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
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- - - ------------------------------------------------------------------------------------------------
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
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- - - ------------------------------------------------------------------------------------------------
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
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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
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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
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- - - -------------------------------------------------------------------------------
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