 1996.
Demand for fractional horsepower motor products with residential applications
slowed somewhat during the first half of the fiscal year, but rebounded during
the second half. Generator product sales grew over 20% from fiscal 1995 to
fiscal 1996, reflecting strong demand from Caterpillar. Price increases in the
Motors & Controls segment were modest and largely offset by overall cost
increases. Margin increases were largely due to continued reduction in
administrative costs and, to a lesser extent, volume-related production
efficiencies.
14
MagneTek, Inc.
RESULTS OF OPERATIONS
NET SALES AND GROSS PROFIT
Net sales declined 3.4% in fiscal 1996, to $1.162 billion from $1.203 billion in
fiscal 1995. This followed a 6% increase in fiscal 1995 net sales over fiscal
1994's $1.133 billion. Net sales in the Motors & Controls segment increased 3%
in fiscal 1996, due to increased sales of generator and drive products, which
was partially offset by lower sales of residential fractional horsepower motors.
Segment revenue increased 9% in fiscal 1995 over fiscal 1994 with sales gains in
all product lines, particularly commercial and residential fractional MagneTek
Inc. horsepower motors. Net sales in the Lighting Products segment declined 17%
in fiscal 1996 due to decreased sales of both magnetic and electronic lighting
ballasts. Segment revenue increased 15% in fiscal 1995 over 1994 due to
increased sales of electronic ballasts. Net sales in the Power Supplies segment
increased 28% in fiscal 1996 due to a 36% increase in sales of electronic power
supplies, primarily due to increased penetration of telecommunications markets.
Segment revenue decreased 24% in fiscal 1995 from fiscal 1994 due to lower sales
of transformer products in Europe, lower sales of power supplies due to softer
demand from computer manufacturers and, to a lesser extent, the effect of
currency translation.
The Company's gross profit declined to $156.6 million in fiscal year 1996 from
$239.6 million in fiscal 1995. Fiscal 1996 results include charges aggregating
$43.3 million reflecting costs associated with repositioning operations and
estimated increases in warranty and other costs (see Note 2). Excluding these
charges, gross profit declined over 16% from fiscal 1995 levels due to
substantially lower gross profits in the Lighting Products segment. Gross profit
in fiscal 1995 was $44.2 million higher than fiscal 1994 gross profit due to
increased gross profit in electronic ballasts and a $19.1 million charge
included in 1994 results reflecting inventory write-downs and other charges.
OPERATING EXPENSES
Selling, general and administrative (SG&A) expense was $164.9 million (14.2% of
net sales) in fiscal 1996 compared to $164.3 million (13.7% of net sales) in
fiscal 1995 and $185.5 million (16.4 % of net sales) in fiscal 1994. Charges
associated with repositioning and restructuring operations (largely severance
and termination benefits) aggregating $7.2 million and $14.8 million are
included in SG&A expense in fiscal years 1996 and 1994, respectively. Excluding
these charges, SG&A expense was 13.6%, 13.7% and 15.1% of net sales in fiscal
years 1996, 1995 and 1994, respectively. The Company will continue to focus on
SG&A reductions through consolidation and cost reduction programs; however,
future improvement as a percentage of sales may be less rapid.
INTEREST AND OTHER EXPENSES
Interest expense declined to $31.6 million in 1996 from $34.4 million in fiscal
1995 and $32.0 million in fiscal 1994. Borrowings were reduced through the
completion of the Company's divestiture program and the application of proceeds
to debt reduction. Additionally, stronger performance in the working capital
area, primarily in accounts receivable and inventory management, further reduced
borrowing requirements. Interest expense allocated to discontinued operations
and not reflected in the foregoing figures amounted to $3.0 million, $10.8
million and $15.8 million in 1996, 1995 and 1994 respectively (see Note 2).
Other expense in fiscal 1996 was $34.9 million as compared to $4.6 million and
$2.3 million in 1995 and 1994 respectively. Other expense in fiscal 1996
included $29.2 million associated with asset write-downs in connection with the
Company's repositioning program.
15
MagneTek, Inc.
NET INCOME (LOSS)
In fiscal 1996, the Company recorded a loss from continuing operations and a net
loss of $94.2 million, or $3.78 per share, compared to income from continuing
operations of $21.5 million, or $87 per share ($84 per share, fully diluted),
and net income of $2.3 million, or $09 per share, in fiscal 1995. During 1995,
the Company recorded aggregate losses from discontinued operations of $14.4
million and losses related to early extinguishment of debt of $4.8 million. The
Company recorded a loss from continuing operations of $16.9 million, or $69 per
share in 1994 before the effect of discontinued operations. The net loss for
fiscal year 1994 was $45.4 million or $1.84 per share.
The Company's fiscal year 1996 performance was adversely affected by charges for
repositioning operations, warranty and other expenses, and asset write-downs.
Excluding the effect of these charges, a pre-tax profit would have been
achieved. The effective tax rate for fiscal 1996 was determined by a variety of
factors, including the inability to reflect tax benefits for losses incurred at
the Company's German operation and a $38.9 million increase in the valuation
reserve for deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Long-term borrowings outstanding as of June 30, 1996 (including the current
portion) totaled $322 million, down from $448 million as of June 30, 1995 and
$524 million as of June 30, 1994. The decrease in long-term borrowings in both
years resulted primarily from the use of proceeds from the divestiture of
discontinued operations, which aggregated $92.1 million in fiscal 1996 and
$105.6 million in fiscal 1995. Free cash flow from operations due to lower
working capital requirements contributed an additional $34 million to debt
reduction in fiscal 1996.
Because of charges recorded for asset write-downs determined in accordance with
FASB No.121 and the other effects of the Company's repositioning program,
MagneTek was in violation of certain covenants under its Bank Loan Agreement as
of June 30, 1996. The Company has amended its Bank Loan Agreement to adjust
covenants to reflect the impact of the charges. As a condition of the amendment,
the lending commitment under the Bank Loan Agreement was reduced to $170 million
from $200 million.
Actions associated with the repositioning of operations as well as estimated
increases in warranty costs could result in cash outflow of up to $49 million
over the respective repositioning and warranty periods. Cash outflow in
connection with these actions in fiscal 1997 is not expected to exceed $20
million.
In addition, the Company may be subject to certain potential environmental and
legal liabilities (see Note 7).
16
MagneTek Inc.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $1,161,625 $1,202,536 $1,133,126
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 1,005,004 962,900 937,719
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 156,621 239,636 195,407
Selling, general and administrative expenses . . . . . . . . 164,930 164,280 185,509
Income (loss) from operations. . . . . . . . . . . . . . . . (8,309) 75,356 9,898
Interest expense . . . . . . . . . . . . . . . . . . . . . . 31,591 34,398 32,018
Other expense, net . . . . . . . . . . . . . . . . . . . . . 34,864 4,562 2,322
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before provision
(benefit) for income taxes and extraordinary item. . . . . . (74,764) 36,396 (24,442)
Provision (benefit) for income taxes . . . . . . . . . . . . 19,400 14,900 (7,500)
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
extraordinary item . . . . . . . . . . . . . . . . . . . . . (94,164) 21,496 (16,942)
Discontinued operations-
Loss from operations (net of taxes). . . . . . . . . . . . -- -- (3,462)
Loss on disposal (net of tax benefit). . . . . . . . . . . -- (14,400) (25,041)
Extraordinary item-loss on early
extinguishment of debt (net of tax benefit). . . . . . . . . -- (4,820) --
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ (94,164) $ 2,276 $ (45,445)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Per common share-primary:
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting changes . . . . . . . . . . . . . . . . . . . . . $ (3.78) $ 0.87 $ (0.69)
Loss from discontinued operations. . . . . . . . . . . . . . -- (0.58) (1.15)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . -- (0.20) --
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ (3.78) $ 0.09 $ (1.84)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Per common share-fully diluted:
Income (loss) from continuing operations before
extraordinary item . . . . . . . . . . . . . . . . . . . . . $ * $ 0.84 $ *
Loss from discontinued operations. . . . . . . . . . . . . . -- * *
Extraordinary item . . . . . . . . . . . . . . . . . . . . . -- * --
Net Income (loss). . . . . . . . . . . . . . . . . . . . . . $ * $ * $ *
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
*Per share amounts on a fully diluted basis have been omitted as such amounts
are anti-dilutive in relation to primary per share amounts.
The accompanying notes are an integral part of these consolidated financial
statements.
17
MagneTek Inc.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1996 1995
- ----------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 871 $ 311
Accounts receivable, less allowance for
doubtful accounts of $5,428 in 1996 and $4,421 in 1995 . . . . . . . . 201,814 235,252
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203,265 225,461
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 12,888 25,463
Prepaids and other assets. . . . . . . . . . . . . . . . . . . . . . . 14,014 3,749
- ----------------------------------------------------------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 432,852 490,236
- ----------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,267 4,089
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . 56,094 62,359
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . 324,137 335,403
- ----------------------------------------------------------------------------------------------------
383,498 401,851
Less accumulated depreciation and amortization . . . . . . . . . . . . 207,079 201,751
- ----------------------------------------------------------------------------------------------------
Net property, plant and equipment. . . . . . . . . . . . . . . . . . . 176,419 200,100
- ----------------------------------------------------------------------------------------------------
Net assets of discontinued operations. . . . . . . . . . . . . . . . . 1,174 98,118
Goodwill, less accumulated amortization of
$7,985 in 1996 and $6,990 in 1995. . . . . . . . . . . . . . . . . . . 30,668 33,134
Deferred financing costs, intangible and other assets,
less accumulated amortization of $19,521 in 1996 and $16,021 in 1995 . 37,661 35,580
- ----------------------------------------------------------------------------------------------------
$678,774 $857,168
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
18
MagneTek Inc.
1996 1995
- -----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $104,273 $118,002
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 126,399 79,234
Current portion of long-term debt. . . . . . . . . . . . . . . . 2,895 17,580
- -----------------------------------------------------------------------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 233,567 214,816
- -----------------------------------------------------------------------------------------------
Long-term debt, net of current portion . . . . . . . . . . . . . 319,128 430,887
Other long-term obligations. . . . . . . . . . . . . . . . . . . 71,633 81,369
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . 12,888 12,818
Commitments and contingencies
Stockholders' Equity
Common stock, $0.01 par value, 100,000,000 shares authorized
25,462,000 and 24,680,000 shares issued and outstanding. . . . 255 247
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 89,609 81,142
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . (34,214) 59,950
Cumulative translation adjustment. . . . . . . . . . . . . . . . (14,092) (15,127)
Minimum pension liability. . . . . . . . . . . . . . . . . . . . -- (8,934)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 41,558 117,278
- -----------------------------------------------------------------------------------------------
$678,774 $857,168
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
19
MagneTek Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL CUMULATIVE MINIMUM
AMOUNTS IN THOUSANDS, COMMON STOCK PAID-IN RETAINED TRANSLATION PENSION
EXCEPT SHARE DATA. SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT LIABILITY
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993 24,122,000 $241 $75,494 $103,119 $(15,825) --
Exercise of stock options 83,000 1 870 -- --
Translation adjustment -- -- -- -- (736) --
Minimum pension liability -- -- -- -- -- (4,637)
Net loss -- -- -- (45,445) -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 24,205,000 $242 $76,364 $57,674 $(16,561) $(4,637)
- ------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 455,000 5 4,778 -- -- --
Restricted stock grant 20,000 -- -- -- -- --
Translation adjustment -- -- -- -- 1,434 --
Minimum pension liability -- -- -- -- -- (4,297)
Net Income -- -- -- 2,276 -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 24,680,000 $247 $81,142 $ 59,950 $(15,127) $(8,934)
- ------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 32,000 -- 172 -- -- --
Restricted stock grant -- -- 1,834 -- -- --
Pension Plan contribution 750,000 8 6,461 -- -- --
Translation adjustment -- -- -- -- 1,035 --
Minimum pension liability -- -- -- -- -- 8,934
Net loss -- -- -- (94,164) -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 25,462,000 $255 $89,609 $(34,214) $(14,092) --
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
20
MagneTek Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, AMOUNTS IN THOUSANDS 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . $ (94,164) $ 21,496 $(16,942)
- ------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 40,041 38,680 36,418
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . -- -- (2,236)
Restructuring charges. . . . . . . . . . . . . . . . . . . . . . . . . . 50,505 -- 31,221
Asset write-downs. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,212 -- --
Changes in operating assets and liabilities of
continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . 43,494 (50,976) (18,331)
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,252 (12,296) 47,072
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . 69,088 9,200 30,130
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of businesses and assets. . . . . . . . . . . . . . . . 92,149 105,644 8,216
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,515) (43,895) (43,338)
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 1,853 3,085
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities. . . . . . . . . . . . 51,671 63,602 (32,037)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings under bank and other long-term obligations. . . . . . . . . . . - 81,217 15,238
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . 172 3,736 871
Repayment of bank and other long-term obligations. . . . . . . . . . . . . (126,444) (171,000) (15,090)
Increase in deferred financing costs . . . . . . . . . . . . . . . . . . . (500) (5,446) (703)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities. . . . . . . . . . . . (126,772) (91,493) 316
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing operations . . . . . . . . . . . . . . . . . . (6,013) (18,691) (1,591)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from discontinued operations:
Loss from discontinued operations. . . . . . . . . . . . . . . . . . . . . -- (14,400) (28,503)
Adjustments to reconcile loss to net cash
provided by discontinued operations:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 2,102 7,738 11,211
Loss on disposal and other noncash charges . . . . . . . . . . . . . . . -- 12,338 27,341
Changes in operating assets and liabilities of discontinued operations . 5,377 7,717 (2,994)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (906) (1,404) (6,057)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations . . . . . . . . . . . . . . . 6,573 11,989 998
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . 560 (6,702) (593)
Cash at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . 311 7,013 7,606
- ------------------------------------------------------------------------------------------------------------------------
Cash at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 871 $ 311 $ 7,013
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
21
MagneTek Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in the notes to consolidated financial statements are expressed in
thousands, except share and per share data.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MagneTek, Inc. and
its subsidiaries (the Company). All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Additions and improvements are capitalized at cost, whereas expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful lives of the respective assets principally on
the straight-line method.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to expense as incurred and
aggregated $21,500, $23,600 and $17,500 for the years ended June 30, 1996, 1995
and 1994, respectively.
DEFERRED FINANCING COSTS, INTANGIBLE AND OTHER ASSETS
Costs incurred to obtain financing are deferred and amortized principally on a
debt-outstanding method over the term of financing acquired. Amortization
expense relating to deferred financing costs was $2,351, $2,425 and $2,358 for
the years ended June 30, 1996, 1995 and 1994, respectively. Goodwill is being
amortized using the straight-line method over a forty-year period. The Company
assesses the recoverability of goodwill based upon several factors, including
management's intention with respect to the operations to which the goodwill
relates and those operations' projected future income and undiscounted cash
flows. Write-downs of goodwill are recognized when it is determined that the
value of such asset has been impaired. Amortization expense relating to goodwill
was $995, $985, and $1,018 for the years ended June 30, 1996, 1995 and 1994
respectively. Amortization expense relating to deferred financing costs and
goodwill is included in the Consolidated Statements of Income as other expense.
INCOME TAXES
Income taxes are provided based upon the results of operations for financial
reporting purposes and include deferred income taxes applicable to timing
differences between financial and taxable income.
Federal income taxes are not provided currently on undistributed earnings of
foreign subsidiaries since the Company presently intends to reinvest any
earnings overseas indefinitely.
22
EARNINGS PER SHARE
Primary earnings per share are computed based upon the weighted average number
of common and common equivalent (principally stock options) shares outstanding.
Fully diluted earnings per share are computed based upon the weighted average
number of common and common equivalent shares outstanding including the effect
of additional shares related to the Company's Convertible Notes as if conversion
to common shares had occurred at the beginning of the fiscal year. Earnings have
also been adjusted for interest expense on the Convertible Notes.
FISCAL YEAR
The Company uses a fifty-two, fifty-three week fiscal year which ends on the
Sunday nearest June 30. For clarity of presentation, all periods are presented
as if the year ended on June 30. Fiscal years 1996 and 1995 contained 52 weeks.
Fiscal year 1994 contained 53 weeks.
23
MagneTek Inc.
2. REPOSITIONING COSTS AND DISCONTINUED OPERATIONS
During the past four fiscal years, the Company has experienced substantial
volatility in sales and profits in its lighting products business, largely
related to its domestic electronic fluorescent ballast product line. During
fiscal 1996, the Company experienced lower demand and a significant
deterioration in operating results in this product line, due largely to a
substantial reduction in utility related incentive programs and increased
competition. Additionally, sales and profits have been steadily declining in the
global magnetic fluorescent ballast product lines, due to both the emergence in
the U.S. of electronic ballasts as a viable replacement and a weakening economy
in Europe. As a result of significant declines in sales and profit margins in
both electronic and magnetic ballast product lines during fiscal 1996, the
Company conducted a review and analysis of actions required to reduce costs and
improve future flexibility and profitability, largely focused on its lighting
products business. Upon completion of the review and approval by the Company's
Board of Directors, certain reserves were established and charges recorded in
the year ended June 30, 1996 to reflect costs associated with repositioning
operations, primarily for severance, termination benefits and asset write-downs
related to facility closures and consolidations. Reserves were also established
for estimated increases in warranty (primarily related to the electronic ballast
product line) and other costs. Charges recorded in connection with these
reserves and the asset write-downs related primarily to the Lighting Products
segment aggregated $79,717, of which $43,337 is included in cost of goods sold,
$7,168 in selling, general and MagneTek Inc. administrative expense and $29,212
in other expense in the accompanying Consolidated Statement of Income for the
year ended June 30, 1996. Asset write-downs for the impairment of long lived
assets and for long lived assets to be disposed of were determined in accordance
with FASB No. 121. The Company estimates that cash outflows associated with
these charges will approximate $49,000 over the respective repositioning and
warranty periods. Cash requirements in fiscal 1997 are not expected to exceed
$20,000.
In July, 1994, the Company's Board of Directors adopted a formal plan of
disposal for certain businesses in connection with an overall restructuring
program designed to focus the Company's resources on its core product lines and
reduce debt. The operations to be disposed of comprised the Company's utility,
military, industrial controls and custom motor product lines. The businesses
identified for divestiture have been classified as discontinued operations in
the accompanying financial statements. During the year ended June 30, 1996 the
Company completed the sale of substantially all remaining discontinued
operations. Total net proceeds from the inception of the disposal program
through June 30, 1996 aggregated over $200,000 and were used to repay debt.
24
During the fiscal year ended June 30, 1994, the Company provided for estimated
losses on disposal of the discontinued operations, net of tax benefit of $2,300,
in the amount of $25,041 which included a provision for anticipated operating
losses prior to disposal. During the fiscal year ended June 30, 1995, the
Company provided for additional losses on disposal, net of tax benefit of
$7,200, in the amount of $14,400. The additional provision was required
primarily due to lower than anticipated sales proceeds primarily associated with
the sale of utility segment businesses and higher than anticipated operating
losses prior to the sale of these and other discontinued operations. The tax
benefits recorded in connection with these losses are less than the benefits
computed using statutory rates due to the disallowance (for tax purposes) of a
portion of the losses on the sale of certain discontinued operations.
The operating results of the discontinued operations are as follows:
YEAR ENDED JUNE 30 1996 1995 1994
- -----------------------------------------------------------------------------------------------
Net sales. . . . . . . . . . . . . . . . . . . . . $92,712 $246,021 $365,609
Income (loss) before provision for income taxes. . 138 (12,369) $ (3,362)
Provision (benefit) for income taxes . . . . . . . 500 (4,700) 100
- -----------------------------------------------------------------------------------------------
Loss of discontinued operations. . . . . . . . . . $ (362) $ (7,669) $ (3,462)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Results of discontinued operations for the years ended June 30, 1996 and 1995
were charged to reserves established in connection with the provisions for
estimated losses on disposal provided in fiscal years 1994 and 1995. Fiscal year
1994 results are reported separately as discontinued operations in the
accompanying Consolidated Statements of Income. A portion of the Company's
interest expense has been allocated to the results of discontinued operations
based upon the ratio of the net assets of discontinued operations to the total
net assets of the Company. Total interest expense allocated to discontinued
operations and included in the results above was $2,975, $10,788 and $15,806 for
the years ended June 30, 1996, 1995 and 1994.
In fiscal 1994, the Company had established restructuring reserves of $31,221 to
cover costs related to potentially obsolete or excess inventory, as well as
severance and relocation costs related to the Company's electronic ballast
product line. Additionally, those reserves included expenses to relocate and
consolidate a number of operating and administrative locations. As of June 30,
1995, the balance in that reserve was $3,611 and was fully used as of June 30,
1996. The charges to the remaining balance were entirely cash related and were
specific to relocation and warranty related matters consistent with the
Company's projections.
25
MagneTek Inc.
3. INVENTORIES
Inventories at June 30, consists of the following:
1996 1995
- -------------------------------------------------------------------------------
Raw materials and stock parts . . . . . . . . . . . . $60,018 $66,507
Work-in-process . . . . . . . . . . . . . . . . . . . 46,354 45,803
Finished Goods . . . . . . . . . . . . . . . . . . . . 96,893 113,151
- -------------------------------------------------------------------------------
$203,265 $225,461
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. LONG-TERM DEBT AND BANK BORROWING ARRANGEMENTS
Long-term debt at June 30, consists of the following:
1996 1995
- -------------------------------------------------------------------------------
Revolving bank loans . . . . . . . . . . . . . . . . . $103,432 $155,021
Term loan. . . . . . . . . . . . . . . . . . . . . . . -- 75,000
10.75 percent Senior Subordinated Debentures, interest
payable semi-annually, due November 15, 1998 . . . . 125,000 125,000
8 percent Convertible Subordinated Notes, interest payable
semi-annually, convertible into 4,687,500 shares of common
stock, due September 2001 . . . . . . . . . . . . . . 75,000 75,000
Miscellaneous installment notes, capital leases and other
obligations at rates ranging from 7.0 percent to 12.2
percent, due through 2001 . . . . . . . . . . . . . . 18,591 18,446
- -------------------------------------------------------------------------------
322,023 448,467
Less current portion . . . . . . . . . . . . . . . . . 2,895 17,580
- -------------------------------------------------------------------------------
$319,128 $430,887
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
26
MagneTek Inc.
BANK BORROWING ARRANGEMENTS
At June 30, 1996, the Company had an agreement with a group of banks that have
committed to lend up to $200,000 under a revolving loan facility through
September 30, 1998. Under the agreement, as amended (the "Bank Loan Agreement"),
borrowings under the credit facility bear interest at the banks' prime lending
rate plus one percent or, at the Company's option, the London Interbank Offered
Rate plus two and one quarter percent. These rates may be reduced by up to one
and one and one-half percent, respectively, based upon the achievement of
certain debt to cash flow ratios. At June 30, 1996, borrowings under the Bank
Loan Agreement bore interest at a weighted average rate of approximately 7.8%.
The Company is required to pay a commitment fee of three-eighths of one percent
on unused commitments.
Borrowings under the Bank Loan Agreements are secured by domestic accounts
receivable and inventories and by stock of certain of the Company's
subsidiaries. The Bank Loan Agreement contains certain provisions and covenants
which, among other things, restrict the payment of cash dividends on common
stock, limit the amount of future indebtedness and require the Company to
maintain specified levels of net worth and cash flow. Effective September 16,
1996, the Company amended its Bank Loan Agreement, as a result of certain
covenant violations, to adjust covenants to reflect the impact of charges
associated with the Company's repositioning program. As a result of the
amendment, the lending commitment under the Bank Loan Agreement was reduced to
$170,000 from $200,000. All other terms and conditions remained substantially
unchanged.
The Company repaid all borrowings under a $75,000 term facility provided under
the Bank Loan Agreement with the proceeds from the sale of discontinued
operations during the year ended June 30, 1996.
The Company's European subsidiaries have certain limited arrangements locally to
finance working capital requirements. Borrowings under these arrangements are
secured by accounts receivable and inventories of the respective subsidiaries.
The Company has also provided certain parent guarantees to banks in Europe which
provide the related financing.
SENIOR SUBORDINATED DEBENTURES
The 10.75 percent Senior Subordinated Debentures ("Subordinated Debentures") are
not redeemable by the Company prior to maturity in November, 1998. The
Subordinated Debentures are subordinated to borrowings under the Bank Loan
Agreement.
The indenture related to the Subordinated Debentures contains certain covenants
which, among other things, limit the nature and amount of future indebtedness
and restrict the payment of dividends on common stock.
CONVERTIBLE SUBORDINATED NOTES
The 8 percent Convertible Subordinated Notes ("Convertible Notes") are
redeemable at the option of the Company, in whole or in part, at redemption
prices set forth in the indenture, and, at the option of the holder, are
convertible into common stock of the Company at $16.00 per share at any time
prior to maturity in September, 2001.
Aggregate principal maturities on long-term debt outstanding at June 30, 1996
are as follows:
YEAR ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,895
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,187
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,089
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,249
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,010
THEREAFTER . . . . . . . . . . . . . . . . . . . . . . . . 77,593
- -------------------------------------------------------------------------------
27
MagneTek Inc.
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts and estimated fair value of the Company's significant
financial instruments as of June 30, 1996 were as follows:
Carrying Amount Fair Value
- -------------------------------------------------------------------------------
10.75 percent Senior Subordinated Debentures . . . . $125,000 $123,750
8 percent Convertible Subordinated Notes . . . . . . 75,000 72,000
- -------------------------------------------------------------------------------
The fair values of long-term debt were estimated based on quoted market prices
or through broker quotations. The carrying amounts of certain financial
instruments such as cash, annuity contracts and borrowings under short-term
revolving credit agreements approximate their fair values.
The Company enters into futures contracts to provide an economic hedge against
fluctuations in copper prices. Gains and losses are recorded in cost of sales as
the related purchased copper is incorporated into finished products and sold.
Unrealized losses on open contracts at June 30, 1996 were not material to the
Company's results of operations.The Company also participates in certain foreign
exchange contracts to minimize its risk of loss from fluctuation in exchange
rates. Unrealized losses on open forward exchange contracts were not material to
the Company's results of operations at June 30, 1996.
6. INCOME TAXES
Income tax expense (benefit) is allocated in the financial statements as
follows:
YEAR ENDED JUNE 30 1996 1995 1994
- --------------------------------------------------------------------------------
Income (loss) from continuing operations
before extraordinary item and cumulative
effect of accounting changes . . . . . . . . . $19,400 $14,900) $(7,500)
Extraordinary item . . . . . . . . . . . . . . -- (3,200) --
Income tax expense (benefit) attributable
to continuing operations . . . . . . . . . . . $19,400 11,700 (7,500)
Discontinued operations . . . . . . . . . . . -- (7,200) (2,200)
- -------------------------------------------------------------------------------
Total $19,400 $4,500 $(9,700)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
28
MagneTek Inc.
The expense (benefit) for income taxes applicable to continuing operations is as
follows:
YEAR ENDED JUNE 30 1996 1995 1994
- -------------------------------------------------------------------------------
Current:
Federal. . . . . . . . . . . . . . . . . . . . $899 $3,575 $(3,836)
State. . . . . . . . . . . . . . . . . . . . . 1,172 1,529 178
Foreign. . . . . . . . . . . . . . . . . . . . 3,444 1,419 942
Deferred:
Federal. . . . . . . . . . . . . . . . . . . . 10,358 5,603 (4,046)
State and Foreign. . . . . . . . . . . . . . . 3,527 (426) (738)
- -------------------------------------------------------------------------------
$19,400 $11,700 $(7,500)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
A reconciliation of the Company's effective tax rate to the statutory Federal
tax rate for income from continuing operations before extraordinary items is as
follows:
1996 1995 1994
-------------------------------------------------------------------------
YEAR ENDED JUNE 30 AMOUNT % AMOUNT % AMOUNT %
-------------------------------------------------------------------------
Provision (benefit) computed at
the statutory rate . . . . . . . . . . . . . . . . $(26,167) (35.0) $12,739 35.0 $(8,555) (35.0)
State income taxes, net of
federal benefit. . . . . . . . . . . . . . . . . . 1,990 2.7 1,975 5.4 (371) (1.5)
Foreign tax rates in excess of
federal statutory rate . . . . . . . . . . . . . . 4,283 5.7 108 3 1,213 5.0
Increase in valuation reserve for
deferred tax assets. . . . . . . . . . . . . . . . 38,908 52.0 -- -- -- --
Other. . . . . . . . . . . . . . . . . . . . . . . 386 5 78 2 213 8
- -------------------------------------------------------------------------------------------------------------------------
$19,400 25.9 $14,900 40.9 $(7,500) (30.7)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes of the Company's foreign
subsidiaries was approximately $50, $(1,000) and $1,500 for the years ended June
30, 1996, 1995 and 1994.
29
MagneTek Inc.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets for continuing operations as
of June 30, 1996 and 1995 follows:
YEAR ENDED JUNE 30 1996 1995
- -------------------------------------------------------------------------------
Deferred tax liabilities:
- -------------------------------------------------------------------------------
Depreciation and amortization (including
differences in the basis of acquired assets) . . . . . . . $21,453 $32,190
Inventory methods and other. . . . . . . . . . . . . . . . 2,534 4,822
- -------------------------------------------------------------------------------
Total deferred tax liabilities . . . . . . . . . . . . . . 23,987 37,012
- -------------------------------------------------------------------------------
Deferred tax assets:
Postretirement medical benefit obligation. . . . . . . . . 24,255 24,066
Warranty reserves. . . . . . . . . . . . . . . . . . . . . 16,772 6,734
Inventory and other reserves (including Restructuring) . . 21,868 18,857
- -------------------------------------------------------------------------------
Total gross deferred tax assets. . . . . . . . . . . . . . 62,895 4,965
- -------------------------------------------------------------------------------
Less valuation allowance . . . . . . . . . . . . . . . . . (38,908) --
- -------------------------------------------------------------------------------
Net deferred tax (assets) liability. . . . . . . . . . . . -- $(12,645)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The Company has evaluated the need for a valuation allowance for the deferred
tax asset and believes that the deferred tax asset is not likely to be fully
realized. Accordingly, a $38,908 valuation allowance has been recorded for the
year ended June 30, 1996.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and machinery and equipment primarily
under operating lease arrangements. Future minimum rental payments under
noncancelable operating leases as of June 30, 1996 total $45,447 and are payable
in future fiscal years as follows: $11,054 in 1997; $9,349 in 1998; $7,110 in
1999; $6,139 in 2000; $4,311 in 2001 and $7,484 thereafter.
Rent expense for the years ended June 30, 1996, 1995 and 1994 was $15,766,
$18,769 and $18,673 respectively.
LITIGATION
The Company is a party to a number of product liability lawsuits, many of which
involve fires allegedly caused by defective ballasts. All of these cases are
being defended by the Company's insurers, and management believes that its
insurers will bear all legal costs and liability, except for applicable
deductibles, and that none of these proceedings individually or in the aggregate
will have a material adverse effect on the Company. In addition, the Company is
frequently named in asbestos-related lawsuits which do not involve material
amounts individually or in the aggregate.
30
MagneTek Inc.
ENVIRONMENTAL MATTERS
GENERAL
The Company has from time to time discovered contamination by hazardous
substances at certain of its facilities. In response to such a discovery, the
Company conducts remediation activities to bring the facility into compliance
with applicable laws and regulations. Except as described below, the Company's
remediation activities for fiscal 1996 did not entail material expenditures, and
its remediation activities for fiscal 1997 are not expected to entail material
expenditures. Future discoveries of contaminated areas could entail material
expenditures, depending upon the extent and nature of the contamination.
CENTURY ELECTRIC (MCMINNVILLE, TENNESSEE)
Prior to its purchase by the Company in 1986, Century Electric, Inc. ("Century
Electric") acquired a business from Gould Inc. ("Gould") in May 1983 which
included a leasehold interest in a fractional horsepower electric motor
manufacturing facility located in McMinnville, Tennessee. In connection with
this acquisition, Gould agreed to indemnify Century Electric from and against
liabilities and expenses arising out of the handling and cleanup of hazardous
waste, including but not limited to cleaning up any PCBs at the McMinnville
facility (the "1983 Indemnity"). Investigation has revealed the presence of PCBs
and other substances, including solvents, in portions of the soil and in the
groundwater underlying the facility and in certain offsite soil, sediment and
biota samples. Century Electric has kept the Tennessee Department of Environment
and Conservation, Division of the Superfund, apprised of test results from the
investigation. The McMinnville plant has been listed as a Tennessee Superfund
Site, a report on that site has been presented to the Tennessee legislature, and
community officials and plant employees have been notified of the presence of
contaminants as above described. In 1995, Gould completed an interim remedial
measure of excavating and disposing onsite soil containing PCBs. Gould also
conducted preliminary investigation and cleanup of certain onsite and offsite
contamination. The cost of any further investigation and cleanup of onsite and
offsite contamination cannot presently be determined. The Company believes that
the costs for further onsite and offsite cleanup (including ancillary costs) are
covered by the 1983 Indemnity. While the Company believes that Gould will
continue to perform under its indemnity obligations, Gould's failure to perform
such obligations could have a material adverse effect on the Company.
OFFSITE LOCATIONS
The Company has been identified by the United States Environmental Protection
Agency and certain state agencies as a potentially responsible party for cleanup
costs associated with alleged past waste disposal practices at several offsite
locations. Due, in part, to the existence of indemnification from the former
owners of certain acquired businesses for cleanup costs at certain of these
sites, and except as described below, the Company's estimated share in liability
(if any) at the offsite facilities is not expected to be material. It is
possible that the Company will be named as a potentially responsible party in
the future with respect to other sites.
CROWN INDUSTRIES SITE (PIKE COUNTY, PENNSYLVANIA)
In March 1992, the Company was informed by the Pennsylvania Department of
Environmental Resources ("DER") that its Universal Manufacturing division is one
of a number of potentially responsible parties with respect to a planned
environmental investigation and cleanup at the Crown Industries site in Pike
County, Pennsylvania. The DER provided a non-binding preliminary allocation of
liability in connection with the site that assigned the Company a 30 percent
share. The aggregate expense of cleaning up the site is not currently known, but
some preliminary indications suggested a range of $5,000 to $15,000. To date,
the
31
MagneTek Inc.
DER has sought reimbursement of approximately $500 in the aggregate from the
Company and the other potentially responsible parties. In connection with the
February 1986 acquisition of Universal Manufacturing, the Company and the
seller, Farley Northwest Industries, Inc. (the predecessor to Fruit of the Loom,
Inc., hereinafter collectively with such successor referred to as "FOL")
executed an environmental agreement. The Company has informed FOL that it
believes at least 90 percent of any liability it may incur relating to the site
is covered by indemnification provisions of its environmental agreement with
FOL, and allocation negotiations between the Company and FOL are continuing. FOL
has acknowledged its indemnity and is currently defending its own and the
Company's interest in this site. FOL's failure to perform its obligations with
respect to the Crown Industries site under the environmental agreement could
have a material adverse effect on the Company.
INDEMNIFICATION OBLIGATIONS FROM RESTRUCTURING
In selling certain business operations, the Company from time to time has
agreed, subject to various conditions and limitations, to indemnify buyers with
respect to environmental liabilities associated with the acquired operations.
The Company's indemnification obligations pursuant to such agreements did not
entail material expenditures for fiscal 1996, and its indemnification
obligations for fiscal 1997 are not expected to entail material expenditures.
Future expenditures pursuant to such agreements could be material, depending
upon the nature of any future asserted claims subject to indemnification.
LETTERS OF CREDIT
The Company has approximately $13,000 of outstanding letters of credit as of
June 30, 1996.
8. STOCK OPTION AGREEMENTS
The Company has three stock option plans (the "Plans"), two of which provide for
the issuance of both incentive stock options (under Section 422A of the Internal
Revenue Code of 1986) and non-qualified stock options at exercise prices not
less than the fair market value at the date of grant, and one of which only
provides for the issuance of non-qualified stock options at exercise prices not
less than the fair market value at the date of grant. One of the Plans also
provides for the issuance of stock appreciation rights, restricted stock,
unrestricted stock, restricted stock rights and performance units. The total
number of shares of the Company's common stock authorized to be issued upon
exercise of the stock options and other stock rights under the Plans is
5,972,620. As of June 30, 1996 and 1995 shares available for grant were
approximately 1,515,560 and 1,422,000 respectively. Options granted under two of
the Plans generally vest in four equal annual installments, and options under
the third Plan vest in two equal annual installments.
A summary of certain information with respect to options under the Plans
follows:
YEAR ENDED JUNE 30 1996 1995 1994
- -------------------------------------------------------------------------------
Options outstanding, beginning of year . . . 1,939,585 2,303,054 1,983,143
Options granted. . . . . . . . . . . . . . . 1,498,000 357,500 903,000
Options exercised. . . . . . . . . . . . . . (32,170) (454,594) (83,389)
Weighted average exercise price. . . . . . . $5.35 $8.30 $7.69
- -------------------------------------------------------------------------------
Options cancelled. . . . . . . . . . . . . . (249,595) (266,375) (499,700)
- -------------------------------------------------------------------------------
Options outstanding, end of year . . . . . . 3,155,820 1,939,585 2,303,054
Weighted average price . . . . . . . . . . . $12.16 $12.52 $12.30
- -------------------------------------------------------------------------------
Exercisable options. . . . . . . . . . . . . 1,463,045 1,113,116 963,107
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
32
MagneTek Inc.
The Company has also granted options in prior years under certain non-qualified
stock option agreements, terms of which are similar to the Plans. No such
options were granted, exercised or cancelled during the three years ended June
30, 1996. As of June 30, 1996, options for 142,835 shares with a weighted
average price per share of $4.74 were outstanding, all of which were
exercisable.
The Company has granted stock appreciations rights (SARs) to certain of its
directors under director incentive compensation plans. As of June 30, 1996 SARs
with respect to 322,250 shares, with a weighted average exercise price of $14.52
were outstanding under these plans. In July of 1995, the Board of Directors
approved the conversion of SAR's with respect to 265,000 shares of common stock
into stock options with comparable share amounts and exercise prices.
9. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has defined benefit retirement plans which, collectively, cover
substantially all of its non-union employees and those union employees whose
collective bargaining agreements specifically provide for coverage. Effective
January 1, 1988, the Company merged all of its plans covering non-union domestic
employees into a single defined benefit plan (the "Plan"). The Plan provides
benefits based upon career average pay as defined in the Plan.
The net pension cost for the years ended June 30, 1996, 1995 and 1994 is as
follows:
1996 1995 1994
- -------------------------------------------------------------------------------
Service cost-benefits earned during the
period . . . . . . . . . . . . . . . . . . . $5,504 $6,935 $8,169
Interest cost on projected benefit
obligation . . . . . . . . . . . . . . . . . 9,592 9,219 8,195
Investment return on plan assets . . . . . . (13,306) (11,846) (1,180)
Net amortization and deferral. . . . . . . . 3,135 2,789 (7,103)
- -------------------------------------------------------------------------------
Net pension cost . . . . . . . . . . . . . . $4,925 $7,097 $8,081
- -------------------------------------------------------------------------------
The Company's net pension cost includes a net curtailment and settlement gain of
$682 which results from the sale of three discontinued business units in fiscal
year 1996.
The projected benefit obligation was determined using an assumed discount rate
of 8.0% for the year ended June 30, 1996 and 7.75% for the year ended June 30,
1995 and a 6% increase in the rate of compensation in both years. The average
expected long-term rate of return on plan assets is 8.5% for both years.
The funded status of the Company's defined benefit plans at June 30, 1996 and
1995 is as follows:
1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation. . . . . . . . . . . . . . . $120,533 $116,004
Non-vested benefits. . . . . . . . . . . . . . . . . . 5,863 9,353
Projected benefit obligation . . . . . . . . . . . . . 127,864 127,949
Market value of plan assets. . . . . . . . . . . . . . 129,409 115,523
Plan assets greater (less) than projected benefit
obligation . . . . . . . . . . . . . . . . . . . . . . 1,545 (12,426)
Unrecognized net loss. . . . . . . . . . . . . . . . . 5,118 16,474
Unrecognized prior service income relating to
merged plans . . . . . . . . . . . . . . . . . . . . . (705) (2,300)
Unrecognized net asset . . . . . . . . . . . . . . . . (1,935) (2,553)
Minimum pension liability. . . . . . . . . . . . . . . -- (8,934)
Accrued (prepaid) pension cost . . . . . . . . . . . . (4,023) 9,739
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
33
MagneTek Inc.
It is the Company's policy to fund pension costs annually. In 1996, the Plan was
partially funded with the issuance of 750,000 shares of common stock valued at
$8.62 per share on the date contributed. Plan assets are primarily invested in
equity and government securities. The Company also has benefit plans for certain
of its foreign subsidiaries which are not reflected above. These plans are not
material to the Company's benefit plans as a whole.
In addition to the defined benefit retirement plans, most of the Company's non-
union employees participate in a defined contribution savings plan which
provides for employee contributions up to specified percentages of compensation
as defined in the plan. The Companys' contribution is equal to 50% of the first
1% and 20% of the next 5% of the employee's contribution. Annual Company
sponsored contributions are subject to a limitation of six hundred dollars per
employee. Company contributions were $1,427, $1,629, and $936 during the plan
years ended March 31, 1996, 1995, and 1994, respectively. Company contributions
vest over a five-year period.
POSTRETIREMENT MEDICAL BENEFIT PLANS
Effective May 1, 1996, the Company announced a substantial revision to the
postretirement medical benefit plans. Under the terms of the revision all
medical benefit plans affecting the accumulated postretirement benefit
obligation ("APBO") were made uniform for all eligible participants. In
addition, the contributions required for participation in these plans were
increased as a percentage of the total value of the plan. Employees who, in
general, retired prior to December 31, 1991, will be required to pay a
contribution which is indexed by the rate of increase in plan costs each year,
while employees retiring later will be required to pay a contribution which
increases by the future trend increases in the total cost of the plan. Finally,
the revised plan was designed to prevent the payment of one hundred percent of
the eligible expenses incurred by a participant when the MagneTek plan
"coordinates" with another plan.
The plan revision was announced with an effective date of January 1, 1997. The
revision resulted in a reduction in the APBO of approximately $11,101; this
amount will be amortized over ten years. Recent improvements in medical claim
costs have resulted in an additional reduction in the APBO of approximately
$22,276; this gain exceeds the FASB No. 106 corridor of ten percent of the APBO,
and the excess will be amortized over thirteen years. The Company, based upon
advice of counsel, has concluded that the Company has adequately reserved the
right to amend these plans without offsetting adjustments in other benefits or
compensation.
The accumulated postretirement benefit obligation as of June 30, 1996 and 1995
consisted of unfunded obligations related to the following:
1996 1995
- -------------------------------------------------------------------------------
Retirees . . . . . . . . . . . . . . . . . . . . . . . $20,682 $48,066
Fully eligible active plan participants. . . . . . . . 2,429 5,450
Other active participants. . . . . . . . . . . . . . . 2,810 6,271
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation. . . . . 25,921 59,787
Unrecognized prior service cost. . . . . . . . . . 11,101 --
Unrecognized gain. . . . . . . . . . . . . . . . . 22,276 1,333
- -------------------------------------------------------------------------------
Accrued postretirement benefit cost. . . . . . . . . . $59,298 $61,120
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
34
MagneTek Inc.
Net periodic postretirement benefit costs for the years ended June 30, 1996,
1995 and 1994 include the following components:
YEARS ENDED JUNE 30 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost benefits earned during period . . . . $304 $405 $515
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . . 4,292 4,384 4,472
Amortization of prior service cost . . . . . . . . (855) -- --
- -------------------------------------------------------------------------------
$3,741 $4,789 $4,987
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The Company's current policy is to fund the cost of the postretirement health
care benefits on a "pay-as-you-go" basis as in prior years.
For measurement purposes, a 9% and 8% annual rate of increase(7% annual rate of
increase for HMO plans) in the per capita cost of covered health care claims was
assumed for fiscal 1996 and fiscal 1997, respectively; the rate of increase was
assumed to decrease to 5.75% by 2009 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend by 1
percentage point in each year would increase the accumulated postretirement
benefit obligation by approximately $1,595 and the aggregate of service and
interest cost components of the annual net postretirement health care cost by
approximately $221. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 8.0%, 7.75% and 8.25% for the
years ended June 30, 1996, 1995 and 1994 respectively.
10. RELATED PARTY TRANSACTIONS
The Company has an agreement with the Spectrum Group, Inc. whereby Spectrum will
provide management services to the company through fiscal 1999 at an annual fee
plus certain allocated and out of pocket expenses. The Company's chairman is
also the chairman of Spectrum. The services provided include consultation and
direct management assistance with respect to operations, strategic planning and
other aspects of the business of the Company. Fees and expenses paid to Spectrum
for these services under the agreement amounted to $865, $818 and $715 for the
years ended June 30, 1996, 1995 and 1994 respectively.
During the years ended June 30, 1996, 1995 and 1994, the Company paid
approximately $952, $948 and $914, respectively in fees to charter an aircraft
owned by a company in which the chairman is the principal shareholder. The
Company believes the fees paid were equivalent to those that would be paid under
an arm's-length transaction.
During fiscal years 1995 and 1994, a member of the Companys' Board of Directors
served as a consultant to the Company on various aspects of the Company's
business and strategic issues. Fees paid for said services by the Company during
the periods ended June 30, 1995 and 1994 were $137 and $146 respectively.
Aggregate fees and expenses for the same periods were $158 and $171.
11. ACCRUED LIABILITIES
Accrued liabilities consist of the following at June 30:
1996 1995
- -------------------------------------------------------------------------------
Salaries, wages and related items. . . . . . . . . . . . $27,828 $29,068
Warranty . . . . . . . . . . . . . . . . . . . . . . . . 43,739 14,580
Interest . . . . . . . . . . . . . . . . . . . . . . . . 4,600 4,703
Income taxes . . . . . . . . . . . . . . . . . . . . . . (862) 2,196
Repositioning reserves (see Note 2). . . . . . . . . . . 21,827 3,611
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 29,267 25,076
- -------------------------------------------------------------------------------
$126,399 $79,234
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
35
MagneTek Inc.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities of continuing operations follows:
YEAR ENDED JUNE 30 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(Increase) decrease in accounts receivable . . . . . . . . . . . . . . $33,023 $(21,166) $29,927
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . . 21,782 (39,718) (10,640)
(Increase) decrease in prepaids and other current assets . . . . . . . 6,335 3,758 (3,258)
(Increase) decrease in other operating assets. . . . . . . . . . . . . (4,942) (111) (1)
Increase (decrease) in accounts payable. . . . . . . . . . . . . . . . (13,729) 3,481 (14,180)
Increase (decrease) in accrued liabilities . . . . . . . . . . . . . . 938 6,193 (20,858)
Increase (decrease) in deferred income taxes . . . . . . . . . . . . . 70 (6,192) (4,785)
Increase (decrease) in other operating liabilities . . . . . . . . . . 17 2,779 5,464
- ---------------------------------------------------------------------------------------------------------------
$43,494 $(50,976) $(18,331)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Cash paid for interest and income taxes follows:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,626 $4,338 $54,841
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,614 $10,548 $5,335
13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company currently operates in three business segments: Motors and Controls;
Lighting Products; and Power Supplies.
The Motors and Controls segment designs, manufactures and markets a broad range
of high quality fractional and integral electric motors, medium output
generators and electronic adjustable speed drives and systems.
The Lighting Products segment produces magnetic and electronic ballasts for
various lighting applications.
The Power Supplies segment produces electronic power supplies primarily for
computer and telecommunications applications, as well as industrial equipment;
component transformers for a wide range of electronic equipment; and power
converters for recreational vehicles.
The Company sells its products primarily to large original equipment
manufacturers and distributors. The Company performs ongoing credit evaluations
of its customers' financial conditions and generally requires no collateral. The
Company has no significant concentration of credit risk.
36
MagneTek Inc.
Financial information by business segment for continuing operations follow:
MOTORS AND LIGHTING POWER
FOR THE YEAR ENDED JUNE 30, 1996 CONTROLS PRODUCTS SUPPLIES TOTAL
- -------------------------------------------------------------------------------------------------------------------------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $530,718 $456,804 $174,103 $1,161,625
Operating income (loss). . . . . . . . . . . . . . . . . . . 38,127 (53,898) 7,462 (8,309)
Identifiable assets* . . . . . . . . . . . . . . . . . . . . 280,464 241,818 156,492 678,774
Capital expenditures . . . . . . . . . . . . . . . . . . . . 18,523 11,737 10,255 40,515
Depreciation and amortization. . . . . . . . . . . . . . . . 16,407 15,572 8,062 40,041
- -------------------------------------------------------------------------------------------------------------------------
Operating income (loss) for the year ended June 30, 1996, reflects pretax
charges of $2,891 and $47,131 and $483 in the Motors and Controls, Lighting
Products and Power Supplies segments, respectively, related to repositioning,
warranty, and other charges(see Note 2).
MOTORS AND LIGHTING POWER
FOR THE YEAR ENDED JUNE 30, 1995 CONTROLS PRODUCTS SUPPLIES TOTAL
- -------------------------------------------------------------------------------------------------------------------------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $515,217 $551,500 $135,819 $1,202,536
Operating income . . . . . . . . . . . . . . . . . . . . . . 39,455 29.442 6,459 75,356
Identifiable assets* . . . . . . . . . . . . . . . . . . . . 331,623 321,663 203,882 857,168
Capital expenditures . . . . . . . . . . . . . . . . . . . . 20,839 15,176 7,880 43,895
Depreciation and amortization. . . . . . . . . . . . . . . . 14,562 17,515 6,603 38,680
- -------------------------------------------------------------------------------------------------------------------------
MOTORS AND LIGHTING POWER
FOR THE YEAR ENDED JUNE 30, 1994 CONTROLS PRODUCTS SUPPLIES TOTAL
- -------------------------------------------------------------------------------------------------------------------------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $472,602 $480,820 $179,704 $1,133,126
Operating income (loss). . . . . . . . . . . . . . . . . . . 26,719 (17,721) 900 9,898
Identifiable assets* . . . . . . . . . . . . . . . . . . . . 421,044 332,203 178,111 931,358
Capital expenditures . . . . . . . . . . . . . . . . . . . . 14,451 21,316 7,571 43,338
Depreciation and amortization. . . . . . . . . . . . . . . . 13,577 16,892 5,949 36,418
- -------------------------------------------------------------------------------------------------------------------------
Operating income (loss) for the year ended June 30, 1994, reflects pretax
charges of $2,339 and $27,975 and $847 in the Motors and Controls, Lighting
Products and Power Supplies segments, respectively, related to restructuring and
other costs primarily in the electronic ballast business.
*Identifiable assets include net assets of discontinued operations of $1,174,
$98,118 and $197,217 for 1996, 1995, and 1994 respectively.
Geographic information with respect to the Company's European Subsidiaries
follows:
FOR THE YEAR ENDED JUNE 30 1996 1995 1994
- -------------------------------------------------------------------------------
Sales. . . . . . . . . . . . . . . . . . . . $206,701 $175,727 $202,593
Operating income . . . . . . . . . . . . . . 3,471 6,003 10,004
Identifiable assets. . . . . . . . . . . . . 172,636 158,207 174,736
Capital expenditures . . . . . . . . . . . . 10,011 8,532 9,723
Depreciation and amortization. . . . . . . . 8,197 8,475 8,689
The Company's foreign operations outside of Europe are not material. Export
sales were $61,520, $60,204 and $60,143 in 1996, 1995 and 1994, respectively.
37
MagneTek Inc.
14. QUARTERLY RESULTS (UNAUDITED)
1996 QUARTER ENDED SEPT. 30 DEC. 31 MAR. 31 JUNE 30
- ----------------------------------------------------------------------------------------------------------
Net sales. . . . . . . . . . . . . . . . . . . . . $272,670 $282,162 $301,628 $305,165
Gross profit . . . . . . . . . . . . . . . . . . . 43,091 46,612 52,512 14,406
Provision (benefit) for income taxes . . . . . . . (884) (211) 1,668 18,827
Income (loss) from continuing operations
before extraordinary item. . . . . . . . . . . . . $(3,538) $(1,530) $1,424 $(90,520)
Net income (loss). . . . . . . . . . . . . . . . . $(3,538) $(1,530) $1,424 $(90,520)
Per common share:
Primary:
Net income (loss). . . . . . . . . . . . . . . . . $(.14) $(.06) $.06 $(3.64)
Fully diluted:
Net income (loss). . . . . . . . . . . . . . . . . * * * *
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
In the fourth quarter of 1996 the Company recorded charges of $79,717, primarily
related to the Company's Lighting Products segment and its investment in its
German subsidiary, for repositioning of operations primarily for severance
costs, termination benefits and asset write-downs associated with plant moves
and closures as well as estimated warranty requirements and other costs (see
Note 2). In review of the Company's deferred tax asset in accordance with FASB
No. 109, a $14,700 charge was incurred and reflected in fourth quarter results.
1996 QUARTER ENDED SEPT. 30 DEC. 31 MAR. 31 JUNE 30
- ----------------------------------------------------------------------------------------------------------
Net sales. . . . . . . . . . . . . . . . . . . . . $274,755 $290,627 $318,652 $318,502
Gross profit . . . . . . . . . . . . . . . . . . . 51,720 58,687 64,386 64,843
Provision (benefit) for income taxes . . . . . . . 1,924 3,246 4,795 4,935
Income (loss) from continuing operations
before extraordinary item. . . . . . . . . . . . . 2,658 4,480 6,901 7,457
Net income (loss). . . . . . . . . . . . . . . . . 5,758 4,480 2,081 (10,043)
Per common share:
Primary:
Income (loss) from continuing operations
before extraordinary item. . . . . . . . . . . . . $.11 $.18 $.28 $.30
Net income (loss). . . . . . . . . . . . . . . . . $.23 $.18 $.08 $(.40)
Fully diluted:
Income (loss from continuing operations
before extraordinary item. . . . . . . . . . . . . $.11 $.18 $.26 $.28
Net income (loss). . . . . . . . . . . . . . . . . $.23 $.18 * *
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
In the first quarter of fiscal 1995, the Company recorded a $3,100 gain (net of
tax) associated with the sale of the controls business. The Company recorded a
third quarter extraordinary after tax loss of $4,820 associated with the write-
off of deferred financing costs and premiums paid to extinguish its 11.45
percent Senior Notes (see Note 4). Fourth quarter results included a $17,500
charge to provide for additional losses on disposal of discontinued operations
(see Note 2).
38
MagneTek, Inc.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MagneTek, Inc.
We have audited the accompanying consolidated balance sheets of MagneTek, Inc.
as of June 30, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MagneTek, Inc. at
June 30, 1996 and 1995, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for the impairment of long lived assets and for long lived
assets to be disposed of in 1996.
/s/ Ernest & Young LLP
St. Louis, Missouri
August 20, 1996, except for the second paragraph of Note 4,
as to which the date is September 16, 1996
39