Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended October 2, 2011

or

 

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 000-52380

 

 

MISCOR GROUP, LTD.

(Exact name of registrant as specified in its charter)

 

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

800 Nave Road, SE

Massillon, OH 44646

(Address of principal executive offices/zip code)

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 7, 2011, there were 11,785,826 shares outstanding of the issuer’s Common Stock, without par value.

 

 

 

---

Table of Contents

MISCOR GROUP, LTD.

INDEX TO FORM 10-Q

 

Item Number				Page Number
PART I — FINANCIAL INFORMATION
1.		Financial Statements:
		Condensed Consolidated Balance Sheets as of October 2, 2011 (Unaudited) and December 31, 2010			1
		Condensed Consolidated Statements of Operations Unaudited for the Three and Nine Months ended October 2, 2011 and October 3, 2010			2
		Condensed Consolidated Statements of Cash Flows Unaudited for the Nine Months ended October 2, 2011 and October 3, 2010			3
		Notes to Unaudited Condensed Consolidated Financial Statements			4
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
3.		Quantitative and Qualitative Disclosures about Market Risk			18
4.		Controls and Procedures			18
PART II — OTHER INFORMATION
6.		Exhibits			20
		Signatures			23

 

ii

---

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MISCOR GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

						October 2,				December 31,
						2011				2010
						(Unaudited)
ASSETS
CURRENT ASSETS
Accounts receivable, net of allowance for doubtful accounts of $149 and $226, respectively						$	4,794			$	6,006
Inventories							4,511				4,359
Assets held-for-sale							4,134				3,493
Other current assets							664				603
Total current assets							14,103				14,461
PROPERTY AND EQUIPMENT, net							4,798				5,521
OTHER ASSETS
Customer relationships, net							6,247				6,537
Other intangible assets, net							566				598
Deposits and other assets							59				59
Total other assets							6,872				7,194
Total assets						$	25,773			$	27,176
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Revolving credit line						$	3,122			$	3,263
Current portion of long-term debt							107				385
Current portion of long-term debt, officers and affiliates							4,150				4,105
Accounts payable							2,291				3,742
Liabilities of held-for-sale operations							1,119				1,076
Accrued expenses and other current liabilities							1,234				1,855
Total current liabilities							12,023				14,426
LONG-TERM LIABILITIES
Long-term debt							919				947
Long-term debt, officers and affiliates							1,929				1,974
Total long-term liabilities							2,848				2,921
Total liabilities							14,871				17,347
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock, no par value; 800,000 shares authorized; no shares issued and outstanding							—				—
Common stock, no par value; 30,000,000 shares authorized; 11,785,826 shares issued and outstanding							59,344				59,344
Accumulated deficit							(48,442	)			(49,515	)
Total stockholders’ equity							10,902				9,829
Total liabilities and stockholders’ equity						$	25,773			$	27,176

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

 

- 1 -

---

Table of Contents

MISCOR GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

		For the Three Months Ended								For the Nine Months Ended
		October 2, 2011				October 3, 2010				October 2, 2011				October 3, 2010
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
REVENUES
Product sales		$	1,223			$	1,514			$	3,313			$	3,964
Service revenue			7,275				6,449				22,720				21,134
Total Revenues			8,498				7,963				26,033				25,098
COST OF REVENUES
Cost of product sales			908				1,157				2,281				2,941
Cost of service revenue			5,692				5,553				18,327				18,004
Total Cost of Revenues			6,600				6,710				20,608				20,945
GROSS PROFIT			1,898				1,253				5,425				4,153
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			1,700				2,104				4,858				6,601
INCOME (LOSS) FROM OPERATIONS			198				(851	)			567				(2,448	)
OTHER (INCOME) EXPENSE
Interest expense			225				233				731				646
Other income			(149	)			(48	)			(251	)			(38	)
			76				185				480				608
INCOME (LOSS) FROM CONTINUING OPERATIONS			122				(1,036	)			87				(3,056	)
INCOME FROM DISCONTINUED OPERATIONS			229				34				986				227
(See Note C, Discontinued and Held-for-Sale Operations)
NET INCOME (LOSS)		$	351			$	(1,002	)		$	1,073			$	(2,829	)
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
From Continuing Operations		$	0.01			$	(0.09	)		$	0.01			$	(0.26	)
From Discontinued Operations			0.02				0.00				0.08				0.02
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE		$	0.03			$	(0.09	)		$	0.09			$	(0.24	)
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING			11,785,826				11,785,826				11,785,826				11,788,945

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

 

- 2 -

---

Table of Contents

MISCOR GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

 

		For Nine Months Ended
		October 2, 2011				October 3, 2010
		(Unaudited)				(Unaudited)
OPERATING ACTIVITIES
Net income (loss)		$	1,073			$	(2,829	)
Adjustments to reconcile net income (loss) to net cash provided (utilized) by operating activities:
Depreciation and amortization			1,231				1,430
Bad debt provision			(71	)			87
Inventory cost adjustments			(260	)			27
Loss on sale of equipment			—				12
Gain on disposal of discontinued operations			—				(314	)
Stock-based compensation, net of forfietures			—				(29	)
Amortization of debt issuance costs and debt discount			—				107
Unrealized gain on conversion option			—				(18	)
Changes in operating assets and liabilities:
Accounts receivable			908				(564	)
Inventories			(142	)			961
Other current assets			(73	)			(274	)
Deposits and other non-current assets			—				28
Accounts payable			(1,394	)			1,592
Accrued expenses and other current liabilities			(613	)			(589	)
Net cash provided (utilized) by operating activities			659				(373	)
INVESTING ACTIVITIES
Proceeds from disposal of discontinued operations			—				746
Acquisition of property and equipment			(191	)			—
Proceeds from disposal of property and equipment			—				173
Net cash provided (utilized) by investing activities			(191	)			919
FINANCING ACTIVITIES
Payments on capital lease obligations			(12	)			(46	)
Short-term debt borrowings, net			(141	)			293
Borrowings of long-term debt			31				19
Repayments of long-term debt			(346	)			(810	)
Cash repurchase of restricted stock			—				(2	)
Net cash utilized by financing activities			(468	)			(546	)
DECREASE IN CASH			—				—
Cash, beginning of period			—				—
Cash, end of period		$	—			$	—
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	738			$	591

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

 

- 3 -

---

Table of Contents

MISCOR GROUP, LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE A—BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of MISCOR Group, Ltd. (the “Company”) as of and for the nine months ended October 2, 2011 and October 3, 2010, have been prepared in accordance with generally accepted accounting principles for interim information and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of the Company’s management, all adjustments, consisting of normal, recurring adjustments, considered to present fairly the financial statements have been included. The results for the nine months ended October 2, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011. Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for the most recent disclosure of the Company’s accounting policies.

As a result of the sale of the Company’s Construction and Engineering Services operations and the sale and planned sale of the Company’s Rail Services operations, the financial results associated with these operations were classified as discontinued operations on the Company’s Condensed Consolidated Statement of Operations and held-for-sale on the Condensed Consolidated Balance Sheets (See Note C, Discontinued and Held-for-sale Operations).

The Company has obtained a 60-day extension (Ninth Amendment) of its Wells Fargo line of credit, through November 18, 2011. The Company and Wells Fargo have not yet finalized the new credit facility it needs to be able to retire the Wells Fargo line of credit by the November 18, 2011 termination date and to operate throughout the remainder of 2011. Additionally, $4,000 of other debt is currently scheduled to mature in 2011. These conditions, coupled with its recurring historical losses from operations, raise substantial doubt as to the Company’s ability to continue as a going concern. No adjustments to the reported financial statements have been made that may result from this uncertainty.

NOTE B—RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of ASU 2009-13 did not have a material impact on the Company’s consolidated financial statements.

NOTE C—DISCONTINUED AND HELD-FOR-SALE OPERATIONS

Construction and Engineering Services Business

In December 2009, the Company announced its plan to sell its CES business, consisting of its Martell Electric and Ideal subsidiaries, in order to raise operating capital and focus on its core industrial services operations. On February 3, 2010, the Company completed the sale of 100 percent of the equity of Martell Electric and Ideal to the Company’s Chairman and former President and Chief Executive Officer, John A. Martell, and his wife, Bonnie M. Martell, for $3,500, consisting of $750 in cash and a $2,750 reduction in the amount owed under a previously issued $3,000 note held by Mr. Martell (the “Martell Note”). Under the sale agreement, the purchase price was subject to a working capital adjustment which the Company could satisfy either with cash or by increasing the outstanding principal amount of the Martell Note.

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

 

- 4 -

---

Table of Contents

included in the Company’s Condensed Consolidated Statement of Operations within Income from Discontinued Operations.

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

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

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

 

		Three Months Ended October 3,  2010				Nine Months Ended October 3,  2010
Revenue from discontinued operations		$	—			$	1,721
Pretax loss from discontinued operations			—				(171	)
Pretax gain on disposal of discontinued operations			—				136

 

				February 3, 2010
ASSETS
Accounts receivable, net of allowance for doubtful accounts of $210 and $209, respectively				$	5,116
Inventories					171
Other current assets					2,208
Total current assets					7,495
PROPERTY AND EQUIPMENT, net					500
Total assets				$	7,995
LIABLITIES
Accounts payable				$	5,252
Accrued expense and other liabilities					1,033
Total liabilities					6,285
Net assets				$	1,710

American Motive Power

In December 2009, the Company announced its plan to sell its domestic AMP subsidiary in order to focus on its core industrial services operations. On March 8, 2010, the Company completed the sale of 100 percent of the outstanding capital stock of AMP to LMC, an unrelated party, in exchange for the assumption of AMP liabilities.

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

 

		Three Months Ended October 3, 2010				Nine Months Ended October 3, 2010
Revenue from discontinued operations		$	—			$	709
Pretax loss from discontinued operations			—				(241	)
Pretax gain on disposal of discontinued operations			—				178

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

 

- 5 -

---

Table of Contents

		March 8, 2010
ASSETS
Accounts receivable, net of allowance for doubtful accounts of $56		$	564
Inventories			1,153
Other current assets			479
Total current assets			2,196
Other assets			—
Total assets		$	2,196
LIABLITIES
Accounts payable		$	683
Accrued expense and other liabilities			1,691
Total liabilities			2,374
Net assets		$	(178	)

HK Engine Components

In December 2009, the Company announced its plan to sell its HKEC subsidiary in order to focus on its core industrial services operations. As a result, the Company has reported HKEC as held-for-sale as of October 2, 2011 and December 31, 2010. The carrying value of the long-lived assets of HKEC was adjusted to their fair market values at December 31, 2009 based on the expected selling price of HKEC. The Company re-evaluated the value of these long-lived assets as of December 31, 2010 and deemed no adjustment to these values was necessary. The Company continues to try to sell HKEC.

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

 

		Three Months Ended								Nine Months Ended
		October 2, 2011				October 3, 2010				October 2, 2011				October 3, 2010
Revenue from discontinued operations		$	2,813			$	1,941			$	8,433			$	5,985
Pretax income from discontinued operations			229				34				986				(55	)

The assets and liabilities of HKEC classified as held-for-sale operations at October 2, 2011 and December 31, 2010 are summarized as follows:

 

		October 2, 2011				December 31, 2010
ASSETS
Accounts receivable, net of allowance for doubtful accounts of $6 and $81, respectively		$	978			$	602
Inventories			1,821				1,571
Other current assets			75				66
Total current assets			2,874				2,239
PROPERTY AND EQUIPMENT, net			1,260				1,254
Total assets		$	4,134			$	3,493
LIABLITIES
Accounts payable		$	875			$	819
Accrued expense and other liabilities			244				257
Total liabilities			1,119				1,076
Net assets		$	3,015			$	2,417

 

- 6 -

---

Table of Contents

NOTE D—INVENTORY

Inventory consists of the following:

 

		October 2, 2011				December 31, 2010
Raw materials		$	2,049			$	2,196
Work-in-progress			1,885				1,633
Finished goods			577				530
		$	4,511			$	4,359

At October 2, 2011 and December 31, 2010, inventory, net of allowance for slow moving, totaling $1,821 and $1,571 respectively, was classified as held-for-sale (See Note C, Discontinued and Held-for-Sale Operations).

NOTE E—OTHER INTANGIBLE ASSETS

Intangible assets consist of the following:

 

						October 2, 2011												December 31, 2010
		Estimated Useful Lives (in Years)				Gross Carrying Amount				Accululated Amortization				Net				Gross Carrying Amount				Accululated Amortization				Net
Technical Library			20			$	700			$	(134	)		$	566			$	700			$	(108	)		$	592
Customer Relationships			15-20				7,722				(1,475	)			6,247				7,722				(1,185	)			6,537
Non-Compete Agreements			3				17				(17	)			—				17				(11	)			6
Total						$	8,439			$	(1,626	)		$	6,813			$	8,439			$	(1,304	)		$	7,135

The estimated future amortization expense related to intangible assets for the periods subsequent to October 2, 2011 on a calendar year basis is as follows:

 

Year Ending December 31 —		Amount
2011		$	108
2012			421
2013			421
2014			421
2015			421
Thereafter			5,021
Total		$	6,813

NOTE F—SENIOR CREDIT FACILITY

As of October 2, 2011, the Company had a $5,000 secured revolving credit agreement (“credit agreement”) with Wells Fargo Bank National Association (“Wells Fargo”) with interest due monthly at LIBOR plus 4.75% (effectively 5.0% at October 2, 2011), due November 18, 2011. At October 2, 2011 and December 31, 2010, approximately $3,122 and $3,263, respectively, was outstanding on the credit facility. The borrowings under the credit facility are limited by specified percentages of the Company’s eligible receivables as defined in the credit agreement. At October 2, 2011, approximately $1,040 of additional borrowings were available under the revolving credit agreement. The credit facility is secured by all assets of the Company.

The provisions of the revolving note include a lock-box agreement and also allow Wells Fargo, in its reasonable credit judgment, to assess additional reserves against, or reduce the advance rate against accounts receivable used in the borrowing base calculation. Wells Fargo, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation or reduce the advance rate against accounts receivable to account for changes in the nature of the Company’s business that alters the underlying value of the collateral. The reserve requirements may result in an

 

- 7 -

---

Table of Contents

over-advance borrowing position that could require an accelerated repayment of the over-advance portion. As a result, the Company classifies borrowings under the revolving note as a short-term obligation.

Additionally, under a real estate loan with Wells Fargo, the Company has outstanding $41 at October 2, 2011 and $322 at December 31, 2010 (re-payments under this real estate loan have been suspended until the revolving credit facility has been renewed). Under the loan agreement, the Company is to make monthly installments of $52 per month plus interest. The Company paid interest expense of approximately $1 and $8 for the three months ended October 2, 2011 and October 3, 2010 and $9 and $26 for the nine months ended October 2, 2011 and October 3, 2010, respectively.

Interest expense under the Wells Fargo credit facility, excluding amortization of debt issue costs and accretion of debt discount, was $40 and $176 for the three and nine months ended October 2, 2011 and $94 and $290 for the three and nine months ended October 3, 2010.

Default and Waiver Agreements

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

 

•

Consented to the planned sale of the CES business;

 

•

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

 

•

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

 

•

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

On February 14, 2010, we received a letter agreement from Wells Fargo which amended the Credit Agreement as follows:

 

•

Revised the terms of Wells Fargo’s consent to the sale of our CES business; and

 

•

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

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

In connection with the Seventh Amendment, the Company paid Wells Fargo an accommodation fee equal to $75.

On December 17, 2010, the Company and Wells Fargo entered into the Eighth Amendment to Credit and Security Agreement (the “Eight Amendment”), pursuant to the following revised terms:

 

•

amortization of the term loan remained at $21 per month through January 31, 2011, when it increased to $52 per month;

 

•

the term loan is to be paid in full upon the earlier of the sale of the Company’s HKEC business or upon maturity;

 

•

the real estate loan was to be paid in full by December 31, 2011, using revolver availability;

 

•

accounts receivable between 91 – 120 days cease to be eligible collateral on the earlier of a sale of the Company’s HKEC business or May 31, 2011, having been subjected to a cap gradually decreasing from $275 in monthly increments of $50 through May 31, 2011;

 

•

the “percentage of ineligibility” test for accounts owed by an account debtor was to reduce from 35% of the total due from an account debtor to 25%, no later than January 31, 2011;

 

•

a stop loss covenant of ($400) measured monthly on a year-to-date basis commenced January 1, 2011; and

 

•

Capital expenditures during 2011 are limited to $200.

Wells Fargo was paid a $25 accommodation fee in connection with the Eighth Amendment.

 

- 8 -

---

Table of Contents

On June 30, 2011, the Company and Wells Fargo entered into the Ninth Amendment to Credit and Security Agreement (the “Ninth Amendment”). In the Ninth Amendment, Wells Fargo agreed to extend our senior credit facility through August 30, 2011, pursuant to the following revised terms:

 

•

a reduced revolver availability of $5,000;

 

•

a reduced interest rate of Daily Three Month LIBOR plus 4.75%; and

 

•

an addition of up to the lesser of $300 or five percent (5%) of the aggregate amount of accounts receivable.

Wells Fargo was not paid an accommodation fee in connection with the Ninth Amendment.

The Company has received several short term extensions to the Credit and Security Agreement. The most recent extension with Wells Fargo expires on November 18, 2011. The Company is currently renegotiating terms of a new credit facility with Wells Fargo, and anticipates having a new credit facility in place by November 18, 2011 (See additional discussion at Note N – Management Plans).

The Company has promissory notes outstanding to BDeWees, Inc. XGenIII, Ltd., and John A. Martell, in the principal amounts of $2,000, $2,000 and $2,079, respectively (together the “Subordinated Indebtedness”) (See Note H, Related Party Transactions). Subordination agreements have been executed which subordinate the obligations of the Company under the Subordinated Indebtedness to the Wells Fargo credit facility.

NOTE G—DEBT

Long-term debt

Long-term debt consists of the following:

 

		October 2, 2011				December 31, 2010
Note payable to Chairman, payable in monthly installments of $5 beginning April 1, 2010, with outstanding balance payable at maturity date of February 28, 2012, plus interest at the greater of 5% or the prime rate (3.25% at October 2, 2011 and December 31, 2010) plus 2%, secured by a subordinated interest in substantially all assets owned by the Company		$	2,079			$	2,079
Note payable to former members of 3-D Service, Ltd. (BDeWees, Inc.) due November 30, 2011, plus interest at 12% at October 2, 2011 and at December 31, 2010, secured by a subordinated interest in machinery and equipment of 3-D Services, Ltd.			2,000				2,000
Note payable to former members of 3-D Service, Ltd. (XGen III, Ltd.) due November 30, 2011, plus interest at 12% at October 2, 2011 and at December 31, 2010, secured by a subordinated interest in machinery and equipment and inventory of 3-D Services, Ltd.			2,000				2,000
Note payable to bank in monthly installments of $52 through November 18, 2011, plus interest currently at Daily Three Month LIBOR (0.37% and 0.31% at October 2, 2011 and December 31, 2010, respectively) plus 8.25%, secured by inventory and substantially all machinery and equipment (see Note F, Senior Credit Facility)			41				322
Note payable to bank in monthly installments of $3 through November 16, 2014, plus interest at 8% secured by a security interest in certain equipment			101				122
Capital lease obligations			985				1,010
			7,206				7,533
Less: current portion			4,257				4,490
		$	2,949			$	3,043

 

- 9 -

---

Table of Contents

At October 2, 2011 and December 31, 2010, debt totaling $101 and $122 was classified as held-for-sale, reported as Rail Services for segment reporting purposes (See Note C, Discontinued and Held-for-Sale Operations).

Aggregate maturities of long-term debt for the periods subsequent to October 2, 2011 on a calendar year basis are as follows:

 

Years Ending December 31,		Amount
2011		$	4,257
2012			2,017
2013			932
		$	7,206

Following is a summary of interest expense for the three and nine months ended October 2, 2011 and October 3, 2010:

 

		Three Months Ended								Nine Months Ended
		October 2, 2011				October 3 2010				October 2, 2011				October 3 2010
Interest expense on principal		$	228			$	204			$	738			$	570
Amortization of debt issue costs			—				4				—				11
Amortization of debt discount— revolving notes payable			—				28				—				73
		$	228			$	236			$	738			$	654

For the three months ended October 2, 2011 and October 3, 2010, interest expense of $3 and for the nine months ended October 2, 2011 and October 3, 2010, interest expense of $7 and $8 was attributable to the Company’s discontinued operations and recorded within Income from Discontinued Operations on the Condensed Consolidated Income Statements.

NOTE H—RELATED PARTY TRANSACTIONS

Trade accounts receivable and accounts payable

As of October 2, 2011, the Company has trade accounts receivable of $323 and $56 due from Martell Electric, LLC and Ideal Consolidated, Inc., respectively.

As of October 2, 2011, the Company has trade accounts payable of $5 due to Martell Electric, LLC.

Long-term debt, officers

In December 2009, the Company announced its plan to sell its Construction and Engineering Services business (“CES business”), consisting of its Martell Electric, LLC (“Martell Electric”) and Ideal Consolidated, Inc. (“Ideal”) subsidiaries, in order to raise operating capital and focus on its core industrial services operations. As a result, the Company has reported Martell Electric and Ideal as held-for-sale, and adjusted the carrying value of Martell Electric’s and Ideal’s long-lived assets based on the sale agreement. On February 3, 2010, the Company completed the sale of 100 percent of the equity of Martell Electric and Ideal to the Company’s Chairman and former President and CEO, John A. Martell, and his wife, Bonnie M. Martell, for $3,500, consisting of $750 in cash and a $2,750 reduction in the amounts owed under a previously issued $3,000 note, held by Mr. Martell (the “Martell Note”). Under the sale agreement, the purchase price was subject to a working capital adjustment which the Company could satisfy either with cash or by increasing the outstanding principal amount of the Martell Note. Interest expense on the note was $27 and $54 for the three and nine months ended October 2, 2011 and $20 and $37 for the three and nine months ended October 3, 2010.

The sale agreement set forth a target working capital range of $2,900-$3,200 at closing. Immediately post-closing, the actual combined working capital for Martell Electric/Ideal was approximately $1,226. During the first half of 2010, the Company recorded working capital adjustments of $(1,654), choosing to satisfy the working capital adjustment by increasing the outstanding principal amount of the Martell Note. These adjustments brought the final sale price to

 

- 10 -

---

Table of Contents

$1,846, comprised of $527 for Ideal and $1,319 for Martell Electric, with the final sale proceeds consisting of a cash payment of $750 and a net reduction of $1,096 in amounts owed under the Martell Note. During the nine months ended October 3, 2010, the Company recognized a pretax gain on sale of $136 from the sale of its CES business, which was included in the Company’s Condensed Consolidated Statements of Operations within Income from Discontinued Operations.

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

The Company is indebted to the former members of 3-D, Bernie DeWees, whom served as President of MIS through November 20, 2009, for two notes payable (“Seller Notes”) each with a balance of $2,000 at October 2, 2011 and December 31, 2010 (See Note F, Senior Credit Facility and Note G, Long Term Debt). These notes were renegotiated and their maturity dates were extended by one year, on November 30, 2010. Interest is payable monthly at 12%. The loans mature on November 30, 2011. Interest expense on these notes was $120 and $360 for the three and nine months ended October 2, 2011 and $17 and $49 for the three and nine months ended October 3, 2010.

Leases

The Company leases its South Bend, Indiana, Hammond, Indiana, and Boardman, Ohio facilities from its Chairman of the Board and stockholder. Total rent expense under these agreements was approximately $73 for the three month periods ended October 2, 2011 and October 3, 2010, respectively. The lease for the Hammond, Indiana facility expired on August 3, 2011. The Company leases a facility in South Bend for its former corporate offices from its Chairman of the Board and stockholder. This lease is set to expire in May 2012. As a result of closure and relocation of the corporate office to Massillon in June 2010, the Company no longer uses this office space. The Company is still obligated to pay rent on the South Bend facility. As of October 2, 2011 and December 31, 2010, approximately $81 and $172, respectively, was included in accrued expenses and other current liabilities on the Company’s Condensed Consolidated Balance Sheets for the abandoned lease.

The Company leases its Hagerstown, Maryland facility from a partnership of which an officer of the Company’s subsidiary, HK Engine Components, LLC, is a partner. Rent expense under this agreement was $42 and $122 for the three and nine months ended October 2, 2011 and $40 and $119 for the three and nine months ended October 3, 2010.

The Company leases a facility in Massillon, Ohio from a partnership, one partner of which is a former officer of MIS, under an agreement expiring in November 2017. Rent expense under the lease was $135 and $405 for the three and nine months ended October 2, 2011 and October 3, 2010.

NOTE I – INCOME (LOSS) PER SHARE

The Company accounts for income (loss) per common share under the provisions of ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted income (loss) per common share. Basic income (loss) per common share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted income (loss) per common share is computed assuming the conversion of common stock equivalents, when dilutive.

For the three and nine months ended October 2, 2011, the Company’s common stock equivalents, consisting of warrants to purchase 308,197 shares of common stock and options to purchase a weighted average of 52,600 and 61,200, respectively, shares of common stock issued to employees under the 2005 Stock Option Plan, were not included in computing diluted loss per share because the effect of including the warrants and options would have been anti-dilutive.

For the three months ended October 3, 2010, the Company’s common stock equivalents, consisting of warrants to purchase 308,197 shares of common stock and options to purchase a weighted average of 40,226 shares of common stock issued to employees under the 2005 Stock Option Plan were not included in computing diluted loss per share because the effect of including the warrants and options would have been anti-dilutive. For the nine months ended October 3, 2010, the Company’s common stock equivalents, consisting of a weighted average of 220,541 potential shares of common stock related to convertible subordinated debt securities, warrants to purchase a weighted average of 308,364 shares of common stock and options to purchase a weighted average 62,463 shares of common stock issued to

 

- 11 -

---

Table of Contents

employees under the 2005 Stock Option Plan, were not included in computing diluted loss per share because the effect of including the warrants and options would have been anti-dilutive.

NOTE J—CONCENTRATIONS OF CREDIT RISK

The Company grants credit, generally without collateral, to its customers, which are primarily in the power, metal working, scrap and rail industries. Consequently, the Company is subject to potential credit risk related to changes in economic conditions within those industries. However, management believes that its billing and collection policies are adequate to minimize the potential credit risk. At October 2, 2011 and December 31, 2010, approximately 13% and 15%, respectively, of gross accounts receivable were due from entities in the power industry, approximately 26% and 25%, respectively, of gross accounts receivable were due from entities in the steel, metal working and scrap industries, and approximately 23% and 14%, respectively, of gross receivables were due from entities in the rail industry. One customer doing business with the Industrial Services and Rail Services segments accounted for approximately 17% of gross accounts receivable at October 2, 2011. For the three and nine months end October 3, 2010, one other customer, of the Industrial Services segment accounted for approximately 23% of revenue from continuing operations. The loss of any of these customers would have a material adverse effect on the Company.

NOTE K—COMMITMENTS AND CONTINGENCIES

Collective bargaining agreements

At October 2, 2011 and December 31, 2010, approximately 11% of the Company’s employees were covered by collective bargaining agreements.

Warranty reserves

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

Product warranty activity for the three and nine months ended October 2, 2011 and October 3, 2010 is as follows:

 

		Three Months Ended October 2, 2011				Three Months Ended October 3, 2010				Nine Months Ended October 2, 2011				Nine Months Ended October 3, 2010
Balance at beginning of period		$	220			$	281			$	217			$	244
Warranty claims paid			(45	)			(15	)			(56	)			(51	)
Warranty expense			25				39				39				112
Balance at end of period		$	200			$	305			$	200			$	305

Employment Agreement

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

Construction and Engineering Services Working Capital Adjustment

Subsequent to agreement of the working capital adjustment related to the sale of our Construction and Engineering Services businesses, the purchasers initiated discussions with the Company’s independent director about restructuring payment of the working capital adjustment. Specifically, the purchasers are requesting that all or part of the working

 

- 12 -

---

Table of Contents

capital adjustment be paid in cash, which would require the consent of the Company’s senior lender, Wells Fargo Bank. MISCOR had elected, as permitted under the purchase agreement, to apply the full amount of the working capital adjustment to the Martell Note. The purchaser, Wells Fargo and the Company’s independent director have not yet reached an agreement on restructuring payment of the working capital adjustment.

NOTE L—FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

The carrying amounts of these items are a reasonable estimate of their fair values because of the short-term nature of these instruments.

Debt

As of October 2, 2011 and December 31, 2010, rates currently available to us for long term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing borrowings at the present value of expected cash flows. As of October 2, 2011 and December 31, 2010, the fair value of debt differed from the carrying amount due to favorable interest terms on the notes with the Company’s Chairman of the Board. At October 2, 2011 and December 31, 2010 the aggregate fair value of debt, with an aggregate carrying value of $9,343 and $9,786, respectively, is estimated at $9,382 and $9,884, respectively, and is based on the estimated future cash flows discounted at terms at which the Company estimates it could borrow such funds from unrelated parties.

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

 

		Nine Months Ended
		October 2, 2011				October 3, 2010
Reduction of note payable in conjunction with sale of CES business		$	—			$	1,096
Expiration of conversion option		$	—			$	18

NOTE N—MANAGEMENT PLAN

In 2011, the Company’s management plan is to continue cost cutting efforts, by improving gross margins via strategic sourcing and improved efficiencies. Additionally, during the last part of 2010, the Company added salesmen in key areas, in order to grow core revenues, and may add additional salesmen. The Company continues pursuing the divestiture of HKEC, as this business does not fit with the Company’s core business competencies. The Company continues to also consider strategic alternatives, including those that may affect it’s capital structure. Lastly, the Company will pursue renewing it’s lending facility with Wells Fargo. By doing such, management believes the Company can significantly reduce its interest expense, increase its base borrowing and eliminate lending restrictions currently in place.

The Company has received several short term extensions to the Ninth Agreement of the Credit and Security Agreement. The most recent extension with Wells Fargo expires on November 18, 2011. The Company and Wells Fargo have not yet finalized the new credit facility which the Company needs to be able to retire the Wells Fargo line of credit by the November 18, 2011 termination date and to operate throughout 2011. Additionally, $4,000 of other debt is currently scheduled to mature in 2011. These conditions, coupled with its recurring losses from operations, raise substantial doubt as to the Company’s ability to continue as a going concern. No adjustments to the reported financial statements have been made that may result from this uncertainty.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

 

- 13 -

---

Table of Contents

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

The severity and extended nature of the most recent recession and the subsequent slow economic recovery resulted in a steep decline in demand for products and services in the industries that we support. In 2009 and throughout 2010, we undertook a number of actions to reduce our fixed costs, improve operational efficiencies and increase operating margins. The Company suspended non-essential cash expenditures and severely reduced capital expenditures. These were efforts to align our operating costs with the decline in sales and respond to debt service and supplier demands. By the end of 2010, the Company had achieved substantially all components of its restructuring plan, with the exception of the divestiture of HK Engine Components, LLC (“HKEC”).

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

In 2010, part of the Company’s restructuring plan also included relocating the Company’s corporate offices to Massillon, Ohio in order to more centrally locate our management team within our operational area and reduce selling, general and administrative expenses. This relocation was completed during the second quarter of 2010. Also, as part of this plan, the Company divested the construction and engineering businesses as well as two of our subsidiaries in the rail services industry. As of October 2, 2011, the Company still owns HKEC, which services the rail services industry. The financial results for HKEC are recorded as discontinued operations.

In 2011, the Company’s management plan is to continue cost cutting efforts, by improving gross margins via strategic sourcing and improved efficiencies. Additionally, during the last part of 2010, the Company added salesmen in key areas, in order to grow core revenues, and may add additional salesmen. The Company continues pursuing the divestiture of HKEC, as this business does not fit the Company’s core business competencies. We also continue to consider strategic alternatives, including, but not limited to, obtaining an equity infusion, being acquired and/or going private. Lastly, by refinancing, repaying or extending our existing debt by current maturity dates, management believes the Company can significantly reduce its interest expense, increase its base borrowing and eliminate lending restrictions currently in place.

Revenues from continuing operations in the nine months ended October 2, 2011 increased approximately 4% from the nine months ended December 31, 2010, reflecting increased service demand. Gross profit increased with lower direct costs and overhead reduction efforts. The benefit of various cost reduction initiatives were realized in selling, general and administrative expenses with a reduction of approximately 65% compared to the nine months ended December 31, 2010. Consequently, the nine months of 2011 as compared to the last nine months of 2010 realized improved operating results. As the Company has experienced improvement in the volume of past due accounts payable, fewer suppliers have placed the Company on credit hold or required cash in advance terms. As more suppliers continue to provide us credit terms, which has allowed us to purchase necessary materials at reduced premiums, we have begun to experience a positive impact in our sales and operating margins in 2011.

The Company has received several short term extensions to the Ninth Agreement of the Credit and Security Agreement. The most recent extension with Wells Fargo expires on November 18, 2011. The Company and Wells Fargo have not yet finalized the new credit facility it needs to be able to retire the Wells Fargo line of credit by the November 18, 2011 termination date and to operate throughout 2011. Additionally, $4,000 of other debt is currently scheduled to mature in 2011. These conditions, coupled with its recurring losses from operations, raise substantial doubt as to the Company’s ability to continue as a going concern. As the Company expects to finalize a refinancing of the Wells Fargo credit facility by November 18, 2011 and to repay or extend its other debt obligations by their currently scheduled maturity dates, no adjustments to the reported financial statements have been made that may result from this uncertainty.

Recent Developments

Not applicable

 

- 14 -

---

Table of Contents

Significant Accounting Policies

The significant accounting polices used in preparation of the Company’s consolidated financial statements are disclosed in Note B of the Notes to the Consolidated Financial Statements within the Form 10-K. No additional significant accounting policies have been adopted during Fiscal 2011.

Recent Accounting Pronouncements

In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of ASU 2009-13 did not have a material impact on its consolidated financial statements.

Results of Operations

Three Months Ended October 2, 2011 Compared to Three Months Ended October 3, 2010

Revenues. Revenues from continuing operations increased by $0.5 million or 6.7% to $8.5 million for the three months ended October 2, 2011 from $8.0 million for the three months ended October 3, 2010. For 2010 and 2011, the Construction and Engineering segment has been classified as discontinued operations. For 2010 and 2011, the Rail Services segment has been classified as discontinued operations. The increase in revenue is related to increased service revenue and a concentrated effort to re-establish the Company in the market place. Additionally, the Company is beginning to experience some economic recovery in most of the markets we serve.

Gross Profit. Total gross profit from continuing operations for the three months ended October 2, 2011 was $1.9 million or 22.3% of revenues from continuing operations compared to $1.3 million or 15.7% of revenues from continuing operations for the three months ended October 3, 2010. For 2010, the Construction and Engineering segment has been classified as discontinued operations. For 2010 and 2011, the Rail Service segment has been classified as discontinued operations. The Industrial Services gross profit increased due to our ability to continue eliminating costs and improve efficiencies.

Selling, General and Administrative Expenses. Selling, general and administrative expenses from continuing operations were $1.7 million for the three months ended October 2, 2011 compared to $2.1 million for the three months ended October 3, 2010, reflecting cost reduction efforts, mainly staff reductions, enacted as part of our management plan during the early part of 2010.

Interest Expense and Other Income. Interest expense for continuing operations decreased slightly from the three months ended October 3, 2010 to the three months ended October 2, 2011 mainly due to reduced levels of borrowings on the revolving line of credit, and the reduced interest rate and expense associated with the revolving line of credit. These savings were partially offset by an increase in expense associated with a portion of our subordinated debt. Additionally, the Company recognized $0.1 million of other income as the result of a recovery on a lawsuit, in which the Company was a plaintiff.

Provision for Income Taxes. We have experienced net operating losses in each year since we commenced operations. We are uncertain as to whether we will be able to utilize these tax losses before they expire. Accordingly, we provided a valuation allowance for the income tax benefits associated with these net future tax assets that primarily relate to cumulative net operating losses, until such time as profitability is reasonably assured and it becomes more likely than not that we will be able to utilize such tax benefits.

Income (Loss) from Continuing Operations. Income from continuing operations increased by $1.1 million to $0.1 million for the three months ended October 2, 2011 from $(1.0) million for the three months ended October 3, 2010. The increase in income from continuing operations is primarily attributed to a $0.6 million improvement in gross profit margin and $0.4 million decrease in selling, general and administrative expenses, as discussed in the gross profit and selling, general and administrative expenses sections above.

Income from Discontinued Operations. Income from discontinued operations of $0.2 million for the three months ended October 2, 2011 increased compared to income from discontinued operations of $0.0 million for the three months ended

 

- 15 -

---

Table of Contents

October 3, 2010. The income from discontinued operations as of October 2, 2011 relates directly to our HK Engine Components, LLC subsidiary. The increase is due to increased sales in rail services.

Net Income (Loss). Net income for the three months ended October 2, 2011 was $0.4 million compared to a net loss of ($1.0) million for the three months ended October 3, 2010. The $1.4 million increase was mainly due to improved operating results, including improved margins, improved operational efficiencies and reduced selling, general and administrative expenses within our Industrial Services segment, as well as increased income from discontinued operations related to our HK Engine Components, LLC subsidiary.

Nine Months Ended October 2, 2011 Compared to Nine Months Ended October 3, 2010

Revenues. Revenues from continuing operations increased by $0.9 million or 3.7% to $26.0 million for the nine months ended October 2, 2011 from $25.1 million for the nine months ended October 3, 2010. For 2010, the Construction and Engineering segment has been classified as discontinued operations. For 2010 and 2011, the Rail Services segment has been classified as discontinued operations. The increase in revenue is related to increased service revenue and a concentrated effort to re-establish the Company in the market place. Additionally, the Company continues to experience some economic recovery in most of the markets we serve. These increases in revenues were attributed to both volume and pricing.

Gross Profit. Total gross profit from continuing operations for the nine months ended October 2, 2011 was $5.4 million or 20.8% of revenues from continuing operations compared to $4.2 million or 16.6% of revenues from continuing operations for the nine months ended October 3, 2010. For 2010, the Construction and Engineering segment has been classified as discontinued operations. For 2010 and 2011, the Rail Service segment has been classified as discontinued operations. The Industrial Services gross profit increased due to our ability to continue eliminating costs and improve efficiencies.

Selling, General and Administrative Expenses. Selling, general and administrative expenses from continuing operations were $4.9 million for the nine months ended October 2, 2011 compared to $6.6 million for the nine months ended October 3, 2010, reflecting cost reduction efforts, mainly staff reductions, implemented as part of our management plan during the early part of 2010.

Interest Expense and Other Income. Interest expense for continuing operations increased slightly from the nine months ended October 3, 2010 to the nine months ended October 2, 2011 primarily due to interest expense associated with a portion of our subordinated debt, which was partially offset by a decline in interest expense attributed with borrowings against our revolving line of credit.

Provision for Income Taxes. We have experienced net operating losses in each year since we commenced operations. We are uncertain as to whether we will be able to utilize these tax losses before they expire. Accordingly, we provided a valuation allowance for the income tax benefits associated with these net future tax assets that primarily relate to cumulative net operating losses, until such time as profitability is reasonably assured and it becomes more likely than not that we will be able to utilize such tax benefits.

Income (Loss) from Continuing Operations. Income from continuing operations improved by $3.1 million to $0.1 million for the nine months ended October 2, 2011 from $(3.0) million for the nine months ended October 3, 2010. The increase in income from continuing operations is primarily attributed to a $1.3 million improvement in gross profit margin and $1.7 million decrease in selling, general and administrative expenses, as discussed in the gross profit and selling, general and administrative expenses sections above.

Income from Discontinued Operations. Income from discontinued operations of $1.0 million for the nine months ended October 2, 2011 increased compared to income of $0.2 million for the nine months ended October 3, 2010. For the nine months ended October 2, 2010, the income from discontinued operations includes $0.4 million in pretax gain on disposal of discontinued operations. Excluding this pretax gain, this segment generated a loss of ($0.1) million. Additionally, the results for the nine months ended October 3, 2010 include pretax loss from discontinued operations of ($0.4) million related to the Construction and Engineering Services and AMP businesses, which were both divested during the first quarter 2010. Accordingly, the income from discontinued operations as of October 2, 2011 relates directly to our HKEC subsidiary. For this subsidiary, we recorded income from discontinued operations of $1.0 million for the nine months ended October 2, 2011 compared to $0.2 million for the nine months ended October 3, 2010. The increase is due to increased sales in rail services.

 

- 16 -

---

Table of Contents

Net Income (Loss). Net income for the nine months ended October 2, 2011 was $1.1 million compared to a net loss of $2.8 million for the nine months ended October 2, 2010. The $3.9 million increase was mainly due to improved operating results, including improved margins, improved operational efficiencies and reduced selling, general and administrative expenses within our Industrial Services segment, as well as increased income from discontinued operations related to our HKEC subsidiary.

Liquidity and Capital Resources

At October 2, 2011, we had approximately $2.1 million of working capital, an improvement of $2.0 million as compared to December 31, 2010. The increase is primarily due to a decrease in accounts payable and accrued liabilities owed at October 2, 2011, as the Company generated sufficient cash flow to become compliant with vendor credit terms and to pay off past due obligations to its vendors.

Net cash provided (utilized) by operating activities was $0.7 million for the nine months ended October 2, 2011 compared to ($0.4) million for the nine months ended October 3, 2010. This increase is primarily due to the Company generating income and reducing its levels of accounts receivable.

For the nine months ended October 2, 2011, net cash flows provided (utilized) by investing activities declined by $1.1 million to ($0.2) million compared to $0.9 million for the nine months ended October 3, 2010. This decrease is a direct result of proceeds from the disposal of discontinued operations for the nine months ended October 3, 2010, as well as the acquisition of property and equipment for the nine months ended October 2, 2011.

Net cash utilized by financing activities decreased by $0.1 million to ($0.5) million for the nine months ended October 2, 2011 as compared to ($0.6) million for the nine months ended October 3, 2010. This decrease is directly attributed to repayments against our revolving line of credit and long term debt.

The Company expects that the refinancing of the existing senior credit facility will provide increased availability and additionally, the refinancing of the long-term debt and subordinated notes due in 2011 and early 2012 will provide additional working capital. Prior operating results and the banking environment offer challenges in modifying or establishing a new senior credit facility. Consequently, capital may not be available on acceptable terms, or at all.

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

The Company has received several short term extensions to the Ninth Agreement of the Credit and Security Agreement. The most recent extension with Wells Fargo expires on November 18, 2011. The Company and Wells Fargo have not yet finalized the new credit facility it needs to be able to retire the Wells Fargo line of credit by the November 18, 2011 termination date and to operate throughout 2011. Additionally, $4,000 of other debt is currently scheduled to mature in 2011. These conditions, coupled with its recurring losses from operations, raise substantial doubt as to the Company’s ability to continue as a going concern. No adjustments to the reported financial statements have been made that may result from this uncertainty.

We have promissory notes outstanding to BDeWees, Inc. and XGen III, Ltd. (together, the “Seller Notes”) and John A. Martell, in the original principal amounts of $2.0 million, $2.0 million and $2.1 million, respectively (collectively, the “Subordinated Indebtedness”). (See Note I, Related Party Transactions). Subordination agreements have been executed that subordinate our obligations under the Subordinated Indebtedness to the Wells Fargo credit facility.

Effective as of December 1, 2010, the Seller Notes were extended through November 30, 2011. Under the loan modification agreements, the time for the payment of principal upon maturity has been extended for one year in consideration of a higher interest rate, monthly installment payments of principal and interest, additional collateral and certain other changes. Prior to a default, the amended and restated Seller Notes bear interest at prime plus 1%, subject to a minimum of 12% until Wells Fargo’s term debt is fully repaid, and thereafter subject to a minimum of 7% per annum. Monthly interest payments may be made, and beginning when we repaid the term loan to Wells Fargo in late December, 2010, repayments of $10 principal per month to each holder of a Seller Note commenced. Upon any sale or combination of sales of assets exceeding $1.0 million gross, or upon a Change in Control as defined in the loan modification agreements, after repayment of transaction costs not to exceed 8%, and that portion of the revolver attributable to the assets sold, each Seller Noteholder will receive a principal payment of 12.5% of the net proceeds from such sale or sales. For an HKEC sale, each Seller Noteholder is to receive a $70 principal payment. The loan modification agreements also restrict both Magnetech and MISCOR from incurring additional indebtedness without the consent of the lenders,

 

- 17 -

---

Table of Contents

excepting $0.1 million per year for indebtedness for certain capital expenditures. The Seller Noteholders have a shared third lien on 3-D Services’ accounts receivable and inventory in addition to their existing shared second lien on 3-D Services’ fixed assets.

MISCOR is in the process of renegotiating its senior credit facility, which is expected to reduce interest expense, provide increased availability, and eliminate financially restrictive covenants. Negotiations continue to extend or repay the Company’s subordinated debt prior to maturity. MISCOR expects to extend or repay $4,000 of subordinated debt prior to its scheduled maturity date of November 2011, and to extend or repay approximately $1,750 of additional subordinated debt prior to its scheduled maturity date in March 2012. Conditions at the time, coupled with previously recurring losses, caused our auditors to express doubt in their report on our December 31, 2010 financial statements as to our ability to continue as a going concern. No adjustments to the reported financial information have been made that may result from this uncertainty.

As of October 2, 2011, we did not have any material commitments for capital expenditures.

Discussion of Forward-Looking Statements

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

Management based the forward-looking statements largely on its current expectations and perspectives about future events and financial trends that management believes may affect our financial condition, results of operations, business strategies, short-term and long-term business objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, and those identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

 

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

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

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures in effect as of October 2, 2011. Based on this evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that, as of October 2, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries required to be included in our Exchange Act reports, including this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported as required, and is made known to management, including the Chief Executive Officer and Chief Accounting Officer, on a timely basis.

Changes in Internal Control Over Financial Reporting

 

- 18 -

---

Table of Contents

There were no changes in our internal control over financial reporting that occurred during the quarter ended October 2, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

- 19 -

---

Table of Contents

PART II—OTHER INFORMATION

ITEM 6. EXHIBITS

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

 

Exhibit No.		Description
10.1		Secured Promissory Note dated February 3, 2010, among John A. Martell and the registrant (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.2		Sixth Amendment to Credit and Security Agreement dated January 14, 2010, among Wells Fargo Bank, the registrant and certain subsidiaries of the registrant (incorporated by reference to Exhibit 10.1 of the registrant’s Current Report or Form 8-K filed January 21, 2010)
10.3		Letter Agreement dated September 8, 2009, among Wells Fargo Bank, the registrant and certain subsidiaries of the registrant, acknowledged and agreed to by the registrant and such subsidiaries on September 16, 2009 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on September 21, 2009)
10.4		Consent and release by Wells Fargo Bank, National Association, dated March 15, 2010 (incorporated by reference to Exhibit 10.10 to the registrant’s Current Report on form 8-K filed on March 15, 2010)
10.5		Letter Agreement dated February 9, 2010, among Wells Fargo Bank, the registrant and certain subsidiaries of the registrant (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.6		Seventh Amendment to Credit and Security Agreement and Limited Waiver of Defaults dated July 15, 2010, among Wells Fargo Bank, the registrant and certain subsidiaries of the registrant (incorporated by reference to Exhibit 10.56 to the registrant’s Annual Report on Form 10-K filed on July 15, 2010)
10.7		Purchase Agreement dated February 3, 2010, among John A. Martell and Bonnie Martell and the registrant (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.8		Lender’s Receipt and Acknowledgement dated February 3, 2010, among John A. Martell and the registrant (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.9		Security Agreement dated February 3, 2010, among Magnetech Industrial Services, Inc. and the registrant (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.10		Indemnification Agreement dated February 3, 2010, among John A. Martell and Bonnie Martell and the registrant(incorporated by reference to Exhibit 10.5 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.11		Amendment No. 1 to Employment Agreement dated February 3, 2010, among John A. Martell and the registrant (incorporated by reference to Exhibit 10.6 to the registrant’s Current Report on Form 8-K filed on February 9, 2010)
10.12		AMP Stock Purchase Agreement dated March 8, 2010, between LMC Transport, LLC, and the registrant (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on form 8-K filed on March 15, 2010)
10.13		Release of Tenant Guaranty made by Dansville Properties, LLC, in favor of the registrant and certain of its affiliates (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on form 8-K filed on March 15, 2010)
10.14		Release of Landlord Guaranty made by American Motive Power, Inc. in favor of Lawrence Mehlenbacher (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on form 8-K filed on March 15, 2010)
10.15		Eighth Amendment to Credit and Security Agreement, dated December 13, 2010, by and among MISCOR Group, Ltd., Magnetech Industrial Services, Inc., and HK Engine Components, LLC as Borrowers and Wells Fargo Bank, National Association as Lender (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on December 22, 2010)
10.16		Form of Loan Extension and Modification Agreement dated as of December 1, 2010 by and between Magnetech Industrial Services, Inc., MISCOR Group, Ltd. and BDeWees, Inc. (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on December 22, 2010)

 

- 20 -

---

Table of Contents

10.17		Form of Amended and Restated Promissory Note dated November 30, 2010 by Magnetech Industrial Services, Inc. and MISCOR Group, Ltd. in favor of BDeWees, Inc. (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on December 22, 2010)
10.18		Form of Amendment to Commercial Security Agreement dated as of December 1, 2010 by and between Magnetech Industrial Services, Inc. and BDeWees, Inc. (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed on December 22, 2010)
10.19		Ninth Amendment to Credit and Security Agreement, dated June 30, 2010, by and among MISCOR Group, Ltd., Magnetech Industrial Services, Inc., and HK Engine Components, LLC as Borrowers and Wells Fargo Bank, National Association as Lender (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on July 6, 2011)
10.20		Extension of Ninth Amendment to Credit and Security Agreement, dated August 30, 2011, by and among MISCOR Group, Ltd., Magnetech Industrial Services, Inc., and HK Engine Components, LLC as Borrowers and Wells Fargo Bank, National Association as Lender (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on August 30, 2011)
10.21		Extension of Ninth Amendment to Credit and Security Agreement, dated September 29, 2011, by and among MISCOR Group, Ltd., Magnetech Industrial Services, Inc., and HK Engine Components, LLC as Borrowers and Wells Fargo Bank, National Association as Lender (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on September 30, 2011)
10.22		Extension of Ninth Amendment to Credit and Security Agreement, dated October 7, 2011, by and among MISCOR Group, Ltd., Magnetech Industrial Services, Inc., and HK Engine Components, LLC as Borrowers and Wells Fargo Bank, National Association as Lender (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on October 10,, 2011)
10.23		Extension of Ninth Amendment to Credit and Security Agreement, dated October 28, 2011, by and among MISCOR Group, Ltd., Magnetech Industrial Services, Inc., and HK Engine Components, LLC as Borrowers and Wells Fargo Bank, National Association as Lender (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on October 31, 2011)
31.1		Certification by Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act
31.2		Certification by Chief Accounting Officer required by Rule 13a-14(a) of the Exchange Act
32		Section 1350 Certifications
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2011, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements.

 

- 21 -

---

Table of Contents

SIGNATURES

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

 

				MISCOR GROUP, LTD.
November 14, 2011				By:		/s/    Marc Valentin, CPA
						Marc Valentin, CPA
						Chief Accounting Officer
						(Signing on behalf of the registrant as Principal Financial and Accounting Officer)

 

- 22 -