Overview

We provide electrical and mechanical solutions to industrial, commercial and institutional customers primarily in the United States. We currently operate in three business segments:

· Industrial Services - We provide maintenance and repair services to several industries including electric motor and wind power; repairing, manufacturing, and remanufacturing industrial lifting magnets for the steel and scrap industries.

· Construction and Engineering Services - We provide a wide range of electrical and mechanical contracting services, mainly to industrial, commercial, and institutional customers.

· Rail Services - We manufacture and rebuild power assemblies, engine parts, and other components related to large diesel engines and provide locomotive maintenance, remanufacturing, and repair services for the rail industry.

We evaluate the performance of our business segments based on net income or loss. Corporate administrative and support services for MISCOR are not allocated to the segments but are presented separately.

Recent Developments

On September 16, 2009, the Company and Wells Fargo executed a Fifth Amendment to the Credit Agreement (the "Fifth Amendment"). The Fifth Amendment amends the Credit Agreement in the following respects:

· Revised the definition of "Borrowing Base," resulting in lower available borrowings; and

· Extended until October 31, 2009, the requirement to raise $2,000,000 of additional capital through subordinated debt or equity contributions.

Under the Fifth Amendment, we agreed to pay Wells Fargo an accommodation fee equal to $25,000, payable on the date of execution of the Fifth Amendment.

As of November 23, 2009, we have not succeeded in raising all of the $2,000,000 of additional capital that the Credit Agreement, as amended by the Fifth Amendment, required us to raise by October 31, 2009. Wells Fargo has not declared an event of default under the Credit Agreement as a result of the failure to raise all of the additional required capital. We are continuing discussions with Wells Fargo regarding an extension of the requirement to raise additional capital or other arrangements under which Wells Fargo would refrain from exercising their rights under the bank credit facilities as a result of the above-mentioned failure to raise additional capital. While we are optimistic that an agreement can be reached with Wells Fargo to extend the due date of the requirement to raise additional capital, there can be no assurances that we will be able to obtain an extension or obtain other relief from Wells Fargo. If Wells Fargo demands immediate repayment of our outstanding borrowings under the bank credit facilities, we do not currently have means to repay or refinance the amounts that would be due. If demanded, and if we were unable to repay or refinance the amounts due under the bank credit facilities, Wells Fargo could exercise its remedies under the bank credit facilities, including foreclosing on substantially all of our assets, which we pledged as collateral to secure its obligations under the bank credit facilities. If Wells Fargo were to exercise its remedies and foreclose on our assets, there would be substantial doubt about our ability to continue as a going concern. Our consolidated financial statements acompanying this quarterly report on Form 10-Q have been prepared assuming the Company is a going concern and do not reflect any adjustments that may arise from this uncertainty.

While we explore asset sales, divestitures and other types of capital raising alternatives in order to reduce indebtedness under the Credit Agreement, there can be no assurance that such activities will be successful or generate cash resources adequate to retire or sufficiently reduce this indebtedness.

Revenues in the quarter were consistent with the prior quarter, with modest improvement realized in our Construction and Engineering Segment. Initiatives undertaken to mitigate the impact on the Company of the unprecedented deterioration of market conditions realized improved margins and improvement in operating cash flow. Indirect expenses and SG&A were reduced, not at the same rate as the decline in revenue. Improving operating results is imperative to realizing needed cash flow. Working capital management mitigated liquidity pressures with improved collections of accounts receivable and reductions in inventory. Wells Fargo imposed reductions in advance rates and line limits reduces the Company's ability to meet supplier payment commitments. Supplier payment requirements cannot always be met directly impacting sales and gross margins.

We are continuing to assess the strategic fit of our various businesses and are considering additional divestitures where businesses do not align with our long-term vision. We will explore a number of strategic alternatives for under-performing or non-strategic businesses including possible divestures. We generally announce publicly divesture and acquisition transactions only when we have entered into definitive agreements relative to those transactions.

On November 23, 2009, the Company received a notice from the Financial Industry Regulatory Authority ("FINRA") stating that the Company is not current in its SEC reporting obligations because it did not file its Current Report on Form 10-Q for the third quarter of 2009 by the prescribed due date. The notice also stated that, as a result of that failure, under NASD Rule 6530 the securities of the Company will not be eligible for quotation on the OTC Bulletin Board unless the delinquent filing is received by the SEC by December 18, 2009. The notice further stated that because of the delinquency, a fifth character "E" was appended to the Company's trading symbol. The Company believes, however, that because it timely filed with the SEC a Form 12b-25, Notification of Late Filing, with regard to its third quarter Form 10-Q, the Company is current in its SEC reporting obligations. The Company advised the FINRA staff to that effect and requested the staff to remove the fifth character "E" from its trading symbol. In any event, the Company believes this matter should be resolved with the filing of this Current Report on Form 10-Q on November 23, 2009 with the SEC.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Principles of consolidation. The consolidated financial statements for the three and nine months ended October 4, 2009 and September 28, 2008 include our accounts and those of our wholly-owned subsidiaries, Magnetech Industrial Services, Inc., Martell Electric, LLC, Ideal Consolidated, Inc., HK Engine Components, LLC, American Motive Power, Inc. ("AMP") and Magnetech Power Services LLC. All significant intercompany balances and transactions have been eliminated.

Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates are required in accounting for inventory costing, asset valuations, costs to complete and depreciation. Actual results could differ from those estimates.

Revenue recognition. Revenue in our Industrial Services segment consists primarily of product sales and service of industrial magnets, and electric motors. Product sales revenue is recognized when products are shipped and both title and risk of loss transfer to the customer. Service revenue is recognized when all work is completed and the customer's property is returned. For services to a customer's property provided at our site, property is considered returned when the customer's property is shipped back to the customer and risk of loss transfers to the customer. For services to a customer's property provided at the customer's site, property is considered returned upon completion of work. We provide for an estimate of doubtful accounts based on specific identification of customer accounts deemed to be uncollectible and historical experience.

Revenues from the Rail Services and Construction and Engineering Services segments are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs to complete for each contract. Costs incurred on contracts in excess of customer billings are recorded as part of other current assets. Amounts billed to customers in excess of costs incurred on contracts are recorded as part of other current liabilities.

Cash Equivalents. The Company considers all highly liquid investments with maturities of three months or less from the purchase date to be cash equivalents.

Concentration of credit risk. The Company maintains its cash and cash equivalents primarily in bank deposit accounts. The Federal Deposit Insurance Corporation insures these balances up to $250,000 per bank. The Company has not experienced any losses on its bank deposits and management believes these deposits do not expose the Company to any significant credit risk.

Earnings per share. We account for earnings (loss) per common share with a dual presentation of basic and diluted earnings (loss) per common share. Basic earnings (loss) per common share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per common share is computed assuming the conversion of common stock equivalents, when dilutive.

Foreign Currency Translation. The assets and liabilities of the Company's Canadian operations are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date, except for non-monetary assets and liabilities, which are translated using the historical exchange rate. Income and expense accounts are translated into U.S. dollars at the year-to-date average rate of exchange, except for expenses related to those balance sheet accounts that are translated using historical exchange rates. The impact of foreign currency translation on the Company's financial statements was not material for the three and nine months ended October 4, 2009 and September 28, 2008.

Segment information. We report our results using three segments.

Goodwill and Intangibles. Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net assets at the dates of acquisition. Goodwill, which is not subject to amortization, is tested for impairment annually during the fourth quarter. We test goodwill and other intangible assets for impairment on an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Reporting units are determined based on our operating segments. The AMP, MIS, and Ideal operating segments, which were also determined to be reporting units, contain goodwill and are thus tested for impairment. We re-evaluate our reporting units and the goodwill and intangible assets assigned to the reporting units annually, prior to the completion of the impairment testing. The fair value of our reporting units is determined based upon management's estimate of future discounted cash flows and other factors. Management's estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows.

Other intangible assets consisting mainly of customer relationships, a technical library, and non-compete agreements were all determined to have a definite life and are amortized over the shorter of the estimated useful life or contractual life of the these assets, which range from 1 to 20 years. Intangible assets with definite useful lives are periodically reviewed to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the recoverability of intangible assets is assessed by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets (See Note E, Goodwill and Other Intangible Assets).

Inventory. We value inventory at the lower of cost or market. Cost is determined by the first-in, first-out method. We periodically review our inventories and make adjustments as necessary for estimated obsolescence and excess goods. The amount of any markdown is equal to the difference between cost of inventory and the estimated market value based upon assumptions about future demands, selling prices and market conditions.

Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the related assets using the straight-line method. Useful lives of property, plant and equipment are as follows:

         Buildings                             30 years
         Leasehold                             Shorter of lease term or useful life
         improvements
         Machinery and                         5 to 10 years
         equipment
         Vehicles                              3 to 5 years
         Office and computer equipment         3 to 10 years

Long-lived assets. We assess long-lived assets for impairment whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable.

Debt issue costs. We capitalize and amortize costs incurred to secure senior debt financing and revolving notes over the term of the financing, which is three years. If modifications related to the Company's revolving note and term notes are made, then the appropriate changes are made to the related debt issue costs.

Advertising costs. Advertising costs consist mainly of product advertisements and announcements published in trade publications, and are expensed when incurred.

Warranty costs. We warrant workmanship after the sale of our products. We record an accrual for warranty costs based upon the historical level of warranty claims and our management's estimates of future costs.

Stock-based compensation. The cost of all share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based upon their fair values at grant date, or the date of later modification, over the requisite service period. Unrecognized cost (based on the amounts previously disclosed in our pro forma footnote disclosure) related to options vesting after the initial adoption are recognized in the financial statements over the remaining requisite service period.

The amount of compensation cost recognized includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value.

Three Months Ended October 4, 2009 Compared to Three Months Ended September 28, 2008

Revenues. Total revenues decreased by $11.7 million or 37% to $19.8 million for the three months ended October 4, 2009 from $31.5 million for the three months ended September 28, 2008. The decrease in revenues resulted from decreases in the Industrial Services ("IS") segment revenue of $7.3 million or 50%, the Construction and Engineering Services ("CES") segment revenues of $.4 million or 4%, and the Rail Services ("RS") segment revenue of $4.0 million or 55%.

The decline in revenue is generally related to the ongoing challenging global economic conditions as well as our continuing liquidity pressures (see liquidity and capital resources section below). Specifically, the decrease in IS segment revenue resulted from decline in the steel industry and the decrease in RS segment revenue resulted from the decline in the railroad industry.

Gross Profit. Total gross profit for the three months ended October 4, 2009 was $1.8 million or 9.1% of total revenues compared to $5.0 million or 15.9% of total revenues for the three months ended September 28, 2008. The decrease of $3.2 million or 64% was due to decreased consolidated revenues and the company's level of fixed costs. Gross profit on IS segment revenue declined 79%, due mainly to unabsorbed overhead costs. Gross profit on CES revenue declined 13%, due to and unabsorbed overhead costs. Gross profit on RS segment revenue declined 102% due to unabsorbed overhead costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $3.2 million for the three months ended October 4, 2009 compared to $4.3 million for the three months ended September 28, 2008 reflecting cost reduction efforts.

Interest Expense and Other Income. Interest expense increased $224 from the three months ended September 28, 2008 to the three months ended October 4, 2009 due to the Wells Fargo amended interest rates.

Provision for Income Taxes. We have experienced net operating losses in each year since we commenced operations. In January 2007, an ownership change occurred that will limit the amount of net operating loss that we will be able to use in future periods in accordance with Section 382 of the Internal Revenue Code, as amended. We are uncertain as to whether we will be able to utilize these tax losses before they expire. Accordingly, we provided a valuation allowance for the income tax benefits associated with these net future tax assets that primarily relate to cumulative net operating losses, until such time profitability is reasonably assured and it becomes more likely than not that we will be able to utilize such tax benefits.

Net Income. Net loss for the three months ended October 4, 2009 was $4.4 million compared to net income of $0.5 million for the three months ended September 28, 2008. The $4.9 million decrease was due to the decline in revenues and cost levels as discussed in the revenue, gross profit and selling, general, and administrative sections above, along with a goodwill impairment charge of $2.5 million, discussed in Note E to the condensed consolidated financial statements.

Nine Months Ended October 4, 2009 Compared to Nine Months Ended September 28, 2008

Revenues. Total revenues decreased by $29.1 million or 32% to $62.7 million for the nine months ended October 4, 2009 from $91.8 million for the nine months ended September 28, 2008. The decrease in revenues resulted from decreases in the Industrial Services ("IS") segment revenue of $19.4 million or 44%, the Construction and Engineering Services ("CES") segment revenues of $1.7 million or 7%, and the Rail Services ("RS") segment revenue of $8.0 million or 37%.

The decline in revenue is generally related to the ongoing challenging global economic conditions as well as our continuing liquidity pressures (see liquidity and capital resources section below). Specifically, the decrease in IS segment revenue resulted from decline in the steel industry and the decrease in RS segment revenue resulted from the decline in the railroad industry.

Gross Profit. Total gross profit in the nine months ended October 4, 2009 was $5.0 million or 7.9% of total revenues compared to $14.8 million or 16.2% of total revenues in the nine months ended September 28, 2008. The decrease of $9.9 million or 66.7% was due to decreased consolidated revenues and the level of fixed costs. Gross profit on IS segment revenue declined 79%, due mainly to unabsorbed overhead costs. Gross profit on CES revenue declined 35%, due to unabsorbed overhead costs. Gross profit on RS segment revenue declined 65% due to unabsorbed overhead costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $12.6 million in the nine months ended October 4, 2009 compared to $12.4 million in the nine months ended September 28, 2008. Costs have been reduced during the nine months ended October 4, 2009; however, the reductions have been offset by fees related to Wells Fargo, a non recurring fee for AMP NY and operations that didn't exist during the nine months ended September 28, 2008 (AMP Montreal and the Traffic division of Martell Electric, LLC).

Interest Expense and Other Income. Interest expense and other income increased from the nine months ended September 28, 2008 to the nine months ended October 4, 2009 by $0.2 million due to the Wells Fargo amended interest rates.

Provision for Income Taxes. We have experienced net operating losses in each year since we commenced operations. In January 2007, an ownership change occurred that will limit the amount of net operating loss that we will be able to use in future periods in accordance with Section 382 of the Internal Revenue Code, as amended. We are uncertain as to whether we will be able to utilize these tax losses before they expire. Accordingly, we provided a valuation allowance for the income tax benefits associated with these net future tax assets that primarily relate to cumulative net operating losses, until such time profitability is reasonably assured and it becomes more likely than not that we will be able to utilize such tax benefits.

Net Income. Net loss in the nine months ended October 4, 2009 was $10.9 million compared to net income of $1.5 million in the nine months ended September 28, 2008. The $12.4 million decrease was due to the decline in revenues and cost levels as discussed in the revenue, gross profit and selling, general, and administrative sections above, as well as a goodwill impairment charge of $2.5 million discussed in Note E to the condensed consolidated financial statements.

Liquidity and Capital Resources

At October 4, 2009, we had approximately $8.0 million of working capital. Working capital decreased approximately $7.1 million from approximately $15.1 million at December 31, 2008. The decrease in working capital was due mainly to the decrease in accounts receivable, which also resulted in a reduction in the availability of our revolving credit line. The revolving credit line is an asset-based lending agreement with the availability driven by our accounts receivable balance. The decrease in accounts receivable resulted mainly from the decline in revenue and improved collection efforts.

Net cash provided by operating activities was $2.9 million for the nine months ended October 4, 2009 and net cash used by operations was $0.8 million for the nine months ended September 28, 2008. For the nine months ended October 4, 2009, net cash provided by operations resulted from a net loss of $10.9 million, increase in bad debt and inventory reserves of $0.4 million, depreciation and amortization of $4.8 million, decrease in accounts receivable and inventories of $12.7 million, offset by a net decrease in accounts payable and accrued expenses of $4.6 million. For the nine months ended September 28, 2008, net cash utilized by operations resulted from net income of $1.5 million, increase in bad debt and inventory reserves of $0.5 million and depreciation and amortization of $2.3 million, reduced by net increases in working capital of $5.1 million.

Cash used for investing activities of $0.5 million for the nine months ended October 4, 2009 consisted of acquisitions of fixed assets offset by proceeds from disposal of fixed assets approximating $.1 million. During the nine months ended September 28, 2008 we used approximately $9.8 million for investing activities, $8.0 million of which was used for our investment in AMP. The remainder was used for acquisitions of fixed assets.

We used approximately $2.5 million for financing activities during the nine months ended October 4, 2009, consisting primarily of repayments related to the Wells Fargo credit facility. We generated approximately $7.7 million from financing activities during the nine months ended September 28, 2008, primarily from advances on the Wells Fargo credit facility.

We continue our efforts to improve our processes to enhance our future cash flows. These improvements include efforts to collect accounts receivable at a faster rate, decrease inventory levels, review alternative financing sources, and negotiating extended terms with our vendors. Certain of our trade accounts payable are extended beyond the terms allowed by the applicable vendors. As a result, certain vendors have placed us on credit hold or require cash in advance which has resulted in delays in the receipt of necessary materials and parts. Disruptions of this nature have on occasion resulted in delayed shipments and service to our customers and may continue to result in such delays in the future. These delays may have resulted in the loss of sales orders, and future delays may have an adverse affect on our business.

On January 14, 2008, we entered into a credit facility with Wells Fargo. The credit facility was originally comprised of a $1.25 million real estate term note and a $13.75 million revolving note. On January 16, 2008, we borrowed $7.5 million under the revolving note and used the net proceeds of the loans for working capital and to acquire all of the outstanding shares of common stock of AMP.

The original maturity date of the Wells Fargo notes is January 1, 2011, at which time the notes will automatically renew for one-year periods until terminated. The notes are secured by (1) a first priority lien on our assets;
(2) a mortgage on certain real property; and (3) the pledge of the equity interests in our subsidiaries. The term note originally bore interest at an annual rate equal to the rate of interest most recently announced by Wells Fargo at its principal office as the Prime Rate, subject to certain minimum annual interest payments. The revolving note originally bore interest at an annual rate of either (i) the Prime Rate, or (ii) Wells Fargo's LIBOR rate plus 2.8%, depending on the nature of the advance. Interest is payable monthly, in arrears, under the revolving note beginning on February 1, 2008. The term note requires monthly principal payments of $10,000, plus interest, beginning on the first day of the month following receipt of the advance. The $1.25 million real estate term note was funded in April 2008.

We have promissory notes outstanding to BDeWees, Inc., XGen III, Ltd., and John
A. Martell, our CEO in the original principal amounts of $2.0 million, $2.0 million and $3.0 million, respectively (together, the "Subordinated Indebtedness"). Subordination agreements have been executed that subordinate our obligations under the Subordinated Indebtedness to the Wells Fargo credit facility.

If we default under our obligations to Wells Fargo, the interest on the outstanding principal balance of each note will increase by 3% until the default is cured or waived. Other remedies available to Wells Fargo upon an event of default include the right to accelerate the maturity of all obligations, the . . .