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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1997
COMMISSION FILE NO.: 0-18018
AEROVOX INCORPORATED
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(Exact name of Registrant as specified in its charter)
DELAWARE 76-0254329
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
740 BELLEVILLE AVENUE, NEW BEDFORD,MA 02745
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(Address of principal executive offices) (Zip Code)
(508) 994-9661
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(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $1.00 PER SHARE TRADED ON THE NASDAQ NATIONAL
PREFERRED SHARE PURCHASE RIGHTS MARKET SYSTEM
Shares Outstanding of the Registrant's Common Stock at March 17, 1998:
5,385,409.
Aggregate market value of voting stock held by non-affiliates of the registrant
at March 17, 1998: $18,723,317.
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 twelve months, and (2) has been subject to such filing
requirements for the past ninety days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended December 27, 1997 are incorporated by reference into Parts I, II and IV
hereof. Portions of the Registrant's definitive Proxy Statement for use at the
1998 Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
An index to exhibits filed with this Report on Form 10-K appears at pages 19
hereof.
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PART I
ITEM 1. BUSINESS
Aerovox's predecessor, Aerovox Corporation, began in 1922 producing crystal
wireless radios. In 1973, the Aerovox AC capacitor operations, including a
plant in New Bedford, Massachusetts, together with the Aerovox name, were
purchased from Aerovox Corporation by a newly-created corporation, Aerovox
Industries, Inc. In 1978, RTE Corporation ("RTE"), a manufacturer of
distribution transformers and other utility electrical products, purchased all
of the assets of Aerovox Industries through its newly organized subsidiary,
Aerovox Incorporated, a Massachusetts corporation ("Aerovox Massachusetts"). In
1988, RTE was acquired by Cooper Industries ("Cooper"), and Aerovox
Massachusetts became an indirect wholly-owned subsidiary of Cooper, through
Aerovox Holding Company ("AHC"); a Delaware corporation incorporated on May 3,
1988. On May 26, 1989, Aerovox Massachusetts was merged into AHC and AHC's name
was changed to Aerovox Incorporated. The sole purpose of this merger was to
eliminate the passive holding company structure. On February 26, 1990,
5,095,086 shares of Aerovox Common Stock were distributed to Cooper shareholders
of record on May 5, 1989.
On March 5, 1993, Aerovox purchased all the stock of Aero M, Inc., an
aluminum electrolytic capacitor manufacturer, from Cooper Industries. On March
11, 1993, Aerovox purchased certain assets of British aluminum electrolytic
capacitor manufacturer, BH Components Ltd., and formed a new company, BHC
Aerovox Ltd. which is located in Weymouth, England.
During 1996 Aerovox reorganized its North American capacitor operations.
The former Aero M Group was merged with the film capacitor businesses of the
Aerovox Group to constitute the North American capacitor business of Aerovox,
which includes the aluminum electrolytic capacitors of the Aero M Group and the
electrostatic capacitor lines of the former Aerovox Group. In addition, the
Company established two small integrated business units for Power Factor
Correction products and EMI Filters. The foregoing product lines are
manufactured in the Company's three North American capacitor plants - one in New
Bedford, Massachusetts and two in Juarez, Mexico. A principal component,
aluminum foil for electrolytic capacitors, is produced in the Aerovox plant in
Huntsville, Alabama.
PRODUCT DESCRIPTION
Aerovox is a leading manufacturer of electrostatic (film and paper) and
aluminum electrolytic capacitors, sold worldwide, principally to original
equipment manufacturers (OEMs) for use as components in electrical and
electronic products.
Capacitors are basic electrical components that store electrical energy and
regulate the frequency, timing and condition of electrical signals. They are
used to release predetermined amounts of energy and assist in running an
electrical device, to send predetermined amounts of energy to start an
electrical device, or to store energy for releases at unscheduled future times.
A principal functional element of every capacitor is its dielectric
(nonconductive) material, which functions as an insulator separating two
electrically charged plates (electrodes). Dielectric systems can be made using
a variety of materials, such as air, ceramic, tantalum oxide, aluminum oxide,
polypropylene film and paper.
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MARKETS AND APPLICATIONS
<TABLE>
<CAPTION>
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MARKETS APPLICATIONS AEROVOX PRODUCTS
======================================================================================================
<S> <C> <C>
MOTORS Compressors, air conditioners, pumps, AC Oil Capacitors
refrigeration, laundry equipment, AC Dry Capacitors
garage door openers, hospital beds Aluminum Electrolytic Capacitors
- ------------------------------------------------------------------------------------------------------
LIGHTING Electromagnetic and electronic AC Oil Capacitors
ballasts for fluorescent and high AC Dry Capacitors
intensity discharge (HID) fixtures, DC Film Capacitors
and strobe lights Aluminum Electrolytic Capacitors
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POWER ELECTRONICS Variable speed drives, DC Film Capacitors
uninterruptible power supplies (UPS), AC Oil Capacitors
power supplies, transportation, AC Dry Capacitors
welders, motor speed controllers, Aluminum Electrolytic Capacitors
telecommunications equipment,
audio/visual equipment, battery
chargers
- ------------------------------------------------------------------------------------------------------
SPECIALTY Microwave ovens, medical equipment Microwave Oven Capacitors
(defibrillator, X-ray equipment), Custom and Pulse Power Capacitors
industrial equipment, government and High Voltage Capacitors
university research
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POWER FACTOR Industrial plants, commercial Power Factor Correction Capacitors
CORRECTION facilities and institutions consuming and Systems
large amounts of electrical power
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EMI/RFI FILTERS Power supplies, industrial equipment, Custom and General Purposes
computer and telecommunications EMI/RFI Filters
equipment and appliances
- ------------------------------------------------------------------------------------------------------
</TABLE>
NORTH AMERICAN CAPACITOR OPERATIONS
Electrostatic Capacitors
Aerovox manufactures electrostatic capacitors in New Bedford, Massachusetts
(since 1938), and in Juarez, Mexico where the Company began manufacturing film
capacitors in 1992.
All Aerovox alternating current (AC) film capacitors are manufactured with
polypropylene film and/or kraft paper, or polyester film (used in small units)
as the dielectric system. Aerovox's AC capacitors are utilized for continuous
duty in starting permanent split-phase motors and then provide power factor
correction during the running phase of the motor circuit. Applications include
air conditioners, pumps, refrigerators and other types of equipment. Aerovox
AC film capacitors are also utilized in ballasts for high intensity discharge
(HID) and fluorescent magnetic lighting fixtures, uninterruptible power supplies
(UPS), power supplies, and in welding equipment.
Direct current (DC) film capacitors utilize polyester films and
polypropylene (for high frequency applications) as the dielectric system.
Applications for Aerovox DC film capacitors
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include lighting (for electronic ballasts in fluorescent fixtures), UPS and
power supplies, variable speed drives, and equipment for audio, communications
and welding applications.
The Company offers a complete line of high voltage, multipurpose custom and
pulse power capacitors for medical, industrial and government applications.
The smaller models in this product line are used as components in photocopiers,
laser equipment, defibrillators and other medical equipment, power supply
systems and welding equipment. Aerovox's larger DC capacitors are used in
government and university fusion power and particle acceleration research
products, government weaponry systems, in equipment for high energy x-rays, and
in high speed trains.
The AEROVOX POWER FACTOR CORRECTION BUSINESS UNIT produces low and medium
voltage power factor correction systems. These systems are installed in
manufacturing facilities, large office buildings and hospitals where use of
motor-driven equipment, air conditioning and specialized medical equipment is
widespread. Power factor correction capacitors improve a facility's electrical
system efficiency thus reducing power costs; they can also reduce the incidence
of system problems such as brownouts.
Aluminum Electrolytic Capacitors
Aerovox manufactures AC and DC aluminum electrolytic capacitors for North
and South America and Far East markets in Juarez, Mexico (since 1994).
Aerovox's AC motor start capacitors are utilized for intermittent duty in the
starting of electric motors and in limited gear motor applications. Start
capacitors of this type are used in compressor motors, pump motors, dental
chairs, garage door openers and other similar applications.
The Company's DC aluminum electrolytic capacitors are used in the
electrical equipment and electronic industry primarily for applications such as
power supplies, UPS, motor drives and energy discharge applications such as
welding, strobes and photo flash.
EMI/RFI Filters
Also organized as an integrated business within the Company is the EMI
FILTERS BUSINESS UNIT. EMI filters protect electronic equipment from electrical
interference ("noise") coming from the power source and suppress high frequency
interference that would otherwise be transmitted out of the equipment along the
power cord. They can also be used to suppress high frequency and unintentional
"noise" generated in electronic and electromechanical equipment. Applications
for EMI filters include computer and computer peripheral equipment,
telecommunications and variable speed drives. They are also used in sensitive
electronic test and medical equipment.
COMPETITION
Electrostatic Capacitors
AC capacitors are made by several domestic and foreign manufacturers, and
competition is intense. In the North American AC capacitor market, Aerovox
competes primarily with domestic manufacturers. Aerovox and the General
Electric Company are the primary producers, each offering a full line of AC
products. Five other suppliers - York, Commonwealth Sprague, American
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Radionics, Compania General de Electronica (CGE) in Mexico and Magnetek - though
smaller, all manufacture quality products, and contribute to price competition.
Offshore competition has not been a major factor in this market because
normally the weight of a typical AC capacitor in relation to its cost and the
service requirements of major customers make shipment to the United States
uneconomical for overseas suppliers. However, Far East manufacturers are
beginning to make inroads into the U.S. markets. Passage in Congress in early
1997 of the Information Technology Agreement (ITA) increases Far East
competition, in particular. (The ITA eliminates tariffs on capacitors coming
into the United States in four equal steps beginning in July 1997. The staged
elimination will be completed by July 2000.) The principal competitive factors
in the industry include product quality and reliability, competitive prices, on-
time delivery, customer service, the ability to meet rigid customer
specifications, currency fluctuations, and the ability to add value to the
customer's product.
The North American business of Aerovox is not a major supplier of general
purpose AC capacitors in either Europe or Asia and faces strong competition from
locally based manufacturers in those markets. However, Aerovox has successfully
marketed energy discharge capacitors for specialized applications in Europe and
in the Korean market.
A significant number of DC film capacitor manufacturers, both domestic and
international, serve the North American market and, accordingly, Aerovox faces
stiff competition in this market. The competitive factors are primarily quality,
delivery and pricing.
Sales of power factor correction systems are largely influenced by the
penalty based rate structure imposed by some utilities on their customers.
Aerovox has four primary competitors in this market, all of whom manufacture
their own capacitors in addition to building the assemblies. Competitive factors
affecting this market are technical solution expertise, delivery performance,
and pricing.
Aluminum Electrolytic Capacitors
In the North American AC motor-start capacitor market, Aerovox has one
major competitor - North American Philips - but two new entries in the field,
North American Capacitor Company (NACC) and Compania General de Electronica
(CGE) in Mexico are stimulating competition with low pricing. Offshore
competition has not been a factor in this market, but this situation may change
with the tariff elimination resulting from passage of the ITA. The principal
competitive factors in the industry are delivery, quality, customer service and
pricing.
The large can computer grade DC electrolytic capacitor market is dominated
by Cornell Dubilier Electronics, North American Philips, and United Chemi-Con.
This marketplace has minimum standardization and is considered application-
specific, normally requiring design-in and qualification testing by its
customers.
EMI/RFI Filters
A significant number of EMI custom filter manufacturers serve the North
American marketplace providing strong competition. The principal competitive
factors are technical support, quality, delivery and price.
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MANUFACTURING
Many of Aerovox's manufacturing processes are automated; mechanization is
essential to its ability to control costs in order to meet competitive prices
and still maintain acceptable profit margins. The control of quality levels is
an equally important function throughout all operations and various tests are
conducted to assure continuity of high standards.
Most recently, the Company has embarked on a program to significantly
improve operating efficiency. In the New Bedford plant, goals to improve on-
time delivery performance, to reduce cycle times, and to reduce inventory
investment have been established, and information systems, materials acquisition
and flows, and production are being re-designed to meet these goals. Continuous
flow pull-through techniques, with emphasis on speed and waste elimination, are
replacing inflexible large-quantity batch production on the factory floor.
In December 1992, the Company formed a maquiladora in Juarez, Mexico for
the assembly of high labor content AC capacitor products and EMI filters. Both
oil filled and dry AC and DC film capacitors are now assembled in this plant
(referred to as Plant II by the Company) in addition to EMI filters.
A special products department in New Bedford assembles the custom and pulse
power product lines. Power factor correction systems are also assembled in New
Bedford.
The key material element of an aluminum electrolytic capacitor is an
essentially pure aluminum foil that has been processed, chemically and
electrically, to meet the capacitance and voltage specifications of the finished
capacitor. This processing, known as etching and forming of the aluminum foil,
is done at the Aerovox plant in Huntsville, Alabama. Slitting of the processed
foil to required widths is also completed at this plant. The foil is then
forwarded to Plant I in Juarez and to BHC Aerovox in England for assembly into a
finished aluminum electrolytic capacitor.
BHC AEROVOX LTD.
BHC Aerovox Ltd., located in Weymouth, England, is one of Europes' leading
manufacturers of aluminum electrolytic capacitors with sales throughout Europe.
PRODUCTS AND MARKETS
BHC Aerovox is the major supplier of AC motor-start capacitors to the
European market, serving the fractional horsepower motor and the compressor
markets. Their leading edge technology high voltage DC capacitors are supplied
to all the major European motor drives manufacturers. Other applications
include uninterruptible power supplies, telecommunication power supplies,
traction units for trains, audio / visual equipment, welding equipment and other
general industrial electronics applications.
A new building, completed in 1995, created 40% more space for expansion of
aluminum electrolytic capacitor production and for the introduction of microwave
oven capacitor manufacturing which took place in 1996.
6
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COMPETITION
There is keen competition from a number of European and Far Eastern
suppliers for all of the aluminum electrolytic products made by BHC Aerovox. In
each of the main countries, there is at least one local supplier. BHC Aerovox
has increased its market share by offering technical backup to support a range
of high quality, technically advanced products.
There is only one European competitor for microwave capacitors (in Italy).
The main competitors are in Korea and the United States. Competitive factors
include European manufacturing status, flexible production, small can sizes,
pricing and quality.
BHC's business is subject to influence by foreign currency exchange rates,
and particularly by the current strength of the pound in comparison to other
European currencies. The principal raw material is purchased in US dollars
from the parent company, and 55% of all sales are outside the United Kingdom,
primarily into Europe.
MANUFACTURING
BHC Aerovox purchases etched aluminum foil from four sources, including the
Aerovox foil operation in Huntsville. The etched foil is processed to form a
dielectric (aluminum oxide) layer according to the voltage requirements. This
processed foil is slit to the required width, wound with specially selected
tissue, impregnated with an electrolyte fluid and then assembled into
containers. A large part of the production is for custom designs to meet the
specific customer applications.
BHC's microwave production is based on the proven technology from Aerovox
USA and incorporates state-of-the-art processing equipment.
GENERAL
SALES AND DISTRIBUTION
Aerovox sells its products worldwide to over 1,000 customers, primarily
original equipment manufacturers ("OEMs"), who purchase capacitors and other
products manufactured by the Company for use as components in the products they
manufacture. No one customer, in 1997, accounted for 10% or more of the net
sales of the Company. In 1997, approximately 42% of the Company's net sales
were to its ten largest customers and 86% were made to its 100 largest
customers. The Company expects that sales to these customers will continue to
represent a significant portion of its total sales.
Foreign sales, primarily from BHC Aerovox Ltd., the Company's United
Kingdom subsidiary, represented approximately 25% of total sales in 1997.
The Company markets most of its products to domestic OEMs primarily through
a network of independent manufacturers' sales representative organizations which
collectively employ over 200 sales people. Aerovox has enjoyed long-term
relationships with many of its sales representatives-some have sold Aerovox
products in excess of twenty-five years. The Company's
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low and medium voltage power factor correction capacitors, which are
manufactured for installation into industrial, commercial and other type
facilities, are marketed through a separate group of industrial manufacturers'
representatives who specialize in these products. In England and Europe, the
Company sells through a combination of direct employees and independent
manufacturers' representatives. In addition, independent sales organizations
represent the Company in the Far East, Japan, Australia, Mexico, the Middle East
and South America. A smaller portion of the Company's sales are through
distributors and a few long-standing customers are handled as house accounts.
The Company's sales are relatively seasonal and are affected by Company
production and shipping schedules; the net sales for the first half of the year
are based on an aggregate average of 122 shipping days compared to 119 days for
the last half of the year. Approximately 75% of the net sales are produced
under agreements negotiated on an annual basis, usually during the latter part
of the year. The Company sells approximately 95% of its products on a
manufactured-to-order basis. If an order is canceled the Company bills the
customer for materials and labor expended on the order prior to cancellation.
A critical element to the Company's strategy is its emphasis on customer
service. The Company maintains continual, multilevel contacts with many
customers and places a high priority on meeting each customer's requirements in
a timely manner.
BACKLOG
Aerovox's total backlog represents approximately 8.5 weeks of production.
The backlog may vary significantly based upon the ordering practice of
customers, and the lead times quoted by the Company. The Company's
manufacturing lead times vary from two to eight weeks depending on the product
type, although some filter products and special larger pulse power products that
must be built specifically to order may require longer lead time. The Company
books orders, for purposes of calculating backlog, when a firm delivery date
that is no more than 12 months out is scheduled. The total active backlog was
$19,041,000 at February 21, l998, and $23,963,000 at February 21, 1997. The
Company expects to fill all backlog orders scheduled for 1998 delivery.
PRODUCT DEVELOPMENT AND QUALITY CONTROL
Product development and improvement are important elements of Aerovox's
strategy. The Company's efforts to develop new products and to improve existing
products are continuous and benefit from long-term technical relationships with
a number of key suppliers and customers. Formal and informal consultation and
discussion on technical matters of common interest with key suppliers have
resulted in a number of significant product improvements, including the
development of thinner dielectric materials resulting in a more cost efficient
capacitor and development of improved capacitor fluid impregnants that reduce
capacitance loss.
Technical exchanges between the Company's operations have resulted in the
development of additional new products and processes, a trend the Company is
fostering particularly with the establishment of an electrolytic foil technical
center at the Huntsville plant.
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The Company places a high degree of emphasis on quality control both in
product design (through improved design specifications) and in the production
process by means of continuous process monitoring and control throughout the
manufacturing cycle. Statistical Process Control (SPC), a program aimed at
encouraging employee involvement and participation through fact-based decision
making, is typical of the programs that have helped Aerovox achieve significant
quality improvements.
The Company adheres to worldwide quality standards in all its operations.
Each of its capacitor manufacturing facilities has achieved International
Standards Organization (ISO) 9000 certification. In January 1997, the Aerovox
plant in New Bedford and one in Juarez were approved for ISO 9002
recertification, while the electrolytic capacitor plant in Juarez was
recertified as an ISO 9002 operation in August 1996. This plant is currently in
the process of preparing for a new certification under the same organization as
the Aerovox plant in New Bedford and the Company's other Juarez facility. BHC
Aerovox Ltd. has been ISO 9001 certified for several years.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
The Company is currently engaged in a company-wide project to convert all
management information and control systems to an integrated and uniform system
that is compliant with year 2000 computing requirements. In addition to meeting
compliance requirements, the Company expects to gain the benefit of better, more
consistent and more timely information. BHC Aerovox Ltd. successfully converted
to the new system in January 1998, and North American operations are expected to
convert during the fourth quarter of 1998.
RAW MATERIALS
The Company purchases raw materials from a number of regional, national and
international suppliers. All of these raw materials are available from a
variety of suppliers with whom the Company has had long-term relationships. The
Company purchases its plain and metallized polypropylene from several sources in
Europe and Asia and three sources in the United States. There are several
Company approved suppliers for metallized polyester, two in the United States
and two in Europe. A number of sources are approved to provide aluminum foil
for the Company's electrolytic products - three in the United States, three in
Europe, and two in Asia.
PATENTS, LICENSES AND TRADEMARKS
The Company's most important intellectual property is its capacitor
manufacturing processes which have been developed over a period of many years.
Aerovox has approximately 22 active patents and three pending patents.
Aerovox licenses some of its product technology and process know-how to a
foreign producer of lighting capacitors and a U.S. producer of motor run
capacitors. An agreement renewing the foreign license was signed by both
companies in September 1996, and with the domestic licensee in March 1997.
Licensing income is included in other income in the statement of operations.
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The Aerovox trademark is registered or registration is pending in 23
countries in Europe, North and South America, the Far East, the Middle East and
Australia. This trademark has been in force since 1976. In addition, the
Company holds or has pending, 19 other United States registered trademarks, some
of which are registered in other countries. The duration of Aerovox's product
trademark registrations range from one year to fifty-nine years. The Company
believes that its trademark status helps to maintain the proprietary nature of
its products.
EMPLOYEES
As of February 22, 1998, Aerovox had 1,459 employees worldwide. An
aggregate of 309 employees hold salaried management, supervisory, sales and
clerical positions and 1,150 hourly employees are engaged in production and
related activities. Unions represent 2.5% of the employees. None of the
Company's production departments are unionized. Approximately 290 employees
have been with their respective Aerovox company for 10 years or more.
Aerovox considers its employee relations to be good. There have been no
labor stoppages in recent years, and union contracts have been renegotiated
without difficulty. In New Bedford, a three-year agreement with the
International Union of Operating Engineers is set to expire in April 1998, and a
two-year contract with the International Brotherhood of Electrical Workers will
also expire in April 1998.
ENVIRONMENTAL COMPLIANCE
The Company has made substantial capital expenditures on environmental
controls and compliance at its facilities. See, "Environmental Matters -
Environmental Compliance" below.
ITEM 2. PROPERTIES
<TABLE>
<CAPTION>
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PROPERTY SQ. FEET OWNED/LEASED YEAR LEASE
EXPIRES
<S> <C> <C> <C>
North Dartmouth, MA 11,900 Leased 2003
(Office space sublet in April 1998)
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New Bedford, MA 435,000 Owned -
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Huntsville, AL 85,000 Owned -
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Juarez, Mexico 45,000 Leased 1998
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Juarez, Mexico 100,000 Leased 1999
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Weymouth, England 10,000 Owned -
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Weymouth, England 35,000 Leased 2008
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Weymouth, England 27,000 Owned -
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</TABLE>
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The Company has invested in automation and equipment necessary to increase
production capability (primarily for the metallized polypropylene product line)
in New Bedford. Capital has also been expended on the research and development
laboratory at this location and on equipment to manufacture new products at the
Plant II maquiladora in Juarez, Mexico. In Weymouth, England, a 27,000 square
foot building to facilitate expanded aluminum electrolytic capacitor and
microwave oven capacitor production was completed in 1995. Equipment at Plant I
in Juarez continues to be up-graded and new equipment acquired for greater
efficiency and capability. A quality control, and research and development labs
were installed at the plant in Huntsville, Alabama during 1995. With the
exception of the New Bedford plant, as described below, the Company believes
that its facilities are adequate for its foreseeable needs. The Company intends
to buy or build a new production facility in the New Bedford, Massachusetts area
during 1998 and 1999 to replace the existing plant.
ITEM 3. ENVIRONMENTAL MATTERS
The Company manufactures film capacitors and maintains its corporate offices in
a building located in New Bedford, Massachusetts, which has been occupied by the
Company and predecessor organizations also engaged in the manufacture of
capacitors since 1938. In June 1997, the United States Environmental Protection
Agency (EPA) conducted preliminary tests within the building that revealed the
presence of polychlorinated biphenyls (PCBs) on surfaces within the plant.
Subsequent engineering tests by independent consultants retained by the Company
confirmed the presence of residual PCBs throughout the plant, which resulted
from their use prior to 1978. While the Company and its expert advisors
consider the PCBs to represent no threat to the health of the employees of the
Company or the surrounding community, subsequent engineering studies indicated
that the cost to remove PCBs within the building to the levels proscribed by the
EPA and the Toxic Substances Control Act would be prohibitive. Therefore, the
Company has decided, and has so informed the EPA, that it intends to vacate the
building, to demolish it, and to dispose of all contaminated building materials
in a legally compliant manner. Accordingly, a reserve was established and
charged to income as of December 27, 1997, in the amount of $7,233,000, which
the Company believes is adequate to dismantle and dispose of the building, clean
equipment located within it, and to pay for related engineering, legal and
professional services. Of this amount, approximately $6,000,000 has been
classified as a long-term liability. Additionally, the Company wrote-off, as of
December 27, 1997, the depreciated value of that building, all improvements
thereto, and certain machinery and equipment which the Company believes will
become surplus, abandoned, or otherwise unusable upon disposal of the building.
The amount of this write-off was $5,767,000.
On February 9, 1990, the Company entered into a settlement agreement (the
"Settlement Agreement") with the United States and The Commonwealth of
Massachusetts (the "governments") resolving litigation commenced by the
governments in the U.S. District Court for the District of Massachusetts, on
December 10, 1983 under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, commonly known as the "Superfund" legislation. The
litigation concerned the alleged disposal by various defendants of
polychlorinated biphenyls (PCBs) in the Acushnet River and New Bedford Harbor.
The Settlement Agreement resolved all of the governments' claims against the
Company and Aerovox Industries, Inc. (the Company's predecessor, now known as
Belleville Industries, Inc.) arising out of the contamination of the Acushnet
River and New Bedford Harbor with PCB's, including cleanup costs, study costs
and damages to natural resources, now or hereafter incurred, except that the
Settlement Agreement provides that the
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governments may seek damages from the Company and Aerovox Industries, Inc. for
future liability in the event that such future liability arises out of unknown
conditions at the site. The Company, based on information presently available,
does not believe that this matter will have any further material adverse effect
on the Company's financial condition.
ENVIRONMENTAL COMPLIANCE
The Company is currently subject to a National Pollutant Discharge
Elimination System (NPDES) permit to discharge water from the New Bedford,
Massachusetts facility into the Acushnet River / New Bedford Harbor. The NPDES
permit has a limitation of up to 10 parts per billion (ppb) of PCBs in its storm
water and other discharges. For several years, the Company and the United
States Environmental Protection Agency (EPA) have been discussing possible
changes to this permit. In June of 1994, the Company submitted the following
plans to the EPA and the Department of Environmental Protection (DEP):
Stormwater Study Plan, Quality Assurance Project Plan, and Stormwater Best
Management Practices Plan. Aerovox will proceed with implementation of the
plans upon receipt of EPA and DEP approvals. The Company cannot predict what
further actions the EPA or DEP may take with regard to the permit or what impact
any such actions may have on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable. No matter was submitted to stockholders of the Company
during the fourth quarter of fiscal 1997.
ITEM 4A. EXECUTIVE OFFICERS - Set forth below are the names, ages and positions
of the executive officers of Aerovox in 1997 and currently:
<TABLE>
<CAPTION>
NAME AGE OFFICE(S)
- ---- --- ---------
<S> <C> <C>
Robert D. Elliott... 46 President and Chief Executive Officer
John A. Chmura Jr... 54 Senior Vice President, Sales
Martin Hudis........ 55 Senior Vice President, Technology
Ted M. Miller....... 55 Senior Vice President, Operations
Earl F. Sherman..... 61 Senior Vice President, Business Development
Jeffrey A. Templer.. 50 Senior Vice President, Chief Financial Officer and Treasurer
</TABLE>
Mr. Elliott graduated in 1973 from Clarkson University with a Bachelor of
Science Degree in Industrial Distribution, and received a Master of Business
Administration from the University of Wisconsin in 1981. From 1991 to 1993, Mr.
Elliott served as President of Hendrix Wire & Cable, a manufacturer of cable and
accessories for the electric utility market, and a business unit of the
Electrical Products Division of Eagle Industries, a diversified manufacturing
company. From 1993 to 1996, he was Group Executive of Eagle's Electrical
Products Division. Mr. Elliott joined Aerovox as President in March 1996 and
was named Chief Executive Officer of the Company in September 1996.
Mr. Chmura graduated with a Bachelor of Science degree in Engineering
Sciences from the United States Naval Academy in 1967. Mr. Chmura joined
Aerovox in 1977 as a product manager.
12
<PAGE>
Since then he has held the positions of Regional Sales Manager, Marketing
Manager, Director of Marketing, Director of Sales, Vice President of Sales, and
since 1995, Senior Vice President, Sales.
Dr. Hudis holds a Bachelor of Science degree from the University of
California in Los Angeles (1965), a PhD in Nuclear Engineering from the
Massachusetts Institute of Technology (1970), and a Master of Business
Administration from the University of Chicago (1981). He was Vice President for
Engineering and Marketing of LH Research, a manufacturer of power supplies, from
1989 to 1991. Dr. Hudis joined Aerovox as Vice President, Technology in
January, 1992 and became a Senior Vice President in 1995. He is a senior member
of The Institute of Electrical and Electronics Engineers, an international
organization of electrical and electronic engineers.
Mr. Miller graduated from Syracuse University with a Bachelor of Science in
Electrical Engineering (1964), and holds a Master of Business Administration
degree from the Rochester Institute of Technology (1982) and an Executive Master
of Business Administration degree from Stanford University (1989). Mr. Miller
was Vice President of Operations and Engineering for Microtouch Systems Inc., a
manufacturer of computer touch screens, from 1991 to 1996. He joined Aerovox as
Senior Vice President, Operations, in 1997.
Mr. Sherman graduated from Bryant College with a Bachelor of Arts degree in
1972. He served as President of Ludell Manufacturing Co., a manufacturer of
heat recovery systems and electronic controls for the petro-chemical industry,
for five years before joining Aerovox as General Manager of the Electronic Group
in 1990. He became Vice President, Marketing, in November 1993, and became a
Senior Vice President in 1997.
Mr. Templer holds a Bachelor of Science Degree from Salem State College
(1972) and a Master of Business Administration from the Harvard Business School
(1974). In 1985 he joined Freudenberg North America Inc., a holding company, as
Vice-President, Finance and Administration. In 1988, Mr. Templer was named
Vice-President, Finance and Chief Financial Officer of Freudenberg Nonwovens, a
manufacturer of nonwoven fabrics and related products, and was President and
Chief Executive Officer of that company from 1992 to 1995. In June 1996, Mr.
Templer joined Aerovox as Senior Vice President and Chief Financial Officer and
was appointed Treasurer in August 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on NASDAQ National Market System under
the symbol ARVX. The Company's Common Stock was distributed to the
beneficiaries of the Aerovox Liquidating Trust on February 26, 1990. See
"Shareholder Information" in the Annual Report to stockholders for the year
ended December 27, 1997, incorporated herein by reference, for the quarterly
market price range of the Company's Common Stock. The number of shareholders of
the Company's Common Stock on March 10, 1998 was 10,028. Of that total, 7,128
were stockholders of record. The Company has not declared dividends previously
and currently intends to continue to retain earnings for use in its business and
does not expect to pay dividends for the foreseeable future. The Company's
common stock dividend policy will be reviewed periodically by the Board of
Directors.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item appears in the Company's 1997 Annual
Report to Stockholders on page 23 and is incorporated herein by reference. Such
information should be read in conjunction with the Company's consolidated
financial statements and the notes thereto which are included in such Annual
Report and are incorporated by reference in Item 8 hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item appears in the Company's 1997 Annual
Report to Stockholders on pages 7 through 9 and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of Aerovox Incorporated appear in the
Company's 1997 Annual Report to Stockholders on the pages indicated below and
are incorporated herein by reference:
<TABLE>
<S> <C>
Consolidated Statements of Operations for the years ended December 27, l997, 10
December 28, 1996, and December 30, 1995.
Consolidated Statements of Stockholders' Equity for the years ended December 27, 10
l997, December 28, l996, and December 30, 1995.
Consolidated Balance Sheets at December 27, l997 December 28, l996. 11
Consolidated Statements of Cash Flows for the years ended December 27, l997 and 12
December 28, l996, and December 30, 1995.
Notes to Consolidated Financial Statements 13
Report of Independent Accountants 24
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
14
<PAGE>
(a) Directors - Information with respect to all directors may be found in
the Company's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders on pages 2 and 3 under the caption "Election of Directors," which
Statement is to be filed with the Securities and Exchange Commission. Such
information is incorporated herein by reference.
(b) Executive Officers - Information with respect to executive officers
appears in Item 4A. of Part I.
ITEM 11. EXECUTIVE COMPENSATION
This information is contained in the Company's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders on pages 5 through 9 under the
caption "Executive Compensation" and "Compensation Committee Report", which
Statement is to be filed with the Securities and Exchange Commission. Such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is contained in the Company's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders on pages 10 and 11 under the caption
"Security Ownership of Certain Beneficial Owners and Management," which
Statement is to be filed with the Securities and Exchange Commission. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits - A list of Exhibits filed with or incorporated by reference
in this Report on Form 10-K appears at pages 19 through 22 hereof, which list is
incorporated herein by reference.
(b) Financial Statements - A list of consolidated financial statements is
contained in Item 8 and is incorporated here by reference.
FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts for the years ended 16
December 27, 1997, December 28, l996, and December 30, 1995.
Report of Independent Accountants on Financial Statement Schedules. 17
All other financial statement schedules are inapplicable or the required
information is contained in the Company's consolidated financial statements or
notes thereto, which have been incorporated by reference herein.
(c) Reports on Form 8-K - None
15
<PAGE>
AEROVOX INCORPORATED
VALUATIONS AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
SCHEDULE II
<TABLE>
<CAPTION>
ADDITIONS
- ------------------------------- ------------------ --------------------------------------------- -----------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE END OF
DESCRIPTION BEGINNING OF EXPENSE OTHER DESCRIBE PERIOD
PERIOD ACCOUNTS (1)
- ------------------------------- ------------------ --------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C>
Year ended December 27, 1997: $685 $4 - $76 $613
Allowance for doubtful
accounts receivable
Year ended December 28, 1996: $635 $715 - $665 $685
Allowance for doubtful
accounts receivable
Year ended December 30, 1995: $295 $354 - $14 $635
Allowance for doubtful
accounts receivable
</TABLE>
(1) Write-off of accounts receivable.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Aerovox Incorporated
Our report on the consolidated financial statements of Aerovox Incorporated
has been incorporated by reference in this Form 10-K from page 24 of the 1997
Annual Report to Stockholders of Aerovox Incorporated. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in Item 14(b) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 13, 1998 except for the information
presented in Note 3 for which the dates are
February 27, l998 and March 11, l998
17
<PAGE>
Signatures
Pursuant to the requirements of Section 13 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.
Aerovox Incorporated
(Registrant)
BY /S/ ROBERT D. ELLIOTT BY /S/ JEFFREY A. TEMPLER
- --------------------------- -----------------------------
President and Chief Executive Officer Sr. Vice President and Chief
March 23, 1998 Financial Officer
March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures
/S/ CLIFFORD H. TUTTLE JR. Chairman of the Board March 20, 1998
- ------------------------------------ of Directors
Clifford H. Tuttle, Jr.
/S/ RONALD F. MURPHY Secretary March 19, 1998
- ------------------------------------
Ronald F. Murphy
/S/ Director March ____, 1998
- ------------------------------------
John F. Brennan
/S/ DENNIS HOROWITZ Director March 19, 1998
- ------------------------------------
Dennis Horowitz
/S/ SHEREL D. HORSLEY Director March 20, 1998
- ------------------------------------
Sherel D. Horsley
/S/ WILLIAM G. LITTLE Director March 20, 1998
- ------------------------------------
William G. Little
/S/ BENEDICT P. ROSEN Director March 19, 1998
- ------------------------------------
Benedict P. Rosen
/S/ JOHN L. SPRAGUE Director March 19, 1998
- ------------------------------------
John L. Sprague
18
<PAGE>
EXHIBIT INDEX
AEROVOX INCORPORATED FORM 10-K
(FOR FISCAL YEAR ENDED DECEMBER 27,1997)
<TABLE>
<CAPTION>
Page/SEC
Exhibit Item Exhibit Document
- ------------ ------- --------
<S> <C> <C>
(3) Articles of Incorporation and By-Laws.
-------------------------------------
3.1 Restated Certificate of Incorporation. 3.1 *
3.1.1 Certificate of Designations, Preferences and Rights of 3.1.1 Form 10-K for
Series A Junior Participating Preferred Stock. year ended
Dec. 30, 1989
3.2 Certificate of Ownership and Merger of Aerovox Incorporated (a 3.2 *
Massachusetts corporation) into Aerovox Holding Company (a
Delaware corporation).
3.3 By-Laws. 3.3 *
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
4.1 Instruments Defining Rights of Security holders (See Exhibits 4.1 *
3.1, 3.1.1, 3.2, 3.3, 4.2 and 4.3).
4.2 Form of Stock Certificate. 4.2 Form 10-K for
year ended
Dec. 30, 1989
4.3 Form of Aerovox Incorporated Rights Agreement. 4.3 ***
4.4 Amended and Restated Revolving Credit Agreement, dated July 8, 4.4 Form 10-K for
1993, between the Company and the First National Bank of Boston. year ended
Jan. 1, 1994
4.4.1 First Amendment to Amended and Restated Revolving Credit 4.3 Form 10-Q for
Agreement, dated August 30, 1994, between the Company, quarter ended
BHC Aerovox Ltd. and the First National Bank of Boston. Oct. 1, 1994
4.4.2 Revolving Credit Facility, dated September 7, 1994, 4.4.2 Form 10-K for
between BHC Aerovox Ltd. and the First National year ended
Bank of Boston. Dec. 31, 1994
4.4.3 Second Amendment to Amended and Restated Revolving 4.4.3 Form 10-K for
Credit Agreement, dated December 29, 1995. year ended
Dec. 30, 1995
4.4.4 Third Amendment to Amended and Restated Revolving 4.4.4 Form 10-Q for
Credit Agreement, dated May 15, 1996. quarter ended
June 29, 1996
</TABLE>
19
<PAGE>
EXHIBIT INDEX
AEROVOX INCORPORATED FORM 10-K
(FOR FISCAL YEAR ENDED DECEMBER 27,1997)
<TABLE>
<CAPTION>
Page/SEC
Exhibit Item Exhibit Document
- ------------ ------- --------
<S> <C> <C>
4.4.5 Fourth Amendment to Amended and Restated 4.4.5 Form 10-Q for
Revolving Credit Agreement, dated November 1, 1996. quarter ended
Sept. 28, 1996
4.4.6 Fifth Amendment to Amended and Restated Revolving 4.4.6 Form 10-K for
Credit Agreement, dated February 14, 1997. year ended
Dec. 28, l996
Filed herewith
4.4.7 Sixth Amendment to Amended and Restated Revolving Credit ---- ----
Agreement, dated February 27, l998.
4.5 Loan and Security Agreement, dated March 30, 1992, between the 4.5 Form 10-K for
Company and The CIT Group/Equipment Financing, Inc., as amended year ended
by Amendment No. 1 dated March 1, 1993. Jan. 2, 1993
4.5.1 Amendment No. 2 dated May 30, 1995. 4.5.1 Form 10-K for
year ended
Dec. 30, 1995
NOTE: The Company agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of any other instrument with respect
to long term debt of the Company & its subsidiaries. Such instruments
are not filed herewith because no such instrument relates to
outstanding debt in an amount greater than 10% of the total assets of
the Company and its subsidiary on a consolidated basis.
(10) Material Contracts.
Compensation Agreements
-----------------------
10.1 1989 Stock Incentive Plan. 10.1 *
10.1.1 Amended Stock Incentive Plan 10.1.1 Form 10-K for
year ended
Dec. 31, 1994
10.2 Profit-Sharing Savings Plan. 10.2 **
10.3 Deferred Supplemental No. 1 to Deferred Supplemental 10.3.1 Form 10-K for
Savings Plan. year ended
Dec. 29, 1990
</TABLE>
20
<PAGE>
EXHIBIT INDEX
AEROVOX INCORPORATED FORM 10-K
(FOR FISCAL YEAR ENDED DECEMBER 27,1997)
<TABLE>
<CAPTION>
Page/SEC
Exhibit Item Exhibit Document
- ------------ ------- --------
<S> <C> <C>
10.4 Deferred Compensation Plan for Directors. 10.4 *
10.5 1989 Stock Option Plan for Directors. 10.4 *
10.5.1 Amended Stock Option Plan for Directors. 10.5.1 Form 10-K for
year ended
Dec. 31, 1994
10.7 Forms of Indemnification Agreements between Aerovox Incorporated
and its directors and certain officers. 10.7 *
10.8 Severance Agreements:
(a) Severance Agreement with Robert D. Elliott 10.8 Form 10-K for
year ended
(b) Severance Agreement with Jeffrey A. Templer 10.8 Dec. 28, 1996
Filed Herewith:
(c) Severance Agreement with Ted M. Miller ---- ----
(d) Form of Severance Agreement for other executives. 10.8 **
10.9 Consulting Agreements:
(a) Consulting Agreement with Clifford H. Tuttle 10.12 Form 10-K for
year ended
(b) Consulting Agreement with Ronald F. Murphy 10.12 Jan. 1, 1994
Other Agreements
----------------
10.10 Form of Sales Representative Agreement. 10.9 **
10.11 Purchase Agreement dated March 5, 1993 between the 2.1 Form 8-K dated
Company and Cooper Ind. March 5, 1993
(13) Annual Report to Security Holders.
---------------------------------
Filed Herewith:
13.1 The Annual Report to Shareholders for the fiscal year ended ---- ----
December 27, 1997. With the exception of the information
</TABLE>
21
<PAGE>
EXHIBIT INDEX
AEROVOX INCORPORATED FORM 10-K
(FOR FISCAL YEAR ENDED DECEMBER 27,1997)
<TABLE>
<CAPTION>
Page/SEC
Exhibit Item Exhibit Document
- ------------ ------- --------
<S> <C> <C>
specifically incorporated by reference in Parts I, II and
IV of this report on Form 10-K, the Annual Report
Stockholders for the fiscal year ended December 27, 1997
is not being filed as part of this report.
(21) Subsidiaries.
------------
Filed Herewith: ---- ----
21.1 List of Subsidiaries of the Company.
(23) Consents of Experts and Counsel.
-------------------------------
Filed Herewith:
23.1 Consent of Coopers & Lybrand L.L.P. ---- ----
</TABLE>
* Filed as an Exhibit to Registration Statement on Form 10 filed with the
Securities and Exchange Commission on October 4, 1989, and incorporated
herein by reference.
** Filed as an Exhibit to Amendment No. 1 to the Registration Statement to
Form 10 filed with the Securities and Exchange Commission on December 1,
1989, and incorporated herein by reference.
*** Filed as and Exhibit to Amendment on Form 8 to the Registration Statement
on Form 10, filed with the Securities and Exchange Commission on February
16, 1990.
22
<PAGE>
Exhibit 4.4.7
SIXTH AMENDMENT TO
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
--------------------------
THE SIXTH AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
(this "Sixth Amendment") is made and entered into as of the 27th day of
February, 1998, by and among AEROVOX INCORPORATED, A Delaware corporation having
its principal place of business at 740 Belleville Avenue, New Bedford,
Massachusetts 02175 (the "Borrower"), BHC AEROVOX, LTD., a corporation organized
under the laws of the United Kingdom (the "Guarantor"), and BANKBOSTON, N.A
(f/k/a The First National Bank of Boston) (the "Bank"), a national banking
association having its principal place of business at 100 Federal Street,
Boston, Massachusetts 02110.
WHEREAS, the Borrower, Aerovox Aero M, Inc., (predecessor in interest to
the Guarantor under the Loan Documents) and the Bank entered into an Amended and
Restated Revolving Credit Agreement dated as of July 8, 1993, and amended as of
August 30, 1994, December 29, 1995, May 15, 1996, November 1, 1996, and February
14, 1997 (as further amended and in effect from time to time, the "Credit
Agreement") pursuant to which the Bank extended credit to the Borrower on the
terms set forth therein;
WHEREAS, the Bank, the Borrower and the Guarantor have agreed to modify
certain terms and conditions of the Credit Agreement as hereinafter set forth;
NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. DEFINITIONS. Capitalized terms used herein without definition have the
------------
meanings ascribed to them in the Credit Agreement.
2. AMENDMENT TO (S)1.1 OF THE CREDIT AGREEMENT. (S)1.1 of the Credit
---------------------------------------------
Agreement is hereby amended to add the following definition:
Consolidated Financial Obligations. With respect to any given period,
-----------------------------------
an amount equal to the sum of all payments on Indebtedness (including, but
not limited to payments of principal and interest) that become due and
payable or the are to become due and payable during such period pursuant to
any agreement or instrument to which the Borrower or any of its
Subsidiaries is a party relating to the borrowing of money or the obtaining
of credit or in respect of Capitalized Leases. Demand obligations shall be
deemed to be due and payable during any period during which such
obligations are outstanding.
<PAGE>
3. AMENDMENT TO (S)2.4(B) OF THE CREDIT AGREEMENT. (S)2.4(b) of the
------------- -------------------------------
Credit Agreement is hereby amended to delete the reference to "one and three-
quarter percent (13/4%)" and to substitute in place thereof "two percent
(2.00%)".
4. AMENDMENT OF (S)3.1A(B) OF THE CREDIT AGREEMENT. (S)3.1A(b) of the
-------------- --------------------------------
Credit Agreement is hereby amended to delete the reference to "one and one-half
percent (11/2%)" and to substitute in place thereof "two percent (2.00%)".
5. AMENDMENT TO (S)8.1 OF THE CREDIT AGREEMENT. (S)8.1 of the Credit
------------- ----------------------------
Agreement is hereby amended to delete in its entirety the table set forth in
(S)8.1 of the Credit Agreement and to substitute in place thereof the following
new table:
PERIOD RATIO
------ -----
Fiscal quarters ending 1.75:1
12/28/96 through 9/30/97
Fiscal quarter ending on or 1.50:1
About 12/31/97
Fiscal quarter ending on or 2.50:1
About 3/31/98
Fiscal quarters ending on or 1.50:1
About thereafter
6. AMENDMENT OT (S)8.2 OF THE CREDIT AGREEMENT. (S)8.2 of the Credit
-------------------------------------------
Agreement is hereby amended to delete (S)8.2 in its entirety and to substitute
in place thereof the following:
(S)8.2 INTEREST COVERAGE RATIO. As of the end of any fiscal quarter
-----------------------
commencing with the fiscal quarter ending December 28, 1996, through the
fiscal quarter commencing with the fiscal quarter ending on or about
December 31, 1997, the ratio of EBIT to Consolidated Total Interest
Expenses (a) for the two fiscal quarters ending on such a date with respect
to the fiscal quarter ending December 28, 1996, and (b) for the fiscal
year-to-date on a cumulative basis with respect to any fiscal quarter
ending after December 28, 1996 shall not be less than the stated ratio for
the fiscal quarters ending during the respective periods set forth below:
Period RATIO
------ -----
Fiscal quarter ending on 1.75:1
Or about 12/28/96
Fiscal quarter ending on 1.80:1
Or about 3/31/97
Fiscal quarter ending on 2.10:1
Or about 6/30/97
Fiscal quarter ending on 2.25:1
Or about 9/30/97
Fiscal quarter ending on 2.50:1
Or about 12/31/97
<PAGE>
7. AMENDMENT TO (S)8.3 OF THE CREDIT AGREEMENT. (S)8.3 of the Credit
-------------------------------------------
Agreement is hereby amended to delete 8.3 in its entirety and to substitute in
place thereof the following:
(S)8.3 DEBT SERVICE COVERAGE, As of the end of each fiscal
----------------------
quarter commencing with the fiscal quarter ending on or about March 31,
1998, (a) on a cumulative quarterly basis for the fiscal quarter ending on
or about March 31, 1998 through the fiscal quarter ending on or about
September 30, 1998, and (b) thereafter, for the four fiscal quarters ending
on such date, the ratio of Consolidated Operating Cash Flow to Consolidated
Financial Obligations shall not be less than 1.25:1.
8. WAIVERS TO THE CREDIT AGREEMENT. The following violations of the
--------------------------------
Credit Agreement are hereby waived: provided that, notwithstanding the waivers
herein, the consolidated net deficit of the Borrower and its Subsidiaries is no
greater than $11,500,000:
8.1 WAIVER OF (S)8.1 OF THE CREDIT AGREEMENT. Violations in the ratio of
----------- ----------------------------
Consolidated Total Liabilities to Consolidated Tangible Net Worth with respect
to the fiscal quarter ended on or about December 31, 1997 are hereby waived.
8.2 WAIVER OF (S)8.2 OF THE CREDIT AGREEMENT. Violations in the ratios
----------- ----------------------------
of EBIT to Consolidated Total Interest Expense with respect to the fiscal
quarters ended on or about September 30, 1997 and December 31, 1997 are hereby
waived.
8.3 WAIVER OF (S)8.3 OF THE CREDIT AGREEMENT. Violations in the ratio of
----------- ----------------------------
Consolidated Operating Cash Flow to Consolidated Annual Financial Obligations
with respect to fiscal quarter ended December 31, 1997 are hereby waived.
9. CONDITIONS TO EFFECTIVENESS. This Amendment Sixth Amendment shall
----------------------------
not become effective until the satisfaction of each of the following:
(a) this Sixth Amendment shall have been executed and delivered by the
respective parties hereto; and
(b) the Bank shall have received an amendment fee of $15,000 from the
Borrower.
10. RATIFICATION, ETC. Except as expressly amended, waived or consented
------------------
to hereby, the Credit Agreement, the other Loan Documents and all documents,
instruments and agreements related thereto are hereby ratified and confirmed in
all respects and shall continue in full force and effect. This Sixth Amendment
and the Credit Agreement shall hereafter be read and construed together as a
single document,
<PAGE>
and all references in the Credit Agreement or any related agreement or
instrument to the Credit Agreement shall refer to the Credit Agreement as
amended by this Sixth Amendment. By executing this Sixth Amendment where
indicated below, the Guarantor hereby ratifies and confirms its guaranty of the
Obligations, and acknowledges and consents to the terms of this Sixth Amendment.
11. GOVERNING LAW. THIS SIXTH AMENDMENT SHALL BE GOVERNED BY AND
--------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND
SHALL TAKE EFFECT AS A SEALED INSTRUMENT IN ACCORDANCE WIATH SUCH LAWS.
12. COUNTERPARTS. This Sixth Amendment may be executed in any number
-------------
of counterparts and by different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
counterparts taken together shall be deemed to constitute one and the same
instrument. Complete sets of counterparts shall be lodged with the Bank.
13. ENTIRE AGREEMENT. The Credit Agreement as amended by this Sixth
-----------------
amendment represents the final agreement between the parties and may not be
contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements of the parties. There are no unwritten oral agreements between the
parties.
[REMAINING PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Sixth Amendment
under seal as of the date first set forth above.
THE BORROWER:
-------------
AEROVOX INCORPORATED
By: Jeffrey A. Templer
-------------------
Title: Senior Vice President
---------------------
THE GUARANTOR:
--------------
BHC AEROVOX, LTD.
By: Jeffrey A. Templer
-------------------
Title: Senior Vice President
----------------------
THE BANK:
---------
THE FIRST NATIONAL BANK OF BOSTON
By: Pauline J. Mozzone
-------------------
Title: Vice President
---------------
<PAGE>
Exhibit 10.8(c)
AEROVOX INCORPORATED
Severance Agreement
-------------------
Agreement, made this 17TH DAY OF APRIL, 1997, by and between TED M. MILLER
----------------------- -------------
("Executive") and AEROVOX INCORPORATED (the "Company"),
WITNESSETH
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its shareholders for the
Company to agree to provide benefits under circumstances described below to
Executive and other executives who are responsible for the policy-making
functions of the Company and its subsidiaries and the overall viability of the
Company's business; and
WHEREAS, the Board recognizes that the possibility of a change of control of
the Company is unsettling to such executives and desires to make arrangements at
this time to help assure their continuing dedication to their duties to the
Company and its shareholders, notwithstanding any attempts by outside parties to
gain control of the Company; and
WHEREAS, the Board believes it important, should the Company receive proposals
from outside parties, to enable such executives, without being distracted by the
uncertainties of their own employment situation, to perform their regular
duties, and where appropriate to assess such proposals and advise the Board as
to the best interests of the Company and its shareholders and to take such other
action regarding such proposals as the Board determines to be appropriate; and
WHEREAS, the Board also desires to demonstrate to the executives that the
Company is concerned with their welfare and intends to provide the loyal
executives are treated fairly.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto agree as follows:
1. In the event that any individual, corporation, partnership, company, or
other entity (a "Person"), which term shall include a "group" (within the
meaning of section 13 (d) of the Securities Exchange Act of 1934 (the "Act")),
begins a tender or exchange offer, circulates a proxy to the Company's
shareholders, or takes other steps to effect a "Change of Control" (as defined
in paragraph 3 below), Executive agrees that he will not voluntarily leave the
employ of the Company and will render the services contemplated in the recitals
to the Agreement until such Person has terminated the efforts to effect a change
of Control or until a Change of Control has occurred.
2. If, within 24 months following a Change of Control, Executive's employment
with the Company is terminated by the Company for any reason other than for
"Cause" (as defined in paragraph 4 below) or Executive terminates such
employment for good reason as described in paragraph 5 below:
<PAGE>
(a) the Company will pay to Executive within 30 days of such
termination of employment a lump-sum cash payment equal to 200% the sum of
(i) his annual base salary at the rate in effect immediately before the
Change of Control (or for such shorter portion of that period as Executive
performed services for the Company), plus (ii) an amount equal to
Executive's X-Factor bonus level, as described in the Aerovox Incorporated
Executive Incentive Bonus Plan as in effect on the date immediately before
the Change of Control (the "Bonus Plan"), multiplied by such annual base
salary, without deduction for any amounts previously paid or payable to
Executive under the Bonus Plan; and
(b) the Company will pay Executive within 30 days after completion of
the year end audit for the fiscal year in which the Change of Control
occurs any "hold back" (as described in the Bonus Plan) due to Executive
under the Bonus Plan based on the actual RONA (as defined in the Bonus
Plan); and
(c) any stock options granted to Executive by the Company will become
immediately exercisable in full, and any restricted stock grants shall
immediately vest in full, notwithstanding any provision to the contrary of
the options or restricted stock awards; and
(d) the Company will pay to Executive within 30 days of such
termination of employment a lump-sum cash payment equal to the full balance
standing to his credit with the Company under any and all deferred
compensation plans or arrangements; and
(e) Executive, together with his dependents, will continue following
such termination of employment to participate fully in all accident and
health plans maintained or sponsored by the Company immediately prior to
the Change of Control, or receive substantially the equivalent coverage (or
the full value thereof in cash) from the Company, until the first
anniversary of such termination; and
(f) in the event the Company is providing an automobile for
Executive's use, the Company will pay to the leasing company 60% of the
balance of the lease payments remaining outstanding and will assign the
lease to Executive, provided that Executive agrees to assume the lease in
accordance with its terms; and
(g) the Company will promptly reimburse Executive for any and all
legal fees and expenses incurred by him, as incurred, as a result of such
termination of employment, including without limitation all fees and
expenses incurred to enforce the provisions of this Agreement.
Notwithstanding anything herein to the contrary, to the extent that any payment
or benefit provided for in this Section 2 is required to be paid or vested at an
earlier date under the terms of any other plan, agreement or arrangement, such
other plan, agreement or arrangement shall control.
-2-
<PAGE>
3. A Change of Control will occur for purposes of this Agreement if (i) any
person becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act)
of securities of the Company representing more than 30% of the combined voting
power of the Company's then-outstanding securities (other than as a result of
acquisitions of such securities from the Company", (ii) there is a change of
control of the Company of a kind which would be required to be reported under
item 6(e) of Schedule 14A of Regulation 14A promulgated under the Act (or a
similar item in a similar schedule or form), whether or not the Company is then
subject to such reporting requirement, (iii) the Company is a party to, or the
stockholders approve, a merger, consolidation or other reorganization (other
than (a) a merger, consolidation or other reorganization which would result in
the voting securities of the Company outstanding immediately prior thereto
continuing to represent, either by remaining outstanding or be being converted
into voting securities of the surviving entity, more than 50% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger, consolidation, or other
reorganization, or (b) a merger, consolidation, or other reorganization effected
to implement a recapitalization of the Company, or similar transaction, in which
no person acquires more than 20% of the combined voting power of the Company's
then outstanding securities), a sale of all or substantially all assets, or a
plan of liquidation, or (iv) individuals who, at the date hereof, constitute the
Board cease for any reason to constitute a majority thereof, provided, however,
-------- -------
that any director who is not in office at the date hereof but whose election by
the Board or whose nomination for election by the Company's shareholders was
approved by a vote of at least a majority of the directors then still in office
who either were directors at the date hereof or whose election or nomination for
election was previously so approved (other than an election or nomination of an
individual whose initial assumption of office is in connection with an actual or
threatened election contest relating to the election of the Directors of the
Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) shall be deemed to have been in office at the date
hereof for purposes of this definition.
Notwithstanding the foregoing provisions of this paragraph 3, a "Change of
Control" will not be deemed to have occurred (i) solely because of the
acquisition of securities of the Company (or any reporting requirements under
the Act relating thereto) by an employee benefit plan maintained by the Company
for its employees or (ii) as a result of the transfer of voting securities of
the Company by Bank of New England, N.A., as Trustee under the Trust Agreement
dated April 17, 1989 between said Trustee and Cooper Industries, Inc., to the
beneficiaries of said Trust.
4. "Cause" means only: commission of a felony by the Executive and intended
to result in substantial personal enrichment of the Executive at the expense of
the Company, conviction of a crime involving moral turpitude, or willful failure
by the Executive to perform his duties to the Company which failure is
deliberate on the Executive's part, results in material injury to the Company,
and continues for more than 15 days after written notice given to the Executive
pursuant to a two thirds vote of all of the members of the Board, such vote to
set forth in reasonable detail the nature of the failure. For purposes of this
definition, no act or omission shall be
-3-
<PAGE>
considered to have been "willful" unless it was not in good faith and the
Executive had knowledge at the time that the act or omission was not in the best
interest of the Company.
5. If Executive leaves the employ of the Company for any reason: following a
reduction in his position, compensation, responsibilities, authority, fringe
benefits, perquisites, or any other benefit or privilege enjoyed by him prior to
the Change of Control (other than an insubstantial and inadvertent action which
is remedied by the Company promptly after receipt of notice thereof given by the
Executive), or following an attempt by the Company to relocate Executive outside
an area of approximately comparable size surrounding the place where he is now
employed, or to require him to perform regular services outside of such area
(except for travel reasonably required in the performance of responsibilities),
his employment will be deemed to have been terminated by the Company for reasons
other than Cause.
6. If any payments or benefits received by Executive under paragraph 2 and/or
any other plan, agreement, or arrangement is subject to the excise tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"),
the Company will pay to Executive an additional amount in cash (the "Additional
Amount") equal to the amount necessary to cause the aggregate payments and
benefits received by Executive under paragraph 2 and/or any other plan,
agreement, or arrangement, including such Additional Amount (net of all federal,
state, and local income taxes and all taxes payable as a result of the
application of Sections 280G and 4999 of the Code), to be equal to the aggregate
payments and benefits Executive would have received under paragraph 2 and/or any
other plan, agreement, or arrangement as if Sections 280G and 4999 of the Code
(or any successor provisions thereto) had not been enacted into law.
Following the termination of Executive's employment, Executive may submit to
the Company a written opinion (the "Opinion") of a nationally recognized
accounting firm, employment consulting firm, or law firm selected by Executive
setting forth a statement as to whether any excise tax pursuant to Section 4999
of the Code is due and a calculation of the Additional Amount. The
determinations of such firm concerning whether and the extent of the additional
amount (which determinations need not be free from doubt), shall be final and
binding on both Executive and the Company. The Company will pay to Executive
the Additional Amount not later than 10 days after the Opinion has been
submitted to the Company. The Company agrees to pay the fees and expenses of
such firm in preparing and rendering the Opinion.
If, following the payment to Executive of the Additional Amount, Executive's
liability for the excise tax imposed by Section 4999 of the code on the payments
and benefits received by Executive under paragraph 2 is finally determined (at
such time as the Internal Revenue Service is unable to make any further
adjustment to the amount of such liability) to be less than or greater than the
amount thereof set forth in the Opinion, Executive shall reimburse the Company
(if the liability is less than the amount so set forth) or the Company shall
reimburse Executive (if the liability is greater than the amount so set forth),
in either case without interest, in an amount equal to the amount by which the
Additional Amount should be reduced or increased to reflect such decrease or
-4-
<PAGE>
increase in the actual excise tax liability. The calculation of such
reimbursement shall be made by a nationally recognized accounting firm, an
employment consulting firm, or a law firm selected by Executive, whose
determination shall be binding on Executive and the Company and whose fees and
expenses therefor shall be paid by the Company.
7. In the case of any dispute under this Agreement, Executive may initiate
binding arbitration in either Boston, Massachusetts or the State capital of the
State where he is now employed, before the American Arbitration Association by
serving a notice to arbitrate upon the Company or, at Executive's election,
institute judicial proceedings, in either case within 90 days of the effective
date of his termination or, if later, his receipt of notice of termination, or
such longer period as may be reasonably necessary for Executive to take such
action if illness or incapacity should impair his taking such action within the
90-day period. The Company shall not have the right to initiate binding
arbitration, and agrees that upon the initiation of binding arbitration by
Executive pursuant to this paragraph 7 the Company shall cause to be dismissed
any judicial proceedings it has brought against Executive relating to this
Agreement. The Company authorizes Executive from time to time to retain counsel
of his choice to represent Executive in connection with any and all actions,
proceedings, and/or arbitration, whether by or against the Company or any
director, officer, shareholder, or other person affiliated with the Company,
which may affect Executive's rights under this Agreement. The Company agrees
(i) to pay the fees and expenses of such counsel as incurred, (ii) to pay the
cost of such arbitration and/or judicial proceeding, and (iii) to pay interest
to Executive on all amounts owed to Executive under this Agreement during any
period of time that such amounts are withheld pending arbitration and/or
judicial proceedings. Such interest will be at the base rate as announced from
time to time by The First National Bank of Boston.
In addition, notwithstanding any existing prior attorney-client relationship
between the Company and counsel retained by Executive, the Company irrevocably
consents to Executive entering into an attorney-client relationship with such
counsel and agrees that a confidential relationship shall exist between
Executive and such counsel.
8. If the Company is at any time before or after a Change of Control merged
or consolidated into or with any other corporation or other entity (whether or
not the Company is the surviving entity), or if all or substantially all of the
assets thereof are transferred to another corporation or other entity, the
provisions of this Agreement will be binding upon and inure to the benefit of
the corporation or other entity resulting from such merger or consolidation or
the acquirer of such assets, and this paragraph 8 will apply in the event of any
subsequent merger or consolidation or transfer of assets.
In the event of any merger, consolidation, or sale of assets described above,
nothing contained in this Agreement will detract from or otherwise limit
Executive's right to or privilege of participation in any stock option or
purchase plan or any bonus, profit sharing, pension, group insurance
hospitalization, or other incentive or benefit plan or arrangement which may be
or
-5-
<PAGE>
become applicable to executives of the corporation resulting from such merger
or consolidation or the corporation acquiring such assets of the Company.
In the event of any merger, consolidation or sale of assets described above,
references to the Company in this Agreement shall unless the context suggest
otherwise be deemed to include the entity resulting from such merger or
consolidation or the acquire of such assets of the Company.
9. All payments required to be made by the Company hereunder to Executive or
his dependents, beneficiaries, or estate will be subject to the withholding of
such amounts relating to tax and/or other payroll deductions as may be required
by law.
10. There shall be no requirement on the part of the Executive to seek other
employment or otherwise mitigate damages in order to be entitled to the full
amount of any payments and benefits to which Executive is entitled under this
Agreement, and the amount of such payments and benefits shall not be reduced by
an compensation or benefits received by Executive from other employment.
11. Nothing contained in this Agreement shall be construed as a contract of
employment between the Company and the Executive, or as a right of the Executive
to continue in the employ of the Company, or as a limitation of the right of the
Company to discharge the Executive with or without Cause; provided that the
Executive shall have the right to receive upon termination of his employment the
payments and benefits provided in this Agreement and shall not be deemed to have
waived any rights he may have either at law or in equity in respect of such
discharge.
12. No amendment, change, or modification of this Agreement may be made except
in writing, signed by both parties.
13. At the election of the Company, this Agreement shall not apply to a
Change of Control which takes place after February 26, 2001, provided that the
Company has given Executive notice of its election at least 30 days before the
Change of Control.
Payments made by the Company pursuant to this Agreement shall be in lieu of
severance payments, if any, which might otherwise be available to Executive.
Executive hereby waives all rights that he may have against the Company, Aerovox
M, Inc., RTE Corporation, Cooper Power Systems, Inc., Cooper Industries, Inc.,
or any affiliate or subsidiary thereof under the Key Executive Employment and
Severance Agreement between Executive and RTE Corporation dated April 15, 1988
and agrees that said agreement is hereby terminated.
The provisions of this agreement shall be binding upon and shall inure to the
benefit of Executive, his executors, administrators, legal representatives, and
assigns, and the Company and its successors.
-6-
<PAGE>
The validity, interpretation, and effect of this Agreement shall be governed
by the laws of the State of Delaware.
The invalidity or unenforceability of any provisions of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
The Company shall have no right of set-off or counterclaims, in respect of any
claim, debt, or obligation, against any payments to Executive, his dependents,
beneficiaries, or estate provided for in this Agreement.
No right or interest to or in any payments hereunder shall be assignable by
the Executive; provided, however, that this provision shall not preclude him
-------- -------
from designating one or more beneficiaries to receive any amount that may be
payable after his death and shall not preclude the legal representative of his
estate from assigning any right hereunder to the person or persons entitled
thereto under his will or, in the case of intestacy, to the person or persons
entitled thereto under the laws of intestacy applicable to his estate. The term
"beneficiaries" as used in this Agreement shall mean a beneficiary or
beneficiaries so designated to receive any such amount, or if no beneficiary has
been so designed, the legal representative of the Executive's estate.
No right, benefit, or interest hereunder shall be subject to anticipation,
alienation, sale, assignment, encumbrance, charge, pledge, hypothecation, or
set-off in respect of any claim, debt, or obligation, or to execution,
attachment, levy, or similar process, or assignment by operation of law. Any
attempt, voluntary or involuntary, to effect any action specified in the
immediately preceding sentence shall, to the full extend permitted by law, be
null, void, and of no effect.
IN WITNESS WHEREOF, AEROVOX INCORPORATED and Executive have each caused this
Agreement to be duly executed and delivered as of the date first written above.
AEROVOX INCORPORATED
BY:___________________________
Robert D. Elliott
President & CEO
__________________________
Executive
Ted M. Miller
-7-
<PAGE>
COMPANY PROFILE
AEROVAX is a leading manufacturer of film, paper,and aluminum electrolytic
capacitors. The Company sells its product worldwide, principally to original
equipment manufacturers (OEMs) of electrical and electronic products.
Applications include air conditioners, fluorescent and high intensity discharge
lighting fixtures, a variety of appliances including microwave ovens,
motors,pwer supplies, photocopiers, telecommunication, computer and medical
equipment, and industrial electrical systems.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Markets Applications Aerovax Products
- --------------------------------------------------------------------------------------------
<C> <S> <C>
Motors Compressors, air conditioners AC Oil Capacitors
refrigeration, laundry equipment AC Dry Capacitors
pumps, garage door opener, Aluminum Electrolytic Capacitors
hospital beds
Lighting Electromagnetic and electronic AC Oil Capacitors
ballasts for fluorescent and HID AC Dry Capacitors
fixtures, and strobe lights DC Film Capacitors
Power Variable speed drives, UPS, DC Film Capacitors
Electronics power supplies, transportation AC Oil Capacitors
welders, motor speed controllers Aluminum Electrolytic Capacitors
telecommunications equipment,
audio/visual equipment
battery chargers
Specialty Microwave ovens Microwave Ovens Capacitors
Medical equipment Custom and Pulse Power
(defibrillator, X-ray equipment), Capacitors
industrial equipment
government and university research
Industrial plants, commerical Power Factor Correction
facilities and institutions consuming Capacitors and Systems
large amounts of electrical power
Power supplies, industrial equipment, EMI Filters
computer and telecommunications
equipment and appliances
</TABLE>
<PAGE>
AEROVOX INCORPORATED-1997 ANNUAL REPORT
CORPORATE INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Clifford H. Tuttle 1
Chairman, Aerovox Inc.
Robert D. Elliott 1,4
President and Chief Executive Officer
John F. Brennan 1,2,3,
Dean, Sawyer School of Management, Suffolk University
Dennis J. Horowitz 1,3
President and Chief Executive Officer, Wolverine Tube, Inc.
Sherel D. Horsley 2
Senior Vice President and Manager of Marketing,
the Digital Imaging Group of Texas Instruments Incorporated
William G. Little 3,4
President and Chief Executive Officer, Quam-Nichols Company, Inc.
Ronald F. Murphy 4
Secretary, Aerovox Inc.
Benedict P. Rosen 1,3
President and Chief Executive Officer, AVX Corporation
John L. Sprague 2,4
Presient, John L. Sprague Associates
EXECUTIVE OFFICERS
Robert D. Elliott
President and Chief Executive Officer
John A. Chmura Jr.
Senior Vice President, Sales
Martin Hudis
Senior Vice President, Technology
Ted M. Miller
Senior Vice President, Operations
Earl F. Sherman
Senior Vice President, Business Development
Jeffrey A. Templer
Senior Vice President, Chief Financial Officer and Treasurer
COMMITTEE MEMBER
1 Executive
2 Audit
3 Compensation
4 Nominating
COPORATE OFFICE
Aerovox Inc.
740 Belleville Avenue
New Bedford, MA 02745-6194
FORM 10-K/INVESTOR CONTACT
Copies of the Company's annual and quarterly reports filed with the Securities
and Exchange Commission on Form 10-K and Form 10-Q are available on request from
the Company. Requests and other investor contacts should be directed to Jeffrey
A. Templer, Chief Financial Officer.
INTERNET ACCESS
Corporate news releases, Forms 10-K and 10-Q, parts of the annual reports and
other information about the Company are availbable through Aerovox's Website on
the Internet. The address is: http://www.aerovox.com.
ANNUAL MEETING
The annual meeting of the shareholders of Aerovox Incorporated will be held on
Monday, May 11, 1998 at 11:00 a.m., at the offices of Ropes & Gray, One
International Place, Room 36/1, Boston, Massachusetts 02110.
COMMON STOCK AND DIVIDEND INFORMATION
The Company's common stock trades on The Nasdaq Stock Market under the symbol
ARVX. As of March 10, 1998, Aerovox had approximately 10,000 shareholders. Of
that total, 7,128 were stockholders of record.
The Company currently intends to retain all earnings for use in its business and
does not expect to pay dividends for the foreseeeable future.
The following table sets forth the high and low sales price information as
reported by Nasdaq:
COMMON STOCK PRICE
<TABLE>
<CAPTION>
1997 1996
High Low High Low
- -----------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $5.50 $4.25 $7.25 $5.63
Second Quarter $5.38 $4.13 $8.75 $5.63
Third Quarter $7.00 $4.63 $8.50 $5.38
Fourth Quarter $6.13 $4.19 $7.06 $4.50
</TABLE>
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone (718)921-8200
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
1997 FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(Amounts in Thousands, Except Per Share Data)
For The Years Ended
------------------------------------------------
Dec. 27, 1997 Dec. 28, 1996 Dec. 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating Results
Net Sales............................ $119,658 $125,975 $129,311
Income (loss) from operations........ (12,574) 143 4,666
Net income (loss).................... (11,499) (1,347) 1,601
Net income (loss) per share.......... $ (2.15) $ (.25) $ .30
Cash Flow
Net cash provided by
operating activities............... $ 9,361 $ 8,317 $ 1,529
Financial Position
Total assets......................... $ 71,559 $ 84,976 $ 89,331
Long-term obligations................ 17,775 23,806 28,777
Stockholders' equity................. 23,766 35,073 35,505
</TABLE>
1997 SALES BY MARKET
[PIE CHART]
(millions US $119.7)
Motors 33%
Power Electronics 31%
Power Electronics 31%
EMI Filters 1%
Custom and Pulse Power 3%
Power Factor 4%
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
ACTION! -- Aerovox Commitment To Improve Operations Now!
Dear Fellow Shareholders:
In our report to you last year we outlined a plan of "ACTION" designed to
improve the basic operating fundamentals of the company. Our goal was to improve
responsiveness to our customers, regaining lost market share, and thereby
reestablishing top and bottom line growth.
Our customers clearly fared better than our shareholders in 1997.
We said we would improve on-time delivery performance to our customers using a
tighter standard of measurement and delivering products of equal or better
quality. We have made substantial progress toward this goal. Company-wide on-
time performance at year-end 1996 was 62%; at year-end 1997 it had improved to
83%. While progress still needs to be made, delivery performance is now
significantly better than it was a year ago and the quality of our products is
better than ever.
We said we would reduce cycle times by half, a key component to meeting customer
requirements. In fact, manufacturing process time now averages eight days. A
year ago the average was twenty. At the beginning of 1997, end-to-end lead time
(the time from order entry to delivery) averaged eight to twelve weeks. It now
averages four to six weeks.
Our goals for 1998 include on-time shipping consistently above 90%, while
continuing to reduce end-to-end lead times.
Reducing working capital and operating expenses were focal points in 1997.
During 1996, we embarked on an ambitious program to reduce working capital,
targeting among other things a major reduction in inventory investment. One year
later, in our core New Bedford/Juarez Plant 2 operations, the reduction was an
impressive 32%. Company-wide, at year-end 1997 inventory levels were down 13%.
In addition, total days outstanding of receivables were reduced from 55 to 50,
while receivables more than 90 days overdue were reduced from 6.4% of total
accounts receivable to less than 1.5%.
2
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
[PICTURE OF ROBERT D. ELLIOTT]
ROBERT D. ELLIOTT
President and Chief Executive Officer
In the second half of the year, we took aggressive measures to reduce headcount
and overhead costs wherever possible. During the fourth quarter of 1997, we
reduced non-direct labor headcount by over 15%. We now have 13% fewer people
company-wide than we did at the end of 1996.
As a result of these and other efforts, cash flow from operations was a record
$9.4 million in 1997. Debt is down 38% since the start of the program, from
$30.1 million at the end of the second quarter of 1996 to $18.6 at year-end
1997. Interest costs declined by approximately $500,000 in 1997 as a result of
the $7.3 million decrease in debt during the year. Throughout the year we worked
with our vendors to reduce material costs, keeping pace with declining selling
prices.
Improvement efforts are beginning to show results.
Sales of aluminum electrolytic capacitors were up at both manufacturing
locations. BHC, our subsidiary in England, posted a 6% increase, despite serious
currency pressures with the pound sterling relative to other European
currencies. Our electrolytic business in Juarez, which had been declining for
several years due to well-known problems, has turned the corner. Their sales
were up in 1997, a clear reflection of our efforts to improve operations at this
plant.
Another measure of our efforts to improve is the increased market share evident
in lighting segment statistics for the last half of 1997. In this core segment
of the business, we had lost share from 1994 through the early part of 1997
because of our inability to keep pace with customer demand for shorter lead
times and improved service. Now, we are showing clear signs of market share
3
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
recovery here as well as in our electrolytic product lines mentioned above.
We are holding our own in the AC motor run capacitor market, but struggling to
achieve share gains in this very soft and very competitive market segment.
1997 performance was impacted by two unforeseeable events.
The decline in sales that began in the third quarter and continued through the
second half of the year, combined with the $13 million pre-tax provision posted
at year-end for costs related to our New Bedford facility, had a devastating
effect on financial performance in 1997.
Overall, sales were down 5% compared to the previous year; the decline was all
in our film capacitor business. Sales of film capacitors to motor customers were
off substantially, reflecting reduced demand by air conditioning manufacturers
who were reacting to the second consecutive cool spring and summer. This was
compounded by a decline in our microwave capacitor business which was plagued by
competition from Korean manufacturers selling at very low prices.
In August, the Environmental Protection Agency informed us that in the course of
an inspection of our New Bedford plant, samples taken from the wooden floor in
the capacitor impregnation tank room revealed the residual presence of
polychlorinated biphenyls. (The residue is the result of the use of PCBs in the
building from the mid-1940s to 1978.) Subsequently, we hired experts in the area
of PCB remediation. After extensive testing, their report outlining remediation
alternatives convinced us the probability of ridding our 440,000 square foot,
90-year-old New Bedford plant of PCBs was dubious and the cost would be
prohibitive.
We determined that relocating our New Bedford capacitor operation to a new
facility was a better course of action, for cost and efficiency reasons as well
as the environmental issue. Relocation will be an investment in the future
rather than a very expensive bandage. Throughout this process, we have been
4
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
working cooperatively with the EPA and with the support of our local government.
While the provision we took at year-end to resolve the matter was a blow to
short-term results, the outcome will have a positive impact on our future.
Plans to relocate New Bedford operations to a new and efficient facility are
progressing.
Our New Bedford plant, where we manufacture our core AC capacitor products, is
simply too old and too costly to meet our current business needs. We need a
single-story, efficiently laid-out facility which will have inherently lower
overhead costs than the current multi-story building.
We are actively looking for a new manufacturing site, and anticipate that it
will take twelve to eighteen months to transfer operations to the new location.
Our actions to improve are ongoing.
We have made substantial progress on our new information system. The system is
up and running at BHC/Aerovox and preparations for conversion are progressing in
our North American operations.
By year-end we should have common software, common hardware, and a fully
integrated year-2000 capable information system functioning throughout the
Company.
In keeping with our plan of "ACTION", a process of continuous improvement, we
will continue to build on these achievements during 1998, better serving our
customers and further reducing costs.
We will continue to meet the challenge of improving shareholder value with
dedication and enthusiasm. We look forward to the prospect of improving
profitability in our core business with a new and efficient facility.
Thank you for your support.
/s/ Robert D. Elliott
Robert D. Elliott
President and Chief Executive Officer
5
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
FACT SHEET
. Founded: .................. In 1922
. Public company: ........... Traded on NASDAQ since 1990
. Trading symbol: ........... ARVX
. Headquarters: ............. New Bedford, MA
. Employees: ................ 1,450
. Engineers: ................ 30
. Shareholders: ............. 10,000
. Shares outstanding: ....... 5,385,409
PLANTS/TECHNOLOGY/PRODUCTS
NEW BEDFORD, MASSACHUSETTS CAPACITOR TYPE/APPLICATIONS
. Metallized polypropylene . Motor Run, Lighting, Power Factor
. Metallized polyester Correction
. Metallized paper . DC Films
. Film/foil . Lighting, Custom and Pulse Power,
Power, Microwave Ovens
. DC Films
JUAREZ, MEXICO -- PLANTS 1 & 2
. Aluminum electrolytics . Motor Start, DC Screw Terminal,
. Metallized polypropylene Large Snap-In
. EMI Filters . Motor Run, Lighting, Power Factor
Correction
HUNTSVILLE, ALABAMA
. Etched & formed aluminum foil . Aluminum Electrolytic Capacitors
WEYMOUTH, ENGLAND
. Aluminum electrolytic capacitors . Motor Starts, DC Screw Terminal,
. Paper/film/foil capacitors Large Snap-In
. Microwave Ovens
740 Belleville Avenue, New Bedford, MA 02745
6
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The table below sets forth the year-to-year percentage increases (decreases) in
various items from the consolidated statements of income.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
------------- -------------
<S> <C> <C>
Net sales............................................. (5.0)% (2.6)%
Cost of sales......................................... (4.3)% (1.3)%
Gross profit.......................................... (9.9)% (10.4)%
Selling, general and administrative expenses.......... (11.8)% 20.7 %
Income from operations................................ N.A. (96.9)%
</TABLE>
The table below depicts the same items as percentages of net sales.
<TABLE>
<CAPTION>
For the Years Ended
---------------------------------------------
Dec. 27, l997 Dec. 28, 1996 Dec. 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales............................................. 100.0 % 100.0% 100.0%
Cost of sales......................................... 88.1 % 87.5% 86.3%
Gross profit.......................................... 11.9 % 12.5% 13.6%
Selling, general and administrative expenses.......... 11.5 % 12.4% 10.0%
Income from operations................................ (10.5)% 0.1% 3.6%
</TABLE>
1997 versus 1996
Consolidated net sales for 1997 were $119,658,000 versus $125,975,000 in
1996, a decline of 5%. Sales of products manufactured by the Company's North
American business units declined 7.3%, from $102,440,000 in 1996 to $94,965,000
in 1997. Although North American business unit sales were ahead of the prior
year through the second quarter of 1997, revenues fell sharply during the second
half of 1997. The causes of this decline were: 1) a reduction in demand for
motor run capacitors for air conditioners due to unseasonably cool summer
weather in much of the United States; 2) the loss of two key customers for
microwave oven capacitors; 3) the expiration of several contracts under which
the Company produced specialized energy discharge capacitors for government and
research applications; and 4) the continued reduction of prices for the
Company's products, particularly film capacitors for motor and lighting
applications. Partially offsetting these declines was an increase in the sale of
aluminum electrolytic foil and aluminum electrolytic capacitors.
Sales by the Company's UK capacitor manufacturing subsidiary, BHC Aerovox
Ltd., increased 6.1% from $23,535,000 in 1996 to $24,966,000 in 1997, primarily
due to increases in shipments of microwave oven capacitors from a new production
line which began operations in mid-1996.
Gross profit on sales declined from $15,789,000 in 1996 to $14,219,000 in
1997. As a percentage of sales, gross profit declined from 12.5% in 1996 to
11.9% in 1997. This decline resulted from lower prices, and lower volumes during
the second half of 1997. Gross profits were further negatively impacted by
increased manufacturing overhead of $1,100,000 incurred in connection with the
realignment of certain production lines in the Company's New Bedford plant.
Selling, general, and administrative expenses declined from a reclassified
$15,646,000 (12.4% of sales) in 1996 to $13,793,000 (11.5% of sales) in 1997.
$513,000 of the decline was attributable to lower commissions paid to
independent sales agents on lower sales volumes. The remainder of the change
resulted from special charges incurred in 1996 that did not recur in 1997.
At year-end 1997 the Company posted a provision of $13,000,000 for
environmental costs, plant remediation and impairment of assets. (See Note 12 to
the Company's 1997 Consolidated Financial Statements.) The provision includes a
reserve for environmental remediation and associated consulting, legal, and
engineering costs of $7,233,000, posted as a result of the identification of PCB
contamination in the New Bedford plant, and the Company's consequent decision to
vacate that facility. In addition, building, building improvements, and
equipment expected to be abandoned in connection with this closure were written
off. The effect of this write-off on income from operations, included in the
provision, was $5,767,000.
7
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other income increased from a loss of $331,000 in 1996 to income of
$323,000 in 1997, or a net change of $654,000. This improvement was the result
of increased royalty income from licenses, as well as lower foreign currency
exchange losses.
Interest expense for 1997 of $1,741,000 was lower by $522,000 compared to
1996. The Company made scheduled principal repayments of $2,695,000 during 1997,
and additional principal repayments of $4,673,000.
The provision for income taxes includes credits against losses during the
period of $5,691,000, less certain state, local, and foreign taxes of $59,000,
and increases in reserves against deferred tax assets of $3,138,000. (See Note
11 to the Company's 1997 Consolidated Financial Statements.) These reserves were
deemed necessary due to the historical variability of operating earnings, and
the timing of expirations of tax credits and operating loss carryforwards.
Management believes that realization of those assets, net of reserves, is more
likely than not.
1996 versus 1995
In fiscal 1996 consolidated net sales were $125,975,000, a decline of 2.6%
from 1995 sales of $129,311,000. Order backlog decreased from the end of the
prior year by $1,400,000. During 1996 the Company reorganized its North American
capacitor operations. The Aero M Group was merged with the film capacitor
businesses of the Aerovox Group to constitute the North American capacitor
division of Aerovox, which includes both the aluminum electrolytic capacitor
business of the former Aero M Group and the AC film capacitor product lines of
the former Aerovox Group.
Compared to 1995, net sales in the Company's North American capacitor
business declined 3.6% in 1996, mainly attributable to the Company's film
capacitor product lines as a result of increased competition and declining
prices. The remainder of the decline was in the aluminum electrolytic capacitor
product lines, and was due to production problems and the resulting inability to
ship on schedule.
Sales of the Company's Power Factor Correction and EMI Filter business
units declined 11% versus 1995 to $6,593,000.
Sales of the Company's UK capacitor manufacturing subsidiary, BHC Aerovox
Ltd., increased from $22,444,000 in 1995 to $23,535,000, or 4.9%. This increase
is accounted for by the start-up in mid-1996 of a new capacitor line at BHC to
supply European manufacturers of microwave ovens.
Gross profit for Aerovox in 1996 was $15,789,000, or 12.5% of sales. This
represents a decrease of $1,836,000 from 1995. Of this decline $600,000 resulted
from the lower volume in North America reported during 1996. Additionally, gross
profit was negatively impacted by $4,249,000 of special charges in the second
quarter and fourth quarter. These charges increased the reserves for obsolete
and excess inventories and warranty costs, primarily related to operational
problems in Mexico. Adjusted for these special charges, gross profit was
$19,895,000, or 15.8% of sales.
Selling, general, and administrative expenses were $15,646,000, an increase
of $2,687,000, or 20.7% over 1995. Approximately one-half of the increase
related to the special charge in the second quarter, and served to increase
reserves for bad debts, as well as account for the termination of certain
employee benefit plans. Selling, general, and administrative expenses in the
fourth quarter of 1996 also included $250,000 in costs associated with the
planned closure of the CompanyOs North Dartmouth offices, and $320,000 in
accrued employee severance benefits. Income from operations for 1996 was
$143,000.
Interest expense for 1996 was $2,263,000, slightly lower than in 1995.
Interest rates paid on borrowings during the year ranged from 6.8% to 8.75%.
Other income in 1996 reflected foreign exchange losses plus the write-off
of accumulated foreign currency translation adjustments, less licensing income.
The provision for income taxes reflects a credit of $1,104,000 against a
loss before taxes of $2,451,000. This credit included an expected refund of
$218,000 for overpayment of income taxes to the United Kingdom in prior years.
Net loss after provision for taxes was $1,347,000, or $(.25) per share.
8
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Working capital at December 27, l997 was $15,216,000 compared to
$24,576,000 at the end of fiscal 1996. Net accounts receivable and inventories
decreased by $1,847,000 and $2,734,000, respectively, during 1997, and accounts
payable increased by $2,053,000. Also contributing to the reduction in working
capital was the reclassification of current deferred income taxes of $3,608,000
to long-term assets. Net cash provided by operating activities in 1997 totaled
$9,361,000 compared to $8,317,000 in 1996. The current ratio was 1.8 at year-end
1997 versus 2.4 at year-end 1996.
The Company invested approximately $2,661,000 in capital assets in 1997
compared to $3,348,000 in 1996. Assets having an original cost of $11,485,000
and accumulated depreciation of $5,192,000 were written off during 1997,
primarily as a result of the planned closing of the New Bedford plant.
The Company's Revolving Credit Agreement (as amended on February 27, 1998)
provides for a credit line of $21,815,000 to the Company, including 4,400,000
British Pounds ($7,387,000 at year-end exchange rates) to BHC Aerovox Ltd.
(BHC), a wholly owned subsidiary in the United Kingdom. The Agreement, which
extends to May 31, 1999, also includes various interest rate options which, for
fiscal 1997, have varied from 6.5% to 8.5% on an annualized basis. The security
for this line of credit is accounts receivable and inventories and a Company
guarantee for the UK loan. The outstanding balance of loans at fiscal years
ended December 27, 1997, and December 28, 1996, was $12,693,000 and $17,422,000,
respectively. During 1997 and at December 27, 1997, the Company was in violation
of certain financial covenants for which it received an amendment to the
Agreement and waiver from the lender. (See Note 3 to the Company's 1997
Consolidated Financial Statements.)
The Company also has a term line of credit with an equipment financing
company with an outstanding balance at the end of 1997 of $3,764,000 compared to
an outstanding balance at the end of 1996 of $6,066,000. These loans, secured by
equipment at the Company's New Bedford facility, have five-year terms and carry
annual interest rates varying from 7.36% to 8.18%. The Company was in violation
of certain financial covenants at December 27, 1997 for which it received a
waiver from the lender. (See Note 3 to the Company's 1997 Consolidated Financial
Statements.)
Other long-term debt of the Company consists of an Industrial Revenue Bond
maturing on July 1, 2002, with an annual interest rate of 7.42% and quarterly
payments on the principal. The outstanding balance at fiscal year-end 1997 was
$2,179,200 versus a balance at year-end 1996 of $2,572,500.
Cash at December 27, 1997, totaled $693,000 compared to $864,000 December
28, 1996.
As a result of the identification of PCB contamination in the New Bedford
plant, operations in that facility will have to be relocated. The Company
expects to buy or construct a plant in the New Bedford, Massachusetts area to
house some or all of the relocated operations. Such a program will entail a
larger than normal capital spending program over the next several years.
Management expects that future cash flows and the borrowing arrangements
described above will be adequate to fund that program, although new debt
arrangements may be sought to provide greater flexibility and higher limits to
cover unanticipated costs or downturns in business activity and cash flows. It
is expected that the remediation of the existing New Bedford building will begin
several years after the building is vacated, and therefore that no cash will be
required for that project until then.
Other Matters
The impact of inflation on the Company's business has not been material.
The Company is currently engaged in a project to convert all management
information and control systems in all business units to an integrated and
uniform system compliant with year 2000 computing requirements. The Company
expects to gain the benefit of better, more consistent, and more timely
information in addition to year 2000 compliance. The Company's United Kingdom
subsidiary, BHC, successfully converted to the new system on January 1, 1998,
and North American operations are expected to convert during the second half of
fiscal year 1998. Consulting, training, and employee time and travel connected
to the project are expensed as incurred.
9
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------------------------
(Amounts in Thousands, Except Per Share Data) Dec. 27, 1997 Dec. 28, 1996 Dec. 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales.............................................. $119,658 $125,975 $129,311
Cost of Sales.......................................... 105,439 110,186 111,686
-------- -------- --------
Gross profit........................................... 14,219 15,789 17,625
Selling, general and administrative expenses........... 13,793 15,646 12,959
-------- -------- --------
Provision for environmental costs, plant
remediation, and impairment of assets................ 13,000 -- --
Income (loss) from operations.......................... (12,574) 143 4,666
Other income (expense):
Interest expense..................................... (1,741) (2,263) (2,296)
Other income (expense)............................... 323 (331) 282
-------- -------- --------
Income (loss) before income taxes...................... (13,992) (2,451) 2,652
Provision for (benefit from) income taxes.............. (2,493) (1,104) 1,051
-------- -------- --------
Net income (loss)...................................... $(11,499) $ (1,347) $ 1,601
Basic earnings (loss) per share........................ $ (2.15) $ (.25) $ .30
======== ======== ========
Diluted earnings (loss) per share...................... $ (2.15) $ (.25) $ .30
======== ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
(Amounts in Thousands) STOCK CAPITAL EARNINGS ADJUSTMENTS EQUITY
-------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994.................... $ 5,231 $ 592 $ 28,527 $ (294) $ 34,056
Net income..................................... -- -- 1,601 -- 1,601
Proceeds from employee stock purchase
plan and exercise of stock options
(68,090 shares).............................. 68 177 -- -- 245
Foreign currency translation adjustments....... -- -- -- (397) (397)
-------- ------ -------- ------ --------
Balances at December 30, 1995.................... 5,299 769 30,128 (691) 35,505
-------- ------ -------- ------ --------
Net loss....................................... -- -- (1,347) -- (1,347)
Proceeds from employee stock purchase
plan and exercise of stock options
(16,254 shares).............................. 16 73 -- -- 89
Foreign currency translation adjustments....... -- -- -- 826 826
-------- ------ -------- ------ --------
Balance at December 28, 1996..................... 5,315 842 28,781 135 35,073
-------- ------ -------- ------ --------
Net loss....................................... -- -- (11,499) -- (11,499)
Proceeds from employee stock
purchase plan and exercise of
stock options (69,384 shares)................ 69 195 -- -- 264
Foreign currency translation adjustment........ -- -- -- (72) (72)
-------- ------ -------- ------ --------
Balance at December 27, 1997..................... $ 5,384 $1,037 $ 17,282 $ 63 $ 23,766
======== ====== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in Thousands) Dec. 27, 1997 Dec. 28, 1996
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash................................................... $ 693 $ 864
Accounts receivable, net of allowance for doubtful
accounts of $617 in 1997 and $685 in 1996............ 14,249 16,096
Inventories............................................ 18,176 20,910
Prepaid expenses and other current assets.............. 637 1,044
-------- --------
Total current assets............................. $ 33,755 $ 38,914
Property, plant and equipment, at cost:
Land................................................... 303 391
Buildings and improvements............................. 3,190 11,285
Machinery and equipment................................ 60,830 61,471
-------- --------
64,323 73,147
Less accumulated depreciation.................... (32,060) (32,617)
-------- --------
32,263 40,530
Deferred income taxes.................................. 5,385 5,259
Other assets........................................... 156 273
-------- --------
Total assets..................................... $ 71,559 $ 84,976
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable....................................... $ 10,351 $ 8,298
Accrued compensation and related expenses.............. 2,887 2,874
Other accrued expenses................................. 3,030 3,012
Current maturities of long-term debt................... 1,909 3,552
Income taxes........................................... 362 210
-------- --------
Total current liabilities........................ 18,539 17,946
Deferred income taxes.................................... 5,446 8,151
Industrial revenue bond.................................. 1,750 2,175
Long-term debt less current maturities................... 14,973 20,335
Reserve for environmental costs and plant remediation.... 6,033 --
Deferred compensation.................................... 1,052 1,296
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued.............................. -- --
Common Stock; $1.00 par value; 20,000,000 shares
authorized; 5,384,379 and 5,314,995 shares
issued and outstanding............................... 5,384 5,315
Additional paid-in capital............................. 1,037 842
Retained earnings...................................... 17,282 28,781
Foreign currency translation adjustments............... 63 135
-------- --------
Total stockholders' equity....................... 23,766 35,073
-------- --------
Total liabilities and stockholders' equity....... $ 71,559 $ 84,976
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended
---------------------------------------------
(Amounts in Thousands) Dec. 27, 1997 Dec. 28, 1996 Dec. 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $(11,499) $(1,347) $ 1,601
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization...................... 4,602 4,673 4,046
Environmental cost, plant remediation and
write-down of impaired assets.................... 13,000 -- --
Loss on disposal of assets......................... 349 -- --
Deferred income taxes.............................. (2,801) (1,104) 489
Changes in operating assets and liabilities:
Accounts receivable.................................. 1,819 3,872 (3,409)
Inventories.......................................... 2,682 3,052 (2,770)
Prepaid expenses..................................... 408 38 79
Recoverable income taxes............................. -- -- (22)
Accounts payable..................................... 2,045 (3,069) 1,344
Accrued compensation and related expenses............ (244) 326 (102)
Other accrued expenses............................... (1,131) 2,183 237
Income taxes payable................................. 131 (307) 36
-------- ------- -------
Net cash provided by operating activities...... 9,361 8,317 1,529
Cash flows from investing activities:
Acquisition of property, plant and equipment......... (2,661) (3,348) (8,498)
Other................................................ 147 666 213
-------- ------- -------
Net cash used in investing activities.......... (2,514) (2,682) (8,285)
Cash flows from financing activities:
Proceeds from employee stock purchase plan and
exercise of stock options.......................... 264 89 245
Net borrowings (repayments) under line of credit..... (4,616) (3,387) 6,246
Long-term borrowings................................. 946 1,500 3,500
Payments of long-term debt........................... (3,646) (3,481) (2,700)
-------- ------- -------
Net cash provided by (used in) financing
activities................................... (7,052) (5,279) 7,291
-------- ------- -------
Effects of exchange rate on cash....................... 34 (65) (64)
Increase (decrease) in cash............................ (171) 291 471
Cash at beginning of year.............................. 864 573 102
-------- ------- -------
Cash at end of year.................................... $ 693 $ 864 $ 573
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............... $ 1,733 $ 2,263 $ 2,344
-------- ------- -------
Cash paid during the year for income taxes........... $ 461 $ 582 $ 637
======== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions have been
eliminated. Certain reclassifications have been made to prior year's financial
statements to conform to the 1997 presentation.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to December 31.
Fiscal years 1997, 1996, and 1995 ended on December 27, December 28, and
December 30, respectively.
Translation of Foreign Currencies
Assets and liabilities of all foreign subsidiaries are translated at
period-end rates of exchange, and income statement accounts are translated at
average rates of exchange. Resulting translation adjustments are recorded as a
separate component of stockholders' equity, "Foreign currency translation
adjustments."
Cash
Cash consists of cash on hand. Interest income included in other income
amounted to $48,000, $73,000, and $72,000, in 1997, 1996, and 1995,
respectively.
Financial Instruments
Derivative financial instruments are used by the Company in the management
of foreign currency exposures and are accounted for on an accrual basis. Gains
and losses resulting from effective hedges of existing assets, liabilities, or
firm commitments are deferred and recognized when the offsetting gains and
losses are recognized on the related hedged items. The Company does not enter
into derivative transactions for speculative purposes.
Grants
Grants received from governments by foreign subsidiaries are recognized in
income when the related funds are received. In 1997, 1996 and 1995, grants of
approximately $91,000, $88,000 and $250,000, respectively, received by the
Company's United Kingdom subsidiary were recognized as a reduction of related
operating expenses.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Provisions for
depreciation of plant and equipment are computed using the straight-line method
over the estimated useful lives of the assets (buildings and improvements, 5-40
years; leasehold improvements, over the life of the lease or the useful life of
the asset, whichever is shorter; machinery and equipment, 3-15 years).
Expenditures for repairs and maintenance are charged to expense when incurred.
Betterments which materially extend the life of the related assets are
capitalized and depreciated. Upon retirement or other disposition of property
and equipment, the cost and related depreciation are removed from the accounts
and the resulting gain or loss is reflected in earnings.
Depreciation and amortization expense was approximately $4,602,000,
$4,673,000, and $4,046,000 for 1997, 1996, and 1995, respectively.
Concentrations of Credit Risks
Financial Instruments which potentially subject the company to
concentrations of credit risk consist primarily of trade receivables and certain
other off-balance sheet financial instruments. By their nature, all such
financial instruments involve risk, including risk of non-performance by
counterparties, and the maximum potential loss may exceed the amounts recognized
on the balance sheet. Exposure to credit risk is controlled through credit
approvals, credit limits, and monitoring procedures.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from product sales are recorded when the product is shipped.
Provisions for product returns and allowances are recorded in the same period as
the related revenue.
Environmental Remediation Costs
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circum-
13
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stances change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Net Income Per Share (Basic and Diluted)
Net income per share is computed based on the weighted average number of
common and common equivalent shares outstanding during the year, calculated
under the treasury stock method. The reconciliation of basic and diluted
earnings per share computation follows (in thousands, except the share and per
share data):
<TABLE>
<CAPTION>
December 27, 1997 December 28, 1996 December 30, 1995
-------------------------------- --------------------------------- ------------------------------
Net income/ Per share Net income/ Per share Net Income/ Per share
(loss) Shares amount (loss) Shares amount (loss) Shares amount
----------- ------ --------- ----------- ------ --------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings
Per Share:
Net income (loss)
to common
shareholders.......... $(11,499) 5,356,640 $(2.15) $(1,347) 5,309,110 $(.25) $1,601 5,258,629 $.31
Effect of Dilutive
Securities:
Options................. -- -- 134,573
Diluted Earnings
Per Share:
Net income (loss)
to common
shareholders
and assumed
conversions............. $(11,499) 5,356,640 $(2.15) $(1,347) 5,309,110 $(.25) $1,601 5,393,202 $.30
</TABLE>
Options to purchase 313,250 shares of common stock at prices ranging from
$6.125 to $9.625 per share were outstanding at December 27, 1997 but were not
included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of common shares.
Options to purchase 251,625 shares of common stock at prices ranging from $3.00
to $5.00 per share were outstanding at December 27, 1997 but were not included
because the options were anti-dilutive.
Options to purchase 372,500 shares of common stock at prices ranging from
$6.125 to $9.625 per share were outstanding at December 28, 1996 but were not
included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of common shares.
Options to purchase 211,875 shares of common stock at prices ranging from $3.00
to $5.00 per share were outstanding at December 26, 1996 but were not included
because the options were anti-dilutive.
Options to purchase 343,092 shares of common stock at prices ranging from
$6.125 to $9.625 per share were outstanding at December 30, 1995 but were not
included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of common shares.
Options to purchase 134,573 shares of common stock at prices ranging from $2.75
to $5.00 per share were outstanding at December 30, 1995 and were included
because the options were dilutive.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 Reporting Comprehensive Income ("SFAS
130") which establishes standards for reporting and display of comprehensive
income and its components (revenue expenses, gains and losses) in a full set of
general purpose financial statements. Management has not yet evaluated the
effects of this change on its reporting of income. The Company will adopt SFAS
130 for its fiscal year ending December 26, 1998.
NOTE 2 - INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 27, 1997 December 28, 1996
------------------------------ ------------------------------
Domestic Foreign Total Domestic Foreign Total
-------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Raw materials...... $ 6,552 $2,060 $ 8,612 $ 7,629 $2,368 $ 9,997
Work in process.... 3,595 343 3,938 3,707 435 4,142
</TABLE>
14
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Finished goods..... 4,914 712 5,626 5,819 952 6,771
------- ------ ------- ------- ------ -------
$15,061 $3,115 $18,176 $17,155 $3,755 $20,910
======= ====== ======= ======= ====== =======
</TABLE>
NOTE 3 - DEBT:
The Company maintains a Revolving Credit Agreement (the "Agreement") with a
bank, which, as amended, provides a credit line of approximately $22 million to
the Company, including a 4,400,000 British Pounds ($7,387,000 at year-end
exchange rates) line of credit to BHC Aerovox, Ltd. (BHC), a wholly-owned
subsidiary of the Company. Amendment six to the Agreement was issued on February
27, 1998, adjusting financial covenants which require the Company to maintain
certain interest coverage ratios. Had this covenant not been amended, the
Company would have been in violation at the end of each quarter of 1997. The
lender waived, as of that date, its rights to accelerate payment on that loan
for financial covenant violations of certain tangible net worth, earnings and
cash flow covenants. This debt is collateralized by inventory and accounts
receivable.
Interest on the credit line is at the bank's prime rate payable in arrears
on the outstanding loan balance. The Company has the option to convert from a
bank base rate loan into a Eurodollar Loan at the then Eurodollar (LIBOR) rate
plus 1 3/4 percentage points. The Company also has the option to convert up to
$4 million of loans to a Bankers' Acceptance facility at interest rates equal to
the per annum average discount rate quoted to the bank on the date of request
for such facility plus 1 1/2% per annum. The Agreement matures on May 31, 1999.
A commitment fee, equal to one-quarter percent per annum will be charged on the
unused portion of the total commitment. At December 27, 1997, borrowings
outstanding under this Agreement were $12,693,000, including 2,440,000 British
Pounds ($4,097,000 at year-end exchange rates); and at December 28, 1996 the
amount was $17,422,000, including 3,608,000 British Pounds ($6,113,000 at year-
end exchange rates).
A ten-year Industrial Revenue Bond was issued by the Massachusetts
Industrial Finance Agency in July 1982 to finance the acquisition of equipment.
The bond was transferred to another purchaser in June 1992. Interest at the rate
of 12.5% per annum through June 1992 and 7.42% per annum thereafter and
principal are payable monthly commencing July 1, 1992 to July 1, 2002. The
amount of each installment is calculated on an assumed 10-year amortization
schedule. $425,000 of principal is payable in 1998. On December 27, 1997 and
December 28, 1996, the bond balance outstanding under this agreement was
$2,179,200 and $2,572,500, respectively.
Other long-term debt of the Company consists of a term line of credit
agreement with an equipment financing company in the amount of $10,000,000,
collateralized by certain equipment. Payments of principal and interest are due
quarterly. At December 27, 1997, borrowings outstanding under this agreement
were $3,764,000 at annualized interest rates ranging from 7.36% to 8.18%, and
maturing at various dates through the year 2002; and at December 28, 1996,
$6,066,000 at annualized interest rates ranging from 7.36% to 8.24%. The
agreement contains several financial covenants requiring the Company to maintain
certain ratios regarding debt, equity, and interest costs. The Company was in
violation of those covenants on December 27, 1997. The lender waived, on March
11, 1998, its right to accelerated payment of this debt for violations of these
financial covenants.
Total maturities of long-term debt over the next five years are:
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1998................. $ 1,910,000
1999................. 14,340,000
2000................. 1,273,000
2001................. 742,000
2002................. 367,000
</TABLE>
NOTE 4 - OTHER CURRENT ACCRUED EXPENSES:
Other accrued expenses consist of the following at December 27, 1997 and
December 28, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Warranty........................................ $ 840 $1,394
Duty............................................ 370 1,002
Environmental Cost and Plant Remediation........ 1,200 --
Other........................................... 620 616
------ ------
$3,030 $3,012
====== ======
</TABLE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
15
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company leases manufacturing space, equipment and software under
various non-cancelable operating leases. Rental expense amounted to $1,721,000
in 1997, $1,672,000 in 1996, and $1,375,000 in 1995. On December 27, 1997,
future minimum annual rental payments under all leases are as follows:
16
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1998................ $724,039
1999................ 647,016
2000................ 590,399
2001................ 574,356
2002................ 590,116
Thereafter.......... 712,497
</TABLE>
The Company closed its office in North Dartmouth, Massachusetts, effective
December 31, 1996, and has accrued for the difference between the sublease
income and lease expense; accordingly, the future minimum annual rental payments
above exclude payments related to those offices.
The Company is self-insured for workers' compensation benefits for some of
its employees. The amounts charged to expense for workers' compensation were
$352,000 in 1997, $307,000 in 1996, and $357,000 in 1995, based upon reported
claims and estimates of claims incurred but not reported.
The Company is also self-insured for a portion of health care costs not
covered by insurance for some of its employees. The Company is liable for claims
up to $150,000 per employee and aggregate claims up to a maximum of $2,100,120
(based on average monthly enrollment) for 1997. Costs accrued are based upon
reported claims and estimates of claims incurred but not reported. The amount
charged to expense for health care costs, which includes paid claims, individual
and aggregate stop/loss coverage and administrative fees, less employee
contributions, was $1,867,000 in 1997, $1,883,000 in 1996, and $1,830,000 in
1995.
NOTE 6 - FINANCIAL INSTRUMENTS:
The Company operates internationally, with manufacturing facilities,
customers, and vendors in several countries outside of the United States. The
Company may reduce its exposure to fluctuations in foreign exchange rates by
creating offsetting positions through the use of foreign currency forward
contracts, a type of derivative financial instrument. The Company does not use
derivative financial instruments for trading or speculative purposes, nor is the
Company a party to leveraged derivatives.
At December 27, 1997 the Company held foreign currency forward contracts
with notional value totaling approximately $485,000 (289,000 British Pounds
Sterling). These contracts matured on December 29, 1997. The carrying and net
fair value of these contracts at December 27, 1997 was $0 and $371,000,
respectively.
At December 28, 1996 the Company held foreign currency forward contracts
with notional value totaling approximately $1,640,000 (970,000 British Pounds
Sterling). These contracts all had maturities prior to December 31, 1997. The
carrying and net fair value of these contracts at December 28, 1996 was $0 and
($121,800), respectively.
NOTE 7 - INCENTIVE AND OTHER PLANS:
Stock Incentive Plan
The 1989 Stock Incentive Plan ("Plan"), permits the granting of a variety
of stock and stock-based awards, including stock options, rights to receive cash
or shares for increases in the value of the Company's common stock, the award of
restricted and unrestricted shares, rights to receive cash or shares on a
deferred basis or based on performance, cash payments sufficient to offset the
federal ordinary income taxes under the Plan, loans to participants in
connection with awards, and other common stock-based awards, including the sale
or award of convertible securities, that meet the requirements of the Plan. The
Plan also provides that option holders may surrender outstanding options in
exchange for a cash payment during the sixty-day period following a change in
control as defined in the Plan.
A total of 950,000 shares of common stock have been reserved by the board
of directors and may be issued under the Plan to full- or part-time officers and
other key employees of the Company and its subsidiaries. The Plan limits the
terms of awards to ten years and prohibits the granting of awards more than ten
years after the effective date of the Plan. The Plan permits the granting of
non-transferable stock options that qualify as incentive stock options (ISOs)
for United States federal income tax purposes and options that do not so
qualify. The exercise price of each option may not be less than 100% of the fair
market value, or 110% in the case of a person holding 10% or more of the
outstanding voting power of all classes of stock of the Company, on the date of
grant in the case of ISOs and not less than 50% of the fair market value in the
case of non-qualified options. The term of each option is fixed by the board of
directors but may not exceed 10 years from the date of grant (5 years in the
case of a 10% shareholder) with respect to ISOs and 10 years and a day with
respect to non-qualified options.
In the event of termination of employment by reason of retirement,
disability or death, an option may be exercised (to the extent it was then
exercisable) for a period of three years. In the event of termination for other
reasons, an option may be exercised (to the extent it was then exercisable) for
three months.
Each option becomes exercisable at the rate of 20% per year beginning on
the first anniversary of the date of grant and expires ten years from the date
of grant. Information for fiscal years 1997, 1996, and 1995, with respect to the
Plan, is as fol-
17
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
lows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- -------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 500,000 $5.59 446,000 $5.57 484,500 $5.27
Granted................................. 67,000 $4.50 140,000 $6.80 66,000 $7.62
Exercised............................... (61,500) $3.00 (7,000) $3.00 (50,000) $3.00
Canceled................................ (34,500) $8.01 (79,000) $7.88 (54,500) $7.77
------- ----- ------- ----- ------- -----
Outstanding at end of year.............. 471,000 $5.59 500,000 $5.59 446,000 $5.57
======= ===== ======= ===== ======= =====
Options exercisable at year-end......... 257,300 $4.95 293,000 $4.46 273,200 $4.23
======= ===== ======= ===== ======= =====
Options available for future grant...... 289,500 322,000 133,000
======= ======= =======
</TABLE>
The following table summarize information about stock options outstanding
at December 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE PRICE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE DEC. 27, 1997 CONTRACTUAL LIFE EXERCISE PRICE DEC. 27, 1997 EXERCISE PRICE
-------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$3.00 - $4.50 ............ 211,000 3.8 $3.53 148,000 $3.23
$4.50 - $6.75 ............ 110,000 7.4 $5.84 45,500 $5.93
$6.75 - $9.00 ............ 150,000 7.2 $8.30 63,800 $8.25
$3.00 - $9.00 ............ 471,000 5.9 $5.59 257,300 $4.95
</TABLE>
Non-Statutory Stock Option Award Agreement
On September 1, 1996, an officer of the Company was awarded an option to
purchase 50,000 shares of Aerovox common stock, bearing an exercise price of
$6.00 per share. The option is exercisable at the rate of 20% per year and
expires ten years from the date of grant. On December 27, 1997, options for
10,000 shares were exercisable under this agreement.
1989 Stock Option Plan for Directors
The 1989 Stock Option Plan for Directors (the "Directors Plan") reserved
80,000 shares of common stock for the granting of options to purchase stock at
100% of the fair market value on the date of grant. Directors who are not
employees of the Company are eligible under the Directors Plan. Each newly
elected director will be awarded options to purchase 2,500 shares of common
stock on the date of election. Following the initial grant, each person who is
an eligible director on the day of each annual meeting of shareholders of the
Company, will receive options covering 1,000 shares or 250 for each quarter of
service if less than one year elapses between the initial grant and an annual
grant.
Options expire in ten years and become exercisable on the first anniversary
of the date of the grant. No options may be awarded under the Directors Plan
after April 1999. In the event of termination of director status by retirement,
an option may be exercised for a period of three years, or until expiration, if
earlier; or for one year after death in the event an optionee dies during the
final year of such exercise period, or until the expiration of the stated term
of the option. In the event of termination of status of director by reason of
death, an option may be exercised (to the extent it was then exercisable) for a
period of three years. In the event of termination for other reasons, an option
may be exercised (to the extent it was then exercisable) for three months.
Information for fiscal years 1997, 1996, and 1995, with respect to the
Directors Plan, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.......... 34,375 $6.41 31,665 $6.14 39,201 $5.81
Granted................................... 9,500 $4.50 6,000 $6.50 8,250 $7.65
Exercised................................. -- $ 0 -- $ 0 (9,951) $4.04
Canceled.................................. -- $ 0 (3,290) $ 0 (5,835) $ 0
------ ----- ------ ----- ------ -----
Outstanding at end of year................ 43,875 $6.00 34,375 $6.41 31,665 $6.14
====== ===== ====== ===== ====== =====
Options exercisable at year-end........... 34,375 $6.42 26,539 $6.29 18,745 $4.95
====== ===== ====== ===== ====== =====
Options available future grant............ 24,292 33,792 36,502
====== ====== ======
</TABLE>
18
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at December 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE PRICE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE DEC. 27, 1997 CONTRACTUAL LIFE EXERCISE PRICE DEC. 27, 1997 EXERCISE PRICE
- -------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$3.00 - $4.50 .............. 18,125 3.3 $3.75 9,625 $3.75
$4.50 - $6.75 .............. 11,500 5.3 $6.53 11,500 $5.97
$6.75 - $9.63 .............. 14,250 6.0 $8.44 13,250 $8.75
------ --- ----- ------ -----
43,875 4.9 $6.07 34,375 $6.42
====== === ===== ====== =====
</TABLE>
Accounting for Stock Options
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS 123") describes a "fair value" method for calculating
the effect of options granted on the reported earnings of the Company. This
method uses certain historical data regarding outstanding options and the price
history of a company's shares in a mathematical model to determine the
hypothetical value of the option had it been sold in the open securities market
rather than granted to the plan participant. This is in contrast to the
valuation method prescribed by Accounting Principles Board Opinion.
No. 25 (APB 25), which calculates the value at the date of grant as the
difference, if any, between the exercise price and the market price of the
shares on that date.
Calculated in accordance with SFAS 123, the weighted average fair value at
date of grant for options granted in 1997, 1996 and 1995 was $2.83, $3.83 and
$4.08 per option, respectively. The fair value of these options at the date of
grant was estimated using the Black-Scholes model with the following weighted
average assumptions for 1997, 1996 and 1995: risk-free interest rates as of the
grant dates from 6.27% to 7.14%; no dividend yields; a volatility factor of the
expected market price of the Company's common stock of 33.82%, 30.97%, and
30.97%, respectively; and a weighted average expected life of the options of
9.81, 9.87, and 9.87 years, respectively.
As allowed by SFAS 123, the Company elected the disclosure-only
alternative, and continues to calculate and report net income and net income per
share according to APB 25 for employee and director stock-based compensation.
Had compensation cost for the Company's 1997, 1996, and 1995 grants for stock-
based employee and director compensation plans been determined using the fair
value method as prescribed by SFAS 123, the Company's net income, and net income
per share for those years would approximate the pro forma amounts below (in
thousands except for per share data).
<TABLE>
<CAPTION>
DECEMBER 27, 1997 DECEMBER 28, 1996 DECEMBER 30, 1995
------------------------- ------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)....................... $(11,499) $(11,784) $(1,347) $(1,493) $1,601 $1,568
Basic earnings (loss) per share......... $ (2.15) $ (2.20) $ (.25) $ (.28) $ .31 $ .30
Diluted earnings (loss) per share....... $ (2.15) $ (2.20) $ (.25) $ (.28) $ .30 $ .29
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of the pro forma effect on net income in future years because these
pro forma calculations do not take into consideration grants made prior to 1995.
Employee Stock Purchase Plan
In 1989, the Company established the Employee Stock Purchase Plan (the
"ESPP") under which 100,000 shares of common stock were reserved for purchase by
employees. The ESPP provides for the sale of common stock at the average of the
reported high and low sales prices of the stock on the last business day of the
accounting period each month. Common stock purchases are paid through regular
payroll deductions of up to 10% of eligible compensation plus Company payments
equal to 5% of the participant's payment plus an additional 1% for each full
year of continuous employment with the Company since January 1, 1973, up to a
maximum of 20% of the participant's payment. In 1997, 1996, and 1995, 7,884,
9,254, and 8,139 shares, respectively, were sold under the ESPP. There were
13,934 shares qualified for future sale on December 27, 1997.
Change of Control Severance Benefits
The Company has severance agreements with certain key employees which
provide that if, within 24 months following a change in control (as defined in
the severance agreements), the Company were to terminate the employee's
employment other than for cause or the employee were to terminate his employment
for reasons specified in the agreements, the employee would receive amounts of
up to three times that person's annual base salary plus target bonus for such
year without deduction for any amounts previously paid under the bonus plan. The
agreements also provide for the immediate vesting of bonus awards, stock options
and similar awards, the immediate payment of deferred compensation amounts and
the continuation of certain benefits. The maximum contingent liability under
these agreements on December 27, 1997 was approximately $1,992,000.
19
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Profit-Sharing Savings Plan
The Company maintains a Profit-Sharing Savings Plan ("PSSP") which covers
substantially all domestic employees with at least six months of service. Under
the PSSP, each employee can elect to make a pre-tax contribution to the PSSP of
not less than 3% and not more than 15% of qualified compensation, of which up to
the first 8% is eligible for a Company match. The Company makes regular
contributions to the PSSP on behalf of each participating employee in an amount
which, together with any forfeitures during the PSSP year, is equal to each
employee's voluntary contribution up to a maximum aggregate contribution of 6%
of the pre-tax income of the Company, as defined, or 50% of the aggregate pre-
tax contributions of the participating employees, or 50% of the first 8% of the
aggregate pre-tax contribution of the participating employees. The Company's
subsidiary in the United Kingdom maintains a plan covering its eligible
employees wherein Company contributions are made on the basis of the
individual's age and amount of contribution. Expense under these plans amounted
to $506,000 in 1997, $471,000 in 1996, and $479,000 in 1995.
Deferred Supplemental Savings Plan
The Company has a Deferred Supplemental Savings Plan under which certain
key employees may defer a percentage of their compensation equal to the
difference between pre-tax amounts of compensation eligible to be contributed to
the PSSP and amounts actually eligible for contributing to the PSSP. Under the
Deferred Supplemental Savings Plan, the Company will make a matching
contribution in an amount equal to the matching contribution which would have
been made if such contribution had been made under the PSSP. Expense related to
the Deferred Supplemental Savings Plan amounted to $85,000 in 1997, $252,000 in
1996, and $189,000 in 1995.
Executive Incentive Bonus Plan
The Company has an Executive Incentive Bonus Plan under which certain
officers and other members of management may receive incentive awards based on a
percentage of the participant's base compensation and an annually targeted
return on net assets, as defined. Bonus expense amounted to $90,000 in 1997,
$169,000 in 1996, and $195,000 in 1995.
Consulting Agreements
The Company has Consulting, Non-Competition and Confidentiality Agreements
with two former executives. Under the Agreements, which expire on December 28,
2006, the executives will be paid an aggregate of $160,000 per year.
NOTE 8 - PREFERRED STOCK:
The Company is authorized to issue up to 5,000,000 shares of preferred
stock without further stockholder approval in such series and with such
preferences, terms and other provisions as may be designated by the board of
directors.
On August 16, 1989, the board of directors voted to create a series of
55,000 shares of preferred stock, par value $.01 per share, designated as Series
A Junior Participating Preferred Stock ("Series A Preferred"). Each Series A
Preferred share is entitled to receive a minimum preferential quarterly dividend
of $1.00 per share and an aggregate dividend of 100 times any dividend declared
per share of common stock. Each share of Series A Preferred is entitled to one
hundred votes and votes together as one class with the common stock. Upon
liquidation or dissolution of the Company, the holder of each share of Series A
Preferred is entitled to a liquidation payment of $100 per share plus an
aggregate payment of 100 times the payment made per share on the common stock.
The Series A Preferred shares are not redeemable and rank junior to all other
series of preferred stock of the Company.
In the event of any merger, consolidation or other transaction in which
shares of the Company's common stock are exchanged, each Series A Preferred
share will be entitled to receive 100 times the amount received per share of
common stock.
On December 27, 1997, 55,000 shares of Series A Preferred were reserved for
issuance for stock purchase rights (see Note 9). No such rights have become
exercisable and no shares of Series A Preferred have been issued.
NOTE 9 - PREFERRED SHARE PURCHASE RIGHTS:
On August 16, 1989, the board of directors approved a preferred share
rights plan (the "Rights Plan") pursuant to which one preferred share purchase
right (a "Right") was distributed for each share of outstanding common stock.
Each Right entitles the holder to purchase from the Company one one-hundredth of
a share of Series A Junior Participating Preferred Stock, $.01 par value per
share, at a price of $16.00 per one one-hundredth of a Series A Preferred Share,
subject to adjustment. The Rights, which do not have voting rights, expire on
December 1, 1999, unless redeemed earlier by the Company.
The Rights will become exercisable if a person or group of affiliated or
associated persons (an "Acquiring Person") acquires beneficial ownership (the
"Shares Acquisition Date") of 15% or more of the outstanding shares of the
Company's common stock or following the commencement of, or announcement of an
intention to make a tender offer or exchange offer which would result in the
beneficial ownership by a person or group of 20% or more of the outstanding
shares of the Company's common stock.
At any time on or prior to the date the Rights become exercisable, the
Company may redeem the Rights in whole, but not in part, at a price of $0.01 per
Right.
21
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the event that the Company is acquired in a merger or other business
combination transaction or 30% or more of its consolidated assets or earnings
power are sold, the Rights Plan requires that proper provision be made so that
each holder of a Right will thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the Right, that number of
shares of common stock of the acquiring company which at the time of such
transaction will have a market value of two times the exercise price of the
Right. In the event that any person becomes an Acquiring Person, the holder of a
Right, other than Rights beneficially owned by the Acquiring Person (which will
hereafter be void), will have the right to receive upon exercise that number of
shares of common stock having a net value of two times the exercise price of the
Right.
At any time after the Shares Acquisition Date and prior to the acquisition
by an Acquiring Person of 50% or more of the outstanding shares of the Company's
common stock, the Company may exchange the Rights (other than Rights owned by
Acquiring Persons which have become void), in whole or in part, at an exchange
ratio of one share of common stock, or one one-hundredth of a Series A Preferred
Share (or of a share of a class or series of the Preferred Stock of the Company
having equivalent rights, preferences and privileges), per Right (subject to
adjustment).
NOTE 10 - OPERATIONS BY GEOGRAPHIC AREA:
The Company is engaged in one industry segment, the manufacture of AC
capacitors, aluminum electrolytic capacitors, DC film capacitors, power factor
correction and energy discharge capacitors and EMI filters.
Information about the Company's operations by geographic area is as follows
(in thousands):
OPERATIONS BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
UNITED STATES UNITED KINGDOM MEXICO ELIMINATIONS CONSOLIDATED
------------- -------------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 27, 1997
Sales to unaffiliated customers $ 93,778 $24,966 $ 914 $ -- $ 119,658
Transfer between geographic areas 3,870 -- 7,325 11,195 --
-------- ------- ------ ------- ---------
Total sales $ 97,648 $24,966 $8,239 $11,195 $ 119,658
-------- ------- ------ ------- ---------
Operating profit (loss) $(13,824) $ 1,244 $ 281 $ -- $ (12,299)
-------- ------- ------ ------- ---------
Interest expense (1,741)
Interest income 48
---------
Losses before taxes $ (13,992)
---------
Identifiable assets $ 65,416 $15,362 $1,030 $ 7,936 $ 73,872
======== ======= ====== ======= =========
YEAR ENDED DECEMBER 28, 1996
Sales to unaffiliated customers $101,664 $23,535 $ 776 $ -- $ 125,975
Transfer between geographic areas 3,739 -- 6,385 10,124 --
-------- ------- ------ ------- ---------
Total sales $105,403 $23,535 $7,161 $10,124 $ 125,975
-------- ------- ------ ------- ---------
Operating profit (loss) $ (1,680) $ 1,077 $ 342 $ -- $ (261)
-------- ------- ------ ------- ---------
Interest expense (2,263)
Interest income 73
---------
Losses before taxes (2,451)
Identifiable assets $ 75,535 $15,901 $1,162 $ 7,622 $ 84,976
======== ======= ====== ======= =========
YEAR ENDED DECEMBER 30, 1995
Sales to unaffiliated customers $106,267 $22,444 $ 600 $ -- $ 129,311
Transfer between geographic areas 2,058 -- 6,648 8,706 --
-------- ------- ------ ------- ---------
Total Sales $108,325 $22,444 $7,248 $ 8,706 $ 129,311
-------- ------- ------ ------- ---------
Operating profit $ 2,258 $ 2,404 $ 214 $ -- $ 4,876
-------- ------- ------ ------- ---------
Interest expense (2,296)
Interest income 72
---------
Income before taxes $ 2,652
---------
Identifiable assets $ 80,308 $15,037 $ 848 $ 6,862 $ 89,331
======== ======= ====== ======= =========
</TABLE>
Transfers between geographic areas are accounted for at cost plus 15% in 1997,
1996, and 1995, except for transfers of etched and formed foil in 1997 which
were accounted for at prices intended to approximate sales to unrelated third
parties. Operating profit (loss) is total sales less operating expenses which in
1997 included a special provision for environmental costs and asset write-down.
Identifiable assets are those assets of the Company that are identified with the
operations in each geographic area.
NOTE 11 - PROVISION FOR INCOME TAXES:
22
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The provision for income taxes consists of (in thousands):
Dec. 27, 1997 Dec. 28, 1996 Dec. 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal............................................... $ -- $ -- $ 6
State................................................. -- 58 93
Foreign............................................... 338 (118) 463
------- ------- ------
Total Current......................................... 338 (60) 562
------- ------- ------
Deferred:
Federal............................................... (1,974) (1,074) 109
State................................................. (950) (190) 19
Foreign............................................... 93 220 361
------- ------- ------
Total deferred taxes.................................. (2,831) (1,044) 489
------- ------- ------
Provision for (benefit from) income taxes............. $(2,493) $(1,104) $1,051
======= ======= ======
Deferred income taxes arise from (in thousands):
Environmental reserve............................... $(2,901) $ -- $ --
Accelerated depreciation............................ (2,477) 1,196 906
Net operating losses................................ (633) (2,033) 278
Inventory valuation................................. (363) 577 (396)
Allowance for doubtful accounts..................... 26 4 (120)
Compensation related costs.......................... 286 (71) (118)
Warranty reserve.................................... 210 (492) --
Other............................................... (95) (335) (64)
Tax credits......................................... (22) (28) 3
Valuation allowance................................. 3,138 138 --
------- ------- ------
$(2,831) $(1,044) $ 489
======= ======= ======
</TABLE>
Income taxes are reconciled to the United States statutory corporate tax
rate as follows (in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
United States corporate tax at statutory rate........ $(4,756) $ (832) $ 902
Increase (decrease) arising from:
State taxes.......................................... (934) (190) 112
Foreign taxes........................................ 50 (218) 80
Other................................................ 9 (2) (43)
Change in valuation allowance........................ 3,138 138 --
------- ------- ------
$(2,493) $(1,104) $ 1,051
======= ======= ======
</TABLE>
The components of the Company's deferred tax assets and liabilities as of
December 27, 1997 and December 28, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, 1997 DECEMBER 28, 1996
------------------------- -------------------------
DEFERRED TAXES: ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------ -----------
<S> <C> <C> <C> <C>
Net operating loss carryforwards........ $ 3,067 $ -- $2,434 $ --
Compensation related cost............... 422 -- 708 --
Bad debt reserve........................ 177 -- 203 --
Depreciation............................ -- 5,446 -- 7,923
Environmental reserve................... 2,901 -- -- --
Equipment reserve....................... 66 -- 199 --
Inventory reserves...................... 135 -- -- 228
Warranty reserves....................... 282 -- 492 --
Tax credit carryforwards................ 1,177 -- 1,155 --
Valuation allowance..................... (3,354) -- (216) --
Other................................... 512 -- 284 --
------- ------ ------ ------
Total $ 5,385 $5,446 $5,259 $8,151
======= ====== ====== ======
</TABLE>
The Company increased its valuation allowance to $3,353,900 at December 27,
1997, principally for foreign tax credits and net operating losses not expected
to be realized.
At December 27, 1997, the Company had a net operating loss carryforward of
approximately $7,600,000 for tax purposes, which begin to expire in 2007. At
December 27, 1997, the Company also had $1,177,000 of foreign and other tax
credits which expire from 1997 to 2012.
23
<PAGE>
Aerovox Incorporated -- 1997 Annual Report
REPORT OF INDEPENDENT ACCOUNTANTS
Income (loss) before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 27, 1997 Dec. 28, 1996 Dec. 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
United States............................ $(15,116) $(3,393) $ 464
Foreign.................................. 1,124 942 2,188
-------- ------- ------
Income (loss) before income taxes........ $(13,992) $(2,451) $2,652
</TABLE>
NOTE 12 - ENVIRONMENTAL MATTERS:
The Company manufactures film capacitors and maintains its corporate
offices in a building located in New Bedford, Massachusetts, which has been
occupied by the Company and predecessor organizations also engaged in the
manufacture of capacitors since 1938. In June 1997, the United States
Environmental Protection Agency (EPA) conducted preliminary tests within the
building that revealed the presence of polychlorinated biphenyls (PCBs) on
surfaces within the plant. Subsequent engineering tests by independent
consultants retained by the Company confirmed the presence of residual PCBs
throughout the plant, which resulted from their use prior to 1978. While the
Company and its expert advisors consider the PCBs to represent no threat to the
health of the employees of the Company or the surrounding community, subsequent
engineering studies indicated that the cost to remove PCBs within the building
to the levels proscribed by the EPA and the Toxic Substances Control Act would
be prohibitive. Therefore, the Company has decided, and has so informed the EPA,
that it intends to vacate the building, to demolish it, and to dispose of all
contaminated building materials in a legally compliant manner. Accordingly, a
reserve was established and charged to income as of December 27, 1997, in the
amount of $7,233,000, which the Company believes is adequate to dismantle and
dispose of the building, clean equipment located within it, and to pay for
related engineering, legal and professional services. Of this amount,
approximately $6,000,000 has been classified as a long-term liability.
Additionally, the Company wrote-off, as of December 27, 1997, the depreciated
value of that building, all improvements thereto, and certain machinery and
equipment which the Company believes will become surplus, abandoned, or
otherwise unusable upon disposal of the building. The amount of this write-off
was $5,767,000.
On February 9, 1990, the Company entered into a settlement agreement (the
"Settlement Agreement") with the United States and The Commonwealth of
Massachusetts (the "governments") resolving litigation commenced by the
governments in the U.S. District Court for the District of Massachusetts, on
December 10, 1983 under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, commonly known as the "Superfund" legislation. The
litigation concerned the alleged disposal by various defendants of
polychlorinated biphenyls ("PCBs") in the Acushnet River and New Bedford Harbor.
The Settlement Agreement resolved all of the governments' claim against the
Company and Aerovox Industries, Inc. (a predecessor of the Company) arising out
of the contamination of the Acushnet River and New Bedford Harbor with PCBs,
including cleanup costs, study costs and damages to natural resources, now or
hereafter incurred, except that the Settlement Agreement provides that the
governments may seek damages from the Company and Aerovox Industries, Inc. for
future liability in the event that such future liability arises out of unknown
conditions at the site. The Company, based on information presently available,
does not believe that this matter will have any further material adverse effect
on the Company's financial condition.
SAFE HARBOR STATEMENT
Statements in this report which are not historical facts, including
statements about the sufficiency of the Company's liquidity, capital and
reserves, and its expectation for capital and other spending in future years for
the relocation of its New Bedford operation and the environmental remediation of
its existing facility, are forward-looking statements. Forward-looking
statements may also be made by the Company from time to time in other reports
and documents as well as oral presentations. When used in written documents or
oral statements, the words anticipate, believe, estimate, objective and similar
expressions are intended to identify forward-looking statements.
Such forward-looking statements are based on management's current
expectations, and are subject to a number of assumptions, uncertainties and
risks, many of which are beyond the Company's control, that could cause actual
results and performance to differ materially from those described in the
forward-looking statements. Such uncertainties and risks include, but are not
limited to: the general business climate and economic conditions; conditions
concerning environmental hazards not currently known to the Company; the
weather; variations in foreign currency exchange rates; potential fluctuations
in the Company's quarterly results; the Company's ability to profitably
distribute and sell its products, including any changes in the Company's
business relationships with its principal distributors; the cost and
availability of raw materials; dependence on key personnel and the Company's
ability to hire and retain competent employees; the unionization of the
Company's non-union employees and changes in relationships with the Company's
unionized employees; developments in the Company's industry; technological
change; competition, and the Company's ability to manage such risks and
uncertainties, introduce new products and avoid product defects and product
liability, and protect its intellectual property and property rights.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
NOTE 13 - FOREIGN OPERATIONS:
Summarized financial information for the Company's foreign operations is as
follows (in thousands):
<TABLE>
<CAPTION>
Dec. 27, 1997 Dec. 28, 1996 Dec. 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current assets.................. $ 9,045 $ 9,132 $ 8,876
Non-current assets............ 7,470 8,132 7,345
------- ------- -------
$16,515 $17,264 $16,221
------- ------- -------
Current liabilities............. $ 3,973 $ 2,870 $ 3,099
Due to parent................. 238 659 338
Long-term debt................ 4,097 6,113 6,423
Stockholders' equity.......... 8,207 7,622 6,361
------- ------- -------
$16,515 $17,264 $16,221
Net Sales....................... $ 25,880 $24,311 $23,044
------- ------- -------
Net income...................... $ 720 $ 840 $ 1,363
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Dec. 27, Dec. 28, Dec. 30, Dec. 31, Jan. 1,
(Amounts in Thousands, Except Per Share Data) 1997 1996 1995 1994 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Income statement data:
Net sales........................................................ $119,658 $125,975 $129,311 $126,532 $115,895
Income (loss) from operations.................................... (12,574) 143 4,666 6,262 6,944
Income (loss) before cumulative effect of change in accounting
for income taxes............................................... (13,992) (2,451) 1,601 3,024 3,737
Cumulative effect of change in accounting for income taxes....... -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)................................................ $(11,499) $ (1,347) $ 1,601 $ 3,024 $ 4,327
======== ======== ======== ======== ========
Basic earning (loss) before cumulative effect of change in
accounting for income taxes.................................... $ (2.15) $ (.25) $ .31 $ .60 $ .83
Cumulative effect of change in accounting for income taxes...... -- -- -- -- .11
-------- -------- -------- -------- --------
Basic earning (loss) per share.................................. $ (2.15) $ (.25) $ .31 $ .60 $ .94
-------- -------- -------- -------- --------
Diluted earnings (loss) per share before cumulative effect of
change in accounting for income taxes......................... $ (2.15) $ (.25) $ .30 $ .56 $ .69
Cumulative effect of change in accounting for income taxes...... -- -- -- -- .11
-------- -------- -------- -------- --------
Diluted earnings (loss) per share............................. $ (2.15) $ (.25) $ .30 $ .56 $ .80
-------- -------- -------- -------- --------
Cash dividends per share.......................................... -- -- -- -- --
======== ======== ======== ======== ========
Balance sheet data:
Total assets.................................................... $ 73,872 $ 84,976 $ 89,331 $ 78,397 $ 71,733
Long-term obligations........................................... 17,775 23,806 28,777 22,466 19,671
Total stockholders' equity...................................... 23,766 35,073 35,505 34,054 30,795
</TABLE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) QUARTER
------------------------------------------
(Amounts in Thousands, Except Per Share Data) FIRST SECOND THIRD FOURTH
------- ------- ------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 27, 1997
Net sales.......................................... $32,616 $34,185 $26,126 $ 26,731
Gross profit....................................... 5,185 4,867 1,904 2,263
Net income (loss).................................. $ 513 $ 340 $ (838) $(11,514)
Basic earnings (loss) per share.................... $ .10 $ .06 $ (.16) $ (2.14)
Diluted earnings (loss) per share.................. $ .10 $ .06 $ (.16) $ (2.14)
------- ------- ------- --------
YEAR ENDED DECEMBER 28, 1996
Net sales.......................................... $33,565 $32,439 $29,699 $ 30,272
Gross profit....................................... 5,816 1,419 4,554 4,000
Net income (loss).................................. $ 861 $(2,677) $ 301 $ 168
Basic earnings (loss) per share.................... $ .16 $ (.50) $ .06 $ .03
Diluted earnings (loss) per share.................. $ .16 $ (.50) $ .06 $ .03
------- ------- ------- --------
</TABLE>
To the Board of Directors and Stockholders of Aerovox Incorporated:
We have audited the accompanying consolidated balance sheets of Aerovox
Incorporated as of December 27, 1997 and December 28, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 27, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Aerovox
Incorporated as of December 27, 1997 and December 28, 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 27, 1997, in conformity with generally accepted
accounting principles.
Boston, Massachusetts
February 13, 1998, except for the information
presented in Note 3 for which the dates are
February 27, 1998 and March 11, 1998
26
<PAGE>
[LOGO OF AEROVOX]
740 Belleville Avenue
New Bedford, Massachusetts 02745-6194
www.aerovox.com
<PAGE>
Exhibit 21.1
Aerovox Incorporated
Subsidiaries
Aerovox de Mexico S.A. De C.V.
Ave. Fernando Borreguero # 3328
Parque Industrial Juarez,
Cd. Juarez, Chihuahua CP32630
Mexico
BHC Aerovox Ltd.
20-21 Cumberland Drive
Granby Industrial Estate
Weymouth, Dorset DT4 9TE
England
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the Registration Statements of
Aerovox Incorporated on Form S-8 (File Nos. 33-35029, 33-35030, 33-35031, 33-
68940 and 33-86092, 33-03693 and 33-11615) of our reports dated February 13,
1998, except for Note 3 for which the dates are February 27, l998 and March 11,
l998, on our audits of the consolidated financial statements and the financial
statement schedule of Aerovox Incorporated as of December 27, 1997 and December
28, l996, and for the years ended December 27, 1997, December 28, 1996 and
December 30, 1995 which reports are included or incorporated by reference in
this Annual Report on Form 10-K.
BY /S/ COOPERS & LYBRAND L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> DEC-27-1997
<CASH> 693
<SECURITIES> 0
<RECEIVABLES> 15,000
<ALLOWANCES> 751
<INVENTORY> 18,176
<CURRENT-ASSETS> 33,755
<PP&E> 64,323
<DEPRECIATION> 32,060
<TOTAL-ASSETS> 71,559
<CURRENT-LIABILITIES> 17,515
<BONDS> 0
0
0
<COMMON> 5,384
<OTHER-SE> 18,382
<TOTAL-LIABILITY-AND-EQUITY> 71,559
<SALES> 26,731
<TOTAL-REVENUES> 26,731
<CGS> 24,468
<TOTAL-COSTS> 40,515
<OTHER-EXPENSES> (203)
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> (13,974)
<INCOME-TAX> (2,460)
<INCOME-CONTINUING> (11,514)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,514)
<EPS-PRIMARY> (2.14)
<EPS-DILUTED> (2.14)
</TABLE>
