SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
MagneTek, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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previously. Identify the previous filing by registration statement number,
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[LOGO] MagneTek, Inc.
26 Century Boulevard
Nashville, Tennessee 37214
September 24, 1997
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
MagneTek, Inc. It will be held on Tuesday, October 21, 1997 at 10:00 a.m., at
the offices of MagneTek, Inc., 26 Century Boulevard, Nashville, Tennessee 37214.
The matters on the agenda for the meeting are set forth in the attached
Notice of Annual Meeting of Stockholders. In addition to the agenda items, there
will be a report on operations and an opportunity for questions. We have also
included the Annual Report for the 1997 fiscal year.
We hope you can attend the meeting. Whether or not you can attend, it is
important that you sign, date and return your proxy as soon as possible. If you
decide to attend the meeting, you may vote in person if you desire, even if you
previously mailed your proxy card. Your vote, regardless of the number of shares
you own, is important. We urge you to indicate your approval by voting FOR the
matters indicated in the Notice.
On behalf of the Board of Directors, we thank you for your cooperation.
Sincerely,
/s/ Andrew G. Galef
Andrew G. Galef
Chairman of the Board of Directors
[LOGO] MagneTek, Inc.
26 Century Boulevard
Nashville, Tennessee 37214
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
---------------------
TO THE STOCKHOLDERS OF MAGNETEK, INC.:
Notice is hereby given that the 1997 Annual Meeting of Stockholders (the
"Annual Meeting") of MagneTek, Inc. (the "Company") will be held on Tuesday,
October 21, 1997, at 10:00 a.m., at the offices of the Company, 26 Century
Boulevard, Nashville, Tennessee 37214 for the following purposes:
1. To elect the Company's Board of Directors for the ensuing year to serve
until the next Annual Meeting of Stockholders and thereafter until their
respective successors are elected and have been qualified.
2. To approve the adoption of the Company's 1997 Non-Employee Director Stock
Option Plan, which provides for the automatic and discretionary grant of stock
options to non-employee directors of the Company.
3. To approve the adoption of the Company's Amended and Restated Director
Compensation and Deferral Investment Plan, which permits the payment of annual
retainer fees and meeting fees to the Company's directors in the form of common
stock of the Company.
4. To transact such other business as may properly come before the Annual
Meeting and any adjournment thereof.
The record date for purposes of determining stockholders entitled to receive
notice of and to vote at the 1997 Annual Meeting is the close of business on
September 12, 1997. Only stockholders of record as of that time are entitled to
such notice and to vote at the Annual Meeting.
All of the Company's stockholders are invited to attend the Annual Meeting.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING,
PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD IN THE PRE-ADDRESSED ENVELOPE
PROVIDED WITH THIS NOTICE. NO ADDITIONAL POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY VOTE IN PERSON, EVEN
THOUGH YOU SEND IN YOUR PROXY PRIOR TO THE MEETING.
By Order of the Board of Directors,
/s/ Samuel A. Miley
Samuel A. Miley
Vice President, General Counsel and Secretary
Nashville, Tennessee
September 24, 1997
[LOGO] MagneTek, Inc.
------------------------
PROXY STATEMENT
---------------------
ANNUAL MEETING OF STOCKHOLDERS
OCTOBER 21, 1997
The Board of Directors of the Company is soliciting the enclosed Proxy for
use at the 1997 Annual Meeting of Stockholders (the "Annual Meeting") of
MagneTek, Inc. (the "Company") to be held on Tuesday, October 21, 1997, at 10:00
a.m., at the offices of the Company, 26 Century Boulevard, Nashville, Tennessee
37214. This Proxy Statement was initially sent to stockholders on or about
September 24, 1997.
Shares represented by a Proxy will be voted at the Annual Meeting as
directed if it is properly executed and delivered. In the absence of
instructions, shares represented by valid Proxies will be voted in accordance
with the recommendations of the Board of Directors set forth herein. At any time
prior to the voting, a Proxy may be revoked by written notice to the Secretary
of the Company or by subsequently filing another properly executed Proxy. Any
stockholder present at the meeting may vote in person even though the
stockholder may have previously given a Proxy.
The cost of solicitation of Proxies will be paid by the Company. The Company
has retained D.F. King & Co., Inc. to aid in the solicitation of Proxies at a
fee not expected to exceed $7,000 plus reasonable disbursements. In addition to
solicitation of Proxies by use of the mail, D.F. King & Co., Inc. and directors,
officers or employees of the Company may, without additional compensation,
solicit Proxies personally, by telephone or by other appropriate means. The
Company will request banks, brokerage firms and other custodians, nominees or
fiduciaries holding shares of the common stock of the Company in their names for
others to send proxy materials and annual reports to and to obtain proxies from
their principals, and the Company will reimburse them for the reasonable
expenses incurred in doing so.
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
Voting rights are vested exclusively in holders of the Company's common
stock, par value $.01 per share ("Common Stock"). As of the close of business on
September 12, 1997, the record date, there were 28,628,281 shares (excluding
12,367 treasury shares) of Common Stock outstanding. As of September 17, 1997,
an additional 2,424,845 shares of Common Stock were issued pursuant to
conversion of convertible debt securities previously called by the Company. Each
share of Common Stock outstanding on such date is entitled to one vote on all
matters. The presence of a majority of the outstanding shares of Common Stock,
either represented in person or by proxy at the meeting, is necessary to
constitute a quorum for purposes of conducting business at the Annual Meeting.
Abstentions and broker non-votes are counted for purposes of determining the
presence of a quorum for the transaction of business. With regard to the
election of directors, votes may be cast in favor of or withheld; votes that are
withheld will be excluded entirely from the vote and will have no effect.
Abstentions may be specified on proposals other than the election of directors
and will be counted as present for purposes of the item on which the abstention
is noted. Therefore, such abstentions will have the effect of a negative vote.
Under applicable Delaware law, broker non-votes are not counted for purposes of
determining the votes cast on a proposal. To the Company's knowledge, no matters
other than those described in this Proxy Statement will be presented at the
meeting.
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of September 1, 1997
(except as otherwise indicated) by (i) each person believed by the Company to
own beneficially more than 5% of its outstanding shares of Common Stock, (ii)
each of the Company's directors, (iii) each of the Company's executive officers
named in the Summary Compensation Table below, and (iv) all current executive
officers and directors of the Company as a group. Except as otherwise indicated
below, the address of each such person is that of the Company, 26 Century
Boulevard, Nashville, Tennessee 37214.
NUMBER OF
NUMBER OF COMMON STOCK ADJUSTED
SHARES(1) PERCENT(1) EQUIVALENTS(2) PERCENT(2)
---------- ------------- ------------- -------------
J.P. Morgan & Co., Incorporated (3) 2,810,037 9.9% -- 9.9%
60 Wall Street
New York, New York 10260
Mellon Bank Corporation (4)(5) 2,633,937 9.3 -- 9.3
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
ICM Asset Management, Inc. (6) 2,338,750 8.2 -- 8.2
601 W. Main Avenue, Suite 600
Spokane, Washington 99201
Mellon Bank N.A. (7)(5) 1,838,937 6.5 -- 6.5
c/o Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
The Dreyfus Corporation (8)(5) 1,681,937 5.9 -- 5.9
c/o Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Andrew G. Galef (9) 956,141 3.3 295,000 4.3
Ronald N. Hoge (10) 212,434 * 12,284 *
Dewain K. Cross (11) 48,800 * 23,629 *
Paul J. Kofmehl (12) 16,000 * 50,123 *
Crocker Nevin (13) 55,375 * 25,000 *
Marguerite W. Sallee (14) 22,000 * -0- *
Robert E. Wycoff (15) 9,000 * 693 *
Brian R. Dundon (16) 316,409 1.1 -0- 1.1
John E. Steiner (17) 71,290 * -0- *
David P. Reiland (18) 221,032 * 4,192 *
James E. Schuster (19) 51,667 * -0- *
Executive Officers and Directors 2,412,561 8.5 423,288 9.9
as a group, including those
persons named above
(20 persons) (20)
- ------------------------
* Less than one percent
2
NOTES:
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any security as of a given date when such person has the right
to acquire such security within 60 days after such date. Except as indicated
in the footnotes to this table and pursuant to applicable community property
laws, to the knowledge of the Company, the persons named in this table have
sole voting and investment power with respect to all shares beneficially
owned by them. The number of shares and percentage ownership amounts do not
reflect amounts listed in the table representing common stock equivalents or
converted stock appreciation rights ("SARs").
(2) Represents (i) amounts that certain of the executive officers have elected
to have allocated to their accounts under the MagneTek, Inc. Directors'
Deferral Investment Plan and the MagneTek, Inc. Deferral Investment Plan
deemed to be invested in stock equivalents and (ii) the restructuring of all
SAR grants outstanding to current Company directors as options, subject to
stockholder approval. See "Other Director Compensation."
(3) As of April 9, 1997, according to public filings. In its most recent
available public filings, J.P. Morgan & Co., Incorporated ("J.P. Morgan")
states that some of these shares may be held by its subsidiaries; J.P.
Morgan has sole investment power with respect to 2,791,037 of shares and
sole voting power with respect to 2,382,050 of these shares; and the amount
includes 745,937 shares that J.P. Morgan has a right to acquire.
(4) As of March 10, 1997, according to public filings. In its most recent
available public filings, Mellon Bank Corporation states that it has sole
investment power with respect to 823,000 of these shares and sole voting
power with respect to 2,581,937 of these shares.
(5) The Company has been informed by one of these holders that there is a
substantial degree of duplicative reporting in the shares shown in the table
for these holders.
(6) As of February 12, 1997, according to public filings. In its most recent
available public filings, ICM Asset Management, Inc. ("ICM") states it has
sole investment power with respect to all these shares and sole voting power
with respect to 1,686,300 of these shares. According to its public filings,
ICM is an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940.
(7) As of March 10, 1997, according to public filings. In its most recent
available public filings, Mellon Bank N.A. ("Mellon") states that it has
sole investment power with respect to 117,000 of these shares and sole
voting power with respect to 1,792,937 of these shares. According to its
public filings, Mellon is a bank as defined in Section 3(a)(6) of the
Securities Exchange Act of 1934.
(8) As of March 10, 1997, according to public filings. In its most recent
available public filings, The Dreyfus Corporation ("Dreyfus") states that it
has sole investment power with respect to none of these shares and sole
voting power with respect to 1,675,937 of these shares. According to its
public filings, Dreyfus is an investment adviser registered under Section
203 of the Investment Advisers Act of 1940.
(9) Includes 357,750 shares issuable upon exercise of options by Mr. Galef.
Also includes 591,954 shares held in a trust, as to which Mr. Galef
disclaims beneficial ownership. Also includes 5,000 shares held by Mr.
Galef's spouse, as to which Mr. Galef disclaims beneficial ownership.
(10) Includes 33,334 shares issuable upon exercise of options by Mr. Hoge. Also
includes 3,000 shares held by Mr. Hoge's children, as to which Mr. Hoge
disclaims beneficial ownership.
(11) Includes 6,000 shares issuable upon exercise of options by Mr. Cross.
(12) Includes 6,000 shares issuable upon exercise of options by Mr. Kofmehl.
Also includes 10,000 shares held by his spouse, as to which Mr. Kofmehl
disclaims beneficial ownership.
3
(13) Includes 52,375 shares issuable upon exercise of options by Mr. Nevin.
(14) Includes 6,000 shares issuable upon exercise of options by Ms. Sallee. Also
includes 15,000 shares held by Ms. Sallee's spouse, as to which Ms. Sallee
disclaims beneficial ownership.
(15) Includes 2,000 shares issuable upon exercise of options by Mr. Wycoff. Also
includes 7,000 shares held in a trust, as to which Mr. Wycoff disclaims
beneficial ownership.
(16) Includes 182,608 shares issuable upon exercise of options by Mr. Dundon and
3,671 shares held in the MagneTek FlexCare Plus Retirement Savings Plan (a
401(k) plan, the "401(k) Plan") as of June 29, 1997.
(17) Includes 71,003 shares issuable upon exercise of options by Mr. Steiner and
288 shares held in the 401(k) Plan as of June 29, 1997.
(18) Includes 170,000 shares issuable upon exercise of options by Mr. Reiland
and 4,668 shares held in the 401(k) Plan as of June 29, 1997. Also includes
39,735 shares held in a living trust, as to which Mr. Reiland disclaims
beneficial ownership.
(19) Includes 16,667 shares issuable upon exercise of options by Mr. Schuster.
(20) Includes 1,215,945 shares issuable upon exercise of options by executive
officers and directors as a group, and 22,503 shares held in the 401(k) Plan
as of September 1, 1997. Also includes, for certain executive officers and
directors, shares held by spouses or children, as to which such executive
officers and directors disclaim beneficial ownership, and shares held by
limited partnerships or trusts, as to which such executive officers and
directors disclaim beneficial ownership.
4
DIRECTORS
The following table sets forth certain pertinent information regarding the
individuals who have been nominated by the Nominating and Corporate Governance
Committee of the Board of Directors to serve as directors of the Company. All of
the individuals listed are currently directors of the Company. Crocker Nevin is
currently a director who is not standing for re-election to the Board of
Directors.
NAME AGE POSITION
- ---------------------------------------------- --- ----------------------------------------
Andrew G. Galef............................... 64 Chairman of the Board of Directors
Ronald N. Hoge................................ 52 President, Chief Executive Officer and
Director
Dewain K. Cross............................... 59 Director
Paul J. Kofmehl............................... 69 Director
Marguerite W. Sallee.......................... 51 Director
Robert E. Wycoff.............................. 67 Director
Mr. Galef has been the Chairman of the Board of Directors since July 1984.
He also is the Chairman of the Nominating and Corporate Governance Committee.
Mr. Galef was the Chief Executive Officer of the Company from September 1993
until June 1996. He has been President of The Spectrum Group, Inc. ("Spectrum"),
a private investment and management firm, since its incorporation in California
in 1978 and its Chairman and Chief Executive Officer since 1987. Prior to the
formation of Spectrum, Mr. Galef was engaged in providing professional interim
management services to companies with serious operating and financial problems.
Mr. Galef is presently a director of Warnaco, Inc., a diversified apparel
manufacturer, and its parent, The Warnaco Group, Inc., and was formerly Chairman
of Aviall, Inc., a company providing aircraft engine refurbishment and related
products and services, and Exide Corporation, a manufacturer of automotive and
industrial batteries. Mr. Galef also currently serves as a director, and was
formerly the Chairman, of Petco Animal Supplies, Inc. In addition, Mr. Galef
serves as chairman or a director of other privately held Spectrum portfolio
companies.
Mr. Hoge was elected as the President and Chief Executive Officer of the
Company in June 1996. He became a director of the Company in July 1996. From
1993 until May 1996, Mr. Hoge was President of the Aerospace Equipment Systems
Division of Allied Signal, Inc. From 1986 to 1993, he was President and Chief
Executive Officer of Onan Corporation, the generator subsidiary of Cummins
Engine Company. He also served as President of Cummins Brasil S.A. for five
years. From 1971, when he first joined Cummins, until 1978, he served in
progressive staff positions, including Manager of Corporate Responsibilities,
and managed the start-up of Cummins' diesel engine factory in Daventry, England.
Mr. Hoge earned a Bachelor's degree in Mathematics from Amherst College in 1967.
He received his MBA in Marketing from Stanford University in 1970, completing
graduate studies in Public Administration at the University of California,
Berkeley, the same year. Mr. Hoge has been serving as a director of Merrill
Corporation since June 1989.
Mr. Cross has been a director of the Company since November 1994. He is
Chairman of the Audit Committee and a member of the Nominating and Corporate
Governance and Pension Committees. Mr. Cross joined Cooper Industries, Inc. in
1966 as Manager of Taxation and subsequently served as Director, Accounting and
Taxation, Assistant Controller, and Treasurer. Mr. Cross was appointed Vice
President, Finance of Cooper Industries in 1972 and was named Senior Vice
President, Finance of Cooper Industries in 1980. Mr. Cross retired from Cooper
Industries in April 1995. Mr. Cross served for several years as a member of the
Financial Council II of the Manufacturers' Alliance for Productivity and
Innovation, and he is a member of the American Institute of Certified Public
Accountants.
Mr. Kofmehl has been a director of the Company since November 1990. He is a
member of the Audit and Compensation Committees. In 1991 Mr. Kofmehl joined
Franklin Health Group ("Franklin") as a partner, and in 1995 Franklin was merged
with Corning, Inc., where he was employed until February 1997. In 1997 Franklin
was acquired by a private investment group and Mr. Kofmehl currently serves as
advisor
5
to the President and Chief Executive Officer of such group. Mr. Kofmehl held
various positions with International Business Machines Corp. from 1955 until his
retirement in 1988, most recently serving as IBM Vice President and Group
Executive, Americas Group, and as a member of the IBM Corporate Management
Board. During his career at IBM, Mr. Kofmehl had executive responsibilities for
various international sectors, including Europe, Canada, Latin America, the
Middle East and Africa.
Ms. Sallee has been a director of the Company since January 1995. She is
Chairman of the Compensation Committee and a member of the Nominating and
Corporate Governance and Pension Committees. Ms. Sallee is the President and
Chief Executive Officer and a director of CorporateFamily Solutions, which she
co-founded in 1987. In 1994 Ms. Sallee was named the first woman chairman of the
Nashville Area Chamber of Commerce, and is active in civic and business matters
in Tennessee. Ms. Sallee also serves as a director of Proffitt's and as a
director of NationsBank for Tennessee and Kentucky.
Mr. Wycoff has been a director of the Company since January 1996. He is
Chairman of the Pension Committee and a member of the Audit Committee. Mr.
Wycoff was President and Chief Operating Officer of Atlantic Richfield Company
("ARCO") from January 1986 until June 1993. He was also a director of ARCO, a
director of ARCO Alaska, Inc., and a director of ARCO Foundation, Inc. In
addition, he served as Chairman of the Board and as a director of Lyondell
Petrochemical Company. Following his retirement from these positions on June 1,
1993, he became President Emeritus of ARCO. Mr. Wycoff is currently a Board
Member of the Electric Power Research Institute (EPRI). He is also Chairman of
LEARN and serves on the Board of Governors of LAMP, civic organizations
dedicated to education reform.
Mr. Nevin has been a director of the Company since July 1984. He is a member
of the Audit and Compensation Committees. Mr. Nevin served as Chairman and Chief
Executive Officer of CF&I Steel Co. from 1985 to 1993. Mr. Nevin is also a
director of the BOC Group PLC.
Directors serve for one year and thereafter until their successors are duly
elected and qualified. Directors who are not employees of the Company receive
(i) an annual fee of $24,000, (ii) an annual fee of $4,000 for chairmanship of
each committee, (iii) $1,500 for each Board meeting attended in person, and (iv)
$1,000 for each committee meeting attended in person or by telephone (applicable
only to the chairman and members of a given committee). Officers serve at the
discretion of the Board of Directors. Mr. Galef and Mr. Hoge do not receive any
directors' fees. Directors may also receive stock option awards pursuant to the
Company's Non-Employee Director Stock Option Plan, and stock appreciation rights
pursuant to the 1991 Director Incentive Compensation Plan and the 1991
Discretionary Director Incentive Compensation Plan, each as described below.
Pursuant to the MagneTek, Inc. Directors' Deferral Investment Plan, directors
who are not employees or officers of the Company may elect to defer up to 100%
of the annual retainer fees and meeting fees described in this paragraph. If
approved, the Amended and Restated Director Compensation and Deferral Investment
Plan will (i) incorporate the existing deferral provisions of the MagneTek, Inc.
Directors' Deferral Investment Plan, (ii) permit eligible directors to receive
shares of Common Stock in the lieu of such cash meeting fees and (iii) require
eligible directors to receive shares of Common Stock in lieu of such cash annual
retainer fees (as described under "Adoption of Amended and Restated Director
Compensation and Deferral Investment Plan").
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
MEETINGS. During fiscal year 1997,(1) the Board of Directors met in regular
or special session six times. The Audit Committee and Compensation Committee
each met five times, the Nominating and Corporate Governance Committee met four
times and the Pension Committee met three times. The number of meetings includes
telephonic meetings and does not include actions taken by unanimous written
- ---------
(1) The Company uses a 52-53 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 1997, 1996 and 1995 contained 52 weeks.
6
consent of the members of the Board of Directors or the Committees. Each of the
Company's directors who has been nominated for re-election (or election)
attended 100% of the meetings of the Board of Directors (held during the period
for which he or she has been a director) and the meetings of the committees of
which he or she is a member (held during the period for which he or she has been
a member).
STANDING COMMITTEES. The Audit Committee makes recommendations regarding
the selection of the Company's independent auditors, reviews the scope of the
annual audit as proposed by the Company's independent auditors and reviews the
findings of the annual audit with the independent auditors. The Audit Committee
also reviews the annual plan of the Company's internal audit department,
monitors plan achievement periodically throughout the fiscal year and reviews
with management significant financial and accounting policies and procedures.
The Compensation Committee reviews and approves the compensation of
executive officers and of certain key employees and generally approves grants
under stock option plans, incentive compensation plans and any other
equity-based or long-term incentive plans. The Compensation Committee also
reviews contributions to the Company's retirement plans and reviews new
executive compensation programs, annual performance evaluations and the Proxy
Statement Compensation Committee Report. See "Executive Compensation" and
"Report of the Compensation Committee of the Board of Directors on Executive
Compensation."
The Nominating and Corporate Governance Committee determines the
qualifications required of candidates for selection to the Board of Directors,
reviews the desirability of each director's standing for election for the next
year, proposes nominees for election or re-election to the Board of Directors,
and recommends the assignment of directors to various committees. The Nominating
and Corporate Governance Committee also evaluates and recommends director
compensation and benefits to the Board of Directors, periodically reviews each
director's stock ownership and determines if the recommended level is being
acquired, evaluates the performance of the Chief Executive Officer and reports
its evaluation to the Compensation Committee.
The Pension Committee establishes and reviews investment policies and
guidelines for the Company's qualified pension plan, reviews investment results
and performance of the pension plan, reviews the accounting impact and costs
related to the Company's retirement plans, and reviews plan design, amendments
and other issues related to the Company's retirement plans.
OTHER DIRECTOR COMPENSATION
1991 DIRECTOR INCENTIVE COMPENSATION PLAN. The 1991 Director Incentive
Compensation Plan of MagneTek, Inc. authorizes the grant of SARs to the
Company's directors. In 1995, this plan was essentially replaced by the
Non-Employee Stock Option Plan, as discussed below. All grants made under this
plan are exercisable for cash only.
1991 DISCRETIONARY DIRECTOR INCENTIVE COMPENSATION PLAN. The 1991
Discretionary Director Incentive Compensation Plan of MagneTek, Inc. authorizes
the Compensation Committee to grant SARs to the Company's non-employee directors
who are not members of the Compensation Committee. The Compensation Committee
selects the non-employee directors to whom the SARs will be granted from time to
time, determines the number of shares to be subject to such SARs and determines
the terms and conditions of such SARs, including when they become exercisable.
The base price of the shares of Common Stock subject to the SARs is also set by
the committee but may not be less than the fair market value of such shares on
the grant date. Certain significant transactions involving the company or its
stock will accelerate the vesting of all SARs then outstanding. SARs under this
plan expire ten years from the date of grant and are exercisable for cash only.
No SARs were granted under this plan in fiscal year 1997. In April 1997, by
agreement between the affected directors and the Company, all SAR grants
outstanding to current
7
Company directors were restructured as options which options were issued,
subject to stockholder approval, under the 1997 Director Plan (defined below).
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. The Company's Non-Employee
Director Stock Option Plan (the "1995 Director Plan") became effective on June
30, 1995. Under the 1995 Director Plan, each qualifying director (any director
of the Company who on the date of the grant is neither an officer nor an
employee of the Company or a subsidiary of the Company) is automatically granted
annually, on each June 30, a non-qualified stock option to purchase 4,000 shares
of the Company's Common Stock. The per share exercise price of the option is the
fair market value of a share of the Company's Common Stock on the date of the
grant. In fiscal year 1997, each of Messrs. Cross, Kofmehl, Nevin, Wycoff and
Ms. Sallee received an option to purchase 4,000 shares. Options with respect to
50% of the shares are exercisable one year after the date of the grant and
options with respect to the remaining 50% of the shares are exercisable two
years after the date of the grant. The 1995 Director Plan replaced the automatic
grant of stock appreciation rights under the Company's 1991 Director Incentive
Compensation Plan. If approved, the Company's 1997 Non-Employee Director Stock
Option Plan (the "1997 Director Plan") will replace the 1995 Director Plan (as
described under "Adoption of 1997 Non-Employee Director Stock Option Plan"
below). All SAR grants outstanding to current Company directors were
restructured as options in April 1997 and such options were issued, subject to
stockholder approval, under the 1997 Director Plan. An aggregate of 491,500 SARs
ranging in base price from $10.00 to $19.375 were restructured. For a
description of the options so granted and the terms of the 1997 Director Plan,
see "Adoption of 1997 Non-Employee Director Stock Option Plan."
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who own more than 10% of any equity security of
the Company to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and to furnish copies of these reports to the
Company. The Company has been advised by Mr. Galef that one Form 4 was not
timely filed by Mr. Galef to report two transactions involving convertible
securities. This transaction was subsequently reported on Form 5, thereby
correcting the oversight.
8
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company for the
three most recent fiscal years of those persons who served as the Company's
Chief Executive Officer during the last fiscal year, and the four other most
highly compensated executive officers whose total annual salary and bonus
exceeded $100,000 during the last fiscal year (collectively, the "Named
Officers"):
LONG-TERM COMPENSATION
-------------------------------------
AWARDS PAYOUTS
------------------------ -----------
SECURITIES LONG-TERM
NAME AND ANNUAL COMPENSATION RESTRICTED UNDERLYING INCENTIVE
PRINCIPAL FISCAL -------------------- STOCK OPTIONS PLAN ALL OTHER
POSITION YEAR SALARY BONUS(1) AWARD(S)(2) (SHARES) PAYOUTS COMPENSATION(3)
- --------------------------- ----------- --------- --------- ----------- ----------- ----------- ----------------
Ronald N. Hoge 1997 $ 500,001 $ 500,000 0 30,000 $ 620,313(4) $ 158,764(5)
President and Chief 1996 75,000 0 $1,100,100 400,000 0 0
Executive Officer 1995 -- -- -- -- -- --
Brian R. Dundon 1997 300,040 200,000 0 55,000 0 4,801
Executive Vice 1996 288,756 80,000 0 20,000 0 9,341
President 1995 275,000 79,772 0 0 0 7,853
John E. Steiner 1997 232,385 175,000 0 55,000 0 21,372(5)
Executive Vice 1996 210,485 26,200 0 20,000 0 33,343(5)
President 1995 145,387 34,455 0 10,000 0 3,682
David P. Reiland 1997 325,000 195,000 0 45,000 0 2,663
Senior Vice President 1996 325,000 37,800 0 20,000 0 69,934(5)
and Chief Financial 1995 300,000 25,000 0 0 0 3,749
Officer
James E. Schuster 1997 265,000 190,000 328,125 65,000 0 80,854(5)
Senior Vice President, 1996 9,173 0 0 0 0 0
Operations 1995 -- -- -- -- -- --
- --------------------------
NOTES:
(1) The amounts reflect bonuses for services rendered during the fiscal year
indicated, which were paid in August of the subsequent fiscal year.
(2) As of the end of fiscal year 1997, the number of Mr. Hoge's and Mr.
Schuster's aggregate restricted stock holdings were 115,800 and 35,000
shares, respectively, and the value of such holdings as of such date
$1,925,175 and $581,875, respectively. These restricted shares vested on
August 31, 1997 and June 18, 1997 for Mr. Hoge and Mr. Schuster,
respectively. No dividends are expected to be paid on any of the Company's
outstanding shares of Common Stock.
(3) The 1997 amounts reflect, for Messrs. Hoge, Dundon, Steiner, Reiland and
Schuster: $7,764, $4,201, $2,165, $2,063 and $5,861, respectively,
reimbursed under the Senior Executive Medical Reimbursement Plan; and $600,
$600, $600, $600 and $1,200, respectively, contributed by the Company to the
MagneTek FlexCare Plus Retirement Savings Plan (a 401(k) plan) for the
account of such person.
(4) The amount reported for Mr. Hoge represents the value of stock awarded to
Mr. Hoge during the 1997 fiscal year pursuant to his employment agreement.
See "Report of the Compensation Committee of the Board of Directors on
Executive Compensation--Chief Executive Officer."
(5) The 1997 amounts reported for Messrs. Hoge, Steiner and Schuster include
$110,400, $18,607 and $73,794, respectively, for reimbursement of relocation
expenses. The 1996 amounts reported for Messrs. Steiner and Reiland include
$30,782 and $65,557, respectively, for reimbursement of relocation expenses.
9
OPTION GRANTS. Shown below is information regarding grants of stock options
during the fiscal year ended June 30, 1997 to the Named Officers.
INDIVIDUAL
GRANTS POTENTIAL REALIZABLE
----------- VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF
SECURITIES TOTAL STOCK PRICE
UNDERLYING OPTIONS EXERCISE OR APPRECIATION FOR
OPTIONS GRANTED TO BASE PRICE OPTION TERM
GRANTED(1) EMPLOYEES IN EXPIRATION --------------------
NAME (SHARES) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---------------------------------------- ----------- ----------------- ----------- ----------- --------- ---------
Ronald N. Hoge 30,000 2.9% 13.8125 1/27/07 394,985 874,370
Brian R. Dundon 40,000 3.9 8.375 7/24/06 692,736 1,227,109
15,000 1.5 13.8125 1/27/07 197,492 437,185
John E. Steiner 40,000 3.9 8.375 7/24/06 692,736 1,227,109
15,000 1.5 13.8125 1/27/07 197,492 437,185
David P. Reiland 30,000 2.9 8.375 7/24/06 519,552 920,332
15,000 1.5 13.8125 1/27/07 197,492 437,185
James E. Schuster 50,000 4.9 8.375 7/24/06 865,920 1,538,886
15,000 1.5 13.8125 1/27/07 197,492 437,185
- --------------------------
NOTES:
(1) Options were granted under the Company's 1989 Incentive Stock Compensation
Plan and are exercisable with respect to one third of the shares covered
thereby on each anniversary of the grant date with full vesting occurring on
the third anniversary date. Certain significant transactions involving the
Company or its stock will make the options granted under this plan
exercisable immediately and, should the Company's Common Stock cease to be
publicly traded, option holders would be entitled to receive cash in lieu of
exercising and selling the shares subject to their options.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES. Shown below is
information relating to the fiscal year-end value of unexercised options for
each of the Named Officers.
NAME
- ---------------------------------------- VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END YEAR-END(1)
-------------------------- --------------------------
UNEXERCISABLE UNEXERCISABLE
EXERCISABLE ------------- -------------
----------- EXERCISABLE
-----------
Ronald N. Hoge 33,334 396,666 $ 243,755 $ 1,096,870
Brian R. Dundon 154,275 85,000 493,233 441,563
John E. Steiner 48,920 80,000 233,598 452,109
David P. Reiland 146,250 73,750 414,375 359,063
James E. Schuster 0 65,000 0 454,688
- --------------------------
NOTES:
(1) Calculated using closing price on June 30, 1997 of $16.625 per share.
EMPLOYMENT AGREEMENT
The Company has an employment agreement with Mr. Hoge. See "Report of the
Compensation Committee of the Board of Directors on Executive
Compensation--Chief Executive Officer."
MAGNETEK FLEXCARE PLUS RETIREMENT PENSION PLAN
The MagneTek FlexCare Plus Retirement Pension Plan (the "Retirement Plan")
is a defined benefit retirement plan which covers employees of the Company
(excluding employees of certain divisions and certain union employees). The
Retirement Plan was established upon the merger of certain defined benefit
10
retirement plans previously maintained by the Company. Although the Retirement
Plan is a defined benefit plan, each non-union participating employee's accrued
benefit is determined by the "cash balance" credited to the employee's
retirement account. Such account is maintained for bookkeeping purposes only.
"Contribution" amounts are credited to each employee's retirement account
annually ranging from 3.5% to 4.5% of an employee's compensation up to the
"integration level" and from 7% to 9% of compensation in excess of the
"integration level" (as of January 1, 1997, compensation over $160,000 may not
be considered). The actual percentage varies depending upon years of vesting
service with the Company. The "integration level," which for calendar 1997 was
$29,000, may vary annually. "Interest," based upon the rates payable on certain
U.S. Treasury debt instruments, is also credited to the employee's bookkeeping
account each year.
Distributions are made in the event of retirement, death, disability or
other termination of employment. Distributions are paid to vested participants
in the form of a ten-year certain life annuity (unless a joint and survivor
annuity is required or an alternative form of payment is elected) in a monthly
amount equal to the balance of the employee's retirement account, divided by
120.
The estimated annual benefits payable to Messrs. Hoge, Dundon, Steiner,
Reiland and Schuster under the Retirement Plan upon retirement at normal
retirement age (in life only form) are approximately $25,595, $116,667, $45,075,
$114,016 and $51,229, respectively (assuming continued compensation at the
present amounts (subject to the $160,000 limit) until normal retirement age and
continued crediting of interest at the current rate, and disregarding probable
future cost-of-living increases to the limit on the amount of compensation that
may be taken into account and to the Social Security wage base).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no interlocks between the Company and other entities involving the
Company's executive officers and directors and those of other entities.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Compensation Committee of the Board of Directors, consisting entirely of
non-employee directors, approves all policies under which compensation is paid
or awarded to the Company's executive officers.
GENERAL. The Company's compensation program for executive officers
currently consists of annual base salary and bonus as well as awards of stock
options and occasionally, restricted stock grants. The Committee believes that
the compensation of executive officers should reflect the scope of their
responsibilities, the success of the Company and the contributions of each
executive to that success. In addition, the Committee believes that base
salaries should be consistent with competitive salaries derived from market
surveys and that short-term and long-term incentive compensation should reflect
the performance of the Company and the contributions of each executive. Salary
and bonus payments are primarily designed to reward current and past
performance. The primary goal of the Company and the Committee is to excel in
the creation of long-term value for stockholders. The principal incentive tool
used to achieve this goal is the periodic grant of stock options and less
frequently, of restricted stock awards, to key employees. The Committee and
management believe that awards of stock options accomplish many objectives.
The Committee's decisions concerning the base salary and total cash
compensation (base salary plus bonus) of individual executive officers during
fiscal year 1997 were made primarily in the context of executive performance in
light of the Company's circumstances, historical practice and the current
competitive environment. The Compensation Committee considered competitive
compensation data from three independent sources. These sources included
broad-based compensation surveys of various manufacturing and/or electrical
equipment companies with sales volumes comparable to the Company's. External
competitiveness is an important element of the Committee's compensation policy.
The Committee found that the executive officers' compensation levels were
consistent with companies included in each of the
11
foregoing sources. Equitable principles are also central to the Committee's
compensation policies. Compensation considered for the Company's executive
officers, whether cash or stock-based incentives, is also evaluated by comparing
it to compensation of other executives within the Company with comparable levels
of responsibility. Stock options and restricted stock are awarded to provide
incentives for superior long-term future performance as well as for retention of
executive officers. Stock option and restricted stock awards are directly linked
to the stockholders' interests, since the potential value of the awards to the
executive officers is directly related to the future price of the Company's
Common Stock. All stock option and restricted stock grants are made under the
1987 Stock Option Plan or the 1989 Incentive Stock Compensation Plan, each of
which was approved by the Company's stockholders.
STOCK OWNERSHIP POLICIES. The Company's compensation program is also
designed to encourage executives to own shares of the Company's Common Stock and
a significant portion of executive compensation, in particular that of the Chief
Executive Officer, is tied to the performance of the Company's stock. The
Committee believes that encouraging executives to acquire and retain Common
Stock provides additional incentive for executive officers to follow strategies
designed to maximize long-term values to stockholders. During fiscal 1997, the
Company adopted the Company's Deferral Investment Plan, a deferred compensation
plan pursuant to which executives may elect to defer significant portions of
salary and bonus and may choose an investment vehicle that replicates the
performance of the company's stock over the deferral period. These deferred
compensation amounts may in turn, at the Company's option, be paid in common
stock. Also during fiscal 1997, the Committee instituted stock ownership
guidelines for officers that are being phased in over a thirty-six month period.
These guidelines specify appropriate levels of ownership of the Company's common
stock based upon the officer's compensation and duration of the officer's
position with the Company. The Committee made a special stock option grant to
selected officers under which vesting was tied to achievement of the
individual's target level of stock ownership during the thirty-six month period
following these option grants. The Committee intends to use the ownership
guidelines as a measure in determining the size of future option grants to
executives.
BONUSES. For fiscal year 1997 the Committee adopted a formula (which varies
from year to year) at the beginning of the fiscal year. Pursuant to the 1997
formula, awards were based upon the performance of the relevant corporate
business unit and upon individual performance. Business units were rated based
upon the achievement of targets which were in turn based upon an "economic value
added" by the particular unit. The Committee believes this to be the key driver
of stock performance over time. Executive's individual performance ratings are
based on each executive's achievement of specific annual financial objectives as
well as other factors, such as realization of strategic plans and progress in
organization and management development. For the executive officers, cash
bonuses are determined by multiplying a target incentive rate (a percentage of
salary that increases with the level of responsibility) by the average of the
performance rating of the individual executive, the applicable business unit and
the Company overall. Target incentive percentages range from 35% to 100% of an
executive's salary, and performance ratings range from 0 to 1.5.
STOCK OPTIONS AND RESTRICTED STOCK. The Committee awarded a total of
511,710 non-qualified stock options to the executive officers during the
Company's 1997 fiscal year, all of which were granted under the 1989 Incentive
Stock Compensation Plan. In awarding these non-qualified stock options, the
Committee reviewed the number of options previously granted to each executive
officer, as well as the aggregate awards granted to all executive officers and
associates of the Company, in light of a study prepared for the Company by
Hewitt Associates, an independent compensation consulting firm. The size of the
individual awards is determined with input from management and is designed to
maintain competitiveness and promote long-term productivity from the executive
officers. Restricted stock awards in an aggregate of 95,000 shares were made to
executive officers in fiscal 1997.
CHIEF EXECUTIVE OFFICER. Pursuant to his employment agreement, Mr. Hoge is
paid a base salary of $500,000 per year and participates in the Company's annual
incentive bonus program. Additionally, under
12
the agreement in 1996, Mr. Hoge was granted 115,800 shares of restricted stock
and four employee stock options, each for 100,000 shares of Common Stock, with
varying exercise prices and vesting schedules. All but one of these stock
options were granted at exercise prices exceeding fair market value on the date
of grant, in some cases, substantially. The employment agreement with Mr. Hoge
also provides for (i) a term of employment through June 1, 1999, which term may
be automatically renewed annually thereafter until terminated by Mr. Hoge or the
Company or until the annual meeting of stockholders that first follows Mr.
Hoge's 65th birthday and (ii) additional stock grants during each of the years
from 1997 through 2001 depending on the achievement of certain performance
criteria measured by the average fair market value of the Company's Common
Stock. As of August 15, 1997, Mr. Hoge had earned an aggregate of 50,000 shares
out of 50,000 stock grants available as of such date pursuant to the agreement.
The employment agreement with Mr. Hoge also provides that (i) if his
employment is terminated involuntarily other than for death, disability, cause
or following a change in control, he will receive a lump-sum cash payment equal
to all accrued and unpaid base salary plus a pro rata portion of any bonus
compensation for such year, his outstanding stock options will become fully
exercisable, and, if Mr. Hoge so elects, the Company will repurchase his primary
residence in the Nashville, Tennessee area at its fair market value; and (ii) if
his employment is terminated following a change in control, his outstanding
stock options will become fully exercisable, and he will receive a lump-sum cash
payment equal to the sum of his accrued and unpaid base salary and bonus plus an
amount equal to the lesser of (A) 2.99 times the sum of (x) his base salary plus
(y) the bonus for the most recent fiscal year in which he received a bonus and
(B) the maximum amount that the Company would be entitled to deduct as a
compensation expense on its federal income tax return without regard to the $1
million limitation of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
TAX DEDUCTIBILITY CONSIDERATIONS. The Committee has reviewed the Company's
compensation plans with regard to the deduction limitation under the Code.
Section 162(m) disallows a tax deduction for any publicly-held corporation for
individual compensation exceeding $1 million in any taxable year for any of the
Named Officers, unless compensation is performance-based. The compensation of
the Chief Executive Officer exceeded $1 million in 1997; none of the other named
executive officers received compensation in excess of $1 million in 1997. The
Committee does not believe that the amount by which the Chief Executive
Officer's compensation exceeded $1 million was significant. The Committee does
not currently expect the compensation of any of the named executive officers
other than the Chief Executive Officer to exceed the $1 million threshold in
fiscal 1998. While the Company intends to pursue a strategy of maximizing the
deductibility of compensation paid to executive officers in fiscal 1998, it also
intends to maintain the flexibility to take actions that it considers to be in
the Company's best interests and to take into consideration factors other than
tax deductibility.
The foregoing report on executive compensation is provided by the following
directors who comprise the Compensation Committee of the Board of Directors:
Marguerite W. Sallee (Chairman)
Paul J. Kofmehl
Crocker Nevin
13
PERFORMANCE GRAPH
Shown below is a line graph comparing the cumulative total return to
stockholders of the Company's Common Stock, the Standard & Poors 500 Index ("S&P
500"), the Standard & Poors Electrical Equipment Index ("S&P Electrical") and
the Dow Jones Electrical Components & Equipment Index ("Dow Jones Electrical")
from June 30, 1992 to June 30, 1997.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG MAGNETEK, INC., S&P 500, S&P ELECTRICAL AND DOW JONES ELECTRICAL
JUNE 30, 1992 -- JUNE 30, 1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
MAGNETEK, INC. S&P 500 S&P ELECTRICAL DOW JONES ELECTRICAL
6/30/92 $100 100 100 100
6/30/93 129.910 113.570 122.932 114.263
6/30/94 99.140 115.190 122.106 111.513
6/30/95 93.160 145.140 152.154 138.341
6/30/96 65.810 182.770 221.968 161.174
6/30/97 113.670 246.080 319.521 199.470
6/30/92 6/30/93 6/30/94 6/30/95 6/30/96 6/30/97
----------- --------- --------- --------- --------- ---------
MagneTek, Inc.............. $ 100 $ 129.910 $ 99.140 $ 93.160 $ 65.810 $ 113.670
S&P 500.................... 100 113.570 115.190 145.140 182.770 246.080
S&P Electrical............. 100 122.932 122.106 152.154 221.968 319.521
Dow Jones Electrical....... 100 114.263 111.513 138.341 161.174 199.470
- ------------------------
* Assuming $100 invested in MagneTek, Inc. Common Stock and each index on June
30, 1992, and reinvestment of all dividends.
CERTAIN TRANSACTIONS
The Company has an agreement with the Spectrum Group, Inc. ("Spectrum")
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
14
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 $907,000 for the year ended June 30, 1997.
During the year ended June 30, 1997, the Company paid approximately $399,000
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.
Under the terms of his employment agreement, Mr. Hoge has received
$1,000,000 from the Company under an interest-free loan in connection with the
purchase of a residence.
The Company has provided to Messrs. Hoge, Schuster and Daryl D. David (an
executive officer) unsecured loans to pay income tax liability in connection
with the vesting of their restricted stock or receipt of stock awards in the
aggregate amounts of $1,317,243, $245,000 and $175,000, respectively. In the
case of Mr. Hoge, such loans are pursuant to his employment agreement. Such
loans bear interest and are due upon the earliest of (i) the date on which the
borrower has sold more than a specified number of shares of Common Stock, (ii)
90 days after the date of the borrower's termination of employment and (iii) the
fifth anniversary of the loan.
COMPANY PROPOSALS
The following proposals will be submitted for stockholder consideration and
voting at the Annual Meeting.
PROPOSAL 1
ELECTION OF DIRECTORS
The Nominating and Corporate Governance Committee of the Board of Directors
of the Company has nominated and recommends for election as directors the
following six persons to serve for the ensuing year until the next Annual
Meeting of Stockholders and thereafter until their respective successors are
elected and have been qualified:
Andrew G. Galef
Ronald N. Hoge
Dewain K. Cross
Paul J. Kofmehl
Marguerite W. Sallee
Robert E. Wycoff
All of the nominees are presently directors of the Company. The enclosed
Proxy will be voted in favor of the persons nominated unless otherwise
indicated. If any of the nominees should be unable to serve or should decline to
do so, the discretionary authority in the Proxy will be exercised to vote for a
substitute or substitutes to be designated by the Board of Directors. The Board
of Directors has no reason to believe that any substitute nominee or nominees
will be required. In the event that a nominee for director is proposed at the
Annual Meeting, the enclosed Proxy may be voted in favor of or against such
nominee or any other nominee proposed by the Board of Directors unless otherwise
indicated. Shares may not be voted cumulatively for election of directors.
Directors are elected by a plurality of the votes cast at the Annual Meeting
either in person or by proxy.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" EACH OF THE
NOMINEES.
PROPOSAL 2
ADOPTION OF 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
GENERAL. In fiscal year 1997, the Board of Directors unanimously adopted,
subject to stockholder approval, the 1997 Non-Employee Director Stock Option
Plan (the "1997 Director Plan"). The Board of Directors believes that offering
long-term incentive opportunities to directors will give directors added
incentive to further the long-term profitability of the Company and thereby
benefit the stockholders of the Company. Upon stockholder approval, the 1997
Director Plan will replace the Company's existing Non-Employee Director Stock
Option Plan (the "1995 Director Plan"). In the event that the 1997 Director Plan
is not approved, the 1995 Director Plan will remain in effect. All statements
set forth in this Proxy Statement relating to the 1997 Director Plan are
qualified in their entirety by reference to the complete text of the 1997
Director Plan which is set forth in Appendix A to this Proxy Statement.
15
ADMINISTRATION. Questions of interpretation of the 1997 Director Plan, if
any, will be resolved by the Board of Directors.
PARTICIPANTS. Options to purchase shares of Common Stock shall be granted
pursuant to the 1997 Director Plan to any director who on the date of said grant
is not an employee of the Company or a subsidiary of the Company (a "Qualifying
Director"). As of the date of this Proxy Statement, six directors were eligible
to participate in the 1997 Director Plan.
OPERATION OF THE 1997 DIRECTOR PLAN; CONTINGENT GRANTS. Each Qualifying
Director who is not an officer of the Company (a "Non-Officer Qualifying
Director") will receive an option to purchase 4,000 shares of the Company's
Common Stock pursuant to the terms and conditions described above upon initial
election or appointment to the Board of Directors or upon a continuing director
becoming a Non-Officer Qualifying Director. In addition, Non-Officer Qualifying
Directors will be automatically granted, on an annual basis, a non-qualified
stock option to purchase 4,000 shares of the Company's Common Stock on each June
30th after the initial grant of such Non-Officer Qualifying Director's 4,000
share option pursuant to terms outlined above. Each such option will have a term
of ten years and shall become exercisable as follows: options with respect to
50% of the shares one year after the date of grant and options with respect to
the remaining 50% of the shares two years after the date of grant. The
ratification of the 1997 Director Plan by stockholders will also confirm the
grant to each Non-Officer Qualifying Director elected at such meeting of
stockholders of a non-qualified stock option to purchase 4,000 shares of the
Company's Common Stock as of June 27, 1997.
Additionally, the issuance of the options set forth below under the 1997
Director Plan, in consideration of the surrender of the corollary SARs as of
April 25, 1997, will be confirmed. See "Other Director Compensation."
EXERCISE
NAME NUMBER OF SHARES PRICE
- ---------------------------------------- ----------------- -------------
Andrew G. Galef 50,000 $ 14.1875
57,500 17.5625
250,000 14.5625
Dewain K. Cross 46,000 13.3125
Paul J. Kofmehl 4,000 13.375
4,000 14.25
4,000 19.375
46,000 14.5625
4,000 14.5625
Crocker Nevin 10,000 10.00
4,000 13.375
4,000 14.25
4,000 19.375
4,000 14.5625
The exercise prices of all of the above options reflect the Fair Market Value
(as defined in the 1997 Director Plan) of the Company's Common Stock on the date
of grant. Pursuant to the 1997 Director Plan, such exercise prices were reduced
by the amount, if any, by which the Fair Market Value of the Company's stock
exceeded the base price of the restructured SAR on the date of its cancellation.
In addition, the Board of Directors may from time to time, in its absolute
discretion, grant non-qualified stock options to Qualifying Directors. Each such
option will have a term of ten years unless otherwise specified by the Board of
Directors, and the Board of Directors shall, in its absolute discretion,
determine the exercisability and other provisions of such option.
If on any date upon which options are to be granted under this 1997 Director
Plan the number of shares of Common Stock remaining available under the 1997
Director Plan are less than the number of
16
shares required for all grants to be made on such date, then options to purchase
a proportionate amount of such available number of shares of Common Stock shall
be granted to each Qualifying Director.
The maximum number of shares of Common Stock which may be awarded or
purchased upon exercise of stock options under the 1997 Director Plan is
1,000,000 (which includes the 448,000 shares available under the 1995 Director
Plan, which are being transferred to the 1997 Director Plan), subject to
adjustments as provided in the 1997 Director Plan. Shares of Common Stock
subject to the unexercised portions of any options granted under the 1997
Director Plan which expire, terminate or are forfeited or canceled may again be
subject to options under the 1997 Director Plan.
AMENDMENT AND TERMINATION. The Board of Directors may alter, amend,
suspend, or terminate the 1997 Director Plan, provided that no such action shall
deprive any optionee, without his consent, of any option theretofore granted to
the optionee pursuant to the 1997 Director Plan or of any of his rights under
such option, and provided further that the provisions of the 1997 Director Plan
designating persons eligible to participate and specifying the amount, exercise
price and timing of grants shall not be amended more than once every six months
other than to comport with changes in the Code, the Employment Retirement Income
Security Act, or the rules thereunder.
TERMINATION OF DIRECTORSHIP. All vested options held by Qualifying
Directors as of the date of cessation of service as a director may be exercised
by the Qualifying Director or his heirs or legal representatives for one year
after such cessation of service.
NON-TRANSFERABILITY. Unless otherwise approved by the Board of Directors,
options granted under the 1997 Director Plan are not transferable by the
optionee otherwise than by will or the laws of descent and distribution, and are
exercisable, during the optionee's lifetime, only by the optionee.
TERM OF THE 1997 DIRECTOR PLAN. Subject to approval of the 1997 Director
Plan by the stockholders of the Company, the 1997 Director Plan will be in
effect commencing as of April 22, 1997 for a period of ten years, unless earlier
terminated by the Board of Directors.
FEDERAL INCOME TAX CONSEQUENCES. The following is a brief description of
the Federal income tax treatment which will generally apply to options granted
under the 1997 Director Plan, based on Federal income tax laws in effect on the
date hereof. No information is provided herein with respect to estate,
inheritance, state or local tax laws, although there may be certain tax
consequences upon the receipt or exercise of an option or the disposition of any
acquired shares under those laws. EACH DIRECTOR IS ADVISED TO CONSULT WITH HIS
OR HER TAX ADVISOR WITH REGARD TO ALL CONSEQUENCES ARISING FROM THE GRANT OR
EXERCISE OF STOCK OPTIONS, AND THE DISPOSITION OF ANY ACQUIRED SHARES.
The options granted under the 1997 Director Plan do not qualify for
treatment as incentive stock options under the provisions of Section 422 of the
Code. Upon exercise of an option, the optionee generally will recognize ordinary
income in an amount equal to the excess of the fair market value of the shares
acquired upon exercise (determined as of the date of exercise) over the exercise
price of such option and the Company will be entitled to a deduction equal to
the ordinary income recognized by the optionee. If the sale of the shares
acquired upon exercise of an option would give rise to liability of the optionee
under Section 16 of the Securities Exchange Act of 1934 ("Section 16"), however,
the date on which the ordinary income is recognized and the date on which shares
are valued for purposes of determining the amount of ordinary income may be
required to be deferred. Recipients of options should consult their tax advisors
regarding the impact of Section 16 on the tax consequences of exercising
options. The ordinary income included in the optionee's taxable income as a
result of the exercise of the option will be added to the exercise price in
determining the optionee's basis in the acquired shares. Any gain or loss on the
subsequent sale or disposition of the shares generally will be treated as
long-term or short-term capital gain or loss, as the case may be.
17
APPROVAL REQUIREMENT. Approval of this proposal will require the
affirmative vote of the holders of a majority of the Company's shares voted at
the Annual Meeting either in person or by proxy.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE ADOPTION OF THE 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN.
PROPOSAL 3
ADOPTION OF AMENDED AND RESTATED
DIRECTOR COMPENSATION AND DEFERRAL INVESTMENT PLAN
GENERAL. Since January 1997, the Company has maintained the MagneTek, Inc.
Directors' Deferral Investment Plan (the "Existing Directors' Deferral Plan")
which permits directors who are not employees or officers of the Company
("Eligible Directors") to elect to defer up to 100% of (i) the cash annual
retainer fees (the "Retainer Fees") they are entitled to receive for their
services as members of the Board of Directors of the Company or as chairmen of
committees thereof and (ii) the cash fees ("Meeting Fees") they are entitled to
receive for attending meetings of the Board of Directors or a committee thereof.
Amounts deferred are deemed to be invested in Common Stock and are credited to a
director's individual deferral account on the date on which deferred amounts
otherwise would have been payable to the director. Such accounts are deemed to
be invested in Common Stock and are credited with investment gains (or losses)
based on the appreciation (or depreciation) in the value of the Common Stock in
which the participating director is deemed to be invested, plus dividends paid,
if any. Plan accounts are 100% vested at all times. Upon ceasing to be an
Eligible Director, a plan participant's account is paid out in cash or Common
Stock, at the option of the Compensation Committee. Directors may elect
distribution in a single lump sum or in installments.
The proposed MagneTek, Inc. Amended and Restated Director Compensation and
Deferral Investment Plan (the "Director Compensation Plan") would incorporate
the deferral provisions of the Existing Directors' Deferral Plan and would also
(i) permit Eligible Directors to elect to receive shares of Common Stock in lieu
of cash Meeting Fees and (ii) generally require such Eligible Directors to
receive shares of Common Stock in lieu of cash Retainer Fees (except any such
Meeting Fees or Retainer Fees being deferred pursuant to the Director
Compensation Plan in which case no such current payments would be made). In July
1997, the Board of Directors adopted the Director Compensation Plan and reserved
250,000 shares of Common Stock for issuance under the plan, subject to
stockholder approval. If stockholder approval is obtained, the Director
Compensation Plan will replace the Existing Directors' Deferral Plan and become
effective on the date of the Annual Meeting. In the event that the Director
Compensation Plan is not approved, the Existing Directors' Deferral Plan will
remain in effect.
The Board of Directors believes that requiring Retainer Fees to be paid in
Common Stock, permitting Meeting Fees to be paid in Common Stock and offering
directors the opportunity to defer voluntarily their fees will align directors'
and stockholders' interests, give directors added incentive to further the
long-term profitability of the Company and enhance the Company's ability to
attract and retain directors of outstanding competence, thereby benefiting the
stockholders of the Company.
The principal features of the Director Compensation Plan are summarized
below. All statements set forth in this Proxy Statement relating to the Director
Compensation Plan are qualified in their entirety by reference to the complete
text of the Director Compensation Plan which is set forth in Appendix B to this
Proxy Statement.
PARTICIPATION. Those members of the Board of Directors who are not
employees or officers of the Company will be eligible to participate in the
Director Compensation Plan. If an Eligible Director no longer meets the
requirements for participation in the Director Compensation Plan, such director
will become an inactive participant, retaining all the rights described in the
Director Compensation Plan,
18
except the right to make any further deferrals under the Director Compensation
Plan or to receive payment of Retainer Fees and Meeting Fees in Common Stock,
until the director again becomes an active participant.
Four current directors, Cross, Kofmehl, Sallee and Wycoff, will participate
in the Director Compensation Plan if the Director Compensation Plan is approved
by the Company's stockholders. All such directors will remain eligible to
participate in the Existing Directors' Deferral Plan if the Director
Compensation Plan is not so approved.
PAYMENT OF COMMON STOCK IN LIEU OF CASH RETAINER FEES AND MEETING
FEES. Subject to the provisions described in the next sentence, an Eligible
Director will receive Common Stock in lieu of the annual cash Retainer Fees
payable to such Eligible Director each year for so long as the Director
Compensation Plan is in effect. The Board of Directors has the authority, in its
sole discretion, to permit all of a director's Retainer Fees to be paid in cash,
rather than in Common Stock, if an Eligible Director establishes, to the
satisfaction of the Board of Directors, that special circumstances, such as
financial hardship, warrant such cash payment. In addition, an Eligible Director
may elect to receive Common Stock in lieu of cash Meeting Fees payable to such
Eligible Director each year for so long as the Director Compensation Plan is in
effect.
The number of shares of Common Stock to be paid in lieu of cash Retainer
Fees or cash Meeting Fees (if an Eligible Director elects to so receive Common
Stock in lieu of cash Meeting Fees) on each payment date will be equal to (i)
the amount of the cash Retainer Fees or cash Meeting Fees, as applicable,
payable to each Eligible Director divided by (ii) the Fair Market Value (as
defined in the Director Compensation Plan) of Common Stock as determined on the
most recent practicable date preceding the payment date.
DEFERRAL OF PAYMENT OF RETAINER FEES AND MEETING FEES. An Eligible Director
may elect to defer up to 100% of his or her Retainer Fees for any calendar year
and up to 100% of his or her Meeting Fees during any calendar year.
Absent a showing to the satisfaction of the Board of Directors of severe
financial hardship (in which case an earlier distribution may be permitted), the
amounts deferred by each participating Eligible Director and the accumulated
earnings thereon will be paid (or commence to be paid) to the participating
Eligible Director in January following the calendar year in which the
termination of the participating Eligible Director's service as a director
occurs for any reason other than death. In the event of the participating
Eligible Director's death, the payment of the amounts deferred and the
accumulated earnings (or the remaining unpaid balance, as applicable) will be
made in a single lump sum payment as soon as administratively practical.
Participating Eligible Directors will have no interest in any specific asset
of the Company. The right to receive deferred payments under the Director
Compensation Plan is equivalent to that of an unsecured general creditor of the
Company.
FEDERAL INCOME TAX CONSEQUENCES. The following is a summary of the Federal
income and employment and withholding tax treatment which generally will apply
to Eligible Directors participating in the Director Compensation Plan, based on
the Federal income tax laws in effect on the date hereof. The following
discussion is limited to the Federal income and certain Federal employment tax
rules relevant to the Company and to individuals who are citizen or residents of
the United States. Except as described below, no information is being provided
herein with respect to estate, inheritance, state, local or foreign laws. THIS
SUMMARY SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. EACH ELIGIBLE DIRECTOR
PARTICIPATING IN THE DIRECTOR COMPENSATION PLAN IS ADVISED TO CONSULT WITH HIS
TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES RELATING TO PARTICIPATION IN THE DIRECTOR COMPENSATION PLAN.
19
The deferral by a participating Eligible Director of a portion of his
compensation under the Director Compensation Plan will not be a taxable event
for the participating Eligible Director. Rather, amounts credited to a
participating Eligible Director's deferral accounts under the Director
Compensation Plan, including all accrued investment earnings thereon, will be
taxable to the participating Eligible Director as ordinary income for Federal
income and self-employment tax purposes in the year in which such amounts are
distributed to such participating Eligible Director. Distributions are not
eligible for rollover into an Individual Retirement Account or a qualified plan.
Thus, the amounts a participating Eligible Director defers and the amount by
which such participating Eligible Director's deferral account balances increase
by way of deemed investments will be taxed when paid to that participating
Eligible Director.
Distributions from a participating Eligible Director's account under the
Director Compensation Plan pursuant to the installment distribution option of
ten years will be exempt under Federal law from taxation in the state in which
the services attributable to the deferred earnings were performed by the
participating Eligible Director, with the result that a participating Eligible
Director will be subject to state income tax on such distributions only in the
state in which the participating Eligible Director is a resident at such time.
Distributions from a participating Eligible Director's account under the
Director Compensation Plan pursuant to either the lump-sum distribution option
or an installment distribution option of less than ten years may be subject to
state income tax in the state in which the services attributable to the deferred
earnings were performed by the participating Eligible Director, the state in
which the participating Eligible Director is a resident at the time of the
distribution, or both. Participating Eligible Directors should consult their tax
advisors as to the state income tax consequences of distributions from their
accounts under the Director Compensation Plan.
AMENDMENT AND TERMINATION. The Company may amend, modify, or terminate the
Director Compensation Plan at any time by action of the Board of Directors, with
or without prior notice. No such amendment or termination will in any material
manner adversely affect any participating Eligible Director's rights to amounts
already deferred or earned or earnings thereon up to the point of amendment or
termination or any rights of such Eligible Director under any Common Stock
previously paid to him or her under the Director Compensation Plan, without the
consent of such Eligible Director.
NON-TRANSFERABILITY. Except under circumstances outlined in the Director
Compensation Plan, participating Eligible Directors' rights to deferred amounts,
contributions and earnings accrued thereon under the Director Compensation Plan
may not be sold, transferred, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. The Company will
not make any payment under the Director Compensation Plan to any assignee or
creditor of a participating Eligible Director.
APPROVAL REQUIREMENT. Approval of this proposal will require the
affirmative vote of the holders of a majority of the Company's shares voted at
the Annual Meeting either in person or by proxy.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE ADOPTION OF THE AMENDED AND RESTATED DIRECTOR COMPENSATION AND DEFERRAL
INVESTMENT PLAN.
20
STOCKHOLDER PROPOSALS
No proposals have been submitted by stockholders for consideration at the
Annual Meeting. Any proposal relating to a proper subject which an eligible
stockholder of the Company may intend to present for action at the 1998 Annual
Meeting of Stockholders of the Company must be received by the Secretary of the
Company not later than June 23, 1998, to be considered for inclusion in the
Company's proxy statement and form of proxy relating to that meeting. The
Company anticipates that next year's annual meeting will take place on October
20, 1998.
OTHER MATTERS
The Company does not know of any business other than that described herein
which will be presented for consideration or action by the stockholders at the
Annual Meeting. If, however, any other business shall properly come before the
Annual Meeting, shares represented by Proxies will be voted in accordance with
the best judgment of the persons named therein or their substitutes.
Representatives of Ernst & Young LLP, the Company's independent auditors, are
expected to be present at the Annual Meeting. At that time they will have the
opportunity to make a statement if they desire to do so, and are expected to be
available to respond to appropriate questions.
ANNUAL REPORT TO STOCKHOLDERS
The Annual Report of the Company for the 1997 fiscal year is being mailed to
stockholders together with this Proxy Statement.
THE COMPANY WILL SEND TO STOCKHOLDERS UPON WRITTEN REQUEST, WITHOUT CHARGE,
A COPY OF THE ANNUAL REPORT ON FORM 10-K (WITHOUT EXHIBITS) FOR THE YEAR ENDED
JUNE 30, 1997 WHICH THE COMPANY HAS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. THE REQUEST MUST BE DIRECTED TO THE ATTENTION OF THE SECRETARY, AT
THE ADDRESS OF THE COMPANY SET FORTH ON THE FIRST PAGE OF THIS PROXY STATEMENT.
By Order of the Board of Directors,
/s/ Samuel A. Miley
Samuel A. Miley
Vice President, General Counsel and
Secretary
Nashville, Tennessee
September 24, 1997
21
APPENDIX A
MAGNETEK, INC.
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. Under this 1997 Non-Employee Director Stock Option
Plan (the "Director Plan") of MagneTek, Inc., a Delaware corporation (the
"Company"), options shall be granted to eligible persons, as set forth in
Section 4, to purchase shares of the Company's common stock ("Common Stock").
This Director Plan is designed to promote the long-term growth and financial
success of the Company by enabling it to attract, retain and motivate such
persons by providing for or increasing their interest in the Company. This Plan
replaces the Non-Employee Director Stock Option Plan of the Company (the "1995
Plan").
2. EFFECTIVE DATES. This Director Plan shall be in effect commencing on
April 22, 1997, subject to approval by the Company's stockholders. Options may
not be granted subsequent to (a) the tenth anniversary of the effective date
hereof or (b) termination of this Director Plan by the Board of Directors of the
Company (the "Board"), whichever is earlier. However, there will be a grant on
the tenth anniversary of the effective date hereof if the Director Plan has not
theretofore been terminated by the Board pursuant to the foregoing clause (b).
3. PLAN OPERATION. To the extent that any questions of interpretation
arise hereunder, these shall be resolved by the Board.
4. ELIGIBLE PERSONS. The persons eligible to receive a grant of
non-qualified stock options hereunder are any Director of the Board who on the
date of said grant is not an employee of the Company or a subsidiary of the
Company (a "Qualifying Director").
5. STOCK SUBJECT TO DIRECTOR PLAN. The maximum number of shares that may
be subject to options granted hereunder shall be 1,000,000 shares of Common
Stock, subject to adjustments under Section 6, of which 448,000 shares are being
transferred from the 1995 Plan. Shares of Common Stock subject to the
unexercised portions of any options granted under this Director Plan which
expire, terminate or are forfeited or cancelled may again be subject to options
under this Director Plan.
6. ADJUSTMENTS. In the event that the outstanding shares of Common Stock
of the Company are hereafter changed into or exchanged for a different number or
kind of shares or other securities of the Company, or of another corporation, by
reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, spin-off, stock dividend or combination of
shares, appropriate adjustments shall be made in the number and kind of shares:
(a) that may be subject to options granted under this Director Plan; (b) as to
which options may thereafter be granted or issued under this Director Plan and
(c) for which options then outstanding under this Director Plan may thereafter
be exercised. Any such adjustments in outstanding options shall be made without
changing the aggregate exercise price applicable to the unexercised portions of
such options.
7. STOCK OPTIONS.
(a) Simultaneous with the ratification of this Director Plan by
stockholders, the grant to each Qualifying Director who is not an officer of
the Company (a "Non-Officer Qualifying Director") elected at such meeting of
stockholders of a non-qualified stock option to purchase 4,000 shares of the
Company's Common Stock as of June 27, 1997 will be confirmed. Thereafter,
upon initial election or appointment of any director to the Board or upon a
continuing director becoming a Non-Officer Qualifying Director, such
Non-Officer Qualifying Director will receive an option to purchase 4,000
A-1
shares of the Company's Common Stock pursuant to the terms and conditions
described in this Section 7. In addition, Non-Officer Qualifying Directors
will be automatically granted, on an annual basis, a non-qualified stock
option to purchase 4,000 shares of the Company's Common Stock on the last
business day of the Company's fiscal year ending after the initial grant of
such Non-Officer Qualifying Director's 4,000 share option pursuant to this
Section 7. Each option granted pursuant to this Section 7(a) will have a
term of ten years and shall become exercisable as follows: options with
respect to 50% of the shares one year after the date of grant and options
with respect to the remaining 50% of the shares two years after the date of
grant.
(b) The Board may from time to time, in its absolute discretion, grant
non-qualified stock options to Qualifying Directors. Each option granted
pursuant to this Section 7(b) will have a term of ten years unless otherwise
specified by the Board, and the Board shall, in its absolute discretion,
determine the exercisability and other provisions of such option.
(c) The per share exercise price of options granted under this Director
Plan will be the fair market value of a share of the Company's Common Stock
on the date of grant (the "Fair Market Value"), defined as (i) the mean
between the highest and lowest sales prices of a share of the Company's
stock on the principal exchange on which shares of the Company's stock are
then trading, if any, on such determination date, or, if shares were not
traded on such date, then on the next preceding trading day during which a
sale occurred, as such prices are quoted in THE WALL STREET JOURNAL; or (ii)
if such stock is not traded on an exchange but is quoted on NASDAQ or a
successor quotation system, (1) the mean between the highest and lowest
sales prices (if the stock is then listed as a National Market Issue under
the NASD National Market System) or (2) the mean between the closing
representative bid and asked prices (in all other cases) for the stock on
such determination date as reported by NASDAQ or such successor quotation
system; or (iii) if such stock is not publicly traded on an exchange and not
quoted on NASDAQ or a successor quotation system, the mean between the
closing bid and asked prices for the stock, on such determination date, as
determined in good faith by the Board; or (iv) if the Company's stock is not
publicly traded, the fair market value established by the Board in good
faith. The exercise price of options may be reduced by an amount equal to
the value, as determined by the Board in good faith, of any rights
surrendered by the recipient of the option at the Company's request.
(d) If on any date upon which options are to be granted under this
Director Plan the number of shares of Common Stock remaining available under
the Director Plan are less than the number of shares required for all grants
to be made on such date, then options to purchase a proportionate amount of
such available number of shares of Common Stock shall be granted to each
Qualifying Director.
8. DOCUMENTATION OF GRANTS. Awards made under this Director Plan may be
evidenced by written agreements or such other appropriate documentation as the
Board shall prescribe. The Board need not require the execution of any
instrument or acknowledgment of notice of an award under Section 7(a) of this
Director Plan, in which case continued service as a Qualifying Director by the
respective optionees will constitute agreement to the terms of the award.
9. NONTRANSFERABILITY. Unless otherwise approved by the Board, options
granted under this Director Plan are nontransferable by the optionee otherwise
than by will or the laws of descent and distribution, and are exercisable,
during the optionee's lifetime, only by the optionee.
10. AMENDMENT AND TERMINATION. The Board may alter, amend, suspend, or
terminate this Director Plan, provided that no such action shall deprive any
optionee, without his consent, of any option theretofore granted to the optionee
pursuant to this Director Plan or of any of his rights under such option and
provided further that the provisions of this Director Plan designating persons
eligible to participate in the Director Plan and specifying the amount, exercise
price and timing of grants under the Director Plan
A-2
shall not be amended more than once every six months other than to comport with
changes in the Internal Revenue Code, the Employee Retirement Income Security
Act, or the rules thereunder.
11. TERMINATION OF DIRECTORSHIP. All vested options held by Qualifying
Directors as of the date of cessation of service as a director may be exercised
by the Qualifying Director or his heirs or legal representatives for one year
after such cessation of service.
12. MERGER, CONSOLIDATION, ACQUISITION, LIQUIDATION OR DISSOLUTION. Upon
or in connection with the merger or consolidation of the Company with or into
another corporation, the acquisition by another corporation, person or group of
all or substantially all of the Company's assets or 40% or more of the Company's
then outstanding voting stock or the liquidation or dissolution of the Company:
(a) If so provided in the relevant agreement relating to a merger,
consolidation, acquisition of assets, liquidation or dissolution, such
option shall be either assumed or replaced by a substitute option, as
applicable, issued by the successor or any corporation that is a "parent" of
the Company within the meaning of Rule 405 under the Securities and Exchange
Act of 1933, as amended (the "Securities Act"), resulting from such
transaction, without any further action on the part of the Board or the
Qualifying Director.
(b) If no provision is made as set forth in (a), or in the event of an
acquisition of 40% or more of the Company's then outstanding voting stock to
which subsection (c) is inapplicable, such option shall become (to the
extent not then fully vested) fully exercisable from and after the date
which is thirty days prior to the effective date of the transaction and
until the normal expiration thereof.
(c) In the event of an acquisition of 40% or more the Company's then
outstanding voting stock (other than pursuant to a merger resulting in the
ownership of all of the Company's outstanding Common Stock by another
corporation), if as a result of the transaction the Company's Common Stock
will cease to be traded on a national stock exchange, listed as a National
Market Issue on the National Market System or quoted on the NASDAQ quotation
system, each option which has not been exercised prior to the consummation
of the transaction shall be converted automatically into the right to
receive, within thirty days of such consummation, an amount in cash equal to
the difference between the aggregate exercise price for all shares subject
to the option (whether or not then subject to exercise) and the Fair Market
Value of such shares on the date which is the last trading date preceding
the consummation of such transaction.
(d) The foregoing provisions shall have no application to a merger in
which (i) the Company is the surviving corporation, (ii) no person or group
acquires 40% or more of the Company's outstanding voting stock and (iii) the
shares of the Company's Common Stock outstanding prior to the merger remain
outstanding thereafter.
13. MANNER OF EXERCISE. All or a portion of an exercisable option shall be
deemed exercised upon delivery to the Secretary of the Company at the Company's
principal office of all of the following: (i) a written notice of exercise
specifying the number of shares to be purchased signed by the Qualifying
Director or other person then entitled to exercise the option, (ii) full payment
of the exercise price for such shares by any of the following or combination
thereof: (a) cash, (b) certified or cashier's check payable to the order of the
Company, (c) the delivery of whole shares of the Company's Common Stock owned by
the option holder, or (d) by requesting that the Company withhold whole shares
of Company Common Stock then issuable upon exercise of the option (for purposes
of such a transaction the shares withheld by the Company shall be valued at the
Fair Market Value as of the date prior to the exercise date), (iii) such
representations and documents as the Board, in its sole discretion, deems
necessary or advisable to effect compliance with all applicable provisions of
the Securities Act and other federal or state securities laws or regulations,
(iv) in the event that the option shall be exercised by any person or persons
other than the
A-3
Qualifying Director, appropriate proof of the right of such person or persons to
exercise the option, and (v) such representations and documents as the Board, in
its sole discretion, deems necessary or advisable.
14. COMPLIANCE WITH LAW. Common Stock shall not be issued upon exercise of
an option granted under this Director Plan unless and until counsel for the
Company shall be satisfied that any conditions necessary for such issuance to
comply with applicable federal, state or local tax, securities or other laws or
rules or applicable securities exchange requirements have been fulfilled.
A-4
APPENDIX B
MAGNETEK, INC.
AMENDED AND RESTATED DIRECTOR COMPENSATION
AND DEFERRAL INVESTMENT PLAN
ARTICLE 1. ESTABLISHMENT AND PURPOSES
1.1 ESTABLISHMENT. MagneTek, Inc., a Delaware corporation (the "Company"),
hereby establishes, effective as of ___________, 1997, an amended and restated
director pay and deferred compensation plan, which shall be known as the
"MagneTek, Inc. Amended and Restated Director Compensation and Deferral
Investment Plan" (the "Plan"), for present and future members of the Board of
Directors who are not employees or officers of the Company.
1.2 PURPOSE. The primary purposes of the Plan are (i) to provide members of
the Board of Directors who are not employees or officers of the Company with the
opportunity to defer voluntarily a portion of their Director's Fees, subject to
the terms of the Plan and (ii) to encourage ownership of common stock by members
of the Board of Directors who are not employees or officers of the Company and
thereby align such directors' interests more closely with the interests of the
stockholders of the Company. By adopting the Plan, the Company desires to
enhance its ability to attract and retain Directors of outstanding competence.
ARTICLE 2. DEFINITIONS
Whenever used herein, the following terms shall have the meanings set forth
below, and, when the defined meaning is intended, the term is capitalized:
(a) "Board" or "Board of Directors" means the Board of Directors of the
Company.
(b) "Board Meeting" means any meeting of the Board of Directors or of any
committee thereof on which the Director serves and for which the Director is
entitled to receive Meeting Fees.
(c) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(d) "Company" means MagneTek, Inc., a Delaware corporation.
(e) "Director" means a member of the Board of Directors of the Company who
is neither an employee nor an officer of the Company.
(f) "Director's Fees" means a Director's Retainer Fees and Meeting Fees,
whether payable in cash or stock or any combination thereof.
(g) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
(h) "Fair Market Value" means (i) the mean between the highest and lowest
sales prices of a share of the Company's stock on the principal exchange on
which shares of the Company's stock are then trading, if any, on such
determination date, or, if shares were not traded on such date, then on the next
preceding trading day during which a sale occurred, as such prices are quoted in
THE WALL STREET JOURNAL; or (ii) if such stock is not traded on an exchange but
is quoted on NASDAQ or a successor quotation system, (1) the mean between the
highest and lowest sales prices (if the stock is then listed as a National
Market Issue under the NASD National Market System) or (2) the mean between the
closing representative bid and asked prices (in all other cases) for the stock
on such determination date as reported by NASDAQ or such successor quotation
system; or (iii) if such stock is not publicly traded on an exchange and not
quoted on NASDAQ or a successor quotation system, the mean between the closing
bid and asked prices for the
B-1
stock, on such determination date, as determined in good faith by the Board; or
(iv) if the Company's stock is not publicly traded, the fair market value
established by the Board in good faith.
(i) "Meeting Fees" means the fees paid to a Director on a per meeting basis
for attending a meeting of the Board of Directors or a committee thereof.
(j) "Participant" means a Director who is actively participating in the
Plan.
(k) "Plan" means this MagneTek, Inc. Amended and Restated Director
Compensation and Deferral Investment Plan, as it may be amended from time to
time.
(l) "Retainer Fees" means annual retainer fees paid to a Director for
serving as a member of the Board of Directors or as a Chairman of a committee
thereof for a full year's service on the Board or such lesser amount as may be
payable to any Director in respect of services on the Board of less than a full
year.
(m) "Stock" means common stock of the Company, par value $.01 per share.
(n) "Value" means the fair market value of the cash and/or Stock a Director
receives (or, absent deferrals hereunder, is entitled to receive) as Director's
Fees.
(o) "Year" means a calendar year.
ARTICLE 3. ADMINISTRATION
3.1 AUTHORITY OF THE BOARD. The Plan shall be administered by the full
Board of Directors of the Company. Subject to the terms of the Plan, and to the
extent permissible under Section 16 of the Securities Exchange Act of 1934, as
amended, the Board may delegate ministerial duties to the Chief Human Resources
Officer or any other executive or executives of the Company.
Subject to the provisions herein, the Board shall have full power and
discretion to issue Stock to Participants in accordance with the terms of the
Plan; to determine the terms and conditions of each Director's participation in
the Plan; to construe and interpret the Plan and any agreement or instrument
entered into under the Plan; to establish, amend, or waive rules and regulations
for the Plan's administration; to amend (subject to the provisions of Article 11
herein) the terms and conditions of the Plan and any agreement entered into
under the Plan; and to make other determinations which may be necessary or
advisable for the administration of the Plan.
3.2 DECISIONS BINDING. All determinations and decisions of the Board as to
any disputed question arising under the Plan, including questions of
construction and interpretation, shall be final, conclusive, and binding on all
parties and shall be given the maximum possible deference allowed by law.
3.3 ARBITRATION. Any individual making a claim for benefits under this
Plan may contest the Board's decision to deny such claim or appeal therefrom
only by submitting the matter to binding arbitration before a single arbitrator.
Any arbitration shall be held in Nashville, Tennessee, unless otherwise agreed
to by the Board. The arbitration shall be conducted pursuant to the Commercial
Arbitration Rules of the American Arbitration Association.
The arbitrator's authority shall be limited to the affirmation or reversal
of the Board's denial of the claim or appeal, and the arbitrator shall have no
power to alter, add to, or subtract from any provision of this Plan. The
arbitrator's decision shall be final and binding on all parties, if warranted on
the record and reasonably based on applicable law and the provisions of this
Plan. The arbitrator shall have no power to award any punitive, exemplary,
consequential, or special damages, and under no circumstances shall an award
contain any amount that in any way reflects any of such types of damages. Each
party shall bear its own attorney's fees and costs of arbitration. Judgment on
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
B-2
3.4 INDEMNIFICATION. Each person who is or shall have been a member of the
Board shall be indemnified and held harmless by the Company against and from any
loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit, or proceeding to which he or she may be a defendant, or in which he or she
may be a party by reason of any act or omission by such Board member in his or
her capacity as an administrator of the Plan, and against and from any and all
amounts paid by him or her in settlement thereof, with the Company's approval,
or paid by him or her in satisfaction of any judgment in any such action, suit,
or proceeding against him or her, provided he or she shall give the Company an
opportunity, at its own expense, to handle and defend the same before he or she
undertakes to handle and defend it on his or her own behalf.
The foregoing right of indemnification shall not be exclusive of any other
rights of indemnification to which such persons may be entitled under the
Company's Certificate of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.
ARTICLE 4. PARTICIPATION
4.1 PARTICIPATION. Those members of the Board of Directors who are not
employees or officers of the Company shall participate in the Plan.
In the event a Participant no longer meets the requirements for
participation in the Plan, such Participant shall become an inactive
Participant, retaining all the rights described under the Plan, except the right
to make any further deferrals or receive payment of Directors' Fees in Stock,
until such time that the Participant again becomes an active Participant.
4.2 PARTIAL YEAR PARTICIPATION. In the event that a Director first becomes
a Participant during a Year, such Participant shall be notified by the Company
of his or her participation, and the Company shall provide each such Participant
with "Election to Defer Forms," which must be completed by the Participant as
provided in Sections 6.2 and 6.3 herein and "Election to Receive Stock Forms,"
which must be completed by the Participant as provided in Sections 5.2 and 5.3
herein; provided, however, that such Participant may only make an election to
defer with respect to that portion of his or her Director's Fees for such Year
which are to be earned after the filing of the election and such Participant may
only make an election to receive payment of Meeting Fees in stock with respect
to that portion of his or her Meeting Fees for such year which are to be earned
after the filing of the election.
ARTICLE 5. STOCK IN LIEU OF CASH DIRECTOR'S FEES
5.1 PAYMENT IN STOCK. Subject to Section 5.5 herein, a Director shall
receive Stock in lieu of the annual cash Retainer Fees otherwise payable to each
Director each year for so long as this Plan is in effect, to the extent and
subject to the terms and conditions set forth in this Article 5. In addition, a
Director may elect to receive Stock in lieu of cash Meeting Fees payable to such
Director each year for so long as this Plan is in effect, to the extent and
subject to the terms and conditions set forth in this Article 5.
5.2 STOCK PAYMENT PROCEDURES. The number of shares of Stock to be paid in
lieu of cash Retainer Fees or cash Meeting Fees (in the event of an election by
a Director to so receive Stock in lieu of cash Meeting Fees) on each payment
date shall be equal to (i) the amount of the cash Retainer Fees or cash Meeting
Fees, as applicable, payable to each Director at the rates then in effect
divided by (ii) the Fair Market Value of Stock as determined on the most recent
practicable date preceding the payment date. No fractional shares of Stock shall
be granted; instead, the cash remainder shall be paid to the Participant. The
Company shall deliver to each Participant each month as payment of Retainer Fees
one or more certificates representing the Stock, registered in the name of the
Participant (or if directed by the Participant, in the joint names of the
Participant and his or her spouse). The Company shall deliver to each
Participant who has filed an "Election to Receive Stock Form" as payment of
Meeting Fees one or more certificates representing the Stock, registered in the
name of the Participant (or, if directed by the
B-3
Participant, in joint names of the Participant and his or her spouse) at the
times such Meeting Fees are customarily paid by the Company.
5.3 METHOD OF ELECTING TO RECEIVE STOCK IN LIEU OF CASH MEETING FEES. In
order to receive Stock in lieu of cash Meeting Fees under the Plan, the Director
must complete and deliver to the Company a written "Election To Receive Stock
Form" on which he or she designates the election to receive Stock. Participants
shall make their elections to receive payment in Stock for their Meeting Fees
under the Plan no later than the date immediately prior to the date of the Board
Meeting to which such Meeting Fees relate. All elections to receive payment in
Stock for Meeting Fees shall be made on an "Election to Receive Stock Form," as
described herein and shall be delivered by the Participant to the Board (or its
delegate) as described in Section 12.1 herein. The election to receive payment
in Stock for Meeting Fees shall automatically remain in effect for all periods
the Participant participates in the Plan until revoked or changed by the
Participant.
The election may be revoked or changed with respect to future Board Meetings
by filing with the Board (or its delegate) a new election on an "Election to
Receive Stock Form" no later than the day immediately prior to the date of the
next Board Meeting for which the Participant shall receive Meeting Fees.
5.4 RIGHTS OF THE PARTICIPANT. Except for the terms and conditions set
forth in this Plan, a Participant paid Stock in lieu of the cash Retainer Fees
or cash Meeting Fees shall have all of the rights of a holder of the Stock,
including the right to receive dividends paid on such Stock and the right to
vote the Stock at meetings of stockholders of the Company. Upon delivery, such
Stock will be nonforfeitable.
5.5 SPECIAL CIRCUMSTANCES. The Board shall have the authority, in its sole
discretion, to permit all of a Director's Retainer Fees to be paid in cash,
rather than in Stock, in the event that a Director establishes, to the
satisfaction of the Board, that special circumstances warrant such cash payment.
The merit of the Director's special circumstances plea shall be judged by the
Board. The Board's decision as to whether the Director's special circumstances
plea justifies the cash payment of the Director's Retainer Fees shall be final,
conclusive, and not subject to appeal.
ARTICLE 6. DEFERRAL OPPORTUNITY
6.1 AMOUNT WHICH MAY BE DEFERRED. A Participant may elect to defer up to
one hundred percent (100%) of his or her Retainer Fees for any Year and up to
one hundred percent (100%) of his or her Meeting Fees for each Board Meeting
during any Year. The amount of Retainer Fees and Meeting Fees to be deferred
shall be expressed as a percentage of the Value of the fees otherwise payable
(in cash or Stock) for the Participant's service as a Director of the Company.
6.2 DEFERRAL ELECTION FOR RETAINER FEES. Participants shall make their
elections under the Plan to defer their Retainer Fees no later than December 20
prior to the beginning of each Year, or not later than thirty (30) calendar days
following notification of initial eligibility to participate herein (with
respect to Retainer Fees not yet earned or paid). All elections to defer
Retainer Fees shall be made on an "Election to Defer Form," as described herein
and shall be delivered by the Participant to the Board (or its delegate) as
described in Section 12.1 herein. The deferral election with respect to Retainer
Fees shall automatically remain in effect for the Year in question (for which it
shall be irrevocable) and for all subsequent periods the Participant
participates in the Plan until revoked or changed by the Participant. The
deferral may be revoked or changed with respect to future Years only by
delivering a new election on an "Election to Defer Form" no later than December
20 prior to the beginning of the Year.
Participants shall make the following elections on an "Election to Defer
Form":
(a) The amount to be deferred with respect to his or her Retainer Fees for
the Year, pursuant to the terms of Section 6.1 herein; and
B-4
(b) The form of payment to be made to the Participant at the end of the
deferral period, pursuant to the terms of Section 6.5 herein.
6.3 DEFERRAL ELECTION FOR MEETING FEES. Participants shall make their
elections to defer their Meeting Fees under the Plan no later than the date
immediately prior to the date of the Board Meeting to which such Meeting Fees
relate. Notwithstanding the foregoing, the initial election of the Participants'
deferral of Meeting Fees shall be made no later than December 20 prior to the
beginning of the Year or no later than thirty (30) calendar days following
notification of initial eligibility to participate in the Plan (with respect to
Meeting Fees not yet earned or paid). All elections to defer Meeting Fees shall
be made on an "Election to Defer Form," as described in Section 6.2 herein and
shall be delivered by the Participant to the Board (or its delegate) as
described in Section 12.1 herein. On the "Election to Defer Form" described in
Section 6.2, the Participant shall elect (in addition to any other relevant
elections described in Section 6.2 herein) the amount to be deferred with
respect to his or her Meeting Fees for each Board Meeting, pursuant to the terms
of Section 6.1 herein. The deferral election with respect to Meeting Fees shall
automatically remain in effect for all periods the Participant participates in
the Plan until revoked or changed by the Participant.
The deferral may be revoked or changed with respect to future Board Meetings
by filing with the Board (or its delegate) a new election on an "Election to
Defer Form" no later than the day immediately prior to the date of the next
Board Meeting for which the Participant shall receive Meeting Fees.
6.4 LENGTH OF DEFERRAL. Except as otherwise provided in Section 6.7, the
amounts deferred by each Participant and the accumulated earnings thereon shall
be paid (or commence to be paid) to the Participant as provided in Sections 6.5
and 6.6 herein in January following the Year in which the termination of the
Participant's service as a Director of the Company occurs for any reason other
than death. In the event of the Participant's death, the payment of the amounts
deferred and the accumulated earnings thereon (or, in the event of death
following commencement of installment payments, the remaining unpaid balance
thereof) shall be made in a single lump sum payment in the form provided in
Section 6.6 herein as soon as administratively practical after the Participant's
death.
6.5 FORM OF PAYMENT OF DEFERRED AMOUNTS. Subject to Section 6.7,
Participants shall be entitled to elect to receive payment of deferred amounts,
together with earnings accrued thereon, at the end of the deferral period in a
single lump sum payment or by means of installments. All deferred amounts,
together with earnings accrued thereon, shall be paid in the same form. If no
election is made, the Participant will be paid in a single lump sum.
(a) LUMP SUM PAYMENT. Such payment of deferred amounts and earnings accrued
thereon shall be made to the Participant in January following the Year in
which he ceases to serve as a Director, as described in Section 6.4
herein.
(b) INSTALLMENT PAYMENTS. Participants may elect to receive the payout of
deferred amounts and earnings accrued thereon in annual installments,
with a minimum number of installments of two (2), and a maximum number of
installments of ten (10). The initial payment shall be made in January
following the Year in which he ceases to serve as a Director, as
described in Section 6.4 herein. The remaining installment payments shall
be made in January of each Year thereafter, until the Participant's
entire deferred account has been paid in full. Earnings shall continue to
accrue on the deferred amounts in the Participant's deferred account, as
provided in Section 7.2 of this Plan. The amount of each installment
payment shall be equal to the balance remaining in the Participant's
deferred account immediately prior to each such payment, multiplied by a
fraction, the numerator of which is one (1), and the denominator of which
is the number of installment payments remaining.
Subject to the following rules, the Participant may elect to change a form
of benefit elected pursuant to this Section 6.5 by filing a revised election
form on an "Election to Defer Form," as described in Section 6.2 herein,
specifying the new form of distribution:
B-5
(1) An election to change the form of distribution must be made no later
than December 31 at least one (1) full Year prior to the payout
commencement date as described in Section 6.4 herein. If a new election
is submitted after this date, the election shall be null and void, and
the form of distribution shall be determined under the Participant's
original election.
(2) Any election to change the form of distribution from installments to a
lump sum is subject in all cases to the approval of the Board.
(3) No further election to change a form of distribution shall be permitted
with respect to amounts already subject to a revised election submitted
pursuant to this Section 6.5.
Notwithstanding anything to the contrary herein, the Board may elect at any
time, in its sole and absolute discretion, to make payment of deferred amounts
and accumulated earnings thereon (or the remaining amount thereof) to the
Participant in a single lump sum, notwithstanding the Participant's election to
receive such amounts in the form of installments.
6.6 TYPE OF PAYMENT OF DEFERRED AMOUNTS. All payments of deferred amounts
hereunder shall be made in cash or shares of Stock, or any combination thereof,
as directed by the Board in its sole and absolute discretion.
6.7 FINANCIAL HARDSHIP. The Board shall have the authority to alter the
timing or manner of payment of deferred amounts in the event that the
Participant establishes, to the satisfaction of the Board, severe financial
hardship. In such event, the Board may, in its sole discretion:
(a) Authorize the cessation of deferrals by such Participant under the Plan;
or
(b) Provide that all, or a portion, of the amount previously deferred by the
Participant shall immediately be paid in a lump sum cash payment; or
(c) Provide that all, or a portion, of the installments payable over a
period of time shall immediately be paid in a lump sum cash payment; or
(d) Provide for such other installment payment schedule as deemed
appropriate by the Board under the circumstances.
For purposes of this Section 6.7, "severe financial hardship" shall mean any
financial hardship resulting from extraordinary and unforeseeable circumstances
arising as a result of one or more recent events beyond the control of the
Participant. In any event, payment may not be made to the extent such emergency
is or may be relieved: (i) through reimbursement or compensation by insurance or
otherwise; (ii) by liquidation of the Participant's assets, to the extent the
liquidation of such assets would not itself cause severe financial hardship; and
(iii) by cessation of deferrals under the Plan. Withdrawals of amounts because
of a severe financial hardship may only be permitted to the extent reasonably
necessary to satisfy the hardship, plus to pay taxes on the withdrawal. Examples
of what are not considered to be severe financial hardships include the need to
send a Participant's child to college or the desire to purchase a home. The
Participant's account will be credited with earnings in accordance with the Plan
up to the date of distribution.
The severity of the financial hardship shall be judged by the Board. The
Board's decision with respect to the severity of financial hardship and the
manner in which, if at all, the Participant's future deferral opportunities
shall be ceased, and/or the manner in which, if at all, the payment of deferred
amounts to the Participant shall be altered or modified, shall be final,
conclusive, and not subject to appeal.
ARTICLE 7. DEFERRED COMPENSATION ACCOUNTS
7.1 PARTICIPANTS' ACCOUNTS. The Company shall establish and maintain an
individual bookkeeping account for deferrals made by each Participant under
Article 6 herein. Each account shall be credited as of the date the amount
deferred otherwise would have become due and payable to the Participant and as
B-6
provided in Section 7.2. Each Participant's account shall be one hundred percent
(100%) vested at all times.
7.2 GAINS AND LOSSES ON DEFERRED AMOUNTS. Each Participant's account for
deferrals will be deemed to be invested in Stock, including any dividends paid
thereon (which will be deemed to be reinvested in such Stock). Each
Participant's account will thus be adjusted and increased or decreased by the
results of such deemed investment from the time Plan deferrals are credited
under Section 7.1 until distributed pursuant to Article 6 hereof.
7.3 CHARGES AGAINST ACCOUNTS. There shall be charged against each
Participant's deferred account any payments made to the Participant or to his or
her beneficiary.
7.4 DESIGNATION OF BENEFICIARY. Each Participant shall designate a
beneficiary or beneficiaries who, upon the Participant's death, will receive the
deferred amounts that otherwise would have been paid to the Participant under
the Plan. All designations shall be signed by the Participant, and shall be in
such form as prescribed by the Board. Each designation shall be effective as of
the date delivered to the Chief Human Resources Officer of the Company by the
Participant.
Participants may change their designations of beneficiary on such form as
prescribed by the Board. The payment of amounts deferred under the Plan shall be
in accordance with the last unrevoked written designation of beneficiary that
has been signed by the Participant and delivered by the Participant to the Chief
Human Resources Officer of the Company prior to the Participant's death.
In the event that all the beneficiaries named by a Participant pursuant to
this Section 7.4 predecease the Participant, the deferred amounts that would
have been paid to the Participant or the Participant's beneficiaries shall be
paid to the Participant's estate.
In the event a Participant does not designate a beneficiary, or for any
reason such designation is ineffective, in whole or in part, the amounts that
otherwise would have been paid to the Participant or the Participant's
beneficiaries under the Plan shall be paid to the Participant's estate.
ARTICLE 8. RIGHTS OF PARTICIPANTS
8.1 CONTRACTUAL OBLIGATION. The Plan shall create a contractual obligation
on the part of the Company to make payments from the Participants' accounts when
due. Payment of account balances shall be made out of the general funds of the
Company.
8.2 UNSECURED INTEREST. No Participant or party claiming an interest in
deferred amounts of a Participant shall have any interest whatsoever in any
specific asset of the Company. To the extent that any party acquires a right to
receive payments under the Plan, such right shall be equivalent to that of an
unsecured general creditor of the Company. The Company shall have no duty to set
aside or invest any amounts credited to Participants' accounts under this Plan.
Nothing contained in this Plan shall create a trust of any kind or a
fiduciary relationship between the Company and any Participant. Nevertheless,
the Company may establish one or more trusts, with such trustee as the Board may
approve, for the purpose of providing for the payment of deferred amounts and
earnings thereon. Such trust or trusts may be irrevocable, but the assets
thereof shall be subject to the claims of the Company's general creditors in the
event of the Company's bankruptcy or insolvency. To the extent any deferred
amounts and earnings thereon under the Plan are actually paid from any such
trust, the Company shall have no further obligation with respect thereto, but to
the extent not so paid, such deferred amounts and earnings thereon shall remain
the obligation of, and shall be paid by, the Company.
8.3 NO GUARANTEE OF PRINCIPAL OR EARNINGS. Nothing contained in the Plan
shall constitute a guarantee by the Company or any other person or entity that
the amounts deferred hereunder will increase or shall not decrease in value due
to the deemed investment of such amounts in Stock. The Stock may be a
B-7
volatile investment and decreases in the value thereof may result in a loss of
some or all of the principal amounts deferred hereunder. Thus, it is possible
for the value of a Participant's account to decrease as a result of its deemed
investment in Stock, if the value of the Stock decreases.
ARTICLE 9. NUMBER AND SOURCE OF SHARES AVAILABLE UNDER THE PLAN
The Company shall reserve a sufficient number of shares of Stock for
purposes of the Plan, as determined by the Board. Such shares may be previously
issued and outstanding shares of Stock reacquired by the Company and held in its
treasury, or may be authorized but unissued shares of Stock, or may consist
partly of each. If the Company shall at any time increase or decrease the number
of outstanding shares of Stock or change in any way the rights and privileges of
such shares by means of the payment of a stock dividend or any other
distribution upon such shares payable in Stock, or through a stock split,
subdivision, consolidation, combination, reclassification, or recapitalization
involving the Stock, then the Board may increase, decrease, or change in like
manner the number, rights and privileges of the shares issuable under the Plan
as if such shares had been issued and outstanding, fully paid, and nonassessable
at the time of such occurrence in order to prevent dilution or enlargement of
Participants' rights under the Plan.
ARTICLE 10. WITHHOLDING OF TAXES
The Company shall have the right to require Participants to remit to the
Company an amount sufficient to satisfy any Federal, state, and local
withholding tax requirements, or to deduct from all payments made pursuant to
the Plan amounts sufficient to satisfy any withholding tax requirements.
ARTICLE 11. AMENDMENT AND TERMINATION
The Company hereby reserves the right to amend, modify, or terminate the
Plan at any time by action of the Board, with or without prior notice. No such
amendment or termination shall in any material manner adversely affect any
Participant's rights to amounts already deferred or earned or earnings thereon
up to the point of amendment or termination or any rights of such Participant
under any Stock theretofore paid to him or her hereunder, without the consent of
the Participant.
ARTICLE 12. MISCELLANEOUS
12.1 NOTICE. Unless otherwise prescribed by the Board, any notice or
filing required or permitted to be given to the Company under the Plan shall be
sufficient if in writing and hand delivered, or sent by registered or certified
mail to the Chief Human Resources Officer of the Company. Notice to the Chief
Human Resources of the Company, if mailed, shall be addressed to the principal
executive offices of the Company. Notice mailed to a Participant shall be at
such address as is given in the records of the Company. Notices shall be deemed
given as of the date of delivery or, if delivery is made by mail, as of the date
shown on the postmark on the receipt for registration or certification.
12.2 CONSIDERATION FOR STOCK ISSUED. Stock will be paid under the Plan in
consideration of the services of Participants as directors of the Company.
12.3 COMPLIANCE WITH SECURITIES LAWS, LISTING REQUIREMENTS, AND OTHER LAWS
AND OBLIGATIONS. The Company shall not be obligated to deliver any shares of
Stock under this Plan, (a) until, in the opinion of the Company's counsel, all
applicable federal and state laws and regulations have been complied with, (b)
if the outstanding Stock is at the time listed on any stock exchange, or quoted
on any automated quotation system, until the shares to be delivered have been
listed or authorized to be listed or quoted on such exchange or system upon
official notice of issuance, and (c) until all other legal matters in connection
with the issuance and delivery of such shares have been approved by the
Company's counsel. If the sale of Stock has not been registered under the
Securities Act of 1933, as amended, the Company may require, as a condition to
the payment of Stock, such representations or agreements as counsel for the
Company may
B-8
consider appropriate to avoid violation of such Act and may require that the
certificates evidencing such Stock bear an appropriate legend restricting
transfer.
12.4 NO SHAREHOLDER RIGHTS CONFERRED. Nothing contained in the Plan or any
agreement hereunder will confer upon any director any rights of a shareholder of
the Company unless and until shares of Stock are issued to such Participant upon
the payment of Stock.
12.5 NO RIGHT TO STOCK. Nothing in the Plan shall be construed to give any
Director of the Company any right to a grant of common stock under the Plan
unless all conditions described within the Plan are met as determined in the
sole discretion of the Board.
12.6 GRANTED SHARES HAVE SAME STATUS AS ISSUED SHARES. Any shares of
common stock of the Company issued as a stock dividend, or as a result of stock
splits, combinations, exchanges of shares, reorganizations, mergers,
consolidations or otherwise with respect to shares of common stock granted
pursuant to the Plan shall have the same status and be subject to the same
restrictions as the shares granted.
12.7 NONTRANSFERABILITY. Except as provided below, Participants' rights to
deferred amounts, contributions, and earnings accrued thereon under the Plan may
not be sold, transferred, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution, nor shall the
Company make any payment under the Plan to any assignee or creditor of a
Participant. Notwithstanding the foregoing, the Board shall provide for
distributions from a Participant's deferred compensation account to the extent
required by a court order that the Board determines to satisfy the requirements
of a qualified domestic relations order within the meaning of Section 206(d)(3)
of ERISA. The amounts assigned to an alternate payee under such an order shall
be paid in a lump sum distribution as soon as administratively practical after
the Board determines that the order meets the requirements of a qualified
domestic relations order. All payments made pursuant to any such order shall be
charged against the Participant's deferred compensation account.
12.8 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
12.9 GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular, and the singular shall include the plural.
12.10 COSTS OF THE PLAN. All costs of implementing and administering the
Plan shall be borne by the Company.
12.11 SUCCESSORS. All obligations of the Company under the Plan shall be
binding on any successor to the Company, whether the existence of such successor
is the result of a direct or indirect purchase, merger, consolidation, or
otherwise, of all or substantially all of the business and/or assets of the
Company.
12.12 APPLICABLE LAW. Except to the extent preempted by applicable federal
law, the Plan shall be governed by and construed in accordance with the laws of
the state of Tennessee.
12.13 EFFECTIVE DATE. The Plan shall become effective at the time that it
is approved by the Board, subject to approval by the stockholders of the Company
by a majority of the votes cast by the holders of the common stock, present in
person or represented by proxy, and entitled to vote.
B-9
Cover
TheMagneTek 1997 Annual Report
Net operating earnings top $1.00 per share
on sales of $1.2 billion
Page 1
About the Cover
The electrical equipment industry, characterized for so long by copper coils
and stacks of steel laminations, today is migrating to electronic circuit
boards and silicon chips. At MagneTek's Power Electronics Group headquarters
in Valdarno, Italy, circuits crafted in climate-controlled "clean rooms"
serve as "platforms" for electrical products ranging from computer power
supplies to lighting ballasts and integrated motor-speed controls.
About the Company
MagneTek designs and manufactures integrated electrical products. The Company
excels at applying two technologies -- magnetics and electronics -- to solve
problems and satisfy needs involving the generation, conservation and control
of energy and motion. Its four product lines - power supplies, lighting
products, drives, and motors/generators - are used primarily in eight
markets: building and factory automation, data processing, electronic
equipment, transportation, energy, climate conditioning,
lighting/illumination and leisure/recreation. Founded in 1984, MagneTek is
based in Nashville, Tennessee. Its stock was listed for trading on the New
York Stock Exchange (symbol: MAG) in 1989. The Company operates 16 plants in
North America, seven in Europe and one in China, and employs some 14,000
associates worldwide.
Departments
2 Financial Highlights
3 Directors & Officers
Letter to Stakeholders
SPECIAL REPORT
5 A New Culture Puts
MagneTek First
MagneTek earned $1.03 a share in fiscal 1997, up from $.01* in 1996. What
objectives did the company's new CEO, Ronald N. Hoge, set for himself and
his associates? And what's the report card to date?
9 The Value of EVA
Economic Value Added, or EVA, is gaining credence as a measure of company
performance.
MANAGEMENT
10 Building a "Front-Back" Company
"Back room" leverage determines a company's ability to compete.
"Out-in-front" marketing seeks to delight every customer by providing not
just products, but solutions.
TECHNOLOGY
18 Platforms for Growth
At MagneTek, technology maps, innovative hardware platforms and
state-of-the-art software packages will be the launching pads for future
products and processes.
PLANNING
25 STRAP--The Playbook for
the Next Millennium
War Rooms, Product Bundling, Strategic Alliances -- fancy names for more of
the same, or a whole new spin on strategic planning?
INTERNATIONAL
29 Planting Hope in Hungary
Replicating capabilities in Eastern Europe: A New Hungarian Revolution
34 Generating Excitement
in Asia
Serve global customers locally, then leverage into regional markets. That's
the theory behind MagneTek's international initiatives.
35 News Briefs
37 Perspectives
38 MagneTek at a Glance
VIEW point
Page 1a
41 Secrets of a Diamond
Prospector
Commentary
71 Education, Not Isolation
By Andrew G. Galef,
Chairman of the Board
MagneTek-Making a
Difference
By Marguerite W. Sallee, Director
72 Stockholder Information
Financials
2 Financial Highlights
42 Selected Financial Data
43 Management's Discussion
and Analysis
47 Consolidated Financial Statements
52 Notes to the Consolidated Financial Statements
69 Auditors' Report
Page 2
This document contains "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995, that are subject to risks and
uncertainties which, in many cases, are beyond the control of the Company.
These include but are not limited to economic conditions in general, business
conditions in electrical and electronic equipment markets, competitive
factors such as pricing and technology, and the risk that the Company's
ultimate costs of doing business exceed present estimates. Further
information on factors which could affect MagneTek's financial results are
described in the Company's filings with the Securities and Exchange
Commission.
Financial Highlights
(Amounts in thousands, except per-share data)
For the years ended June 30 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Sales $ 1,190,540$ 1,161,625 $ 1,202,536
Cost of sales 950,617 1,005,004
9 6 2 , 9 0 0
- -----------------------------------------------------------------------------------------------
Gross profit 239,923 156,621 239,636
SG&A expenses 159,859 164,930 164,280
Provision for impairment
of long-lived assets - 29,212
- -
Operating profit (loss) 80,064 (37,521)
7 5 , 3 5 6
Interest expense 27,825 31,591
3 4 , 3 9 8
Other expense 4,288 5,652
4 , 5 6 2
- -----------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before tax 47,951 (74,764)
3 6 , 3 9 6
Income tax provision 19,200 19,400
1 4 , 9 0 0
- -----------------------------------------------------------------------------------------------
Net Income (loss)
from continuing operations $ 28,751 $ (94,164) $
2 1 , 4 9 6
- -----------------------------------------------------------------------------------------------
E.P.S.--Primary $ 1.09 $ (3.78) $ 0.87
E.P.S.--Fully Diluted $ 1.03 N.A. $
0 . 8 4
This document contains "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995, that are subject to risks and
uncertainties which, in many cases, are beyond the control of the Company.
These include but are not limited to economic conditions in general, business
conditions in electrical and electronic equipment markets, competitive
factors such as pricing and technology, and the risk that the Company's
ultimate costs of doing business exceed present estimates. Further
information on factors which could affect MagneTek's financial results are
described in the Company's filings with the Securities and Exchange
Commission.
Page 71
commentary
Education, Not Isolation
A company, community or country is only as good as the summation of its
components. And the human component is the most vital, most important element
in determining success - in business, in life and in our geopolitical world.
In the increasingly complex life in which we participate, the role of
education becomes more and more critical, and the state of education can no
longer be measured locally, regionally or nationally, but must be examined on
a global basis as the world shrinks through technology, and competition
occurs in an international arena.
The relative success of industrialized nations over the last twenty-five
years can be easily correlated with the success of their systems of
education. During this time period, kindergarten through high school
education in the United States has been surpassed by an increasing number of
countries as measured by international test results. The causes of this
decline have been well covered in many publications and media presentations.
The United States has, however, managed to stay in a competitive global
position because of the excellence of our colleges and universities. This
advantage, however, is starting to erode as our better secondary schools are
increasingly educating foreign students.
To counter this trend requires a sustained change in expectations,
methodology and pedagogy. We must stop feeling that teaching a diverse
population is difficult and an excuse to lower our goals. We must believe
that all children can learn --and learn on a basis of rigorous curriculum and
standards that are truly world class. We must acknowledge that students learn
through different intelligences, and that our education system must allow for
and integrate this fact. We must improve our teacher training programs to
provide techniques and knowledge to deal with diversity and the requirements
of information-age technology.
To maintain our global economic position, we must change, and provide
what we always have. Leadership and knowledge go hand in hand.
MagneTek has been a major supporter of educational improvement in many
communities. It is this kind of activity which will help ensure that American
businesses have a talent pool to continue to win on the global battlefield.
All companies should join in this quest. @
MagneTek -- Making a Difference
Enlightened companies today are striving to make a real difference with
the charitable contributions they make to their community. They are choosing
to put their community support where their employees' hearts are. They are
careful to use charitable dollars in ways that represent a cross section of
company sentiment. They are also encouraging associates to become more
actively involved in the community, allowing them to use work time to
contribute their time and talents to community service. In all of these ways,
MagneTek exemplifies an enlightened company striving to make a real
difference.
At my company, CorporateFamily Solutions, because we manage workplace
child care centers, children are truly our first love. MagneTek's is
education (see Chairman Andy Galef's editorial before this commentary). It is
not surprising that our charitable paths sometimes cross.
It happened last year when we teamed up to form the Red Shield Family
Initiative, a collaborative effort aimed at helping welfare families in an
inner-city neighborhood achieve self-sufficiency. The most pressing needs
these families face are education and child care. MagneTek provided
seed-money and management support for the project, and CorporateFamily
prepared a master plan for a child care center serving infants and toddlers
to be housed in a neighborhood Salvation Army facility.
The Red Shield Family Initiative is a new kind of collaborative effort
involving business, government, not-for-profit organizations and private
citizen groups. It is the sort of cause about which some grant makers might
be skeptical, since the outcome is not certain. However, it is a cause that
MagneTek and CorporateFamily believe must be taken on because the lives of
more than 3,000 children in the poorest section of Nashville are at stake.
As a director, I know that MagneTek's community support extends well
beyond Nashville and the Red Shield Family Initiative. But I believe this
example says something about the company's "heart." MagneTek is truly doing
its part as a responsible corporate citizen to make a real difference in
communities wherever it does business -- especially in its own plant
communities. @
Page 61a
of this Annual Report there were approximately 325 direct accounts holding
Common Stock. No dividends have been paid on the Common Stock. The Registrar
and Transfer Agent for the Common Stock is The Bank of New York. Telephone
inquiries: 1-800-524-4458
Page 72
commentary
MagneTek -- Making a Difference
Continued from previous page
Enlightened companies today are striving to make a real difference with
the charitable contributions they make to their community. They are choosing
to put their community support where their employees' hearts are. They are
careful to use charitable dollars in ways that represent a cross section of
company sentiment. They are also encouraging associates to become more
actively involved in the community, allowing them to use work time to
contribute their time and talents to community service. In all of these ways,
MagneTek exemplifies an enlightened company striving to make a real
difference.
At my company, CorporateFamily Solutions, because we manage workplace
child care centers, children are truly our first love. MagneTek's is
education (see Chairman Andy Galef's editorial before this commentary). It is
not surprising that our charitable paths sometimes cross.
It happened last year when we teamed up to form the Red Shield Family
Initiative, a collaborative effort aimed at helping welfare families in an
inner-city neighborhood achieve self-sufficiency. The most pressing needs
these families face are education and child care. MagneTek provided
seed-money and management support for the project, and CorporateFamily
prepared a master plan for a child care center serving infants and toddlers
to be housed in a neighborhood Salvation Army facility.
The Red Shield Family Initiative is a new kind of collaborative effort
involving business, government, not-for-profit organizations and private
citizen groups. It is the sort of cause about which some grant makers might
be skeptical, since the outcome is not certain. However, it is a cause that
MagneTek and CorporateFamily believe must be taken on because the lives of
more than 3,000 children in the poorest section of Nashville are at stake.
As a director, I know that MagneTek's community support extends well
beyond Nashville and the Red Shield Family Initiative. But I believe this
example says something about the company's "heart." MagneTek is truly doing
its part as a responsible corporate citizen to make a real difference in
communities wherever it does business -- especially in its own plant
communities. @
Stockholder Information
10-K Report
MagneTek's Annual Report on Form 10-K for the fiscal year ended June 30,
1997, is available upon request without charge. To receive a copy, direct
your request to:
Investor Relations Department
MagneTek, Inc.
26 Century Blvd.
Suite 600
Nashville TN, 37214
Telephone: 1-888-NYSEMAG
1-615-316-5288
Annual Stockholders' Meeting
The Annual Stockholders' meeting of MagneTek, Inc. will be held at the
Company's headquarters office, 26 Century Boulevard, Nashville, Tennessee, on
Tuesday, October 21, 1997.
Stockholders' Information
The following table sets forth the high and low sales prices of the Company's
Common Stock on the New York Stock Exchange during each quarter of fiscal
1997.
Quarter Ending High Low
Sept. 30,1996 11 5/8 8 1/8
Dec. 31,1996 14 1/8 10 5/8
March 31,1997 18 1/8 12 1/4
June 30,1997 18 3/8 14 7/8
The Company's Common Stock is listed on the New York Stock Exchange under the
ticker symbol "MAG." As of the date
Page 3
Directors & Officers
Board of Directors
Andrew G. Galef
Chairman of the Board
MagneTek, Inc.
Ronald N. Hoge
President and Chief Executive Officer
MagneTek, Inc.
Dewain K. Cross
Retired Senior Vice President, Finance
Cooper Industries, Inc.
Paul J. Kofmehl
Retired Vice President and Group Executive
IBM
Crocker Nevin
Retired Chairman
CF&I Steel Company
Marguerite W. Sallee
President and Chief Executive Officer
Corporate Family Solutions
Robert E. Wycoff
President Emeritus
Atlantic Richfield Company
Corporate Officers
Andrew G. Galef
Chairman of the Board
Ronald N. Hoge
President and Chief Executive Officer
Antonio Canova
Executive Vice President
Brian R. Dundon
Executive Vice President
Gerard P. Gorman
Executive Vice President
John E. Steiner
Executive Vice President
Daryl D. David
Senior Vice President,
Human Resources and Administration
Alexander Levran, Ph.D.
Senior Vice President, Technology
David P. Reiland
Senior Vice President and Chief Financial Officer
James E. Schuster
Senior Vice President, Operations
Page 3a
John P. Colling, Jr.
Vice President and Treasurer
Nancy M. Falls
Vice President, Investor Relations
Thomas R. Kmak
Vice President and Controller
Samuel A. Miley
Vice President, General Counsel and Secretary
Dennis L. Hatfield
Assistant Vice President,
Facilities and Environmental Affairs
Page 3b
to our stakeholders:
When I joined MagneTek, I promised that in my first year here we would solve the
company's most pressing operational problems and begin to build on our inherent
strengths, and that the bottom line would show it. I believe we have kept that
promise.
During fiscal 1997:
- Gross profit margins improved 3 full points, from
17. 2 percent to 20.2 percent of sales
- Net operating earnings* increased from $.01 per share
to $1.03 per share
- Total debt declined 24 percent, from $322 million to
$244 million
- Stockholders' equity increased 146 percent, from
$42 million to $102 million
While my arrival at MagneTek was not solely responsible for these
results, I hope it served as a catalyst for some of them. The improvements
resulted from the efforts of a team of experienced MagneTek veterans and
outstanding newcomers -- top level talent from companies such as ABB,
AlliedSignal, GE, Textron and Wal-Mart -- who share a common vision for
MagneTek's future.
What is that vision? We call it "Vision 2000." In it, MagneTek becomes a
company driven by the three standards of profitability, predictability and
growth. The vision defines a company with $2 billion in revenues,
double-digit growth rates, mid-twenties gross margins, and double-digit
operating margins, all achieved by the year 2000. And in this vision we
become a company fundamentally transformed through the implementation of new
disciplines on four fronts: operations, strategic planning, financial and
capital structure, and people and performance management.
On the operations front we made great progress in 1997, proceeding with
a philosophy of "be the best in the world or find a partner who is." We are
consolidating excess capacity, expanding low-cost operations, outsourcing
wherever appropriate, and making
Page 4
major commitments to "Demand Flow Technology" (DFT) principles and "Six Sigma"
quality deployment. Every major MagneTek factory is being redesigned and
retooled under DFT. Our first 24 candidates are currently in Six Sigma quality
training, and we will have well over 100 Six-Sigma "Black Belts" in our
factories by the year 2000.
These operational improvements will require some up-front investment, but
will provide dramatic downstream savings. The annual net benefit to MagneTek in
three to four years should reach $50 million.
On the strategic planning front, we have completed chapter one. We recently
finished a rigorous, "outside-in" strategic planning process, involving
extensive interviews with key customers and industry experts. They helped us
identify MagneTek's core competencies (power electronics and miniaturization),
strengths (customer relationships, marketing channels and niche market
positions) and potential differentiators (organizational flexibility,
manufacturing cost, product quality and speed-to-market).
Our strategic plan calls for us to capitalize on these competitive
strengths in a number of ways. For instance, products from all of our business
groups can be "bundled" to achieve greater market penetration and provide unique
solutions for customers. One such solution, for the "clean room" industry,
combines our lighting ballasts, motors, drives and power electronics into
prefabricated climate-control modules. Our strengths can and will be leveraged
across the company and around the world. And we fully intend to pursue more
alliances like the one we recently signed with General Electric (see Alliance on
page 27).
We also made good progress on the financial front during fiscal 1997. We
called $35 million of our 8-percent Convertible Notes, retired our 10
3/4-percent Senior Subordinated Debentures and entered into a new credit agree-
ment with our banks that more than doubles our credit line to $350 million,
extends our debt maturity to June 2002, and reduces our borrowing cost
substantially. This will save us about $7 million annually in interest expense.
We recently announced the call of our remaining Convertible Notes, which will
shift another $40 million from debt to equity, further reducing interest expense
and moving us another step closer to our goal of 50 percent debt to total
capitalization by the end of fiscal 1998.
The fourth and most important front in MagneTek's transformation process is
our people. It is quite a challenge to mold experienced veterans and talented
newcomers into a coordinated, highly motivated, winning team, especially during
a period of extraordinary change. But we are doing it. On the following pages
you will learn about our "People Plan" and the beginnings of a "value-added"
compensation system, which we expect to implement throughout the company.
I want to take this opportunity to thank all of you -- MagneTek's
associates, investors, customers and suppliers -- who have persisted with us
during this challenging but rewarding year. Your loyalty is one of the company's
greatest strengths. It has been key to our turnaround and will be instrumental
in transforming MagneTek into a world-class company committed to profitability,
predictability and growth.
President & Chief Executive Officer
September 17, 1997
Page 5
A New Culture Puts MagneTek First
A year ago Ronald N. Hoge, MagneTek's new president and chief executive officer,
outlined a strategy designed to give MagneTek, a company made up of many parts
and many cultures, a single mind-set that would create a common culture -- one
that calls for personal excellence and an industry leadership position.
MagneTek is a company assembled through a series of 18 acquisitions during
the 1980s and early 1990s. With all the acquisitions came distinct corporate
cultures, cultures that may have been ideal for a particular company, but often
created confusion in the combined corporate environment.
MagneTek is a very different company from that day just 14 months ago when
Hoge came aboard from AlliedSignal. Under him, MagneTek has set into motion
strategies and plans for the future that are in some measure psychological and
symbolic, but in large part, material.
Among the changes taking place:
- - Development of a corporate culture that recognizes no barriers -- neither
geographic boundaries nor walls between business units or individuals.
- - Recruitment and development of associates to serve in key management roles
throughout the next
decade, as well as the nurturing of the next generation of executives who will
eventually run MagneTek.
- - Moving the company at a faster pace, emerging from a time often referred to
as the manufacturing/sales era into today's marketing era, where the customer,
not necessarily the product, has be-come the driving force.
- - Developing a synergism between marketing and operations so that the two
functions are closely coordinated, resulting in added value not only for
MagneTek's customers, but for the company and its suppliers as well.
COMPANYWIDE CULTURE
Dictating a specific corporate culture is, of course, impossible. Influencing
the development of a companywide culture, however, is indeed possible. But the
direction and support for such a progression has to come from the top.
It is management's stated mission to instill values and to promote
understanding and cooperation at all levels within the company. To nurture such
a culture, the cooperation and understanding of all associates is essential.
"I wouldn't say that MagneTek possesses a complete culture of its own at
this moment, but I can say with confidence that a culture is
Page 6
evolving," comments David P. Reiland, senior vice president and chief financial
officer. Reiland, who was with the company during the pre-Hoge years, has seen
cultures clash as new companies were squeezed into what is now MagneTek.
How important is a corporate culture? Almost all companies talk culture,
but often it is a vague intangible that most employees, regardless of rank,
don't comprehend and that management doesn't expend much energy cultivating.
No Excuses
Hoge takes the opposite tack. He believes that the right culture can be the
catalyst that propels the company into the next millennium, not only as a $2
billion-enterprise, but one with leadership positions on three continents.
Perhaps Hoge's first test of fire at MagneTek was the stark realization
that the company was a victim of past disappointments which had created
expectations, if not toleration, of limited success. Removing the psychological
barrier was a challenge that had to be met quickly and decisively.
MagneTek had good people --loyal and dedicated -- and good products. What
it didn't have was a winning philosophy, discipline, accountability and a team
effort, all of which resulted in under-performance. "What MagneTek needed was a
'no excuses' culture," says Hoge, radiating the confidence of a championship
football coach who has taken on the assignment of coaching a team that hadn't
had many winning seasons.
MAGNETEK FIRST
Daryl D. David, senior vice president of human resources and administration,
recruited by Hoge from AlliedSignal last year, also sees a new culture evolving,
one that he thinks will differentiate MagneTek from its competitors.
One facet of the culture is called MagneTek First, not a complicated
concept, but one intended to instill in all associates an allegiance to the
company as a whole. "In other words, MagneTek First challenges the individual to
put the overall company first, not just a division, a plant or a department.
Ultimately, that will benefit everyone," David says.
Another building block of MagneTek's new culture is accountability, which
can be described simply as people taking responsibility for results.
"Previously, a mindset prevailed in MagneTek that missing goals and not taking
responsibility had no consequences," notes David. "Now we emphasize aggressive
but achievable targets and a culture that does all it can to not miss those
objectives --- a culture that delivers consistently." (see Balanced Scorecard on
next page).
The new culture also demands strong values and ethics which define the way
MagneTek does busi
Page 7
ness with both customers and suppliers. "Creating a work environment that shows
respect for our fellow associates and ensures that we act responsibly toward the
outside world is central to the new culture. The end result will be increased
customer and associate satisfaction," David concludes.
NO BARRIERS
Hoge's vision of the MagneTek culture calls for constant and automatic
interaction among divisions as well as among associates at all levels. Again, it
is difficult not to draw a sports analogy where success depends upon overall
team effort.
Using the "MagneTek First" rallying cry, Hoge talks about a company
without barriers. What does that mean? Hoge explains, "No barriers between
product groups or divisions. No barriers to suppliers and customers who want to
work with us for our common benefit. No barriers to training and
The Balanced Scorecard
During the past year, MagneTek has borrowed from the old, tinkered with the
existing, and stirred in some of the new to come up with a better way of
measuring performance.
More than 250 management associates last year had part of their
compensation calculated on the basis of a "Balanced Scorecard," "MVA" (MagneTek
Value Added) and for good measure, the old standby, MBOs (Management By
Objectives).
The Balanced Scorecard, by which all MagneTek associates one day will be
measured, mixes two performance management systems. First, each manager lists
his/her personal objectives for the coming year. For example, to produce so many
motors, to sell so many ballasts, or to sign up so many new accounts.
Enter, the Balanced Scorecard. Every manager, regardless of responsibility,
develops objectives around the balanced scorecard with details on how he/she
will help the company achieve them.
COMMON OBJECTIVES
"The reason it's called a 'Balanced Scorecard' is that it harnesses the whole
company to go after three or four companywide objectives, along with the your
normal responsibilities," explains Daryl David, senior vice president, human
resources and administration. "Obviously, we have objectives to produce and sell
products, but now we also include objectives that drive the company's overall
areas of emphasis."
But the Balanced Scorecard is just part of the equation. Now add MVA --
MagneTek's version of Economic Value Added (see EVA -Registered Trademark- on
page 9 ). MagneTek calculates part of each manager's pay based on net operating
earnings minus the cost of invested capital. For instance, a manager buys a new
piece of equipment for his department. This is the invested capital. If the
machine, in fact, results in improved productivity which, in turn, translates
into profits that exceed the cost of the invested capital, then the company
benefits and so does the manager.
"Essentially, the thinking is that a manager who is looking at an
investment must understand how much benefit over and above the cost of capital
the company can derive from that investment. Is the investment going to add
economic value?" challenges David Reiland, senior vice president and chief
financial officer.
Adds Daryl David: "We feel that if we've got 250 people on a variable pay
plan chasing MVA, we've got the best chance of strengthening the company."
MagneTek intends to extend MVA (coupled with the Balanced Scorecard) to all
management associates during l997-98.
Page 8
Personal advancement. No barriers to new ideas. No racial, cultural or gender
barriers. And no nationalistic or geographic borders."
But MagneTek First also carries with it very high expectations. The company
demands a lot from its associates in terms of personal conduct, discipline,
performance and commitment. "For those who can meet this challenge, MagneTek
will do its utmost to provide new opportunities for the associates and their
families," Hoge says.
Gerard P. Gorman, president of the Drives & Systems Group, who joined
MagneTek from General Electric, is the architect of the company's strategic
planning effort (see STRAP on page 25). He, too, sees the new culture beginning
to take hold.
"The old MagneTek played it pretty close to the vest -- not much trading of
information. What we're beginning to accomplish is people sharing ideas, and
lines of cross-communication developing. Everything we are doing is directed to
leveraging this business for the benefit of MagneTek -- not just the motors
group, not just the lighting group, but MagneTek as a whole. The culture that is
evolving here has a greater potential for longevity than many others."
Hoge, meanwhile, likes what he sees thus far, but observes, "Anybody can
write the playbook -- getting people to follow it is the trick."
THE PEOPLE PLAN
The successful development of a companywide culture is closely linked to
MagneTek's effort to recruit new talent and to integrate cost-effectiveness
throughout the corporation. Shortly after joining the company, Hoge introduced
what he calls the "People Plan" into MagneTek's lexicon.
The initial step in bringing the People Plan to fruition fell to Daryl
David. "The 'People Plan' is an integrated approach to building increased
organizational capability through development, performance management, reward
systems and strategic staffing. Part of the development piece includes an
ambitious process for building future global managers. We call it the 'People
Pipeline' -- taking MBAs straight from school, along with relatively new
managers, and accelerating their development through structured assignments.
"Another facet of MagneTek's People Plan is an effort to extract the full
potential of skills from all associates -- in other words, avoid pigeonholing
people. For example, one human resources manager is working side-by-side with
engineers in developing a new product." David explains, "In one of our
businesses, we had more new product opportunities than we had resources to
pursue them. This human resource person agreed to sponsor the new product
effort and help its move to market in addition to his regular job."
Reuben M. Smith is a former marketing editor of Business Week, and co-author of
Marketing: Concepts and Applications, McGraw-Hill.
Page 9
editorial
The Value of EVA
Economic Value Added (EVA) is a company's after-tax profit less a charge for the
use of capital required to create that profit. It is also known as value
creation, economic earnings and economic profit, and is closely related to such
concepts as Net Present Value, Internal Rate of Return, discounted cash flow,
and return on invested capital. EVA itself is a registered brand name of Stern,
Stewart and Company, which has built a consulting practice around the use of the
metric in management strategy and executive compensation systems.
While there are many names for EVA, the concept is fundamental to business.
Two basic tenets of capitalist economies are that owners of capital demand
compensation for the use of their capital and that capital will gravitate to
where it can be most productive (generate the highest return). The question is
how to capture these concepts quantitatively so that investment performance can
be assessed and monitored.
EVA is important to equity investors because it is the residual after all
providers of goods, services and capital have been duly compensated. That
residual accrues to shareowners, and therefore from their standpoint is
something to be maximized. The main virtue of basing executive incentive
compensation on increasing EVA is that it aligns the pay system with the
interests of stockholders.* It forces managements to consider the balance sheet
implications as well as the income statement impact of their decisions.
For example, will holding more inventory generate sufficient sales and
profit to justify the extra working capital investment? Reducing costs increases
net operating profit after taxes. But minimizing working and fixed capital usage
is a value-creating activity as well, since it frees up capital that can be
redeployed into other productive assets or returned to capital providers in the
form of debt repayment, dividends and share repurchases. Most importantly, the
removal of accounting-based distortions forces management to make decisions
based on economic reality.
Investors are placing more reliance on EVA as an investment analysis tool
because it has proven to be an effective prognosticator of stock performance. To
the extent that a company posts an economic profit (positive EVA), it is
creating value by virtue of generating more than enough cash income from ongoing
operations to pay interest and dividends. Theoretically, investors will place a
higher value on such an enterprise. If, on the other hand, a company generates a
return that is less than its cost of capital (negative EVA), it means that
shareholder value is being destroyed; and if that persists, the company will
eventually encounter difficulty even though it may be posting an accounting
profit. At the very least, equity investors will begin to recognize that returns
are inadequate, and may sell their stock in favor of enterprises with better
returns.
Improving EVA, even if the base is negative, is good news because it means
that the company is operating more efficiently and that new investments are
generating returns in excess of their cost of capital. Increasing value creation
eventually is noted by investors and thus could result in a higher stock price.
* MagneTek has adopted MVA (MagneTek Value Added) as the measurement to drive
the company's variable compensation programs. MVA, which is based on EVA
principles, grades managers on their ability to generate operating earnings in
excess of the cost of capital (working capital and net fixed assets) under their
control.
Page 10
Building a 'Front-Back' Company
By Reuben M. Smith
Tending to future personnel needs is all well and good. But with talent and
skills at a premium throughout industry today, a company must marshal its
personnel with care and conviction. "No square pegs in round holes," CEO Ron
Hoge stipulates.
Before his arrival, MagneTek had been arrayed in semi-autonomous business
units -- like a lot of little teams led by general managers responsible for both
operations and marketing. Reflecting the MagneTek First philosophy, Hoge has
reconfigured the company along the lines of a single, two-platoon team with a
"front end" (marketing) and a "back end" (operations ).
"The object is to achieve pinpoint customer focus on the front end combined
with maximum operating efficiency on the back end," Hoge explains.
FRONT LINE MARKETING
Hoge says that customer demands have changed dramatically in recent years. In
most cases they now reflect the requirements of companies that have been
successful at meeting the needs of more demanding customers themselves.
Getting associates on the pro- verbial "North Bound Train" is an absolute
necessity if MagneTek is to emerge from the 20th century as an industry leader.
And the engineer driving that train is the customer. In examining its business
relationships, MagneTek recognized that the customer, too often taken for
granted in years gone by, now will accept nothing less than the best.
"Today, everyone is trying to make products faster and better for less
money. Customers who, for the most part, were satisfied with good motors, drives
and ballasts most of the time, now want perfect motors, drives and ballasts
every time. Customers who once were happy with weekly or even monthly
deliveries, now want daily deliveries," observes Hoge.
In the face of a changing business environment, he recognizes that MagneTek
has to do a better job of both making and marketing its products, and those
products must be of the highest quality (see Six Sigma on page 14). "We must
satisfy our current customers with both our products and our technical support.
In the final analysis, marketing is everybody's job. Every associate and all of
our actions impact customer perceptions directly or indirectly, sooner or
later," Hoge observes.
He contends that consumer marketing and industrial marketing have all but
converged. "When you buy a computer you expect it to work. When you click on the
Page 11
Internet, you expect to be connected. When our customers use a MagneTek product,
they, too, expect it to work. We can't afford the luxury of any 'fatal errors'.
We can no longer function by depending just upon buy-sell relationships with
customers. We must forge partnerships with them. We must provide solutions for
them."
John E. Steiner, president of MagneTek's Lighting Products Group, is an
outspoken proponent of providing the customer with a complete "bundle of value."
As such, Steiner is moving his group into the partnership era.
Historically, the lighting industry has been relationship driven, what
could be described as a good-ol'-boy network -- friendships that translated into
sales. Steiner is steering away from this mentality toward a total marketing
approach, involving his sales people from the very beginning of the process --
market research -- all the way through the post transactional phase --
after-sale service.
FOCUS TEAMS
After the sale is often the time when customers are lost. So Steiner is
mobilizing a group that will extend and enhance the MagneTek-customer
relationship. He is establishing focus teams that are on call immediately in the
event a customer encounters a problem, or just has a question.
"The intent is to create a cross-functional team to provide services
unsurpassed by anybody in the industry. When customers call us, they make one
phone call. It's a one-stop shop -- all the questions are answered. They want to
talk price, they want to talk application, they want to talk credit, they want
to talk delivery, they want to talk warranty -- we'll be able to handle all of
that," Steiner explains. The game plan calls for a physical "pod" staffed with
appropriate specialists. This arrangement will provide the expertise to answer
85 percent of customers' questions on the first phone call.
Often a sales person spends a good part of the day answering minor
questions. "The focus team in Nashville will be the eyes and ears of the
salesperson, providing all those things, large and small, that help keep
customers happy," says Steiner. "This will free the sales force to develop a
deeper understanding of customers' needs."
NIMBLE AND QUICK
The "nimbleness" that comes with a lean, barrier-free organization gives
MagneTek a decided advantage. By making the right decisions quickly, the company
is in position to sprint past its larger competitors, which are more apt to be
hindered by cumbersome, inbred cultures that preclude quick reaction.
MagneTek motors, for example, pervade the "leisure water"
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market, powering pumps for spas, swimming pools, jetted tubs and fountains. In
this and many other "niche" markets, the company's reaction time enables it to
get a foothold before corporate battleships can get away from the dock. For the
giants, these niches may appear insignificant, but MagneTek has turned them into
a profitable market domain.
The company also has found sizable niches in exercise equipment, heating,
ventilating, air conditioning, food processing and what Motors and Generators
Group president Brian Dundon defines as the clean-room industry. "Computer chips
have to be manufactured in a very clean environment. We have uniquely engineered
a series of solutions, using our motors and drives, to help the Intels and the
Motorolas of the world get precisely the kind of air flow, precisely the kind of
climate control they need. Now these companies are specifying MagneTek
products," he notes .
The utility industry represents a particularly attractive niche market. As
Dundon observes, "The utility industry is going through deregulation, and we see
this as a real opportunity for our energy-efficient equipment and technology."
He adds that such opportunities often call for a team-selling approach. The
concept, confirmed in the company's strategic planning process, is to assemble
technical sales teams to market product "bundles" to major accounts that buy or
can influence the purchase of more than one MagneTek product.
MAGNETEK NICHEs -
AT HOME AND ABROAD
In the United States and abroad, Dundon sees market segmentation fitting into
the company's objectives. "Niche marketing will result in much more business for
us. We're working to identify new market segments and to move rapidly into them.
"One of the distinct advantages we have is our organization
Turning Obstacles into Opportunities
By Claudia B. Flisi
Antonio Canova, president of MagneTek's Power Electronics Group, believes in
shirt sleeves, not slogans.
He is apt to be found checking activity on the shop floor at group
headquarters in Valdarno, Italy. Or bent over a technical problem with his chief
engineer, Lorenzo Cincinelli. Or on the phone in his simple, almost spartan,
office.
The modest facilities reflect both the personality of the man and his
business philosophy. "Our offices are modest because our clients visit us," he
says. "Today, if you visit a doctor or a professional in a grandiose office, you
might say, 'Why am I paying for all this?' Our clients ask the same question. We
sell to them by showing them how we work."
Canova insists that you have to keep in mind what actually
drives the market are customer needs. "You can't treat all your clients in the
same way, especially in Europe," he points out. "The concept of standardization
is NOT a European concept."
Standardization has to do with a product's position in the market cycle, he
believes. Customization is a characteristic of young, fragmented markets, when
many companies compete by innovating. This stage is followed by a period of
consolidation, when a few companies control production, and standardization
results.
Because MagneTek's Power Electronics Group competes in both developing and
mature markets, it has to cover the waterfront of capabilities. "We have to be
innovative in our R & D, yet economical and efficient in our manufacturing,"
summarizes the MagneTek executive.
The formula has been successful. In a year when European economies were
confronted with low growth and high unemployment, MagneTek in Europe increased
both sales and market share. Canova's approach is three-pronged:
diversification, flexibility, long-term vision.
"If you want to survive in Europe's socialized labor market," he explains,
"you have to develop a strategy of diversification. Otherwise, you will always
be at the mercy of negative events in one market."
Hence Valdarno's entry into lighting five years ago. Hence its
Page 13
Turning Obstacles into Opportunities con't
R & D focus on automotive systems today, which may be profitable several
years down the road. Canova's group diversifies to dampen the cycles of
different market segments, which have different rates of change. For example,
while the telecommunications market is changing rapidly, computer electronics
is changing more gradually. Canova notes, "The pace of change in auto
electronics is very fast these days, and you have to spend a lot on R & D to
keep up.
"Flexibility is essential to transform obstacles into marketing
opportunities. Corporate restructurings create opportunities for us.
Corporate outsourcing gives us work," says Canova.
MagneTek Power Electronics' size is another obstacle-turned- advantage.
It is not as large as a giant multinational, but it is much bigger than its
competitors in Europe. "Many of our customers are looking for partners that
are small enough to offer them economic advantages, but large enough to meet
their technological and manufacturing needs," Canova reports.
His Power Electronics Group also focuses on identifying niches that the
giants are abandoning. As customers like IBM, Siemens and Ericsson exit
businesses that aren't essential to their core strategies, opportunities open
up for MagneTek.
"We have to be very flexible to seize these opportunities as soon as
they present themselves," says Canova. "We can play the same role they did in
niche technologies, but with greater innovation and intensity."
Long-term vision is as necessary as diversification and flexibility,
insists the MagneTek executive. Without it, MagneTek could only take
advantage of its position as an exclusive supplier of certain products.
"Short term, we might profit. But long term, we'd be hurting ourselves," he
says. "We have a strong sense of long-term company continuity."
al flexibility -- our ability to quickly cross functional and operational
lines to serve a market," asserts Dundon.
This companywide flexibility carries over to MagneTek's businesses in
Europe and the Far East. The company is not a new face on the international
scene, but neither is it a major player yet. MagneTek looks to strengthen its
presence in Asia, Europe and Latin America by means of strategic placement of
manufacturing facilities and pinpoint marketing.
"The future of every MagneTek plant will be determined by what is needed
to keep the whole company competitive. To be competitive, we must operate on
a global scale because our customers and competitors operate globally. But we
must do only what we do best," contends Dundon.
The company's growth strategy is focusing on custom products, most of
which are made in North America and Europe. "As we grow, jobs will increase
in all the countries where we operate. Will we make the same products we make
today five years from now? I hope not! Hopefully, we'll be making entirely
new products -- and different kinds of products," Dundon concludes.
BACK ROOM Excellence
As MagneTek seeks closer working relationships with its customers, the
company is moving full speed ahead to streamline its internal marketing and
manufacturing relationships.
A Westinghouse alumnus, James E. Schuster, oversees all of MagneTek's
manufacturing operations. His position is new. Never
Page 14
before has MagneTek had one executive responsible for what the company calls
the "back room." It falls to Schuster to exact a balance between
manufacturing and marketing. For example, he must juggle the need to hold
inventory to a minimum yet deliver top quality products on time.
He accepts the challenge with characteristic pragmatism. "To compete
globally, you must perform at world-class levels in virtually every respect,"
Schuster points out. "So we have adopted a multi-faceted operational
strategy. It encompasses repositioning and consolidation of operations,
expanded use of low-cost manufacturing techniques, new factory designs
incorporating DFT (Demand Flow Technology), and a companywide commitment to
Six Sigma quality (see Six Sigma).
SIX SIGMA Imagine you are taking a business trip. You have two airlines from
which to choose. The pilots from airline A land their planes within a few
feet of the center of the runway every time they fly. They require only a
small fraction of the space allotted to make a landing. The pilots from
airline B, while still making successful landings, touch down in a variety of
spots, from the center of the runway to ten feet from the right or left of
the runway's edge. With which airline would you feel more comfortable --
airline A, which barely deviates from perfect, or airline B, which varies
from trip to trip?
Now take that same scenario and apply it to manufactured goods -- a
motor, a lighting ballast, a yo-yo. Would you rather purchase a product whose
deviation from perfect is only a fraction of the standards allowed, or one
that, while still functional, is much closer to the outer specified limits.
The answer, again, is clear.
It is this level of quality -- only a small deviation from perfect,
called Six Sigma in statistical terminology -- that Michael Daniels and
MagneTek's quality control team are striving to attain in manufacturing and
all of the company's other processes.
Daniels says that the concept may sound difficult, but in reality it is
very simple. "What we are trying to do is reduce normal variations from the
mean between the upper limit and lower limit of a product's specifications.
The smaller the variation, the more a product can shift within the bounds of
the upper and lower limits while still remaining perfectly workable. We are
looking for that sort of predictability."
Once a company successfully controls its variations -- reaches Six Sigma
- -- then it shifts from an inspection-based company to a measurement-based
company. Daniels explains that the predictability which comes from achieving
Six Sigma produces enough confidence in the manufacturing process that "you
can take inspection away, have the people who were previously spending all of
their time with inspections move to more productive jobs and begin adding
value to the company. Our goal is to reach an error level of only three parts
per million -- for every million products produced, only three fall outside
specifications. It is an ambitious goal, but one that we believe is highly
attainable."
Daniels and his team have already begun the process of bringing MagneTek
up to Six Sigma. His plan calls for taking the company's top managers and
putting them through training classes. Daniels will select 24 of the "best of
the best," who will be further initiated into the ways of achieving Six
Sigma. "These individuals will become MagneTek's 'black belts' -- the people
who will make this change happen."
As the black belts delve into their tasks, they will discover that parts
of MagneTek are already operating at Six Sigma levels. But what Daniels and
his team are looking for are "more than pockets of excellence in the
organization. What we are talking about is getting the company as a whole
operating up to its highest potential."
Page 15
"And if we aren't able to achieve world-class performance levels in any given
area," Schuster emphasizes, "then we will find a partner to work with who is.
This philosophy will result in a profoundly different manufacturing
structure for MagneTek." In keeping with this philosophy, during fiscal 1997
alone, MagneTek reduced its total floor space by 10 percent (379,000 square
feet) through factory consolidations. And shortly after fiscal year-end, the
company outsourced steel stamping for all of its North American magnetic
lighting ballast products in order to assure that MagneTek will have
world-class capabilities for this key lighting component.
SUPPLIER PARTNERSHIPS
When Schuster joined MagneTek in July of 1996, the company was buying more
than half a billion dollars worth of materials annually, but with little
companywide purchasing collaboration. "To begin with, we are consolidating
and leveraging our purchases to the maximum extent possible," he says.
"Instead of approaching our supplier network as independent business units or
manufacturing sites, we are beginning to capitalize on the buying power of a
billion-dollar-plus corporation with all of the associated volume discounts
and strategic benefits."
Schuster also found that MagneTek had more than 800 active suppliers, a
number he intends to pare to 200 by the year 2000. Increased outsourcing to
fewer suppliers will, of course, entail profoundly different vendor
relationships as well. "They will
Page 16
be true partnerships, based on shared business goals, coordinated investment
strategies, and a mutual commitment to achieving our objectives of
world-class cost, quality and speed," Schuster explains.
"Specifically," he adds, "our 'vendor-partners' often may need to
establish facilities near ours to minimize costs, reduce cycle times, and cut
raw-material inventories in our plants to near zero. Critical to these
relationships will be long-term business agreements, use of the latest
information technologies, and, most important of all, impeccable incoming
quality.
"Are we there yet? Absolutely not. Can we and will we get there?
Absolutely! We must," Schuster states.
What will get the company there? Operational excellence, DFT,
outsourcing and solid supplier relationships, to be sure. "We are well
underway in each of these areas and already beginning to show remarkable
results in many of our factories around the world," Schuster says. But the
linchpin, he believes, is organizational capability grounded on MagneTek's
"People Plan", Six Sigma implementation, and team building. "Only our people
can give us a sustainable competitive advantage," he concludes. @
Call 1-800-MAGNETEK
Five years ago, in a back office in West Los Angeles, MagneTek installed its
first "800" line to field product information calls. Often, callers were
simply connected with an answering machine and received a call-back from
whomever was first to notice the message light blinking. By 1994, the
answering machine was inundated with nearly 300 calls per month. To remedy
this situation, the MagneTek InfoCenter was born.
The center was set up and staffed at MagneTek's distribution center in
LaVergne, TN. Demand continued to grow -- escalating to more than 600 calls a
month by 1996. And so, from its inauspicious beginnings as a blinking light
in a back room, the center was again moved into larger space at MagneTek
headquarters in Nashville.
InfoCenter manager Carla Niebuhr and information specialist Henri Green
now field more than 1,000 telephonic requests for product information each
month.
The InfoCenter operates between the hours of 8:00 a.m and 7:00 p.m. EST,
with both Niebuhr and Green fielding calls in person. Requested information
is mailed or faxed within 24 hours. Callers needing more immediate technical
or ordering assistance are connected with the appropriate MagneTek location.
With its larger facility, the InfoCenter is now capable of handling not
only phone traffic and an increasing number of E-mail requests from
MagneTek's Web Site on the Internet, but also all literature "fulfillment"
for the Nashville-based Lighting Products Group.
The Center's ultimate objective is "just-in-time" communications with
marketing partners, customers and prospects. In today's competitive arena,
the company most likely to get the business is the company whose sales
information gets to the prospect first.
And that is what MagneTek's InfoCenter is all about.
Page 17
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Page 18
Platforms for Growth
By Christopher R. Smith, Contributing Editor
With all the changes going on in the company today, MagneTek has not overlooked
tomorrow. It is depending upon its technical expertise to develop products for
the year 2000 and beyond. Dr. Alexander Levran, senior vice president of
technology, who joined MagneTek from Groupe Schneider in 1993, sees a new
commitment to research and product development at MagneTek. Dr. Levran and his
associates, once viewed as the white coats in the back rooms, no longer fit that
stereotype.
"Now we are focusing on the strategic planning of technology -- to identify
the technologies that will give us the growth we want in the next three to five
years. We've put together technological road maps which will allow us to achieve
that growth," comments Dr. Levran.
And the company is making a commensurate financial commitment to its R&D
program. According to Levran, R&D funding is growing significantly -- l5 percent
to 20 percent more for the four advanced development centers (ADCs) MagneTek
operates in the United States and Europe. He foresees many advantages as a
result of this new recognition of the
Page 19
impact and importance of research, from the recruiting of new associates to more
support for pure research on college campuses.
PRODUCT PLATFORMS
"Naturally, we will support pure research in magnetics and power electronics
because we will benefit from it," Levran says. "But in our own ADC labs we
concentrate on applying magnetics and power electronics to satisfy customer
needs and bring leading-edge products to market.
"We believe we are among the best in the world at integrating these two,
complementary technologies."
Apparently, Dr. Levran's conviction is shared by some of the world's
largest firms -- multinational customers such as IBM, General Motors,
Caterpillar, Ericsson and General Electric, which recently entered into a
far-reaching R&D pact with MagneTek (see Lighting Alliance on page 27). Over the
past year, the company has introduced more new lighting products than ever
before.
"Our strategic initiative includes a program to develop common platforms
for a wide variety of products," Dr. Levran explains. "By this I mean that we
integrate magnetic and electronic components into unique, thermally stabilized
circuits. These compact, low-cost circuits perform specific tasks but can be
used in many different applications, which speeds product development and
simplifies manufacturing." On the subsystem level, MagneTek's engineers
integrate these "platform circuits" into unique products that satisfy customers'
performance needs. Examples include the InteliPac-TM- motor-drive, which can be
programmed to change speeds automatically or in response to sensor readings, and
MagneTek's new electronic ballasts for energy-saving "T5" fluorescent lamps.
On the systems level, Dr. Levran adds, MagneTek develops the hardware and
software necessary to integrate its products with those of other manufacturers
and comply with the codes and standards of the international marketplace.
AN ORACLE WITHOUT RIDDLES
Dr. Levran compares technology's pervasive internal influence on MagneTek with
that of Six Sigma -- which he characterizes as "the glue that binds the back and
front ends of the company together."
Internally, in addition to its two core technologies, which touch
practically everything it does, MagneTek is starting to implement a new,
companywide management information system known as Retool 2000.
According to Dr. Levran, whose brain child it is, Retool 2000 is a
high-tech fix for riddles ranging from supply chain bottlenecks to the
"millennium bug" (a programming oversight that will cause computer clocks to
recycle back to the year 1900 on January 1, 2000). Based on Oracle Corporation's
Enterprise Resource software, it will establish a single, common data base for
all of the company's business transactions, worldwide.
According to Thomas Pike, Retool 2000 leader, the Enterprise Resource
software will streamline
Page 20
the company's computer systems, "replacing the hodgepodge of 32 separate systems
and data bases in use throughout MagneTek -- many of those systems coming from
various acquisitions made by the company over the years."
According to Pike, the one system from Oracle will do the same job the
other 32 systems did, only much more quickly and efficiently. It will provide
automation and interaction of business functions -- tying together MagneTek's
global network of plants and offices. It will be literally the backbone of the
business from an intelligence and information standpoint.
INVENTORY MONITORING
The system also will afford MagneTek associates tremendous power and
flexibility. Pike uses order management as an example:
"Oracle lets us instantly view the finished goods inventory of any product
at each and every MagneTek location. It also can look into future production
schedules to more efficiently control inventory flow. It can oversee logistics
capabilities, making sure products are
The MagneTek Universe
If Oracle's software one day facilitates electronic commerce on the Internet, as
MagneTek's MIS director expects, the "MagneTek Universe" will be waiting. In the
photograph above, computer marketing specialist Stefan Horstschaer (right)
works on "the creation of the Universe" with John Timble (left) and Joel
Berghoff of New Order Media, MagneTek's Nashville-based web site provider.
Horstschaer hails from the company's May & Christe subsidiary in Mainaschaff,
Germany, which is fitting, since the Universe is both multinational and
(progressively) multilingual. As its name suggests, the MagneTek Universe
includes a companywide home site inter-linked with satellite product-group web
sites, where visitors can obtain detailed information about the company's
products. It even has a "Transporter Room" for "beaming" visitors from one site
to another. You are invited to come aboard. The address is: www.magnetek.com
Page 21
properly shipped and that the right product gets to the right customer. All
these functions will be accessible at one computer terminal with a few
keystrokes. The system will really provide us with a competitive edge -- for our
customers and our suppliers, as well as for our associates."
John Steiner, president of MagneTek's Lighting Products Group, sees the
Oracle system as an important tool in moving the company into the next century.
"The Oracle software is going to help us immensely. Just being a sales person
taking an order and waiting for it to be delivered is not acceptable in the new
MagneTek. We have to become proactive, to link ourselves closer to end users of
our products. In doing so, we deliver greater value to the customer; our product
is no longer simply a commodity."
Pike sees the system opening up myriad possibilities. He uses the Internet
as an example. "I envision
Growth Through Innovation
There's lots of action in power supplies," states Simone Gardella, an R&D
engineer for MagneTek's Power Electronics Group in Valdarno, Italy. "But patent
protection counts for little," he cautions, "except in a few specialized areas
like DC-to-DC converters."
Patented or not, the important thing in product development is innovation,
and innovation is where the group excels. In fields like telecom, marked by
rapid change and exponential growth, MagneTek is working with names like
Ericsson to develop more compact and potent power supplies for cellular phones.
The automotive industry is noted for its long lead times, but the pace of
change in auto electronics is also very fast these days, affirms group president
Antonio Canova. Cars are moving from one kw of electrical energy to 5-10 kw, he
says, and will soon be dominated by electronics. He points to the growing market
for anti-lock braking systems, electronically powered headlights, and electronic
route maps.
So his group is investing a lot of R & D in this industry. "What is
important in cars is comfort and confidence," he suggests, "in braking,
pollution control, and motor efficiency. We are exploring all of these areas
because any one of them can lead to major market positions four or five years
down the road."
Simone Gardella notes other areas of development --- applications in power
steering systems and electric cars. MagneTek has started working with Piaggio
and other companies on the latter, although there is a long way to go before
this market matures.
Railroads offer still other opportunities. One project now being explored
by MagneTek in Italy and the United States would substitute electronic braking
signals for electro-mechanical braking control. Electronic controls respond very
quickly, an important feature in American trains, which haul many more cars than
their European counterparts.
The use of power electronics also opens up a whole new level of
functionality, making it possible, for example, to monitor the location of
individual railroad cars by satellite.
Page 22
it being possible for our customers to sign onto the worldwide web and place an
order directly with MagneTek. It's not in our immediate future, but it certainly
seems to be the direction Oracle is heading."
The system also offers advantages to MagneTek's suppliers. Pike explains
that the software "will enable us to see who our largest suppliers are, develop
cooperative partnerships with them to lower our inventories and, eventually,
negotiate better prices. In the long run, everyone benefits -- MagneTek, our
customers and our suppliers."
Parts of the Oracle system are projected to be up and running by early
1998, with MagneTek's Drives & Systems Group set to be completely on-line by
February. The time frame for implementation companywide is about two years. Pike
and his team plan to oversee the training of the nearly 2,000 associates who
will use the software. He believes that, "initially, it will be a little
difficult -- the hardest thing is not to learn something new, but to unlearn
what you already know. But once our associates see what this system can do for
them, they will wonder how they ever got along without it. The Oracle system is
simply a tool for the real brain power behind MagneTek -- our people."
MagneTek Gains Software Edge
MagneTek has acquired an equity position in Automation Systems and Products,
Inc. (ASAP), an award-winning developer of factory automation software based in
Chagrin Falls, Ohio.
This strategic alliance advances MagneTek's software capabilities to meet
the growing demand for factory automation control systems. A leading developer
of Microsoft Windows NT-TM--based softlogic, ASAP recently received a U.S.
patent for its "Integrated Control System for Industrial Automation
Applications" and was recognized by Control Engineering magazine for the "best
new control software product."
"ASAP is a recognized leader in automation software, and we are excited
about being partners with them," notes Gerard Gorman, president of MagneTek's
Drives & Systems Group. "ASAP's software expertise, combined with MagneTek's
electronic variable-speed-drive technology, positions us to respond effectively
to the emerging market for integrated factory automation systems," he observes.
Page 23
AC Elevator Drive Incorporates Years of Industry Experience
By Jim Herringer, Contributing Editor
MagneTek is the acknowledged world leader in providing DC (direct current)
traction drives to the elevator industry. All of the elevators in eight of
the ten tallest buildings in the world use MagneTek drives. The four largest
elevator companies in North America have standardized on MagneTek DC drives
for one reason -- reliability.
Example: recent brutal "accelerated life testing" by one
elevator manufacturer produced enough heat to melt the drive's plastic LED
display, while the drive itself continued to operate problem-free.
The same kind of performance has now been incorporated into
MagneTek's new HPV 900-TM- AC (alternating current) traction drive. The new
drive incorporates the advantages of AC power, including lower motor cost,
durability and low maintenance. Development of the drive by the company's
Drives & Systems Group reflects the growing demand for AC technology in
building construction.
The HPV 900 drive is matched to and pre-programmed for use
with MagneTek AC traction motors. However, "adaptive control" technology
allows it to be matched to virtually any existing AC motor. Once installed,
the drive is able to monitor motor characteristics and tune itself to produce
desired motor performance.
"It's a case of taking knowledge acquired through years of
leadership in DC elevator technology and applying it to meet developing needs
for AC technology," says James Papez, MagneTek director of custom drives.
A 27-story Toronto test installation has been completed and is
being monitored by Thyssen Elevator Ltd. and MagneTek engineers. Testing by
Thyssen and other major manufacturers is progressing well, according to
Papez. Full introduction of the HPV 900 is planned for November 1997. / /
Speed-Engineered-TM- Motors Prevent Corona
MagneTek's Motors & Generators Group has introduced a new motor design
developed to ensure reliable operation when motor speed is controlled by
variable-frequency drives incorporating electronic power inverters.
Speed-Engineered motors are technologically superior to standard motors
because they prevent a destructive phenomenon called "corona," which can
cause premature motor failure. Corona is most prevalent when motors are
driven by some electronic inverters. It has been around for a long time, but
as variable frequency drives became smaller and more sophisticated, it's
occurrence increased.
The exact cause of premature motor failure was a bit of a mystery until
researchers at MagneTek's Advanced Development Center in St. Louis identified
the operating conditions leading up to it. Not only did they identify the
problem -- corona -- but also came up with the solution. The Speed-Engineered
motor line prevents corona altogether, avoiding costs associated with motor
replacement, as well as productivity lost during downtime.
Introduced in February, the new motors already are having an impact on
heating and air conditioning markets and in material handling applications
that require both a motor and drive, such as pumping and conveying. / /
Page 25
STRAP - The Playbook for the Next Millennium
By Reuben M. Smith
STRAP is an acronym for strategic planning. At MagneTek, the strategic
planning process is carried out by analytical teams representing each
product group as well as key staff functions such as human resources and
technology.
MagneTek recruited Gerard Gorman from General Electric to head up
strategic planning and to establish the multi-team task force that -- for the
first time in MagneTek's history -- would zero-base the company's strategic
plan. "Gorman's War Room," as his STRAP conference center in Nashville came
to be known, moved into full scale operation in January of '97.
In June, the group presented its distillation of the first companywide
analysis and plan.
"What we did was more intense than any effort I've seen -- even at GE.
What it took was actually a team of teams -- one from each of our
businesses," recounts Gorman, who was named president of MagneTek's Drives &
Systems Group following completion of the 1998 STRAP.
Page 26
CORE COMPETENCIES
"STRAP determines for a company what businesses it should be in based on what
we call 'core competencies' -- things we do differently and better than
anyone else, things that would be extremely difficult for a competitor to
duplicate within a short time frame," Gorman explains.
One of the core competencies evaluated in the STRAP process was power
electronics. Result: wheels have now been set in motion to leverage
MagneTek's electronics expertise across all of its other businesses.
"The lighting industry, for instance, is moving from magnetic ballasts
to electronic ballasts," Gorman points out. "Consequently, electronics winds
up being a critical element for our Lighting Products Group. Electronics is
also the key to building management systems, where computers control, among
other things, lighting, heating and air conditioning.
"Controlling power represents another huge target market," Gorman notes.
"IBM has become one of our largest customers. Today, nearly 10 percent of
power supplies for personal computers worldwide are provided by MagneTek. But
there are many other applications for precise control of power.
"We also want to implement our electronics competency in the auto
industry with a broad range of electronic sub-systems for cars and automotive
lighting."
Gorman says that MagneTek's expertise in power electronics is extremely
difficult for competitors to duplicate in a short time frame. "Duplication is
difficult because our electronics experts develop new products with the needs
of the markets we are targeting in mind. So without question, our people are
our major asset. For another company to attempt what our people do, as
quickly and cost-effectively as they do it, would be very difficult."
MEETING FUTURE NEEDS
When people enter into the equation, so does Daryl David, senior vice
president of human resources and administration and a key member of the STRAP
team. As it became clear where MagneTek was heading, David, too, had to plan
to meet future needs today. He uses a sports analogy to explain:
"Obviously, different strategic directions demand different
organizational capabilities. STRAP tells us what kind of company we want to
be in three to five years. It's much like a football game. The receiver is
going to run down the field and execute a post pattern. The quarterback has
to throw the pass to hit him when he's at just the right spot. STRAP tells us
where MagneTek is going to be in three to five years. That alters the
destination of organization capability. STRAP is the playbook, so to speak,
on the type of people we'll need down the road as MagneTek focuses on
particular
Page 27
markets with specific products."
MagneTek's strategic planning process goes far beyond simply
identifying what the company does best. Gorman explains:
"MagneTek's plan is based upon client and customer input versus what I
call the 'I say' strategy. Instead of going down the hall to people in the
company, asking them what they think about the company and the industry, we
asked our customers.
"For example, if I ask Joe what he thinks and he says, 'I've been in the
industry 25 years, and this is what we should be doing,' that's an 'I say'
strategy, and it's used by many companies. Regrettably, no one ever talks
directly with a customer. We took the other course, went to our customers and
asked them, 'How can we create value for you? How will you measure us against
our competition?' Based on the answers we received, we were able to identify
specific actions that needed to be taken, incorporating specific dates and
specific responsibilities."
PRESSING NEED
Gorman's strategic planning teams also spotted opportunities demanding
immediate attention. One such opportunity involved MagneTek's sales force,
which has been organized along product lines. "It became obvious as we
analyzed the company that there was a pressing need for a multiple-threat
sales team that could 'bundle' all of the company's products into various
packages based on customer needs."
As David of human resources points out: "There are many cross-business
customers, huge accounts that potentially can buy products from every part of
MagneTek's line. For example, there is a major casino project now under way
in Las Vegas that will require lighting, drives for elevators, even pool and
spa motors. Rather than several of our people calling on the casino, each
representing only one product, we are working toward a MagneTek salesperson
who will offer the complete line. There's literally $100 million in potential
sales at this one casino if we approach it on a companywide basis."
Yet another dimension of MagneTek's strategic plan is geographic. The
STRAP process clearly confirmed the potential opening up for the company's
products overseas. "A big part of our vision for the year 2000 and beyond is
to be well established on three continents -- North America, Europe and
Asia," CEO Ron Hoge made clear in meetings with financial analysts in July.
MagneTek, GE Form Alliance
In August, subsequent to fiscal 1997 year end, MagneTek entered into an
alliance with GE Lighting to develop and market energy-efficient lighting
systems.
The alliance calls for joint development lamp/ballast systems for
strategically targeted markets, including those for linear fluorescent,
compact fluorescent and high-intensity discharge lighting. In connection
with this effort, MagneTek and GE will co-locate engineers to perform
research on lighting technologies.
Also under the agreement, GE will assume exclusive responsibility in
North America for marketing all MagneTek electronic ballasts to electrical
wholesalers. The ballasts will be branded "GE Electronic Ballast" and "Made
by MagneTek." MagneTek will continue marketing its magnetic linear
fluorescent and high-intensity-discharge ballasts through electrical
wholesalers, as well as all magnetic and electronic ballasts to original
equipment manufacturers.
"We are pleased to be aligned with MagneTek, a leader in the ballast
industry, in this important effort," stated GE Lighting president and CEO
David L Calhoun. MagneTek president and CEO Ronald N. Hoge added, "Clearly,
we will benefit from GE Lighting's experience and marketing might, and we
believe GE will benefit from our power electronics application know-how."
The worldwide market for electronic linear fluorescent ballasts exceeds
$1 billion a year, and markets for all types of electronic ballasts are
growing steadily.
Page 28
going glocal
MagneTek became an "international" company in 1986 with the acquisition of
Universal Electric, a motor manufacturer based in Owosso, Michigan. With
Universal came a fractional horsepower motor factory in Gainsborough,
England, which has been and still is one of MagneTek's most profitable
overseas operations.
Today, a major thrust of the company's strategic plan is international,
based on existing operations in the United Kingdom, Italy, Germany and
Hungary, and a promising joint-venture in the People's Republic of China.
MagneTek's management is unanimous in its commitment to growth overseas.
"It's a huge opportunity for us because less than 25 percent of our
revenues are international now," notes Gorman. "Besides, it's not optional.
We encounter global companies in North American markets every day. At the
same time, many of our North American customers are going global. If we
don't compete for their business overseas, we may not be serving them here
tomorrow.
"If we hope to fulfill our vision for the year 2000, we've got to think
globally and act locally," says Gorman. He calls it "glocalization," and it
is evident in MagneTek's recent expansion in Hungary and joint venture in
China (see International section on page 34).
The road map into the 2000s is now in place, with a $2 billion company
the objective. What's to come in the early years of the new millennium?
That's what the 1999 STRAP team aims to find out. / /
Product 'Bundle' Helps Mexican School Cut Costs
A "bundle" of MagneTek products is helping the Monterrey Institute of
Technology and Advanced Studies (MITAS) in Monterrey, Mexico reduce costs
and save energy. The leading engineering university in Mexico, MITAS
encompasses eight schools and 208 classrooms on a 35-acre campus.
Wanting to match its high-tech curriculum with high-tech energy
conservation, MITAS contracted with Johnson Controls Inc. (JCI) to transform
its aging electrical system into an integrated source of income and energy
savings. Based on JCI's Metasys-Registered Trademark- computerized Facility
Management System, the retrofit included installation of 24 MagneTek GPD
variable-frequency drives in building ventilating systems and approximately
3,000 MagneTek electronic lighting ballasts. MITAS has a performance contract
with Johnson Controls, meaning that equipment upgrades are paid for through
energy savings, which are expected to exceed 7,000,000 pesos ($600,000) over
the first year and a half of operation.
Drives for the project were supplied by MagneTek's Drives & Systems
Group in New Berlin, WI, and the ballasts were manufactured at the company's
plant in Matamoros, Mexico. Latin America in general and Mexico in
particular represent growing markets for MagneTek products produced in both
the U.S. and Mexico.
Page 29
International
MagneTek Plants Hope in Hungary
By Claudia B. Flisi
When MagneTek first entered the Hungarian market in 1990 through a joint
venture with a state-owned company, EVIG, the economic situation in Hungary
was bad and getting worse. The U.S.S.R., EVIG's main market, had just
collapsed, and the Eastern trading block had ceased to exist.
At its peak in 1983, EVIG employed 3,000 people, including 600 at its
integral-horsepower motor plant in Kobanya (a suburb of Budapest) and 760 in
Cegled, a small-motor factory 100 km (60 miles) south of Budapest. "Our low
point in production was 1992, when we produced 26,000 motors in Budapest --
less than one-third of our capacity -- with about 250 people," says site
manager Endre Farkas. "In fiscal 1997, we produced 53,300 motors with the
same number of employees."
The difference in productivity (and profitability) is a tale of
motivation and managerial skill played out in the context of an economic
system in transformation.
During the three-year joint venture between MagneTek and EVIG, there
were no profits to be enjoyed. Hungarian labor costs are anywhere from 1/5 to
1/10 of those in Western Europe, but low labor costs do not necessarily
translate into high profits. It was not until 1993, when MagneTek bought 100
percent of the Budapest facility, that changes began to occur in earnest.
"We always had good productivity here," notes Farkas, who came to the
Budapest plant in 1983 as head of engineering and was named site manager in
1994. "But we are constantly improving. In 1997 it took us 20 percent less
time to produce a motor than in 1996."
Quality has also improved. Both Budapest and Cegled are ISO
9001-certified, a qualification expected by MagneTek's customers.
Page 30
Previously, under the Communist regime, the Budapest factory did not keep
records of reject rates either internally or at the "customer" level. Today
it does, and the rate is as low as that for comparable U.S.-made products.
What was the basis for improvement? Up-to-date, well- maintained
equipment for starters, but other factors also count, according to Farkas:
professional management and supervision, commitment to the customer -- and
performance-based bonuses for employees.
Cegled
The situation is somewhat different at the Cegled fractional-horsepower motor
plant, purchased by MagneTek in October, 1996. In its peak years under EVIG,
Cegled employed 760 workers. Today there are 270 at the seven-hectare site,
including 13,000 square meters of buildings.
Prior to its acquisition, Cegled was already exporting motors to the
West, but it too had been affected by the negative economic climate. Although
its labor costs were lower than those in Budapest, its workers were not as
productive. Zoltn Tanko, a Cegled senior advisor who has worked at the plant
for 40 years, explains, "This factory always operated smoothly. Employees
were not unruly; they simply did as they were told. But the risk of losing
their jobs when MagneTek took over was a strong incentive to improve."
Today, more motors are being exported to the West than ever before, says
Dezs Szokolai, a 10-year employee who has been Cegled's factory manager since
April, 1997. Productivity has increased and motivation has improved. The
major change under MagneTek, he believes, is "that the plant now has a
future."
Working Together
Teamwork between Budapest and Cegled also is increasing, with greater
coordination of purchasing, shipping, computerization of management systems,
integration of marketing materials, and more interaction with American
colleagues. "We survived an uncertain period, and now we are producing solid
results," says Szokolai.
"Employees required no special training during the transition," notes
Farkas. Budapest workers -- many of them women -- average 15 years of
experience, and many are highly-skilled. In the early 1990s, they knew the
plant was in trouble and their jobs were threatened. "People today aren't
afraid that the plant might close, but they know we must perform," he points
out.
Farkas himself sets a good example. With MagneTek, he works longer hours
with more responsibilities than ever before. "I have much more business
information to deal with, and I have to deal with it in English," he admits.
"But, on the other hand, today we have a vision for the future and the chance
to explore new markets and develop new business."
A recently-established European sales office should aid in that
development. Currently, 60 percent of combined Budapest-Cegled motor
production goes to the West, about 15 percent to Hungary and the rest
elsewhere in the world, as far away as Australia. In the fractional to 60-
horsepower range, MagneTek has profitably attained 90 percent of the
Page 31
domestic Hungarian motor market.
Exports to Western Europe will increase in coming months when the
Commander-TM-, a new swimming pool pump motor, goes into production in
Cegled. Today 80 percent of Cegled's European sales are domestic; that will
change when the Commander enters the Western European market.
Pomaz
MagneTek's third facility in Hungary is located in Pomaz, a noted tourist
region about 50 km (30 miles) north of Budapest. Pomaz is part of the Power
Electronics Group, headquartered in Valdarno, Italy, and produces lighting
ballasts and power supplies.
Says group president Anton o Canova, who is responsible for the Pomaz
facility: "Hungary is a kind of 'China' for Europe because it is nearby and
the costs of labor are five to six times less. But the advantage of low labor
costs is transitory because it can be duplicated easily. The key factor
remains the know-how of the individual -- and we find that intellectual
capability in Hungary."
MagneTek moved into the custom-renovated factory in Pomaz in October,
1996. Already the shop space has expanded from 2,000 to 4,000 square meters,
and the number of employees increased 80 percent between January and July,
from 120 to 220.
Assembly work previously done in Germany has been moved to Pomaz; so has
ballast and power supply assembly work formerly handled in Valdarno. "Our
goal is 300-320 employees by the end of 1997," says Laszlo Vitvera, the
Hungarian plant manager hired last January.
Expansion has occurred along a sometimes-painful learning curve. When
Vitvera was hired, plant absenteeism was high and wages were out of sync with
the region, heavily influenced by a short-lived but lucrative tourist season.
Today, 60-65 percent of the work force comes from the city of Budapest, and
tighter management has brought absenteeism down dramatically. In October, the
plant will apply for ISO 9001 accreditation.
Choosing the right people is the key to success in Hungary, Canova
believes. By the "right people," he means Hungarians who understand
MagneTek's way of doing business, rather than having it imposed on them. He
specifies: "I don't mean the 'Italian way' or the 'American way,' but
MagneTek's way."
He admits that this is not as easy as it seems. "You have to be flexible.
You have to be tolerant." He adds with a half-smile, "As Italians, we pride
ourselves on our flexibility. The biggest lesson we learned in Hungary is
that maybe we are not always as flexible as we had thought." / /
Claudia B. Flisi is a free lance writer based in Europe. Her articles have
appeared in Fortune, Personal Finance, The International Herald Tribune and
many other publication
Page 32
Electronic Power Supplies Help Clear the Air
By Claudia B. Flisi
Dr. Antonio Canova, president of MagneTek's Power Electro-nics Group in
Valdarno, Italy, cannot resist a challenge. So when ENEL, the giant Italian
electrical utility, approached him four years ago with a problem that
Valdarno had never before tackled, he agreed to take a look.
The issue was one of pollution- control equipment. ENEL uses
electrostatic precipitators to remove particulates from the emissions it
generates, as do many industries: manufacturing plants, steel mills, chemical
processing plants, paper mills, etc. But because laws on environmental
emissions are increasingly stringent, these precipitators require
correspondingly higher-voltage power to produce the electrostatic charges
needed.
In the past, the power had been provided by large, inefficient 50- and
60-Hz transformer-rectifiers that were heavy, hard to install, and difficult
to operate. In addition, they had been designed in the days before
sophisticated computer monitoring became standard.
"ENEL came to us because they wanted a company with expertise in both
electronics and high voltages, and we were the only ones in Italy with both,"
explains Massimiliano Savi, the MagneTek engineer who currently oversees the
project. "We didn't make any similar products, so it was a big step for us."
Canova presented the challenge to his chief engineer, Lorenzo Cincinelli,
who studied the problem for two weeks before outlining a tentative solution.
The major issue, he explained, was that high voltages can lead to
unacceptable energy loss.
Cincinelli's proposal, with only minor modifications, has been on the job
for the last two years at ENEL's power plant in Porto Marghera near Venice.
The testing stage of the "EPS" (electronic power supply) awaits only the
assurance that "100 percent absolute reliability has been achieved," says
engineer Savi. "We want a product that will 'plug and play' for our
customers."
MagneTek's EPS power supplies have other advantages as well. They are
compact and lightweight, to reduce installation and maintenance costs. They
are extremely energy- efficient, saving up to 30 percent in energy
consumption and electricity costs. They are user- friendly for the operator,
lowering training and operating costs through computerized monitoring. And
they are programmable.
While ENEL's testing has involved several 5 kw units, a 15 kw model will
be in production within the year, and a 22-25 kw version is being planned.
Several hundred units are expected to be produced annually. / /
Page 33
Old Church Sheds Light on New Ballast
By Claudia B. Flisi
A 1,000-year-old church, the Chiesa dei Santi Ippolito e Cassiano near
Arezzo, Italy, served as the unlikely testing site for one of MagneTek's
newest lighting products.
The ceiling of the church was fitted with MagneTek's electronic ballasts
for High- Intensity Discharge (HID) lamps to see whether the ballasts would
deliver greater economy and durability than traditional electromagnetic
ballasts.
Aesthetically, there was an added factor to consider: How would the
ballast blend in with its unusual background?
MagneTek engineer Nicoletta Rosini, who is in charge of marketing the new
electronic HID ballasts, explains that the product was designed to meet all
three criteria. "No question that our electronic ballast improves light
performance -- from 6-7,000 hours life with an old-fashioned electromagnetic
ballast to 10,000 hours with electronic. It is also lightweight and compact,
so it maximizes the flexibility of lighting planners," she says.
The new ballasts actually increase lamp life up to 35 percent compared to
conventional ballasts, with energy savings of up to 18 percent. Other
advantages include flicker-free illumination, reduced heat loss that
translates into lower air-conditioning costs, 50 percent faster lamp warm-up,
and no variation in lamp color.
But it is the ballasts' small size and light weight that are particularly
appealing to MagneTek customers. Such ballasts reduce shipping, storage and
installation costs, as well as improve the appearance of their surroundings.
The new HID ballasts began shipping only recently, but customer reaction
has been enthusiastic, and MagneTek estimates it could capture half of the
growing European market for HID electronic ballasts by the end of the first
year.
MagneTek Valdarno began developing products for the lighting industry
five years ago. There are synergies between this area and that of power
electronics in the use of components and circuitry.
One big difference is that the manufacture of lighting ballasts tends to
be standardized, while 90 percent of Valdarno's work in power electronics is
customized. In addition, ballast designs are protected by patents.
On one marketing fundamental the two engineers agree: "We used to be
focused primarily on quality. Now quality is a given, so the new emphasis is
on power management to reduce energy consumption costs, increase life and
improve efficiency."
A tenet to which the Chiesa dei Santi Ippolito e Cassiano would
undoubtedly give its blessing. / /
Page 34
Generating Excitement in Asia
By Robert W. Murray, Contributing Editor
In 1997, MagneTek made its debut in the People's Republic of China. The
MagneTek Fuzhou Generator Company Ltd. is a 55 percent MagneTek-owned joint
venture, located in the Chinese city of Fuzhou (pronounced Foo-joe).
Production of 15-1,000 kw electric generators began in June.
The Fuzhou plant will serve existing MagneTek customers doing business in
Asia, such as Caterpillar, which has an extensive presence in the region. The
MagneTek plant will also allow the company to expand its customer base
throughout Asia. By producing generators and gensets at manufacturing bases
in Asia, MagneTek is able to lower shipping costs and speed delivery times to
its Asian customers.
"The Fuzhou plant offers a great opportunity for MagneTek to establish
itself in the expanding Chinese marketplace. As China continues to grow, the
demand for electric power increases. There is a tremendous need for efficient
power sources. With the Fuzhou manufacturing facility, MagneTek is in an
excellent position to help fill that need," says Gary Wolfe, general manager
of the joint venture.
With a population exceeding 1.2 billion and gross domestic product
growing at nearly 10 percent a year, China offers tremendous opportunities.
"Power shortages are common here, and the need for electricity to support all
the cities and towns that are springing up can't be met by central power
plants. So more than half of the seven percent annual growth in demand for
electric power must be met by diesel gensets," continues Wolfe.
With the Fuzhou plant in place, MagneTek signed a contract with Nippon
Sharyo Company of Nagoya, Japan, for more than 1,600 generators in calendar
1997.
MagneTek manufacturing in Asia is now focused on generators. But "this
joint venture is MagneTek's beachhead in the Asian market, the success of
which will determine the direction of the company's future strategy
throughout the Far East," comments Brian Dundon, president of MagneTek's
Motors & Generators Group. / /
MagneTek's beachhead in Asia will be secured with the opening of regional
headquarters offices in Hong Kong early in 1998. Leading the company's Asia
initiative is Bernard Kwok, who joined MagneTek from Nortel in April of 1997.
An experienced Asia hand, Mr. Kwok was a driving force in Nortel's successful
entry into the Asian theatre, serving latterly as Managing Director & General
Manager, Nortel (Asia) Ltd., based in Hong Kong.
Page 35
News Briefs
Remaining Convertible Notes Called
In September, subsequent to its 1997 fiscal year-end, MagneTek called the
remaining $40 million of its 8% Convertible Subordinated Notes due 2001,
following the conversion of an initial $35 million principle amount of the Notes
in June. Successful conversion of the remaining notes will reduce debt and
increase equity by an additional $40 million, further cutting interest expense
and bringing the company within striking distance of its targeted one-to-one
debt-to-equity ratio.
Defense! Defense!
In May, MagneTek received the Defense Supply Center of Richmond's (DSCR)
prestigious Gold Medal, symbolic of perfect performance on a contract awarded in
July, 1996, for the supply of linear fluorescent ballasts. DSCR is the
organization that procures lighting and other products for the Defense Logistics
Agency.
The award is part of that agency's Automated Best Value Model (ABVM)
program. A factor considered when awarding new contracts, ABVM is an automated
system that collects each vendor's performance data and translates them into
numeric scores, reflecting a combination of product quality and on-time
delivery.
MagneTek Earns EPA Award
In 1990, MagneTek was one of the first companies to sign up for the
Environmental Protec-tion Agency's "Green Lights" program. A giant step forward
in government-industry relations, "Green Lights" encourages building owners to
voluntarily upgrade the efficiency of their lighting based on potential energy
cost savings.
To date, according to the EPA, more than 3.5 billion pounds of carbon
dioxide (CO2) emissions have been prevented through "Green Lights" efficiency
upgrades. MagneTek's contribution to the effort consists of more than 5.5
million pounds of CO2 saved, as well as lesser amounts of other air pollutants.
That much CO2 is roughly equivalent to the amount that would be removed from the
air by 1,000 acres of trees, qualifying MagneTek for the "EPAcres" award.
Joining MagneTek in accepting "EPAcres" awards at the Tennessee Energy &
Environmental Expo in Nashville were Columbia/HCA Healthcare and Belmont
University, both of which used MagneTek ballasts in their lighting upgrades.
Page 36
MagneTek Motor Steers EV1
A MagneTek electric motor is helping to steer General Motors' EV1,
the first mass-produced electric vehicle in the United States, toward success.
The electric car, developed in response to government regulations intended to
reduce vehicle emissions, relies on battery power, requires no gasoline and
produces no emissions.
Power steering for the car is provided by a pump powered by a MagneTek
electric motor. A control in the car senses the amount of steering torque
required, activating the motor only when needed. The power-assisted,
variable-effort electro-hydraulic steering system uses 65 percent less energy
than conventional hydraulic systems used in gasoline-powered cars.
MagneTek has worked with GM's Saginaw Steering Systems Division since 1991
on the project.
MagneTek Products Help
Electrify Olympic Games
Although not as visible as Michael Johnson - who became the first man in
history to win both the 200 and 400 meter runs in the same Olympics - or Amy
Van Dyken - who emerged from the pool with four swimming gold medals -
MagneTek was a key participant in the 1996 Centennial Olympic Games in
Atlanta.
MagneTek products were used throughout the newly constructed dormitories
on the campus of Georgia Tech University, where Olympic athletes lived during
the two-week long competition, and at various other sites throughout the
Olympic grounds.
They included 8,000 compact fluorescent electronic ballasts used in
dormitory hallways, bathrooms and kitchens; 700 Century-TM- motors for
chillers and air handling units; and 150 Genesys-TM- generator sets. The
gensets provided electricity at a variety of cellular phone communications
stations throughout Olympic sites and venues, and emergency standby power at
permanent cellular phone sites.
Andy Quinter, national sales manager for Atlanta-based Teron Lighting,
the fixture manufacturer overseeing the dorm construction, explains that he
chose MagneTek ballasts because of their reputation for efficiency and
reliability.
About 400 MagneTek motors were installed in chillers, and 300 motors in
air handling units throughout various Olympic venues. The motors were
installed in York air conditioning products and York spokesman Mike Duguid,
notes that MagneTek motors were selected because of overall value.
BellSouth and Signal Point Systems, MagneTek's distributor in the Atlanta
area, have standardized on MagneTek gensets, so it was only natural to use
them at the Olympics.
Seven MagneTek Projects Honored
MagneTek lighting ballasts, motors and drives helped seven buildings earn
1996 Efficient Building Awards from Energy User News magazine. MagneTek was
one of only two manufacturers honored as many times.
The awards were presented at a ceremony in Atlanta. Each project also was
featured in Energy User News.
MagneTek products were honored in the following categories:
- - Federal Facilities: Hill Air Force Base
- - School Districts: San Diego Unified School District
- - Colleges/Universities: SUNY at Cortland SUNY at Buffalo
- - Building Automation: Johnson & Johnson Consumer Products, Inc.
- - Integrated Engineering: Target Stores in Fullerton, CA
- - Building Management: Rouse Company
Page 37
Perspectives
Did You Know:
MagneTek electric motors are at work in seven out of nine American homes.
M agneTek
electronic power supplies are inside 10-percent of all the desktop computers in
the world.
M agneTek
builds more than 35,000 electric motors every day.
MagneTek variable speed drives power the elevators in eight of the world's ten
tallest buildings.
Every year, over 2,000,000,000
electronic
components are incorporated
into MagneTek
products, ranging
from drives to
power supplies.
More than a third of all the fluorescent lights in the United States, and
a growing number in Europe, are operated by MagneTek ballasts.
Each year, MagneTek
uses enough magnet
wire (3,011,363 miles!)
in its products to reach to the moon and back
almost seven times!
Page 38
MagneTek at a glance Additional information about the products described
below is available by calling 1-800-MAGNETEK or E-mailing your request to
productinfo@magnetek.com.
Product Line Primary End Markets Primary Market Needs*
Power Supplies Custom power supplies Computer, telecommunications and Product/service reliability
office machine users
Special purpose power Recreational vehicle and boat owners Product/service reliability;
supplies after-market availability
Converters and Utilities, independent power producers; Proven technologies and custom design
inverters electronic equipment users capability in electronics and power
integration
Component transformers Users of all types of electronic Product reliability; after-market
equipment availability
Lighting Products Magnetic fluorescent Building owners and operators Product/service reliability; after-market
lighting ballasts availability; ease of maintenance
Electronic fluorescent Building owners and operators Energy efficiency; product/service
lighting ballasts reliability; reduced harmonics;
compatibility with lamps and controls
High-intensity-discharge Building owners and operators; Energy efficiency; product/service
lighting ballasts public works reliability; ease of maintenance
Sign and neon ballasts Building owners and operators Product/service reliability; ease of
maintenance
Capacitors Lighting and motor manufacturers Product reliability; environmental
compatibility
Variable-Speed AC drives Building owners and operators; Energy efficiency; product/service
manufacturing Drives reliability; plants; machinery builders;
food processors flexible programmability;
motor compatibility
Drive systems Web process machinery operators Precise control of multiple-motor-driven
machinery; flexible programmability; motor
compatibility
Motor starters Industrial plants; machinery builders Application flexibility; energy savings
Custom drives Building owners and operators; Extreme reliability, high performance;
extensive mining companies technical support
and application knowledge
Motors/Generators Residential fractional Homeowners; building owners and Product/service reliability; after-market
horsepower operators; food service availability
Commercial fractional Building owners and operators; Energy efficiency; product/service
horsepower reliability; agribusiness; pool and spa
owners after-market availability
Fractional horsepower Exercise machines; battery-powered Light weight; quiet, dependable operation;
direct-current mobile equipment; material handling after-market availability
Integral horsepower Industrial plants; building owners and Energy efficiency; product/service
operators; heavy machinery users reliability; after-market availability
Generators Building services; construction Reliable stand-by or supplemental power;
contractors; telecommunications remote control capability
Page 39
For more financial facts about MagneTek, call 615/316-5271 and ask for our
investor's Information Kit or E-mail your request to investorinfo@magnetek.com.
For a general recap of MagneTek news, views and financial data, you are
cordially invited to visit our site on the worldwide web. Our Internet address
is http:\\www.magnetek.com.
Primary Channels to Market
MagneTek's Competitive Advantages
Primary Competitors
Primary Channels to Market MagneTek's Competitive Advantages Primary Competitors
Electronic equipment Close relationships with leading manufacturers; proven designs; access to Astec; Zytec; Vicorp;
service manufacturers and technical assistance; technical innovation; Computer Products
international manufacturing capability
Recreational vehicle builders; Close relationships with leading RV builders; proven designs; access to Todd Engineering
service and RV equipment distributors technical assistance; extensive
distributor network; technical innovation
Pollution control and renewable Extensive experience in converter/inverter design and electronic Toshiba
energy-source equipment builders integration, resulting in cost-effective products and consistent
manufacturability
Electronic equipment Broad product line; custom design/manufacturing capability; extensive Basler; SNC; Signal
manufacturers; distributors distribution network; technical support
Lighting fixture manufacturers; Full product line; large installed base; close relationships with fixture Advance Transformer
distributors manufacturers; extensive distributor network; technical innovation
Lighting fixture manufacturers; Product reputation and reliability; 5-year warranty; full product line; Advance Transformer;
technological distributors leadership; access to service and technical Motorola
assistance; technical innovation
Fixture manufacturers; Close relationships with fixture manufacturers; on-time delivery; acsess Advance Transformer;
to service distributors and technical assistance; full product line Deltona
Sign manufacturers; distributors Close relationships with sign distributors and manufacturers; Advance Transformer;
full product line; multi-purpose models enable inventory savings France Mfg. Co.
Direct to manufacturers Close relationship with leading ballast and motor manufacturer (MagneTek); Aerovox; GE
patented technology; product reliability; environmental compatibility
HVAC/R** manufacturers and Product/service reliability; compact size, low noise and light weight; Allen Bradley;
contractors; industrial motor compatibility; strong technical support; leading technology Toshiba; ABB; Baldor
distributors
Process line builders; systems AC, DC and servo-systems capability; motor/drive package availability; Reliance; Control
integrators strong technical support; technical innovation Techniques
Machinery builders; Energy efficiency; application flexibility; proven designs; strong Allen Bradley; Furnas
technical support sales agents; distributors
Elevator and mining Product/service reliability; extensive application experience; customer GE; ABB
equipment builders commitment; proven capability
HVAC/R equipment Performance and durability; broad product offering; custom Emerson; GE;
design/manufacturing manufacturers; distributors capability; extensive A.O. Smith; FASCO
distributor network
HVAC/R manufacturers; pump and Energy efficiency; product reliability; strong application engineering GE; Emerson; Baldor;
compressor builders; distributors capability; extensive distributor network; new products A.O. Smith; Leeson
Equipment manufacturers; Proven designs; broad application flexibility; custom Baldor; Leeson;
industrial resellers design/manufacturing capability; access to service and technical Pacific Scientific;
assistance Reliance
HVAC/R contractors; machinery Energy efficiency; product reliability; strong application engineering Baldor; GE; Reliance;
builders; distributors capability; extensive distributor network; 24-hour delivery; U.S. Electric Motor;
ac-drive compatible Marathon
Caterpillar Inc. Close relationship with leading equipment builder; product/service Onan; Kohler;
reliability; strong technical support; remote control capability; Generac; Kato;
special models for co-generation Emerson
Page 41
View point
Secrets of a Diamond Prospector
By Robert W. Murray, Contributing Editor
Since its inception on November 1, 1995, the Oakmark Small Cap Fund has
outperformed the Russell 2000 Small Cap Index nearly two to one, with an
annualized return of 43 percent as of July 31, 1997. During this period, the
Oakmark Small Cap Fund -- indeed, the whole Oakmark family of funds -- has
gained national recognition. Steven Reid, portfolio manager, and Henry
Berghoef, senior research analyst from Chicago-based Harris Associates, the
advisor to the Oakmark funds, with over $15 billion under management, offered
their thoughts on investment philosophy.
First, as the Fund's name states, it invests primarily in companies with
small market capitalizations -- $100 million to $1 billion.* Whether new or
simply overlooked by what Reid refers to as "the thundering herd" of
investors, Oakmark's holdings are typically diamonds in the rough. They
include orphaned corporate spin-offs and former leveraged buy-outs, as well
as restructuring situations.
The key is underexploited value. "We look for companies that are trading
at a substantial discount to their underlying value -- that is, what a
rational person would be willing to pay for the whole company," explains
Reid.
"We talk directly to their managements. We look for depth -- one person
doesn't make a company. We look for quality -- how management allocates
capital, how their personal interests align with shareholders' interests. And
we talk to their competitors," adds Berghoef. "If their competitors are
impressed with them, it's a good sign."
The Fund's diamonds are literally in the rough. "Our companies don't make
headlines. They are usually buried in the back of the Wall Street Journal,"
Reid says. "Often, they're traditional manufacturing companies. We're not
faddish investors. We don't own companies trading on hype or dependent on
products on the come -- like biotechnology or drugs in phase-three testing.
Today's technology is tomorrow's obsolescence," he avers. "Rather than guess
what the new chip might be, we look for companies that will be the
beneficiaries of technology -- in the form of lower production costs, faster
delivery or better service."
Once the Fund has mined its diamonds, Reid likes to hold them for the
long term. "We allocate capital to our investments the way the companies we
invest in allocate capital to their businesses. We do it for the long term,
so we have very low turnover. Our ideal situation is one where our inventory
(of investments) doesn't need to be replenished -- which minimizes the cost
of commissions, price impacts and taxable events."
Where does the fund uncover these gems? "A lot of our success in the
stock market is based on our store of knowledge," states Berghoef. "We've
been in this business for a long time, we've built up extensive networks, and
we think independently. We don't reject Wall Street's rejects. We do our own
analysis, we make up our own minds, and we're not afraid to lean against the
wind." There is often some luck involved, but you have to lay the foundation
for your luck, Reid points out. @
* The Oakmark Small Cap Fund has been a major MagneTek shareholder since May,
1996.
Page 42
Selected Financial Data
Statement of Income Data
For the years ended June 30,
(Amounts in thousands,
except per share data) 1997 1996** 1995** 1994** 1993
- --------------------------------------------------------------------------------------------------------------------
Net sales $1,190,540 $1,161,625 $1,202,536 $1,133,126 $1,119,392
Income (loss):
Continuing operations 28,751 (94,164) 21,496 (16,942) 19,263
Discontinued operations - - (14,400) (28,503) 7,770
Extraordinary item (4,676) - (4,820) - -
Cumulative effect of
accounting changes - - - - (48,734)
Net income (loss) 24,075 (94,164) 2,276 (45,445) (21,701)
- --------------------------------------------------------------------------------------------------------------------
Per common share--primary:
Income (loss) from continuing
operations before extraordinary
item and cumulative effect of
accounting changes $ 1.09 $ (3.78) $ 0.87 $ (0.69) $ 0.78
Net income (loss) $ 0.91 $ (3.78) $ 0.09 $ (1.84) $ (0.87)
Per common share--fully diluted:
Income (loss) from continuing
operations before extraordinary
item and cumulative effect of
accounting changes $ 1.03 $ * $ 0.84 $ * $ .73
Net income (loss) $ 0.88 $ * $ * $ * $ *
- --------------------------------------------------------------------------------------------------------------------
* 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) 1997 1996** 1995** 1994** 1993
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 654,548 $ 678,774 $ 857,168 $ 931,358 $ 995,359
Long-term debt,
including current portion 243,945 322,023 448,467 523,779 523,301
Common stockholders' equity 102,223 41,558 117,278 113,082 163,029
- --------------------------------------------------------------------------------------------------------------------
Page 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
During the year ended June 30, 1997, the Company's operating results and
financial condition reflected substantial improvement. Even excluding the
effects of certain repositioning and other charges recorded during fiscal 1996,
profits and margins were up significantly on a slight increase in net sales. The
improved results reflect benefits associated with a number of consolidation and
cost reduction actions initiated during fiscal 1996 and continuing into fiscal
1997, resulting in a reduction in the Company's fixed cost base, primarily in
the Lighting Products segment. The Company continues to review opportunities for
further improvements in its operating costs, product quality and manufacturing
flexibility. A number of programs have been or will be initiated which, over the
next three years, will result in i) the outsourcing of certain components and
operations which have historically been produced or performed internally; ii) a
continued reduction in factory space and fixed costs through consolidation of
manufacturing operations; iii) the establishment of Six Sigma quality objectives
throughout the Company and iv) a comprehensive upgrade in information technology
and communication systems over the next three fiscal years at a cost currently
estimated between fourteen and seventeen million dollars. The Company believes
it will realize substantial savings from these actions, however, during fiscal
1998, the costs to implement the actions will likely offset related benefits.
Subsequent to fiscal 1998, implementation costs are expected to decline as
benefits accelerate.
Solid improvement in the Company's financial condition was also achieved during
fiscal 1997. The Company's long-term debt balance declined $78.1 million during
the fiscal year, to $243.9 million from $322.0 million at the end of the prior
fiscal year. The debt reduction resulted from the return to profitabilty in
fiscal 1997, a continued reduction in working capital--most notably inventories,
and the conversion of $35.4 million (out of a total of $75.0 million) of the
Company's Convertible Notes in June, 1997 (see Note 4). Shareholders' equity
increased $60.6 million, to $102.2 million from $41.6 million, as a result of
the fiscal 1997 net income and the conversion of the Convertible Notes into
common stock. The Company also refinanced its 10 3/4% Subordinated Debentures
with lower cost borrowings under an amended Bank Loan Agreement (see Note 4).
On August 28, 1997, the Company announced an agreement with General Electric
Company ("GE") wherein GE will become the exclusive distributor in North America
of the Company's linear electronic ballasts. The product will be co-branded with
the MagneTek and GE names. The Company will continue to sell magnetic and HID
ballasts through its traditional market channels and linear electronic ballasts
directly to OEM customers. The agreement also contemplates possible future joint
product development for electronic lighting products
Page 44
The Company is also actively expanding its marketing/sales presence in the Asia
Pacific region. The Company believes that growth in this area of the world
provides an opportunity to increase sales of its products.
In the fourth quarter of fiscal 1996, the Company established reserves
reflecting anticipated costs associated with operational repositioning as well
as estimated increases in warranty and other costs (see Note 2). In fiscal 1997,
charges to these reserves were consistent with the Company's original
expectation and remaining reserves appear adequate to meet the projected future
charges.
The Company currently operates in three business segments: Motors and 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.
RESULTS OF OPERATIONS
Net Sales and Gross Profit
Net sales increased 2.5% in fiscal 1997, to $1.191 billion from $1.162 billion
in fiscal 1996. The increase followed a 3.4% decline in sales in fiscal 1996
versus fiscal 1995 results. Net sales in the Motors and Generators segment
increased 3% in fiscal 1997 due primarily to commercial and residential
fractional horsepower motors and drives sales. Segment revenues increased 3% in
fiscal 1996 over fiscal 1995 due to stronger generator and drives sales. Net
sales in the Lighting Products segment increased 5% in fiscal year 1997 due to
growing compact fluorescent sales. Lighting Products segment results improved
from the 17% drop in fiscal 1996 results versus fiscal 1995 when both magnetic
and electronic ballast revenues declined. Net sales in the Power Supplies
segment declined 5% due to the sale of a transformer business. Adjusting for the
sale, Power Supplies sales were comparable to the year earlier results. Segment
revenue had increased 28% in fiscal 1996 from fiscal 1995 due to expanded sales
of electronic power supplies, primarily due to increased penetration of the
telecommunications market.
The Company's gross profit increased to $239.9 million in fiscal 1997 from
$156.6 million in fiscal 1996. While all segments participated in the
improvement, the Lighting Products segment contributed significantly due to
improved sales volume and the positive effect of increased production levels as
well as the continued transition to lower cost manufacturing locations. Gross
profit in fiscal 1996 included charges aggregating $43.3 million reflecting
costs associated with repositioning operations and estimated warranty and other
costs. Excluding those charges, gross profits in fiscal 1996 declined over 16%
from fiscal 1995 due to substantially lower gross profits in the Lighting
Products segment.
Page 45
Operating Expenses
Selling, general and administrative (SG&A) expense was $159.9 million (13.4% of
net sales) in fiscal 1997 compared to $164.9 million (14.2% of net sales) in
fiscal 1996. In fiscal 1996, results included $7.2 million of repositioning
expenses (largely severance and termination benefits). Excluding these charges,
fiscal 1997 SG&A expense increased slightly from 1996 but declined when
expressed as a percent of net sales. Excluding the fiscal 1996 repositioning
charges, SG&A expense was 13.4%, 13.6% and 13.7% of net sales in fiscal 1997,
1996 and 1995 respectively. While the Company continues to review opportunities
to reduce support costs, expenses associated with upgrades in information
systems, quality programs and organizational capability will limit the ability
to reduce SG&A expense in fiscal 1998.
Interest and Other Expenses
Interest expense declined to $27.8 million in 1997 from $31.6 million in fiscal
1996 and $34.4 million in fiscal 1995. Debt levels were reduced due to
improvements in accounts receivable and inventory turnovers and efficient
management of its capital spending. The Company also converted to equity $35.4
million of its 8% Convertible Notes which will further reduce ongoing interest
expense. The Company repurchased the majority of its 10 3/4% Subordinated
Debentures using available capacity under its Bank Loan Agreement with lower
available interest rates (see Note 4). Both transactions occurred in the fourth
quarter of fiscal 1997 and will have a full effect in fiscal 1998. Other expense
in fiscal 1997 was $4.3 million as compared to $5.7 million and $4.6 million in
fiscal 1996 and 1995 respectively.
Net Income (Loss)
In fiscal 1997, the Company recorded income of $28.8 million or $1.09 per share
on a primary basis before an extraordinary charge of $4.7 million associated
with the extinguishment of the majority of its Subordinated Debentures.
Including the extraordinary charge, the Company reported net income of $24.1
million or $.91 per share on a primary basis. Comparable results on a fully
diluted basis for 1997 were $1.03 per share and $.88 per share respectively. In
fiscal 1996, the Company recorded 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. Results for the Company in fiscal 1996 were adversely
affected by charges for repositioning operations, warranty and other expenses
and asset write-downs. Exclusive of the repositioning charges in fiscal 1996, a
pre-tax profit would have been achieved. The effective tax rate for fiscal 1996
was impacted 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 to the valuation reserve for deferred taxes.
Page 46
Liquidity and Capital Resources
Long term borrowings outstanding as of June 30, 1997 (including the current
portion) were $244 million, reduced from $322 million as of June 30, 1996 and
$448 million as of June 30, 1995. The reduction in fiscal 1997 resulted from
improved profitability, effective working capital management and lower
capital spending. In addition, the Company, on June 23, 1997, called $35.4
million out of $75 million of its Convertible Notes which were converted by
the holders of the Notes into equity. The Company also tendered for the
majority of its 10 3/4% Subordinated Debentures and substituted lower
interest rate debt (see Note 4). In June of fiscal 1997, the Company entered
into an amended Bank Loan Agreement which provides up to $350 million of
borrowings under a revolving loan facility versus the $170 million capacity
previously available. As of June 30, 1997, the Company had available
borrowings of $157 million under this agreement. The Bank Loan Agreement
expires in 2002 and along with internally generated cash flows, provides
adequate financing capability for shorter term debt requirements.
Cash outflow in connection with the Company's repositioning program approximated
$11 million in fiscal 1997 and is not expected to exceed $20 million in fiscal
1998. In addition, the Company may be subject to certain potential environmental
and legal liabilities (see Note 7).
Page 47
Consolidated Statements of Income
For the years ended June 30,
(Amounts in thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $1,190,540 $1,161,625 $1,202,536
Cost of sales 950,617 1,005,004 962,900
Gross profit 239,923 156,621 239,636
Selling, general and administrative expenses 159,859 164,930 164,280
Provision for impairment of long-lived assets - 29,212 -
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 80,064 (37,521) 75,356
Interest expense 27,825 31,591 34,398
Other expense, net 4,288 5,652 4,562
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before provision
for income taxes and extraordinary item 47,951 (74,764) 36,396
Provision for income taxes 19,200 19,400 14,900
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before extraordinary item 28,751 (94,164) 21,496
Loss on disposal of discontinued operations (net of tax benefit) - - (14,400)
Extraordinary item--loss on early extinguishment of debt
(net of tax benefit) (4,676) - (4,820)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 24,075 $ (94,164) $ 2,276
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Per common share primary:
Income (loss) from continuing operations before extraordinary item
and cumulative effect of accounting changes $ 1.09 $ (3.78) $ 0.87
Loss from discontinued operations - - (0.58)
Extraordinary item (0.18) - (0.20)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.91 $ (3.78) $ 0.09
Per common share fully diluted:
Income (loss) from continuing operations before extraordinary item $ 1.03 $ * $ 0.84
Loss from discontinued operations - - *
Extraordinary item (0.15) - *
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.88 $ * $ *
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
* 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.
Page 48
Consolidated Balance Sheets
As of June 30,
(Amounts in thousands, except share and per share data) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------------------------------------------
Current assets:
Cash $ 6,138 $ 871
Accounts receivable, less allowance for doubtful accounts of $5,168 in 1997
and $5,428 in 1996 191,011 201,814
Inventories 181,014 203,265
Deferred income taxes 12,888 12,888
Prepaids and other assets 16,088 14,014
- --------------------------------------------------------------------------------------------------------------------
Total current assets 407,139 432,852
- --------------------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land 3,139 3,267
Buildings and improvements 56,264 56,094
Machinery and equipment 348,594 324,137
- --------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization 231,627 207,079
- --------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 176,370 176,419
- --------------------------------------------------------------------------------------------------------------------
Goodwill, less accumulated amortization of $8,952 in 1997 and $7,985 in 1996 30,741 30,668
Deferred financing costs, intangible and other assets
less accumulated amortization of $22,395 in 1997 and $19,521 in 1996 40,298 38,835
- --------------------------------------------------------------------------------------------------------------------
$654,548 $678,774
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Page 49
Consolidated Balance Sheets
As of June 30,
(Amounts in thousands, except per share and per share data) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 97,060 $104,273
Accrued liabilities 119,755 126,399
Current portion of long-term debt 3,109 2,895
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 219,924 233,567
- --------------------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion 240,836 319,128
Other long-term obligations 71,273 71,633
Deferred income taxes 20,292 12,888
Commitments and contingencies
Stockholders' Equity:
Common stock, $0.01 par value, 100,000,000 shares authorized
28,259,000 and 25,462,000 shares issued and outstanding 282 255
Additional paid-in capital 129,151 89,609
Accumulated deficit (10,139) (34,214)
Cumulative translation adjustment (17,071) (14,092)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 102,223 41,558
- --------------------------------------------------------------------------------------------------------------------
$654,548 $678,774
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Page 50
Consolidated Statements of Stockholders' Equity
Common stock Additional Cumulative Minimum
(Amounts in thousands, ----------------------------- paid-in Accumulated translation pension
except share data) Shares Amount capital Deficit adjustment liability
- ------------------------------------------------------------------------------------------------------------------------------
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) -
- ------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 332,000 3 3,434 - - -
Restricted stock grants 252,000 2 634 - - -
Debt conversion 2,213,000 22 35,474 - - -
Translation adjustment - - - - (2,979) -
Net income - - - 24,075 - -
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 28,259,000 $282 $129,151 $(10,139) $(17,071) -
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Page 51
Consolidated Statements of Cash Flows
For the years ended June 30,
(Amounts in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income (loss) from continuing operations $ 28,751 $(94,164) $ 21,496
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 38,431 40,041 38,680
Restructuring charges - 50,505 -
Provision for impairment of long-lived assets - 29,212 -
Changes in operating assets and liabilities of continuing operations 22,558 43,494 (50,976)
- --------------------------------------------------------------------------------------------------------------
Total adjustments 60,989 163,252 (12,296)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 89,740 69,088 9,200
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of businesses and assets 2,679 92,149 105,644
Capital expenditures (33,245) (40,515) (43,895)
Other investments (2,382) 37 1,853
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (32,948) 51,671 63,602
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings under bank and other long-term obligations 80,594 - 81,217
Proceeds from issuance of common stock 3,413 172 3,736
Repayment of bank and other long-term obligations (129,985) (126,444) (171,000)
Increase in deferred financing costs (1,323) (500) (5,446)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (47,301) (126,772) (91,493)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing operations 9,491 (6,013) (18,691)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations (4,224) 6,573 11,989
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 5,267 560 (6,702)
Cash at beginning of year 871 311 7,013
- --------------------------------------------------------------------------------------------------------------
Cash at end of year $ 6,138 $ 871 $ 311
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Page 52
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. Certain reclassifications have been made to
the fiscal 1996 financial statements to conform to the current year
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
The Company's policy is to record and recognize sales only upon shipment.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Additions and improvements are capitalized at cost, whereas expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful lives of the respective assets principally on
the straight-line method (normally five to ten years).
Accounting For Stock Options
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" (APB25), and related interpretations, in accounting for stock
based awards to employees. Under APB 25, the Company recognizes no compensation
expense with respect to such awards. The Company has adopted the disclosure-only
option under SFAS No.123.
Research and Development
Expenditures for research and development are charged to expense as incurred and
aggregated $23,600, $21,500 and $23,600 for the years ended June 30, 1997, 1996,
and 1995, respectively.
Page 53
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 $2,874, $2,351 and $2,425 for
the years ended June 30, 1997, 1996 and 1995, 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 $967, $995, and $985 for the years ended June 30, 1997, 1996, and 1995,
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.
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.
In June of 1997, holders converted $35,410 of the Convertible Notes to shares of
common stock. Had the conversion taken place at the beginning of fiscal 1997,
primary earnings per share for the year would not have been materially
different.
Fiscal Year
The Company uses a fifty-two, fifty-three week fiscal year which ends on Sunday
nearest June 30. For clarity of presentation, all periods are presented as if
the year ended on June 30. Fiscal years 1997, 1996 and 1995 contained 52 weeks.
Page 54
2. REPOSITIONING COSTS AND DISCONTINUED OPERATIONS
In fiscal 1996, as a result of significant declines in sales and profit margins
in both electronic and magnetic ballasts, the Company initiated a review and
analysis of actions to reduce costs and improve future flexibility and
profitability, focused to a large extent in its lighting products business.
Subsequent to review and approval by the Company's Board of Directors, certain
reserves were established and charges recorded in the year ended June 30, 1996.
These charges were associated with a variety of repositioning actions and
included severance, termination benefits and asset write-downs related to
facility closures. 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 asset write-downs
related primarily to the Lighting Products segment and aggregated $79,717 of
which $43,337 is included in cost of goods sold and $7,168 in selling, general
and administrative expense. Asset write-downs of $29,212 are included separately
within the caption "Provision for impairment of long-lived assets" and were
determined in accordance with FASB No. 121. Of the $50,505 included in cost of
goods sold and SG&A expense, approximately $28,700 related to warranty, $17,900
to severance and termination benefits and $3,900 in other costs. In fiscal 1997,
cash outflows associated with these repositioning charges aggregated $11,000
with $4,900 related to warranty, $3,700 in severance and termination benefits
and $2,400 million in plant and other repositioning charges. The Company
estimates that cash requirements will not exceed $20,000 in fiscal 1998. At this
time the Company believes that the reserves established in 1996 are adequate to
cover the remaining liabilities anticipated from the repositioning and other
actions.
In July of 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 divesture 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. In
fiscal 1997, the Company incurred net cash outlays of $4,224 (primarily legal
and environmental costs) related to "discontinued operations." The Company
believes that future expenditures will not
be material.
During the fiscal year ended June 30, 1995, the Company provided for additional
losses on disposal of discontinued operations, 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 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Net sales $ - $ 92,712 $ 246,021
Income (loss) before provision for income taxes - 138 (12,369)
Provision (benefit) for income taxes - 500 (4,700)
- ----------------------------------------------------------------------------------------------------------
Loss of discontinued operations $ - $ (362) $ (7,669)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Page 55
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. 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 and $10,788 for the years ended June 30, 1996
and 1995.
3. INVENTORIES
Inventories at June 30, consists of the following:
1997 1996
- -------------------------------------------------------------------------------
Raw materials and stock parts $ 55,584 $ 60,018
Work-in-process 40,343 46,354
Finished goods 85,087 96,893
- -------------------------------------------------------------------------------
$181,014 $203,265
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. LONG-TERM DEBT AND BANK BORROWING ARRANGEMENTS
Long-term debt at June 30, consists of the following:
1997 1996
- ----------------------------------------------------------------------------------------------------------
Revolving bank loans $184,026 $103,432
10.75 percent Senior Subordinated Debentures, interest payable
semi-annually, due November 15, 1998 3,035 125,000
8 percent Convertible Subordinated Notes, interest payable semi-annually,
convertible into 2,474,375 and 4,687,500 shares of common stock,
in fiscal 1997 and 1996 respectively, due September 2001 39,590 75,000
Miscellaneous installment notes, capital leases and other obligations at rates
ranging from 6.5 percent to 10.75 percent, due through 2002 17,294 18,591
- ----------------------------------------------------------------------------------------------------------
243,945 322,023
Less current portion 3,109 2,895
- ----------------------------------------------------------------------------------------------------------
$240,836 $319,128
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Bank Borrowing Arrangements
On June 20, 1997, the Company entered into an amended agreement with a group of
banks (Bank Loan Agreement) that have committed to lend up to $350,000 under a
revolving loan facility through June, 2002. Borrowings under the credit facility
bear interest at the bank's prime lending rate or, at the Company's option, the
London Interbank Offered Rate plus three quarters percent. These rates may be
reduced or increased based upon the level of certain debt-to-cash flow ratios.
At June 30, 1997, borrowings under the Bank Loan Agreement bore interest at a
weighted average rate of approximately 6.6%. The Company is required to pay a
commitment fee of .225 percent on unused commitments.
Page 56
Borrowings under the Bank Loan Agreement are secured by domestic accounts
receivable and inventories and by the capital stock of certain of the Company's
subsidiaries. The Bank Loan Agreement contains certain provisions and convenants
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 specific levels of net worth and cash flow.
The Company's European subsidiaries have certain limited local borrowing
arrangements to finance working capital needs. Borrowings under these
arrangements are secured by accounts receivable and inventories of the
respective subsidiaries. The Company has provided parent guarantees to the local
banks which provide the related financing.
Senior Subordinated Debentures
On June 27, 1997, the Company completed a tender for its 103_4 percent Senior
Subordinated Debentures ("Debentures") leaving $3,035 of the Debentures
outstanding. The Debentures are not redeemable by the Company prior to maturity
in November, 1998 and are subordinated to borrowings under the Bank Loan
Agreement.
As a result of the tender offer, the indenture governing the remaining
Debentures was modified to eliminate substantially all restrictive covenants.
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 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 anytime prior to maturity in
September, 2001.
On June 23, 1997, holders of the Convertible Notes converted $35,410 of the
Convertible Notes to 2,213,067 shares of common stock as a result of a partial
call of the Convertible Notes by the Company.
Aggregate principal maturities on long-term debt outstanding at June 30, 1997
are as follows:
Year ended June 30
-----------------------------------------------------------------
1998 $ 3,109
1999 7,239
2000 3,387
2001 2,166
2002 225,503
Thereafter 2,541
-----------------------------------------------------------------
Page 57
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts and estimated fair value of the Company's significant
financial instruments as of June 30, 1997 were as follows:
Carrying Amount Fair Value
- --------------------------------------------------------------------------------
8 percent Convertible Subordinated Notes $39,590 $41,965
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fair values of long-term debt are 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 gains on open contracts at June 30, 1997 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 gains on open forward exchange contracts were not
material to the Company's results of operations at June 30, 1997. In combination
with the amended Bank Loan Agreement (see Note 4), the Company has entered into
certain interest rate swaps in connection with the management of its exposure to
fluctuation in interest rates. Gains or losses from terminated contracts are
amortized over the period of the original contract.
6. INCOME TAXES
Income tax expense (benefit) is allocated in the financial statements as
follows:
Year ended June 30 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before extraordinary item $19,200 $19,400 $14,900
Extraordinary item (3,250) - (3,200)
- ----------------------------------------------------------------------------------------------------------
Income tax expense attributable to continuing operations $15,950 $19,400 $11,700
Discontinued operations - - (7,200)
- ----------------------------------------------------------------------------------------------------------
Total $15,950 $19,400 $ 4,500
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
The expense for income taxes applicable to continuing operations is as follows:
Year ended June 30 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Current:
Federal $ 1,279 $ 899 $ 3,575
State 1,184 1,172 1,529
Foreign 6,083 3,444 1,419
Deferred:
Federal 4,786 10,358 5,603
State and Foreign 2,618 3,527 (426)
- ----------------------------------------------------------------------------------------------------------
$15,950 $19,400 $11,700
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Page 58
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:
1997 1996 1995
--------------------------------------------------------------
Year ended June 30 Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------
Provision (benefit) computed at the statutory rate $16,783 35.0 $(26,167) (35.0) $12,739 35.0
State income taxes, net of federal benefit 1,338 2.7 1,990 2.7 1,975 5.4
Foreign tax rates in excess of federal statutory rate 4,434 9.3 4,283 5.7 108 0.3
Increase (decrease) in valuation allowance for
deferred tax assets (11,904) (24.8) 38,908 52.0 - -
Provision for additional taxes 7,933 16.5 - - - -
Other--net 616 1.3 386 0.5 78 0.2
- ------------------------------------------------------------------------------------------------------------------------
$19,200 40.0 $ 19,400 25.9 $14,900 40.9
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes of the Company's foreign
subsidiaries was approximately $9,703, $50 and $(1,000) for the years ended June
30, 1997, 1996 and 1995.
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, 1997 and 1996 follows:
Year ended June 30 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization (including differences in the basis of acquired assets) $30,530 $21,453
Inventory methods and other - 2,534
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 30,530 23,987
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Postretirement medical benefit obligation 21,654 24,255
Warranty reserves 11,601 16,772
Inventory and other reserves (including restructuring) 16,875 21,868
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 50,130 62,895
- -------------------------------------------------------------------------------------------------------------------
Less valuation allowance (27,004) (38,908)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 7,404 $ -
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
The Company has established the above valuation allowance for deferred tax
assets based upon a review and determination that the deferred tax assets are
currently not likely to be fully realized.
Page 59
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, 1997 total $41,853 and are payable
in future fiscal years as follows: $10,380 in 1998; $8,019 in 1999; $6,654 in
2000; $4,275 in 2001; $3,549 in 2002 and $8,976 thereafter.
Rent expense for the years ended June 30, 1997, 1996 and 1995, was $14,988,
$15,766 and $18,769 respectively.
Litigation--Product Liability
The Company is a party to a number of product liability lawsuits, many of which
involve fires allegedly caused by defective ballasts. All of these cases are
being defended by the Company'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 effect on the Company.
Litigation--Asbestos
The Company and certain of its subsidiaries have been named as defendants in a
suit filed by Cooper Industries, Inc. ("Cooper"), alleging breach of the 1986
agreement by which the Company acquired certain businesses from Cooper. At issue
in the litigation is the question of which party has responsibility in
connection with pending lawsuits (the "asbestos lawsuits") involving numerous
plaintiffs who allege injurious exposure to asbestos contained in products
manufactured by current or former subsidiaries and divisions of Cooper. Cooper
claims that the Company is obligated to defend and indemnify Cooper in
connection with the asbestos lawsuits. The Company has denied that it is
obligated under the agreement to defend and indemnify Cooper in connection with
the asbestos lawsuits, and has filed a counterclaim asserting that Cooper is
obligated under the agreement to defend and indemnify the Company in connection
with the asbestos lawsuits and that certain insurance coverage available to
Cooper should be applied to the asbestos lawsuits. The Company intends to
litigate its position vigorously.
In 1994, the Company sold the assets of one of its subsidiaries to Patriot
Sensors and Controls ("Patriot") pursuant to an agreement which provides that
the parties will share responsibility for most of the asbestos lawsuits over a
five year period, with Patriot bearing full responsibility for the asbestos
lawsuits thereafter. Patriot has stated that it may be financially unable to
perform its indemnification obligations with respect to the asbestos lawsuits.
The Company and Patriot are not currently in litigation.
Due to (i) the early stage of the Cooper litigation, (ii) the potential that
Patriot may or may not perform some or all of its indemnification obligations to
the Company, and (iii) the ongoing review of strategies and defenses available
to the Company in the asbestos lawsuits, it is difficult to predict the outcome
of the foregoing legal proceedings. However, management of the Company does not
believe that the financial impact of the foregoing legal proceedings will be
material.
Page 60
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 1997 did not entail material expenditures, and
its remediation activities for fiscal 1998 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.
Environmental Matters--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 certain
waste materials, including but not limited to cleaning up any PCBs at the
McMinnville facility (the "1983 Indemnity"). Investigation has revealed the
presence of PCBs and other substances, including solvents, in portions of the
soil and in the groundwater underlying the facility and in certain offsite soil,
sediment and biota samples. Century Electric has kept the Tennessee Department
of Environment and Conservation, Division of Superfund, apprised of test results
from the investigation. The McMinnville plant has been listed as a Tennessee
Inactive Hazardous Substance Site, a report on that site has been presented to
the Tennessee legislature, and community officials and plant employees have been
notified of the presence of contaminants as above described. In 1995, Gould
completed an interim remedial measure of excavating and disposing onsite soil
containing PCBs. Gould also conducted preliminary investigation and cleanup of
certain onsite and offsite contamination. The cost of any further investigation
and cleanup of onsite and offsite contamination cannot presently be determined.
The Company 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.
Environmental Matters--Offsite Locations
The Company has been identified by the United States Environmental Protection
Agency and certain state agencies as a potentially responsible party for cleanup
costs associated with alleged past waste disposal practices at several offsite
locations. 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.
Environmental Matters--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 1997, and its indemnification
obligations for fiscal 1998 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.
Page 61
Letters of Credit
The Company has approximately $11,200 of outstanding letters of credit as of
June 30, 1997.
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
5,392,887. As of June 30, 1997 and 1996 shares available for grant were
approximately 972,802 and 1,515,560 respectively. Options granted under two of
the Plans vest in three or four equal annual installments, and options under the
third Plan vest in two equal annual installments.
A summary of certain information with respect to options under the Plans
follows:
Year ended June 30 1997 1996 1995
- -------------------------------------------------------------------------------
Options outstanding, beginning of year 3,155,820 1,939,585 2,303,054
Options granted 1,045,810 1,498,000 357,500
Options exercised (334,770) (32,170) (454,594)
Weighted average exercise price $ 10.85 $ 5.35 $ 8.30
- -------------------------------------------------------------------------------
Options cancelled (216,375) (249,595) (266,375)
- -------------------------------------------------------------------------------
Options outstanding, end of year 3,650,485 3,155,820 1,939,585
Weighted average price $ 11.78 $ 2.16 $12.52
- -------------------------------------------------------------------------------
Exercisable options 1,541,135 1,463,045 1,113,116
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The following table provides information regarding exercisable and outstanding
options as of June 30, 1997.
Exercisable Outstanding
---------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise remaining
Options price Options price contractual
Range of exercise price per share exercisable per share outstanding per share life (years)
- -----------------------------------------------------------------------------------------------------------------------
Under $10.00 423,400 $ 7.30 1,302,775 $ 8.14 6.96
$10.00-$12.50 239,885 10.11 407,860 10.77 5.30
$12.51-$15.00 756,600 13.96 1,544,100 13,57 7.11
Over $15.00 121,250 17.56 395,750 17.77 7.82
- -----------------------------------------------------------------------------------------------------------------------
Total 1,541,135 $11.82 3,650,485 $11.78 6.93
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
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, 1997. As of June 30, 1997, options for 142,835 shares with a weighted
average price per share of $4.74 were outstanding, all of which were
exercisable.
Page 62
The Company has granted stock appreciation rights (SARs) to certain of its
directors under director incentive compensation plans. As of June 30, 1997 SARs
with respect to 66,000 shares, with a weighted average exercise price of $14.76
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 vesting, share amounts and exercise prices.
In April of 1997, the Board of Directors approved the conversion of SAR's with
respect to an additional 491,500 shares of common stock into stock options with
comparable vesting, share amounts and exercise prices.
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25) in accounting for stock-based awards to employees. Under
APB 25, the Company generally recognizes no compensation expense with respect to
such awards.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for awards granted in fiscal years after December
31, 1994 as if the Company had accounted for its stock-based awards to employees
under the fair value method of SFAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following assumptions:
Options
--------------
1997 1996
- -----------------------------------------------------------------------------
Expected life (years) 5.4 4.7
Expected stock price volatility 35% 35%
Risk-free interest rate 6.5% 6.2%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period. The Company's
pro forma information follows:
(Thousands except per share amounts) 1997 1996
- ------------------------------------------------------------------------------
Net income (loss)--as reported $24,075 $(94,164)
Net income (loss)--pro forma $22,792 $(94,640)
Primary net income (loss) per share--as reported $ 0.91 $ (3.78)
Primary net income (loss) per share--pro forma $ 0.88 $ (3.82)
Fully diluted net income (loss) per share--as reported $ 0.88 *
Fully diluted net income (loss) per share--pro forma $ 0.85 *
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
*Per share amounts are omitted as such amounts are anti-dilutive in relation to
primary per share amounts.
Page 63
Because SFAS 123 is applicable only to awards granted subsequent to fiscal years
beginning after December 31, 1994, its pro forma effect will not be fully
reflected until approximately 1999. A total of 1,498,000 options were granted
during fiscal year 1996 with exercise prices equal to the market price of the
stock on the grant date. The weighted-average exercise price and
weighted-average fair value of these options were $12.91 and $3.98 respectively.
A total of 1,045,810 options were granted during fiscal year 1997 with exercise
prices equal to the market price of the stock on the grant date. The weighted
average exercise price and weighted average fair value of these options were
$9.75 and $4.29 respectively.
9. EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has a defined benefit retirement plan which covers substantially all
of its non-union employees and those union employees whose collective bargaining
agreements specifically provide for coverage (the "Plan"). The Plan provides
benefits for non-union employees based upon career average pay as defined in the
Plan and for union employees as provided in the bargaining agreements.
The net pension cost for the years ended June 30, 1997, 1996 and 1995 is as
follows:
1997 1996 1995
- ------------------------------------------------------------------------------
Service cost--benefits earned during the period $ 4,500 $ 5,504 $ 6,935
Interest cost on projected benefit obligation 9,920 9,592 9,219
Investment return on plan assets (29,139) (13,306) (11,846)
Net amortization and deferral 17,483 3,135 2,517
- ------------------------------------------------------------------------------
Net periodic pension cost 2,764 4,925 6,825
- ------------------------------------------------------------------------------
Curtailment (gain) or loss 106 (682) 272
- ------------------------------------------------------------------------------
Net pension cost $ 2,870 $ 4,243 $ 7,097
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The funded status of the Company's defined benefit plans at June 30, 1997 and
1996 is as follows:
1997 1996
- ------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $131,452 $120,533
Non-vested benefits 6,835 5,863
Projected benefit obligation 140,065 127,864
Market value of plan assets 160,329 129,409
Plan assets greater (less) than projected benefit
obligation 20,264 1,545
Unrecognized net loss (9,426) 5,118
Unrecognized prior service income relating to
merged plans (469) (705)
Unrecognized net asset (1,612) (1,935)
Accrued (prepaid) pension cost (8,757) (4,023)
- ------------------------------------------------------------------------------
The projected benefit obligation was determined using an assumed discount rate
of 8.0% for the year ended June 30, 1997 and June 30, 1996 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.
Page 64
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 Company's 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 $1,184, $1,427, and $1,629 during the plan
years ended March 1997, 1996, and 1995, respectively. Company contributions vest
over a five-year period.
Postretirement Medical Benefit Plans
Effective May 1, 1996, the Company announced a substantial revision to its
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 January 1, 1992, 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 the entire cost of
coverage exceeding a fixed company contribution amount. 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 accumulated postretirement benefit obligation as of June 30, 1997 and 1996
consisted of unfunded obligations related to the following:
1997 1996
- ------------------------------------------------------------------------------
Retirees $17,232 $20,682
Fully eligible active plan participants 2,365 2,429
Other active participants 3,009 2,810
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 22,606 25,921
Unrecognized prior service cost 9,972 11,101
Unrecognized gain 23,089 22,276
- ------------------------------------------------------------------------------
Accrued postretirement benefit cost $55,667 $59,298
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net periodic postretirement benefit costs (income) for the years ended June 30,
1997, 1996 and 1995 include the following components:
Years ended June 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Service cost benefits earned during period $ 162 $ 304 $ 405
Interest cost on accumulated postretirement benefit obligation 1,806 4,292 4,384
Amortization of prior service cost (1,129) (855) --
Amortization of (gain)/loss (1,705) -- --
- -----------------------------------------------------------------------------------------------
$ (866) $3,741 $4,789
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Page 65
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, an 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 1997 and fiscal 1998; the rate of increase was assumed to
decrease to 5.75% by fiscal 2008 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 $1,557 and the aggregate of service and
interest cost components of the annual net periodic postretirement benefit cost
by approximately $110. The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 8.0%, 8.0% and 7.75% for
the years ended June 30, 1997, 1996 and 1995 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 $907, $865 and $818 for the
years ended June 30, 1997, 1996 and 1995 respectively.
During the years ended June 30, 1997, 1996 and 1995, the Company paid
approximately $399, $952 and $948, 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 year 1995, a member of the Company's 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 period
ended June 30, 1995 were $137. Aggregate fees and expenses for the same period
were $158.
11. ACCRUED LIABILITIES
Accrued liabilities consist of the following at June 30:
1997 1996
- ------------------------------------------------------------------------------
Salaries, wages and related items $ 33,449 $ 27,828
Warranty 39,253 43,739
Interest 1,576 4,600
Income taxes (1,658) (862)
Repositioning reserves (see Note 2) 14,890 21,827
Other 32,245 29,267
- ------------------------------------------------------------------------------
$119,755 $126,399
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Page 66
12. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities of continuing operations follows:
Year ended June 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------
(Increase) decrease in accounts receivable $14,368 $ 33,023 $(21,166)
(Increase) decrease in inventories 23,273 21,782 (39,718)
(Increase) decrease in prepaids and other current assets (5,981) 6,335 3,758
(Increase) decrease in other operating assets (2,461) (4,942) (111)
Increase (decrease) in accounts payable (9,316) (13,729) 3,481
Increase (decrease) in accrued liabilities (3,452) 938 6,193
Increase (decrease) in deferred income taxes 7,404 70 (6,192)
Increase (decrease) in other operating liabilities (1,277) 17 2,779
- -------------------------------------------------------------------------------------------
$22,558 $ 43,494 $(50,976)
Cash paid for interest and income taxes follows:
Interest $28,255 $ 31,626 $ 43,388
Income taxes $ 3,463 $ 4,614 $ 10,548
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
During the year ending June 30, 1997 an additional 2,213,067 shares of common
stock were issued upon the conversion of $35,410 of Convertible Notes.
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.
Page 67
Financial information by business segment for continuing operations follow:
Motors and Lighting Power
For the year ended June 30, 1997 Controls Products Supplies Total
- ------------------------------------------------------------------------------------------------
Sales $548,008 $477,958 $164,574 $1,190,540
Operating income 43,785 25,138 11,141 80,064
Identifiable assets 293,315 222,288 138,945 654,548
Capital expenditures 15,441 7,095 10,709 33,245
Depreciation and amortization 17,111 12,594 8,726 38,431
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
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) 36,794 (78,600) 4,285 (37,521)
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, $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). Asset write-downs included in
operating income are $1,333 in Motors and Controls, $24,702, in Lighting
Products and $3,177 in Power Supplies.
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
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Geographic information with respect to the Company's European Subsidiaries
follows:
For the year ended June 30 1997 1996 1995
- -----------------------------------------------------------------------
Sales $202,124 $206,701 $175,727
Operating income 16,605 3,471 6,003
Identifiable assets 154,345 172,636 158,207
Capital expenditures 11,852 10,011 8,532
Depreciation and amortization 7,810 8,197 8,475
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
The Company's foreign operations outside of Europe are not material. Export
sales were $61,036, $61,520 and $60,204 in 1997, 1996 and 1995, respectively.
Page 68
14. QUARTERLY RESULTS (UNAUDITED)
1997 quarter ended Sept. 30 Dec. 31 Mar. 31 June 30
- -------------------------------------------------------------------------------
Net sales $291,410 $293,707 $301,391 $304,032
Gross profit 54,842 55,540 64,672 64,869
Provision for income taxes 2,996 3,839 6,396 5,969
Income from continuing operations
before extraordinary item $ 4,315 $ 5,756 $ 9,198 $ 9,482
Net income $ 4,315 $ 5,756 $ 9,028 $ 4,976
Per common share:
Primary:
Income from continuing operations
before extraordinary item $ .17 $ .22 $ .34 $ .35
Net income $ .17 $ .22 $ .33 $ .18
Fully diluted:
Income from continuing operations
before extraordinary item $ .17 $ .22 $ .32 $ .32
Net income $ .17 $ .22 $ .31 $ .18
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
In the third and fourth quarters of 1997, the Company recorded extraordinary
charges of $170 and $4,506 respectively, associated with the extinguishment of
the majority of its 10 3/4% Subordinated Debentures. The charges (net of tax)
included the unamortized portion of original issuance costs and premium in
excess of face value.
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 $79,817, 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 closures
as well as estimated warranty 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 reflected in fourth quarter results.
Page 69
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, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1997. 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, 1997 and 1996 and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997, 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.
St. Louis, Missouri
August 18, 1997
PROXY
MAGNETEK, INC.
ANNUAL MEETING OF STOCKHOLDERS, OCTOBER 21, 1997
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints ANDREW G. GALEF and SAMUEL A. MILEY, or
either of them, attorneys and proxies to represent the undersigned, with
power of substitution, to appear and to vote all shares of stock of MAGNETEK,
INC. (the "Company") which the undersigned would be entitled to vote at the
Annual Meeting of Stockholders of the Company to be held at the offices of
the Company, 26 Century Boulevard, Nashville, Tennessee 37214 on October 21,
1997, at 10:00 a.m. and any adjournment thereof.
1. Election of Directors
---------------------
Nominees are: Andrew G. Galef, Ronald N. Hoge, Dewain K. Cross, Paul J.
Kofmehl, Marguerite W. Sellee and Robert E. Wycoff
2. Approval of adoption of the MagneTek, Inc. 1997 Non-Employee Director
Stock Option Plan.
3. Approval of adoption of the MagneTek, Inc. Amended and Restated
Director Compensation and Deferral Investment Plan.
UNMARKED PROXIES WILL BE VOTED "FOR" THE
FOREGOING MATTERS UNLESS SPECIFIED MAGNETEK, INC.
TO THE CONTRARY P.O. BOX 11128
NEW YORK, N.Y. 10203-0128
(Continued and to be voted, dated and signed on the reverse side.)
1. Election of Directors FOR all nominees / X / WITHHOLD AUTHORITY to vote / X / *EXCEPTIONS / X /
listed below for all nominees listed below
Nominees: Andrew G. Galef, Ronald N. Hoge, Dewain K. Cross, Paul J. Kofmehl,
Marguerite W. Sallee and Robert E. Wycoff
(INSTRUCTIONS: TO VOTE YOUR SHARES FOR ALL DIRECTOR NOMINEES, MARK THE "FOR"
BOX ON ITEM 1. TO WITHHOLD VOTING FOR ALL DIRECTOR NOMINEES, MARK THE
"WITHHELD" BOX ON ITEM 1. IF YOU WISH TO VOTE FOR SOME BUT NOT ALL DIRECTOR
NOMINEES, MARK THE "EXCEPTIONS" BOX ON ITEM 1 AND ENTER THE NAME(S) OF THE
DIRECTOR NOMINEE(S) FOR WHOM YOU WISH TO WITHHOLD VOTING IN THE SPACE
PROVIDED.)
* Exceptions _______________________________________________________________
2. Approval of adoption of the MagneTek, Inc. 1997 Non-Employee Director
Stock Option Plan.
FOR / X / AGAINST / X / ABSTAIN / X /
3. Approval of adoption of the MagneTek, Inc. Amended and Restated Director
Compensation and Deferral Investment Plan.
FOR / X / AGAINST / X / ABSTAIN / X /
4. The undersigned confers upon the proxies hereby appointed discretion to
act upon such other business as may properly come before said meeting or
adjournment thereof.
I plan to attend the meeting. CHANGE OF ADDRESS OR
COMMENTS MARK HERE / X /
Yes / X / No / X /
Receipt of copies of the Annual Report to Stockholders, the Notice of the
Annual Meeting of Stockholders and the Proxy Statement dated September
24, 1997 is hereby acknowledged.
Dated:
--------------------------------
- ---------------------------------------
Signature of Stockholder
- ---------------------------------------
Signature of Stockholder
(Please date and sign exactly as name appears on this proxy. Joint owners
should each sign. If the stockholder is a corporation, please set forth
full corporate name and a duly authorized officer should sign stating name
and title. Executors and trustees should give full title as such).
VOTES MUST BE INDICATED
(X) IN BLACK OR BLUE INK. / X /
PLEASE RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE U.S.
MAGNETEK, INC. MAGNETEK, INC.
IER Proxy Services ANNUAL MEETING OF STOCKHOLDERS, OCTOBER 21, 1997
P.O. Box 7008 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
San Carlos, CA 94070-7008
The undersigned hereby appoints ANDREW G. GALEF and SAMUEL A.
MILEY, or either of them, attorneys and proxies to represent the
undersigned, with power of substitution, to appear and to vote
all shares of stock of MAGNETEK, INC. (the "Company") which
the undersigned would be entitled to vote at the Annual Meeting
of Stockholders of the Company to be held at the offices of the
Company, 26 Century Boulevard, Nashville, Tennessee 37214 on
October 21, 1997, at 10:00 a.m. and any adjournment thereof.
WITHHOLD 1. Election of Directors
AUTHORITY Nominees: Andrew G. Galef, Ronald N. Hoge, Dewain K. Cross, Paul
FOR to vote for all J. Kofmehl, Marguerite W. Sallee and Robert E. Wycoff
all nominees nominees listed (INSTRUCTIONS: To vote your shares for all Director nominees,
listed to the right to the right mark the "For" box on Item 1. To withold voting for all Director
/ / / / nominees, mark the "Withhold Authority" box on Item 1. If you wish
to vote for some but not all Director nominees, mark the "Exceptions"
box on Item 1 and enter the name(s) of the Director nominee(s) for
whom you wish to withold voting in the space provided.)
FOR AGAINST ABSTAIN
/ / / / / / / / EXCEPTIONS
--------------------------------
/ / / / / / 2. Approval of adoption of the MagneTek, Inc. 1997 Non-Employee
Director Stock Option Plan.
3. Approval of adoption of the MagneTek, Inc. Amended and Restated
Director Compensation and Deferral Investment Plan.
UNMARKED PROXIES WILL BE VOTED "FOR" THE FOREGOING MATTERS
UNLESS SPECIFIED TO THE CONTRARY.
4. The undersigned confers upon the proxies hereby appointed
discretion to act upon such other business as may properly come
before said meeting or adjournment thereof.
I plan to attend the meeting. / /Yes / /No
Proxy Number: Receipt of copies of the Annual Report to Stockholders,
the Notice of the Annual Meeting of Stockholders and the
Proxy Statement dated September 24, 1997 is hereby
acknowledged.
Dated:
----------------------
-------------------------------------------
Signature of Stockholder
-------------------------------------------
Signature of Stockholder
MAGNETEK, Inc.
MagneTek Plan
As a participant in the the MagneTek FlexCare Plus
Retirement Savings Plan or the MagneTek Unionized
Employee Savings Plan or the MagneTek Unionized
Employee Savings Plan (collectively, the "Plan"), you
have the right to direct Barclays Global Investors,
N.A. (the "Plan Trustee") to vote the shares of
Common Stock of MagneTek, Inc. (the "Company")
represented by your interest attributable to such shares
held in the MagneTek Stock Fund under the Plan at
the Annual Meeting of Stockholders of the Company
to be held on October 21, 1997.
For your information, a Proxy Statement and an
Annual Report are enclosed. In addition, a postage-
paid return envelope addressed to IER Proxy Services
is enclosed for your use in returning your completed,
signed and dated Proxy Vote Card to the Plan Trustee.
The Plan Trustee will hold your voting instructions in
confidence and will not divulge or release specific
information regarding your instructions to any person,
including officers or employees of the Company,
except to the extent required by law.
If your completed Proxy Vote Card is not received by
the Plan Trustee by October 17, 1997, the
Administrative Committee for the Plan may direct the
Plan Trustee to vote your shares.
Barclays Global Investors, N.A.
(Please date and sign exactly as name appears on this
proxy. Joint owners should each sign. If the stockholder
is a corporation, please set forth full corporate name and
a duly authorized officer should sign stating name and title.
Executors and trustees should give full title as such.)
PLEASE RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE U.S.