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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 JANUARY 2, 1999
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 15, 1999: 5,394,036
Aggregate market value of voting stock held by non-affiliates of the registrant
at March 15, 1999: $11,462,326.
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 January 2, 1999 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 20
through 24 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. 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 and
subsequently merged that company into Aerovox Incorporated. 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.
In August 1998, the Company sold its Power Factor Correction business unit
to a division of General Electric. The remaining product lines are manufactured
in the Company's three North American capacitor plants - one in New Bedford,
Massachusetts and two in Juarez, Mexico, and at its subsidiary, BHC Aerovox, in
Weymouth, England. 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. The capacitors manufactured by the Company
generally use film, paper and aluminum oxide as the dielectric material.
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MARKETS AND APPLICATIONS
<TABLE>
<CAPTION>
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
- --------------------------------------------------------------------------------------------------
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, power factor Power Factor Correction Capacitors
control systems
- --------------------------------------------------------------------------------------------------
EMI/RFI FILTERS Power supplies, industrial equipment, Custom and General Purposes EMI/RFI
computer and telecommunications 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 its
most labor intensive 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 include lighting (for electronic
ballasts in fluorescent fixtures), UPS and power supplies, variable speed
drives, and equipment for audio, communications and welding applications.
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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.
Aluminum Electrolytic Capacitors
Aerovox manufactures AC and DC aluminum electrolytic capacitors for North
and South America and Far East markets in Juarez, Mexico (since 1993).
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. The Company's EMI filter product lines
are assembled in Juarez, Mexico.
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
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 makes
shipment to the United States uneconomical for overseas suppliers. However, Far
East manufacturers are beginning to make inroads into the U.S. markets, and
passage in Congress in early 1997 of the Information Technology Agreement (ITA)
is expected to increase Far East competition, in particular. (The ITA
eliminates tariffs on capacitors
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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, including Vishay and Matsushita,
both of which are larger and have more resources than Aerovox. Accordingly,
Aerovox faces stiff competition, and enjoys only a minor share of this market.
The competitive factors are primarily quality, delivery and pricing.
Aluminum Electrolytic Capacitors
In the North American AC motor-start capacitor market, Aerovox has three
major competitors - North American Philips, North American Capacitor Company
(NACC) and Compania General de Electronica (CGE) in Mexico. 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 pricing, delivery, quality and customer
service.
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 minimal 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.
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 all its plants, 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 have been re-designed to meet these goals. Continuous flow
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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.
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 Europe's leading
manufacturers of aluminum electrolytic capacitors with sales throughout Europe.
PRODUCTS AND MARKETS
BHC Aerovox is a major supplier of AC motor-start capacitors to the
European market, serving the fractional horsepower motor and the compressor
markets. Additionally, BHC Aerovox supplies high-voltage DC capacitors to all
the major European motor drives manufacturers. Other applications for their
products include uninterruptible power supplies, telecommunication power
supplies, traction units for trains, audio/visual equipment, welding equipment
and other general industrial electronics applications. A third product line,
begun in 1996, is electrostatic paper/foil capacitors for microwave ovens.
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.
Among the more significant competitors are Siemens and Evox-Rifa. 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 at value prices.
There is only one European competitor for microwave capacitors (in Italy).
The main competitors are in Korea. Competitive factors are mainly due to
pricing.
BHC's business is subject to influence by foreign currency exchange rates.
The principal raw material is purchased in US dollars from the parent company
and approximately 60% of all sales are outside the United Kingdom, primarily
into Europe and are typically priced in the local currency.
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Introduction of the European Currency Unit ("Euro") is not expected to adversely
affect the financial results of BHC Aerovox.
MANUFACTURING
BHC Aerovox purchases etched aluminum foil from three 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 non-standard parts, custom
designed to meet the specific customer applications. In 1998, BHC Aerovox began
a program of significant investment to upgrade and automate its capacitor
assembly operations.
BHC's microwave production is based on the proven technology from Aerovox
USA and incorporates relatively new product lines.
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 1998, accounted for 10% or more of the net
sales of the Company. In 1998, approximately 41% of the Company's net sales
were to its ten largest customers and 89% 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.
Sales to customers outside the U.S., primarily from BHC Aerovox Ltd., the
Company's United Kingdom subsidiary, represented approximately 23% of total
sales in 1998.
The Company markets its products directly to domestic OEMs and through a
network of independent manufacturers' sales representative organizations which
collectively employ over 150 sales people, and in the case of certain large
customers, directly through its own sales force. In England and Europe, the
Company also sells directly to OEMs and through 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.
The Company continually reviews the performance of its independent
representatives, and from time to time, makes changes in its relationships with
them.
The Company's sales are slightly seasonal and are affected by the buying
cycles of the various industries it serves. 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.
Increasingly, customers require that the Company maintain stock of finished
capacitors for them,
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either at Aerovox plants or at the customer's designated location. This trend
has resulted in an increase in the Company's investment in finished goods
inventory.
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 6.5 weeks of production.
The Company's manufacturing lead times vary from one to six 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 times.
The Company books orders, for purposes of calculating backlog, when a firm
delivery date that is no more than twelve months out is scheduled. The trend of
major OEM customers to demand shipments from stock, as noted above, reduces the
order backlog and short-term visibility of demand. The total active backlog was
$13.9 million at February 27, 1999, and $19.0 million at February 21, 1998. The
Company expects to fill all backlog orders scheduled for 1999 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.
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.
Its North American manufacturing facilities in New Bedford, Massachusetts and
Juarez, Mexico have achieved International Standards Organization (ISO) 9002
certification. BHC Aerovox Ltd. has been ISO 9001 certified for several years.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
The Company has substantially completed a company-wide project to
convert all
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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. North American headquarters, and the New
Bedford and Juarez II plants converted during the third quarter of 1998. The
remaining two plants will complete their conversion in mid-1999.
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, two 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 twelve active patents and one pending patent.
Aerovox licenses some of its product technology and process know-how to
Lumisistemas in Mexico. An agreement renewing the license was signed by both
companies in September 1996. The Company has also granted a license to American
Radionic to make, use, import, sell, and/or offer for sale a certain capacitor
patented by Aerovox
The Aerovox trademark is registered or registration is pending in 22
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, thirteen 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 27, 1999, Aerovox had 1,428 employees worldwide. An
aggregate of 297 employees hold salaried management, supervisory, sales and
clerical positions and 1,131 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 ten years or more.
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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 2001, and a
three-year contract with the International Brotherhood of Electrical Workers
will also expire in April 2001.
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
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<S> <C> <C> <C>
New Bedford, MA 435,000 Owned -
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Huntsville, AL 85,000 Owned -
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Juarez, Mexico 45,000 Leased 1999
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Juarez, Mexico 100,000 Leased 2003
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Weymouth, England 35,000 Leased 2008
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Weymouth, England 37,000 Owned -
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</TABLE>
Prior to 1997, the Company invested in automation and equipment necessary
to increase production capability (primarily for the metallized polypropylene
product line) in New Bedford. In Weymouth, England, a 27,000 square foot
building to facilitate expanded aluminum electrolytic capacitor and microwave
oven capacitor production was completed in 1995 and $1.4 million was spent on
new production equipment at that plant in 1998. During 1997 and 1998, capital
spending at the Company's North American plants has been limited to maintenance,
environmental and cost reduction projects. Equipment at Plant I in Juarez
continues to be upgraded 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. The Company believes that its
facilities are adequate for its foreseeable needs.
As a result of the environmental matter related to the Company's New
Bedford plant, as described in Item 3 below, the Company will construct a new
plant to house the headquarters and manufacturing operations currently conducted
in that facility. The Company is currently in negotiations with the City of New
Bedford to receive a grant of land in that city, and expects to begin
construction of a new plant and headquarters during 1999 and to complete the
relocation in 2000. This project will cause the Company to expend capital or
incur lease obligations of between $8.0 and $12.0 million. The Company believes
it can obtain the financing necessary to complete this project.
ITEM 3. ENVIRONMENTAL MATTERS
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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 $7.2 million 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 $6.0 million has been classified as a long-term liability and $0.4
million was expended and charged against the reserve in 1998 for engineering and
legal services. 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 $5.8 million.
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 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.
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 ten 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
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Stormwater Best Management Practices Plan. Aerovox will proceed with
implementation of the plans upon receipt of EPA and DEP approvals. The Company
can not 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 1998.
ITEM 4A. EXECUTIVE OFFICERS - Set forth below are the names, ages and positions
of the executive officers of Aerovox in 1998 and currently:
<TABLE>
<CAPTION>
NAME AGE OFFICE(S)
- -------------------- --- -----------------------------------------------------------------------
<S> <C> <C>
Robert D. Elliott......47 President and Chief Executive Officer
Timothy J. Brown.......49 Senior Vice President, Marketing and Sales
Martin Hudis...........56 Senior Vice President, Technology Development
Ted M. Miller..........56 Senior Vice President, Engineering and Operations
Earl F. Sherman........62 Senior Vice President, Business Development
Jeffrey A. Templer.....51 Senior Vice President, Chief Financial Officer, Secretary 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. Brown graduated with a Bachelor of Arts degree in Physics from Hamilton
College (1971) an received a Master of Arts from the University of Massachusetts
(1973). From 1987 to 1998, Mr. Brown was Vice President of Marketing and Sales
at Alberox Corporation, a manufacturer of technical ceramics. He joined Aerovox
in April, 1998 as Senior Vice President, Marketing and 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
12
<PAGE>
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. He became Senior Vice President,
Engineering and Operations in September, 1998.
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). From 1985 to 1996, Mr. Templer was employed by Freudenberg and
Company, and its subsidiaries, as Vice President, Finance (1985-1991), and
President and CEO (1992-1996) of Freudenberg Nonwoven, a manufacturer of
industrial fabrics and materials. In June 1996, Mr. Templer joined Aerovox as
Senior Vice President and Chief Financial Officer and was appointed Treasurer in
August, 1996 and Secretary in May, 1998.
13
<PAGE>
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 January 2, 1999, 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 15, 1999 was 8,738. Of that total, 6,132
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item appears in the Company's 1998 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 1998 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 1998 Annual Report to Stockholders on the pages indicated below and
are incorporated herein by reference:
Consolidated Statements of Operations for the years ended January 2, 1999, 15
December 27, 1997, and December 28, 1996.
Consolidated Statements of Stockholders' Equity for the years ended January 15
2, December 27, 1997, and December 28, 1996.
Consolidated Balance Sheets at January 2, 1999 and December 27, 1997. 16
Consolidated Statements of Cash Flows for the years ended January 2, 1999, 17
December 27, 1997, and December 28, 1996.
Notes to Consolidated Financial Statements 18
Report of Independent Accountants 36
14
<PAGE>
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
(a) Directors - Information with respect to all directors may be found in
the Company's definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders on pages 1 through 4 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 1999 Annual Meeting of Stockholders on pages 10 and 14 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 1999 Annual Meeting of Stockholders on pages 16 and 17 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 20 through 23 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.
15
<PAGE>
FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts for the years ended January 17
2, 1999, December 27, 1997, and December 28, 1996.
Report of Independent Accountants on Financial Statement Schedules. 18
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 in 1998. On March 8, 1999, the Company
filed Form 8-K relating to the agreement in principle to acquire the capacitor
business of Compania General de Electronica of Mexico City.
16
<PAGE>
AEROVOX INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------------------------
BALANCE AT CHARGED CHARGED TO DEDUCTIONS BALANCE
DESCRIPTION BEGINNING TO OTHER DESCRIBE(1) END OF
OF PERIOD EXPENSE ACCOUNTS PERIOD
<S> <C> <C> <C> <C> <C>
Year ended January 2, 1999:
Allowance for doubtful $617 $115 - $126 $606
accounts receivable
Year ended December 27, 1997:
Allowance for doubtful $685 $ 4 - $ 72 $617
accounts receivable
Year ended December 28, 1996:
Allowance for doubtful $635 $715 - $665 $685
accounts receivable
</TABLE>
(1) Write-off of accounts receivable.
17
<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 1998
Annual Report to Stockholders of Aerovox Incorporated. In connection with our
audit of such financial statements, we have also audited the related financial
statement schedule listed in Item 14(b) of this Form 10-K. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements as a whole, presents fairly, in all
material respects, the information required to be included therein.
BY /S/ PRICEWATERHOUSECOOPERS LLP
----------------------------------
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 23, 1999, except for certain
information presented in Note 3 for which the
date is February 26, 1999
18
<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 Financial
March 29, 1999 Officer
March 29, 1999
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/ SHEREL D. HORSLEY Chairman of the Board March 29, 1999
- --------------------- of Directors
Sherel D. Horsley
/S/ JOHN F. BRENNAN Director March 29, 1999
- -------------------
John F. Brennan
/S/ DENNIS HOROWITZ Director March 30, 1999
- -------------------
Dennis Horowitz
/S/ WILLIAM G. LITTLE Director March 29, 1999
- ---------------------
William G. Little
/S/BENEDICT P. ROSEN Director March 26, 1999
- --------------------
Benedict P. Rosen
/S/ JOHN L. SPRAGUE Director March 26, 1999
- -------------------
John L. Sprague
19
<PAGE>
EXHIBIT INDEX
AEROVOX INCORPORATED FORM 10-K
(FOR FISCAL YEAR ENDED JANUARY 2, 1999)
<TABLE>
<CAPTION>
Exhibit Page/SEC
Item Exhibit Document
- ------ ----------- -----------------
<S> <C> <C> <C>
(3) Articles of Incorporation and By-Laws.
--------------------------------------
3.1 Restated Certificate of Incorporation. 3.1 *
3.1.1 Certificate of Designations, Preferences 3.1.1 Form 10-K for
and Rights of Series A Junior Participating year ended
Preferred Stock. Dec. 30, 1989
3.2 Certificate of Ownership and Merger of Aerovox 3.2 *
Incorporated (a 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 4.1 *
holders (See Exhibits 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 4.4 Form 10-K for
Agreement, dated July 8, 1993, between the year ended
Company and the First National Bank of Boston. Jan. 1, 1994
4.4.1 First Amendment to Amended and 4.3 Form 10-Q for
Restated Revolving Credit Agreement, quarter ended
dated August 30, 1994, between the Oct. 1, 1994
Company, BHC Aerovox Ltd. and the First
National Bank of Boston.
4.4.2 Revolving Credit Facility, dated 4.4.2 Form 10-K for
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
September 7, 1994, between BHC Aerovox Ltd. year ended
and the First National Bank of Boston. Dec. 31, 1994
4.4.3 Second Amendment to Amended and 4.4.3 Form 10-K for
Restated Revolving Credit Agreement, dated year ended
December 29, 1995. Dec. 30, 1995
4.4.4 Third Amendment to Amended and 4.4.4 Form 10-Q for
Restated Revolving Credit Agreement, dated May quarter ended
15, 1996. June 29, 1996
4.4.5 Fourth Amendment to Amended and 4.4.5 Form 10-Q for
Restated Revolving Credit Agreement, dated quarter ended
November 1, 1996. September 28, 1996
4.4.6 Fifth Amendment to Amended and 4.4.6 Form 10-K for
Restated Revolving Credit Agreement, dated year ended
February 14, 1997. December 28, 1996
4.4.7 Sixth Amendment to Amended and 4.4.7 Form 10-K for
Restated Revolving Credit Agreement, dated year ended
February 27, 1998. December 27, 1997
Filed Herewith:
4.4.8 Seventh Amendment to Amended and ---- ----
Restated Revolving Credit Agreement, dated
September 28, 1998.
Filed Herewith:
---- ----
4.4.9 Eighth Amendment to Amended and
Restated Revolving Credit Agreement, dated
February 18, 1999.
4.5 Loan and Security Agreement, dated March 30, 4.5 Form 10-K for
1992, between the Company and The CIT year ended
Group/Equipment Financing, Inc., as amended by Jan. 2, 1993
Amendment No. 1 dated March 1, 1993.
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
4.5.1 Amendment No. 2 dated May 30, 1995. 4.5.1 Form 10-K for
year ended
Dec. 30, 1995
</TABLE>
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
-----------------------
<TABLE>
<S> <C> <C>
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 10.3.1 Form 10-K for
Supplemental Savings Plan. year ended
Dec. 29, 1990
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 10.5.1 Form 10-K for
Directors. year ended
Dec. 31, 1994
10.7 Forms of Indemnification Agreements between
Aerovox Incorporated and its directors and 10.7 *
certain officers.
10.8 Severance Agreements:
(a) Severance Agreement with Robert D. Elliott 10.8
Form 10-K for
year ended Dec.
28, 1996
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C>
(b) Severance Agreement with Jeffrey A. Templer 10.8
Filed Herewith:
(c) Severance Agreement with Timothy J. Brown ---- ----
(d) Form of Severance Agreement with other 10.8 **
executives.
10.9 Consulting Agreements:
(a) Consulting Agreement with Clifford H. Tuttle 10.12
Form 10-K for
year ended
Jan. 1, 1994
(b) Consulting Agreement with Ronald F. Murphy 10.12
Other Agreements
----------------
10.10 Form of Sales Representative Agreement. 10.9 **
10.11 Purchase Agreement dated March 5, 1993 between 2.1 Form 8-K dated
the 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 January 2, 1999. With
the exception of the information 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
January 2, 1999 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.
--------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Filed Herewith:
23.1 Consent of PricewaterhouseCoopers LLP ---- ----
</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.
24
<PAGE>
EXHIBIT 4.4.8
SEVENTH AMENDMENT TO
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
THE SEVENTH AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
(this "Seventh Amendment") is made and entered into as of the 30th day of
September, 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, February 14,
1997 and February 27, 1998 (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:
"ADJUSTED CONSOLIDATED OPERATING CASH FLOW. For any period, an amount
-------- ------------ --------- ---- ----
equal to (i) the sum of (A) EBIT for such period (net of non-recurring items),
plus (B) depreciation, and amortization an all other noncash charges for such
- ----
period, less (ii) the sum of (A) cash payment for all income taxes paid during
----
such period, plus (B) Capital Expenditures for such period to the extent
----
permitted by (S)8.4, provided, however, that Capital Expenditures financed by
-------- -------
term debt shall be excluded in computing Adjusted Consolidated Operating Cash
Flow."
3. ADDITION OF (S)2.13 OF THE CREDIT AGREEMENT. Section 2.13 is hereby
-------- -- ------- -- --- ------ ----------
added to the Credit Agreement immediately following (S)2.12 thereof, which
(S)2.13 shall read as follows:
1
<PAGE>
(S)2.13. LOCK BOX PROVISION
-------- ---- --- ---------
(a) The Borrower agrees to deliver to the Bank an agreement, in form and
substance satisfactory to the Bank, from Wachovia Bank concerning the
Bank's interest in the lock box accounts in the name of the Borrower
at such financial institution (the "Agency Agreement") executed by the
Borrower and Wachovia Bank.
(b) The Borrower agrees to that all payments received by the Bank pursuant
to the Agency Agreement will be the sole and exclusive property of the
Bank. If, notwithstanding the existence of the lock box accounts, the
Borrower receives any cash proceeds of any of the Collateral, whether
in the form of money, check or otherwise, the Borrower will hold such
cash proceeds in trust for the benefit of the Bank in turn such cash
proceeds promptly over to the Bank in the identical form received,
with appropriate endorsements. The Bank shall, on the second Business
Day immediately following the day of the Bank's receipt of payments
pursuant to the Agency Agreement of cash proceeds from the Borrower or
on such later date as the Bank determines that good funds will be
received, and on a provisional basis until final receipt of good
funds, credit to the Obligations as contemplated by (S)2.13(c) all
such cash proceeds which are in the form of money, checks or like
items. For purposes of the foregoing provisions of this (S)2.13(b),
the Bank shall not be deemed to have received any such cash proceeds
on any day unless received by the Bank before 3:00 p.m. (Boston time)
on such day. The Borrower further acknowledges and agrees that any
such provisional credit shall be subject to reversal if final
collection in good funds of the related item is not received by the
Bank in accordance with the Bank's customary procedures and practices
for collecting provisional items.
(c) All payments to be applied towards the Obligations pursuant to
(S)2.13(b) shall, except as otherwise provided, be applied to the
Obligations as follows: (i) first, to any Unpaid Reimbursement
-----
Obligations; (ii) second, to any interest on the Loans then due and
------
payable (and if interest is due and payable on more than one Loan, in
such order as the Bank may determine in its own discretion); (iii)
third, (A) first, to the outstanding principal amount of the Revolving
-----
Credit Loans, and (B) second to any other outstanding Obligations,
(iv) fourth, unless the Bank shall otherwise elect, as cash collateral
------
for any settlement of provisional credit; and (v) fifth, the excess,
-----
if any, shall be credited to the Borrower's operating account with the
Bank. In the event that the Bank shall elect at any time not to apply
the payment as contemplated by the foregoing clause (iv), such
election shall not be deemed a waiver of the Bank's rights to apply
payments pursuant to such clause at a later time, and the Bank shall
be entitled to apply payments pursuant to such at such later time and
from time to time thereafter."
4. AMENDMENT OF (S)4.1 OF THE CREDIT AGREEMENT. Section 4.1 of the
--------- -- --- -- --- ------ ---------
Credit
2
<PAGE>
Agreement is hereby amended to add the following subsections (c) and (d):
"[(S)4.1] (C) COLLATERAL MANAGEMENT FEE. The Borrower agrees to pay a
---------- ---------- ---
collateral management fee to the Bank in the amount of $600.00 per month,
payable in advance on the first day of each month commencing with October, 1998,
for as long as any Obligations remain outstanding.
"[(S)4.1] (D) RESTRUCTURING FEE. The Borrower agrees to pay a
------------- ---
restructuring fee of $25,000, $15,000 of which has been paid previously in
consideration of the covenant waived at June 30, 1998. The balance of
$10,000 shall be paid on the earlier of (i) November 30, 1998 and (ii) the
Closing of the contemplated restructure of the Obligations."
5. ADDITION OF (S)6.18 OF THE CREDIT AGREEMENT. Section 6.18 is hereby
-------- -- ---- --- --- ------ ----------
added to the Credit Agreement immediately following (S)6.17 thereof, which
(S)6.18 shall read as follows:
"(S)6.18. CONSIGNED INVENTORY. As soon as practicable (but in no
--------- ---------
event fewer than ten (10) business days) before Borrower, as consigner, agrees
to deliver goods on consignment to any entity or any location in addition to or
otherwise different from those listed on the Perfection Certificate Supplement
attached hereto as Exhibit A, the Borrower will inform the Bank of the full name
and mailing address of such entity and the location where such goods will be
kept, and will provide to the Bank such other information regarding such
agreement, entity and location as the Bank reasonably may request. Borrowing
Base eligibility for such consigned inventory will not be granted until the
Bank, in its sole discretion, grants such eligibility."
6. AMENDMENT TO (S)6.2 OF THE CREDIT AGREEMENT. (S)6.2 of the
--------- -- ------ -- --- ------ ----------
Credit Agreement is hereby amended to delete the reference to "370 Faunce Corner
Road, North Dartmouth, Massachusetts" and to substitute in place thereof "740
Belleville Avenue, New Bedford, Massachusetts 02745."
7. AMENDMENT TO (S)6.9 OF THE CREDIT AGREEMENT. (S)6.9 of the
--------- -- ------ -- --- ------ ----------
Credit Agreement is hereby amended to designate the current (S)6.9 as subsection
6.9(a) and to add the following sentence at the end of such subsection:
"For each day that the Bank or its designated representative is conducting
such inspection, the Borrower shall pay an auditing charge of $650 per day plus
expenses."
8. AMENDMENT TO (S)6.9 OF THE CREDIT AGREEMENT. (S)6.9 of the Credit
--------- -- ------ -- --- ------ -----------
Agreement is hereby amended to add the following as subsection 6.9(b):
[(S)6.9](B) "In connection with any inspection conducted pursuant to
(S)6.9(a) hereof, the Bank shall have the right to contact any of the Borrower's
account debtors directly to verify the information in such books and records."
9. AMENDMENT TO (S)8.1 OF THE CREDIT AGREEMENT. (S)8.1 of the Credit
--------- -- ------ -- --- ------ ----------
Agreement is
3
<PAGE>
hereby deleted in its entirety and the following substituted in place thereof:
"(S)8.1. DEBT TO WORTH RATIO. As at the end of any fiscal quarter
---- -- ----- ------
commencing with the fiscal quarter ending September 30, 1998, the ratio of
Consolidated Total Liabilities to Consolidated Tangible Net Worth shall be
2.50:1 or less."
10. AMENDMENT TO (S)8.3. OF THE CREDIT AGREEMENT. (S)8.3 of the Credit
--------- -- ------- -- --- ------ ---------
Agreement is hereby deleted in its entirety and the following substituted in
place thereof:
"(S)8.3. DEBT SERVICE COVERAGE. As of the end of any fiscal quarter
---- ------- --------
commencing with the fiscal quarter ending September 30, 1998, the ratio of
Adjusted Consolidated Operating Cash Flow to Consolidated Financial
Obligations for the quarter just ended together with the immediately
preceding three quarters shall not be less than 1.25:1."
11. AMENDMENT TO (S)8.4 OF THE CREDIT AGREEMENT. (S)8.4 of the Credit
--------- -- ------ -- --- ------ ---------
Agreement is hereby deleted in its entirety and the following substitute in
place thereof:
"(S)8.4. CAPITAL EXPENDITURES. As at the end of any fiscal year
------- ------------
commencing with the fiscal year ending December 31, 1998, the total amount of
Capital Expenditures for such fiscal year shall not exceed $7,000,000. To the
extent that Capital Expenditures for the fiscal year ending December 31, 1998
are less than the full amount allowed hereunder, Borrower may carry forward up
to $4,000,000 of the unused allowed amount to the fiscal year ending December
31, 1999."
12. BORROWING BASE REPORT. After the date hereof, all Borrowing Base
--------- ---- ------
Reports required to be submitted by the Borrower shall be in a revised form
acceptable to the Bank.
13. CONDITIONS TO EFFECTIVENESS. This Seventh Amendment shall become
---------- -- -------------
effective when executed and delivered by the respective parties hereto.
14. 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 Seventh Amendment
and the Credit Agreement shall hereafter be read and construed together as a
single document, 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 Seventh Amendment. By executing this Seventh
Amendment where indicated below, the Guarantor hereby ratifies and confirms its
guaranty of the Obligations, and acknowledges and consents to the terms of this
Seventh Amendment.
15. GOVERNING LAW. THIS SEVENTH AMENDMENT SHALL BE GOVERNED BY AND
--------- ---
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND
SHALL TAKE EFFECT AS A SEALED ISNSTUMENT IN ACCORDANCE WITH SUCH LAWS.
4
<PAGE>
16. COUNTERPARTS. This Seventh 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.
17. ENTIRE AGREEMENT. The Credit Agreement as amended by this Seventh
------ ---------
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 not unwritten oral agreements between the
parties.
IN WITNESS WHEREOF, the undersigned have duly executed this Seventh
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: Mark Evitts
------------------
Title: Vice President
--------------
5
<PAGE>
EXHIBIT 4.4.9
EIGHTH AMENDMENT TO
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
THE EIGHTH AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
(this "Eighth Amendment") is made and entered into as of the 18th day of
February, 1999, 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, February 14,
1997, February 27, 1998 and September 30, 1998 (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. The definition of
--------- --- --- ------ ------ ---------
"Borrowing Base" in Section 1.1 of the Credit Agreement is hereby amended to
delete the reference to "80%" in subclause (a) thereof and to substitute in
place thereof "85%," and to delete the reference to "40%" in subclause (c)
thereof and to substitute in place thereof "50%."
3. CONDITIONS TO EFFECTIVENESS. This Eighth Amendment shall become
---------- -- -------------
effective when executed and delivered by the respective parties hereto.
4. 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 Eighth Amendment
and the Credit Agreement shall hereafter be read and construed together as a
single document, and all references in the Credit Agreement or any related
agreement or instrument to the
1
<PAGE>
Credit Agreement shall refer to the Credit Agreement as amended by this Eighth
Amendment. By executing this Eighth Amendment where indicated below, the
Guarantor hereby ratifies and confirms its guaranty of the Obligations, and
acknowledges and consents to the terms of this Eighth Amendment.
5. GOVERNING LAW. THIS EIGHTH 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 WITH SUCH LAWS._
6. COUNTERPARTS. This Eighth 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.
7. ENTIRE AGREEMENT. The Credit Agreement as amended by this Eighth
------ ---------
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 not unwritten oral agreements between the
parties.
IN WITNESS WHEREOF, the undersigned have duly executed this Eighth
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
2
<PAGE>
By: Mark Evitts
-------------------
Title: Vice President
---------------
3
<PAGE>
Exhibit 10.8 ( c )
AEROVOX INCORPORATED
Severance Agreement
-------------------
Agreement, made this 20th day of April, 1998, by and between Timothy J.
Brown ("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
1
<PAGE>
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:
(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) 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
(c) the Company will pay 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
(d) 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
2
<PAGE>
(e) 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
(f) 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.
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.
3
<PAGE>
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 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
4
<PAGE>
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 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
5
<PAGE>
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 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 the fifth anniversary of the date
first written above, 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
6
<PAGE>
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.
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
7
<PAGE>
President & CEO
Timothy J. Brown
Executive
8
<PAGE>
EXHIBIT 13.1
<TABLE>
<CAPTION>
MARKETS/APPLICATIONS PLANTS/TECHNOLOGIES
- -------------------------------------------- --------------------------------------------------
<S> <C>
MOTORS NEW BEDFORD, MASSACHUSETTS
------ --------------------------
. Compressors, air conditioners, . Metallized polypropylene
refrigeration, laundry equipment, pumps, . Metallized polyester
garage door openers, hospital beds . Metallized paper
. Film/foil
LIGHTING JUAREZ, MEXICO - PLANTS 1 & 2
-------- -----------------------------
. Electromagnetic and electronic ballasts . Aluminum electrolytics
for fluorescent and HID fixtures, and . Metallized polypropylene
strobe lights . EMI Filters
POWER ELECTRONICS HUNTSVILLE, ALABAMA
----------------- -------------------
. Variable speed drives, UPS, power . Etched and formed aluminum foil
supplies, transportation, welders, motor
speed controllers, telecommunications
equipment, audio/visual equipment, battery
chargers
SPECIALTY WEYMOUTH, ENGLAND
--------- -----------------
. Medical equipment (defibrillators, X-ray . Aluminum electrolytics
equipment), industrial equipment, . Paper/film/foil
government and university research
Power factor correction equipment and
systems
Power supplies, industrial equipment,
computer and telecommunications
equipment and appliances
</TABLE>
1
<PAGE>
CORPORATE INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Sherel D. Horsley 1
Chairman, Aerovox Inc.
Senior Vice President and Manager of Marketing, the Digital Imaging Group of
Texas Instruments Incorporated
Robert D. Elliott 1, 4
President and Chief Executive Officer
John F. Brennan 1, 2
Dean, Sawyer School of Management, Suffolk University
Dennis J. Horowitz 1, 3
President and Chief Executive Officer, Wolverine Tube, Inc.
William G. Little 3, 4
President and Chief Executive Officer, Quam Nichols Company, Inc.
Benedict P. Rosen 3
Chairman and Chief Executive Officer, AVX Corporation
John L. Sprague 2, 4
President, John L. Sprague Associates
EXECUTIVE OFFICERS
Robert D. Elliott
President and Chief Executive Officer
Timothy J. Brown
Senior Vice President, Marketing and Sales
Martin Hudis
Senior Vice President, Technology Development
Ted M. Miller
Senior Vice President, Engineering and Operations
Jeffrey A. Templer
Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Committee Member
1 Executive
2 Audit
3 Compensation
4 Nominating
Corporate Office
Aerovox Inc.
740 Belleville Avenue
New Bedford, MA 02745-6194
FORM 10K/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 report and
other information about the Company are available through Aerovox's web site on
the Internet. The address is http://www.aerovox.com.
----------------------
Annual Meeting
The Annual Meeting of Shareholders of Aerovox Incorporated will be held on
Monday, May 3, 1999 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(R), under the
symbol ARVX. As of February 22, 1999, Aerovox had approximately 8,500
shareholders. Of that total, 6,152 were shareholders of record.
The Company currently intends to retain all earnings for use in its business and
does not expect to pay dividends for the forseeable future.
The following table sets forth the high and low sales price information as
reported by Nasdaq:
Common Stock Price
<TABLE>
<CAPTION>
1998 1997
High Low High Low
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
First $4.75 $3.13 $5.50 $4.25
Quarter
Second $3.69 $2.75 $5.38 $4.13
Quarter
Third $4.00 $2.75 $7.00 $4.63
Quarter
Fourth $3.13 $1.38 $6.13 $4.31
Quarter
</TABLE>
Transfer Agent and Registrar
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone: (800) 937-5449
2
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
For The Years Ended
Jan. 2, 1999 Dec. 27, 1997 Dec. 28, 1996
<S> <C> <C> <C>
OPERATING RESULTS
Net sales $116,194 $119,658 $125,975
Income (loss) from operations 2,648 (12,574) 143
Net income (loss) 1,786 (11,499) (1,347)
Net income (loss) per share 0.33 (2.15) (0.25)
CASH FLOW
Net cash provided by operating activities $ 1,731 $ 9,361 $ 8,317
FINANCIAL POSITION
Total assets $ 70,571 $ 71,559 $ 84,976
Long-term obligations 17,888 23,808 23,806
Stockholders' equity 25,289 23,766 35,073
</TABLE>
1998 SALES BY MARKET
(MILLION US $116.2)
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Motors 33%
Power Electronics 31%
Lighting 27%
Specialty 7%
EMI Filters 2%
</TABLE>
AEROVOX is a leading manufacturer of film, paper and aluminum electrolytic
capacitors. The Company sells its products 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, motors, power supplies,
photocopiers, telecommunication, computer and medical equipment and industrial
electrical equipment and systems.
The Company's manufacturing facilities are located in New Bedford,
Massachusetts; Huntsville, Alabama; Weymouth, England; and Juarez, Mexico.
3
<PAGE>
SHAREHOLDER LETTER
(PHOTO OF ROBERT D. ELLIOTT)
Dear Fellow Shareholders:
Last year, I defined our 1998 goals as further improving customer responsiveness
by consistently achieving on-time shipping above 90%, while continuing to reduce
end-to-end lead times. I told you we would cut operating expenses and overhead
costs. I informed you of our decision to relocate our New Bedford facility to a
modern, cost-efficient building in the near future. Also, I explained we would
be converting to a fully operational, year 2000-compliant information system
throughout the Company.
I'm proud of the accomplishments we've made in 1998, as we met the challenges
laid before us.
IMPROVED CUSTOMER SERVICE
-------------------------
On-time delivery, a key element in satisfying our customers, has been a focal
point for improvement for the past two years. At year-end 1996, our company-
wide on-time delivery level sat at an unacceptable 62%. At the close of 1997,
we were able to improve that average to 83%. Due to a continued cooperative
effort at all locations and improvements in manufacturing processes, 1998 year-
end company-wide on-time deliveries averaged 90% and are climbing, with shorter
end-to-end lead times. So, not only are we meeting our commitments to our
customers, we are now promising much shorter lead times than we were two years
ago.
A particularly noteworthy accomplishment was made at our electrolytic operation
in Juarez, which had been plagued with manufacturing and delivery problems for
several years. During the second half of 1998, this plant consistently
performed at or above 95% on-time deliveries, a vast improvement over the
disturbing 25% of 1996. It is encouraging to see this facility servicing
customers in such a manner.
COST REDUCTION
--------------
In 1998, we continued to take aggressive cost reduction measures to further
improve profitability. These cost cutting initiatives, which began in 1996,
were evident in our year-end financial results for 1998. Gross margin rates
improved to 17.3%, from 14.1% a year ago, and gross margin dollars increased by
over $3 million, despite a $3.4 million drop in sales.
We are streamlining the business by carefully rationalizing our products and
selectively exiting the production of less profitable lines. We are
reorganizing and redesigning our products, processes, plants and people as we
streamline the business and eliminate waste in all areas. These on-going
efforts are clearly visible at the gross margin line.
The reduction in fixed costs is expected to continue as we relocate our New
Bedford, Massachusetts operations into a new, modern, cost-effective facility in
the nearby New Bedford Industrial Park. Last year, I explained that for a
combination of environmental and cost-efficiency reasons, we decided to vacate
the plant rather than attempting an expensive and unlikely remediation of our
nearly 100 year-old multi-story building.
4
<PAGE>
At this point, the site, which contained abandoned manufacturing buildings, has
been cleared and is being prepared for new construction. Groundbreaking is now
scheduled for the second quarter 1999 on a 130,000 square foot, single-story
facility. We're expecting the construction portion of the project to last about
seven months, with the actual relocation phase taking three to five months. The
entire New Bedford operation should be completely relocated by the end of the
first half of 2000.
The transfer to a new facility in New Bedford signifies the Company's commitment
to the future and dedication to our employees. In a new single-level plant, we
will be able to make additional improvements to manufacturing processes and
operating efficiencies, reduce overhead expenditures and retain our valuable
people.
Our company-wide conversion to a state-of-the-art, year-2000 compliant,
enterprise resource planning system is nearing completion. We have successfully
implemented the new system at three of our five locations, plus corporate
functions, with the remaining two manufacturing sites scheduled to come on-line
in the second quarter of 1999. All accounting systems are now operating on the
new year-2000 compliant system.
TURNING TOWARD THE FUTURE
-------------------------
The past two years have been spent rebuilding the foundation of this great
Company. We now have a strong management team in place, committed to growing
shareholder value by rapidly providing the best quality products and services to
our customers at the lowest possible costs. We are focused on doing this better
than anyone else in our industry.
Building on our work to date, we now have a company-wide initiative underway
called "Two in 2000". This continues very specific goals for further
improvement in the speed and quality of our customer responsiveness, and
additional improvements in working capital management.
Now that the foundation is fixed and improving, we can, and are, turning more
time and attention to growth issues: new account development, more effective
sales and marketing programs, new product development and new business
partnerships.
As I write this, we have recently announced our intention to purchase the
capacitor products of Compania General de Electronica, S.A. (CGE) of Mexico
City. We are very excited about our two companies combining forces. Mr.
Enrique Sanchez Aldunate, the President and principal owner of CGE, together
with his entire team, has built a strong, nimble, competitive organization. We
look forward to Enrique and his colleagues joining our Aerovox team.
This combination will make Aerovox the largest supplier of motor start
capacitors in the world and will strengthen our overall aluminum electrolytic
business. CGE's strong presence in Mexico and throughout Latin America will
open new opportunities for all Aerovox products. The other capacitor lines of
CGE are additive and complementary to those we currently market. We expect our
joining with CGE is just the beginning of a new Aerovox, growing both through
internal development and through newly created partnerships with others.
On your behalf, I would like to express sincere appreciation to the members of
your Board of
5
<PAGE>
Directors. They are a group of devoted individuals who have worked closely and
diligently with your management team, as we have dealt with several difficult
issues during the past two to three years.
Thank you for your continued support and interest. Your entire management team
and Board of Directors look forward with excitement as we move a revitalized
Aerovox into the next Millennium.
Sincerely,
Robert D. Elliott
President and Chief Executive Officer
6
<PAGE>
EXECUTIVE TEAM
(PHOTO OF EXECUTIVE TEAM)
(from left to right: Ted Miller, Martin Hudis, Jeff Templer, Bob Elliott, Graham
Yates, Tim Brown)
<TABLE>
<S> <C>
Ted Miller "1998 was a year in which the cost of goods sold was
Senior Vice President, slashed by over 3%. At the same time, lead times
Engineering continued to shrink and on-time deliveries improved at all
North American plants."
Martin Hudis "The development of both low cost and modern dry capacitor
Senior Vice President, technology, which will provide the foundation for a new
Technology Development line of dry capacitors for line frequency and pulsing
applications, was a major accomplishment in 1998."
Jeff Templer "In 1998, we developed a comprehensive model of the cost
Chief Financial Officer structure of our manufacturing process that will enable us
to drive costs down over the next several years.
Additionally, we were able to achieve our goal of
converting our information systems to a efficient,
state-of-the-art, Year 2000 compliant ERP system."
Graham Yates "During 1998, BHC Aerovox improved on its 1997
Managing Director performance, despite extremely difficult trading
BHC Aerovox Ltd. conditions."
Tim Brown "In the past year, we made great improvements in our
Senior Vice President, customer service posture, including new application
Marketing and Sales engineering resources in major product areas and improved
order entry and expediting capabilities."
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Statements concerning the Company's anticipated performance including future
revenues, costs and profits, or about the development of the Company's markets,
made through this Annual Report, may be deemed forward-looking statements. Such
statements are based on the current assumptions of Aerovox management, which are
believed to be reasonable. However, they are subject to significant risks and
uncertainties, including, but not limited to the important factors described
under "Certain Factors That May Affect Future Results" that could cause actual
results to differ materially from those described in the forward-looking
statements.
RESULTS OF OPERATIONS
The table below depicts significant components from the statement of operations
as percentages of net sales.
<TABLE>
<CAPTION>
For Fiscal Years
-----------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 82.7% 85.9% 85.2%
Gross profit 17.3% 14.1% 14.8%
Selling, general and administrative expenses 15.0% 13.8% 14.7%
Income from operations 2.3% (10.5)% 0.1%
</TABLE>
Fiscal year 1998 ended on January 2, 1999, and included 53 weeks. Fiscal years
1997 and 1996 included 52 weeks. The additional week in 1998 was required to
comply with Company policy that the fiscal year end on the Saturday nearest to
December 31. Because the additional week included in 1998 was the week between
the Christmas and New Year holiday, during which shipping activity is
historically slow and included only three shipping days, the Company believes
the effect on sales and income from operations was immaterial.
1998 VERSUS 1997
Sales
- -----
Consolidated net sales for 1998 were $116.2 million versus $119.7 million in
1997, a decline of 2.9%. Sales of products manufactured by the Company's North
American business units declined 5.3%, to $89.7 million in 1998 from $95.0
million in 1997; whereas, net sales at BHC Aerovox increased 6.0% to $26.5
million in 1998 from $25.0 million in 1997. The decline in net sales was due to
declining prices in the electrical equipment and appliances markets served by
both the North American and European operations of the Company, the loss of
several key customers for the Company's line of microwave and motor run
capacitors, as well as the elimination of the Power Factor Correction Systems
("PFC") business in the second half of the year. Price erosion experienced by
BHC Aerovox was overcome by increases in sales of certain electrolytic
capacitors used in power electronics applications.
8
<PAGE>
In general, the Company's sales are seasonal, with the first two quarters having
higher shipping rates due mainly to seasonal production schedules among OEM
manufacturers of air conditioning equipment. The strength and variation of these
seasonal patterns vary from year to year depending upon weather and other
conditions. During 1998, the Company experienced sharply lower demand in the
first two quarters as compared to 1997, and year-to-date sales at June 28, 1998
were lower by $5.0 million than sales for the same period of the prior year.
During the second half of the 1998, sales increased by $1.6 million over those
of the last six months of 1997, due mainly to weather related demand for air
conditioning equipment in the United States.
Gross Profit
- ------------
Gross profit on sales increased to $20.1 million in 1998 from $16.9 million in
1997 as a result of a significant cost reduction effort, which began in the
fourth quarter of 1997 and continued throughout 1998. Declining prices noted
above offset the positive impact of the cost reductions by approximately $3.0
million.
Research and Development
- ------------------------
Expenditures for research, product development and engineering charged to
selling, general, and administrative expense aggregated $2.5 million and $2.7
million for 1998 and 1997, respectively. Prior to fiscal 1998, these costs were
included with cost of sales on the statement of operations, and presentation of
those years results have been restated to provide comparability.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses increased to $15.0 million in 1998
from $13.8 million in 1997, primarily due to $0.8 million of expenses related to
the implementation of new information systems throughout the Company, which
address improvement of the planning and control systems of the Company as well
as compliance with Year 2000 computing.
Interest Expense
- ----------------
Interest expense for 1998 of $1.5 million was lower by $0.2 million compared to
1997 as a result of more favorable interest rates and a lower average
outstanding balance on the Company's lines of credit and outstanding term loans.
Other Income
- ------------
The $1.2 million increase in other income to $1.5 million in 1998 from $0.3
million in 1997 resulted primarily from the sale of the Company's PFC business
to a unit of General Electric Company. This business entailed the assembly of
capacitor and other component into systems sold to large industrial consumers of
electrical power. The Company remains in the business of manufacturing
capacitors used in power factor systems. A gain on the sale of $0.9 million was
recorded in the third quarter of 1998. An increase in royalty income from
licensees and foreign currency exchange losses account for the remaining $0.2
million increase in other income.
Provision for Income Taxes
- --------------------------
The provision for income taxes included credits against deferred tax accounts of
$0.8 million and
9
<PAGE>
taxes currently payable of $37,000.
1997 VERSUS 1996
Sales
- -----
Consolidated net sales for 1997 were $119.7 million versus $126.0 million in
1996, a decline of 5.0%. Sales of products manufactured by the Company's North
American business units declined 7.3%, to $95.0 million in 1997 from $102.4
million in 1996. 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 partially offset by 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% to $25.0 million 1997 from $23.5 million in 1996, primarily due
to increases in shipments of microwave oven capacitors from a new production
line which began operations in mid-1996.
Gross Profit
- ------------
Gross profit on sales declined to $16.9 million in 1997 from $18.6 million in
1996. As a percentage of sales, gross profit declined to 14.1% in 1997 from
14.8% in 1996. 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 $1.1 million incurred in connection with
the realignment of certain production lines in the Company's New Bedford plant.
Research and Development
- ------------------------
Expenditures for research, and product development and engineering charged to
selling, general, and administrative expense aggregated $2.7 million and $2.8
million for 1997 and 1996, respectively. Prior to fiscal 1998, these costs were
included with cost of sales on the statement of operations, and presentation of
those years results have been restated to provide comparability.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses declined to $13.8 million in 1997
from $15.6 million in 1996. $0.5 million 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.
In the fourth quarter of 1997, the Company recorded a provision of $13.0 million
for environmental costs, plant remediation and impairment of assets. The
provision included a reserve for environmental remediation and associated
consulting, legal and engineering costs of $7.2 million, resulting from the
identification of PCB contamination in the New Bedford plant, and the Company's
consequent decision to vacate that facility. In addition, building and building
improvements, and equipment expected to be abandoned in connection with this
closure were
10
<PAGE>
written off. The effect of this write-off on income from operations, included in
the provision was $5.8 million.
Interest Expense
- ----------------
Interest expense for 1997 of $1.7 million was lower by $0.5 million compared to
1996. The Company made scheduled principal repayments of $2.7 million during
1997, and additional principal repayments of $4.7 million.
Other Income
- ------------
Other income increased $0.6 million to $0.3 million in 1997 from a loss of $0.3
million in 1996. The improvement was the result of increased royalty income from
licenses, as well as lower foreign currency exchange losses.
Provision for Income Taxes
- --------------------------
The provision for income taxes included credits against losses during the period
of $5.7 million, less certain state, local and foreign taxes, and increases in
reserves against deferred tax assets of $3.1 million. These reserves were
deemed necessary due to the historical variability of operating earnings, and
the timing of expirations of tax credits and operating loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, calculated as total current assets less total current
liabilities at January 2, 1999 was $13.5 million compared to $15.2 million at
the end of fiscal 1997. The decrease was due to reclassification of balances
outstanding at end of fiscal year 1998 under certain bank lines as current
liabilities which had been categorized as long-term liabilities at the end of
the prior year, reflecting the terms of new credit arrangements entered into
subsequent to the end of fiscal 1998. (See Note 3 to the Company's 1998
Consolidated Financial Statements.) Excluding the current portion of short term
debt, working capital increased during 1998 from $17.1 million to $20.8 million.
Current ratio was 1.84 at year-end 1998 and 1.82 at year-end 1997. Net accounts
receivable and days sales outstanding in accounts receivable were unchanged
year-end to year-end. Inventories increased by $1.7 million during 1998
primarily due to build up of finished goods in anticipation of customer orders
in the fourth quarter. Net cash provided by operating activities in 1998 totaled
$1.7 million compared to $9.4 million in 1997 and $8.3 million in 1996.
The Company invested approximately $2.8 million in capital assets in 1998
compared to $2.7 million in 1997 and $3.3 million in 1996. Of these totals,
investment in capital assets at BHC Aerovox was $1.6 million, $0.6 million and
$0.9 million, respectively.
The Company's Revolving Credit Agreement, as amended on September 28, 1998,
provides for a credit line of $21.8 million to the Company, including 4.4
million British Pounds ($7.3 million 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 1998, have varied from 7.05% to 8.50% on an annualized basis.
The bank has indicated to the Company their intention to renew the credit line
under similar
11
<PAGE>
terms, although they have not committed to do so. The Company believes that
other lenders will be willing to enter into similar credit arrangements with the
Company should the present lending bank decline to renew the credit line. 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 January 2, 1999, and December 27, 1997, was $14.5 million and $12.7
million, respectively. (See Note 3 to the Company's 1998 Consolidated Financial
Statements.) Net availability under this line at January 2, 1999 was $5.9
million.
On February 22, 1999, BHC Aerovox entered into an agreement with a bank which
provides for 1) a ten-year mortgage on real property in the amount of 500,000
British Pounds, 2) a five-year loan secured by machinery and equipment in the
amount of 1,000,000 British Pounds, and 3) an "Overdraft" credit line allowing
borrowings in British Pounds, European Currency Units, or US Dollars up to
equivalent of 2,500,000 British Pounds. It is the Company's intention to use
these new credit arrangements to repay existing bank debt of BHC, and to fund
future working capital needs of that company.
The Company also has a term line of credit with an equipment financing company
with an outstanding balance at the end of 1998 of $2.3 million compared to an
outstanding balance at the end of 1997 of $3.8 million. These loans, secured by
equipment at the Company's New Bedford facility, have five-year terms and carry
annual interest rates varying from 7.16% to 8.13%. The Company was in violation
of certain financial covenants at January 2, 1999 for which it received a waiver
from the lender. (See Note 3 to the Company's 1998 Consolidated Financial
Statements.)
On February 26, 1999, the Company amended its agreement with this lender. Under
this amendment, the balances outstanding at that date were repaid and additional
funds borrowed under a new promissory note and security agreement in the amount
of $9.0 million, payable monthly over six years, and bearing interest at a rate
of 7.8%. Principal payments due under that note in 1999 are $1.3 million, and
$1.5 million per year thereafter. The additional funds borrowed of $6.8 million
were used to pay down the balance due under the Company's revolving credit
agreement.
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 1998 was
$1.8 million versus a balance at year-end 1997, of $2.2 million.
Cash at January 2, 1999, totaled $1.1 million compared to $0.7 million at
December 27, 1997. In 1998, the Company received $1.6 million in cash, net of
$0.4 million of expenses, from the sale of the Company's Power Factor Correction
Systems business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March, 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The Company plans to adopt the SOP in the fiscal
year ending January 1, 2000. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company currently expenses such costs
12
<PAGE>
as incurred. Management has determined that the effect of the SOP 98-1 will be
immaterial to the Company's consolidated financial position, results of
operations and cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activity" ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter. The Company
has yet to determine its date of adoption. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges of underlying transactions must be adjusted
through fair value through income. If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Management has determined that SFAS 133 will have an immaterial effect on the
Company's consolidated financial statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Year 2000
- ----------
Many currently operational computer systems, software products and other
equipment utilizing microprocessors are coded to accept only two digit entries
in the date code field. These date code fields will need to accept four digit
entries to distinguish twenty-first century dates from twentieth century dates.
This situation is commonly referred to as the "Year 2000 issue".
The Company is currently involved in implementing a year 2000-compliant, state-
of-the-art enterprise resource planning ("ERP") system (the "Millennium
Project") to be completed by the second quarter of 1999. In regards to the Year
2000 issue, the Millennium Project is focused on two objectives: 1) the software
and systems used in the Company's internal business; and 2) the software and
systems of the Company's customers and third-party suppliers. The Company's
products have no date-oriented functionality and, therefore, pose no risks to
customers with respect to the Year 2000 issue.
The new ERP system is now operational in two of the Company's four North
American plants, as well as in BHC. The remaining two plants in North America
will implement the system by the second quarter of 1999. In the event that the
final phase is not completed by the end of the second quarter of 1999,
management believes there will be sufficient time remaining to complete the
Millennium Project as intended prior to the year 2000.
During 1998, the Company expensed $0.8 million ($0.9 million project-to-date at
January 2, 1999) on the Millennium Project and was approximately 85% complete
with the project tasks. In addition to addressing the Year 2000 issue, the
system is expected to improve operating efficiencies, customer service levels
and product costing data. It is therefore impossible to distinguish how much of
the cost of implementation can be attributed to the Year 2000 issue versus the
cost of implementing a more up-to-date and functional information system.
13
<PAGE>
Satisfactorily addressing the Year 2000 issue is dependent on many factors, some
of which are not completely within the Company's control. Should the Company's
internal systems or the internal systems of one or more significant suppliers or
customers fail to achieve year 2000 compliance, the Company's business and its
results of operations could be adversely affected.
Environmental Status
- --------------------
In June 1997, the United States Environmental Protection Agency (EPA) conducted
tests that revealed the presence of polychlorinated biphenyls (PCBs) on surfaces
within the Company's New Bedford plant. 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 decided, and 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, the Company wrote-off, as
of December 27, 1997, the undepreciated value of that building, all improvements
thereto, and certain machinery and equipment, and a reserve was established and
charged to income as of December 27, 1997, in the amount of $7.2 million, 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, $0.4 million was expended during 1998 for
such legal and professional services. During 1998, the EPA approved the
Company's plan to dismantle and dispose of the building, and the Company is
currently engaged in discussions with the EPA regarding the timing of the
planned dismantling and disposal activity.
14
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Years Ended
(Amounts in thousands, except per share data) Jan. 2, 1999 Dec. 27, 1997 Dec. 28, 1996
<S> <C> <C> <C>
Net sales $ 116,194 $ 119,658 $ 125,975
Cost of sales 96,062 102,731 107,356
------------------------------------------------------
Gross profit 20,132 16,927 18,619
Research and development 2,492 2,708 2,830
Selling, general and administrative expenses 14,992 13,793 15,646
Provision for environmental costs, plant -- 13,000 --
remediation, and impairment of assets
-----------------------------------------------------
Income (loss) from operations 2,648 (12,574) 143
Other income (expense):
Interest expense (1,530) (1,741) (2,263)
Other income (expense) 1,520 323 (331)
-----------------------------------------------------
Income (loss) before income taxes 2,638 (13,992) (2,451)
Provision for (benefit from) income taxes 852 (2,493) (1,104)
-----------------------------------------------------
Net income (loss) $ 1,786 $ (11,499) $ (1,347)
=====================================================
Earnings (loss) per share - basic and diluted $ 0.33 $ (2.15) $ (0.25)
=====================================================
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
(Amounts in thousands) STOCK CAPITAL EARNINGS Profit (LOSS) EQUITY INCOME (LOSS)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 30, 1995 $ 5,299 $ 769 $ 30,128 $ (691) $ 35,505
Net loss -- -- (1,347) -- (1,347) $ (1,347)
Proceeds from employee stock 16 73 -- -- 89
purchase plan and exercise of
stock options (16,254 shares)
Foreign currency translation -- -- -- 826 826 826
---------
Comprehensive loss $ (521)
------------------------------------------------------------------- =========
Balances at December 28, 1996 5,315 842 28,781 135 35,073
-------------------------------------------------------------------
Net loss -- -- (11,499) -- (11,499) $ (11,499)
Proceeds from employee stock 69 195 -- -- 264
purchase plan and exercise of
stock options (69,384 shares)
Foreign currency translation -- -- -- (72) (72) (72)
---------
Comprehensive loss $ (11,571)
------------------------------------------------------------------- =========
Balances at December 27, 1997 5,384 1,037 17,282 63 23,766
-------------------------------------------------------------------
Net income -- -- 1,786 -- 1,786 $ 1,786
Proceeds from employee stock 9 22 -- -- 31
purchase plan and exercise of
stock options (8,842 shares)
Foreign currency translation -- -- -- (294) (294) (294)
Comprehensive income $ 1,492
------------------------------------------------------------------- ---------
Balances at January 2, 1999 $ 5,393 $ 1,059 $ 19,068 $ (231) $ 25,289
===================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) JAN. 2, 1999 DEC. 27, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 1,149 $ 693
Accounts receivable, net of allowance for doubtful
accounts of $606 in 1998 and $617 in 1997 14,220 14,249
Inventories 19,906 18,176
Prepaid expenses and other current assets 566 637
--------------------------------------
Total current assets 35,841 33,755
Property, plant and equipment, at cost:
Land 290 303
Buildings and improvements 3,197 3,190
Machinery and equipment 63,351 60,830
--------------------------------------
66,838 64,323
Less accumulated depreciation and amortization (36,338) (32,060)
--------------------------------------
30,500 32,263
Deferred income taxes 4,146 5,385
Other assets 84 156
--------------------------------------
Total assets $ 70,571 $ 71,559
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,490 $ 10,351
Accrued compensation and related expenses 3,048 2,887
Other accrued expenses 2,374 3,030
Current maturities of long-term debt 7,376 1,909
Income taxes 84 362
--------------------------------------
Total current liabilities 22,372 18,539
Deferred income taxes 5,022 5,446
Industrial revenue bond 1,292 1,750
Long-term debt less current maturities 9,916 14,973
Reserve for environmental costs and plant remediation 6,033 6,033
Deferred compensation 647 1,052
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;
5,393,221 and 5,384,379 shares issued and outstanding 5,393 5,384
Additional paid-in capital 1,059 1,037
Retained earnings 19,068 17,282
Accumulated other comprehensive profit (loss) (231) 63
--------------------------------------
Total stockholders' equity 25,289 23,766
--------------------------------------
Total liabilities and stockholders' equity $ 70,571 $ 71,559
======================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
(Amounts in thousands) JAN. 2, 1999 DEC. 27, 1997 DEC. 28, 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,786 $ (11,499) $(1,347)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Provision for bad debts -- -- 50
Depreciation and amortization 4,366 4,602 4,673
Environmental cost, plant remediation and write- -- 13,000 --
down of impaired assets
Gain on sale of business unit (949) -- --
Loss on disposal of assets -- 349 --
Deferred income taxes 833 (2,801) (1,104)
Changes in operating assets and liabilities:
Accounts receivable (371) 1,819 3,822
Inventories (1,912) 2,682 3,052
Prepaid expenses 82 408 38
Accounts payable (790) 2,045 (3,069)
Accrued compensation and related expenses 55 (244) 326
Other accrued expenses (1,097) (1,131) 2,183
Income taxes payable (272) 131 (307)
----------------------------------------------------------------
Net cash provided by operating activities 1,731 9,361 8,317
----------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of business unit 2,000 -- --
Acquisition of property, plant and equipment (2,785) (2,661) (3,348)
Other (400) 147 666
----------------------------------------------------------------
Net cash used in investing activities (1,185) (2,514) (2,682)
----------------------------------------------------------------
Cash flows from financing activities:
Proceeds from employee stock purchase plan and
exercise of stock options 30 264 89
Net borrowings (repayments) under line of credit 1,855 (4,616) (3,387)
Long-term borrowings 946 1,500
Payments of long-term debt (1,861) (3,646) (3,481)
----------------------------------------------------------------
Net cash provided by (used in) financing activities 24 (7,052) (5,279)
----------------------------------------------------------------
Effects of exchange rate on cash (114) 34 (65)
----------------------------------------------------------------
Increase (decrease) in cash 456 (171) 291
Cash at beginning of year 693 864 573
----------------------------------------------------------------
Cash at end of year $ 1,149 $ 693 $ 864
================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,530 $ 1,733 $ 2,263
================================================================
Cash paid during the year for income taxes $ 398 $ 461 $ 582
================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
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 years' financial
statements to conform to the 1998 presentation.
FISCAL YEAR
The Company uses a fiscal calendar, which normally includes 52 weeks, and ends
on the Saturday nearest to December 31. In 1998, the fiscal calendar included 53
weeks ending on Saturday, January 2, 1999, the Saturday nearest to December 31.
Fiscal years 1997 and 1996 ended on December 27 and December 28, respectively,
and each included 52 weeks.
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, "Accumulated other comprehensive profit
(loss)."
CASH
Cash consists of cash on hand.
FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the management of
foreign currency exposures to reduce commodity and financial market risk 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.
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 $4,366,000, $4,602,000,
and $4,673,000
18
<PAGE>
for 1998, 1997, and 1996, 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.
RESEARCH AND DEVELOPMENT
Expenditures for research, and product development and engineering were
$2,492,000, $2,713,000 and $2,830,000 for 1998, 1997 and 1996, respectively.
ENVIRONMENTAL REMEDIATION COSTS
The Company accrues for costs associated with environmental remediation
obligations when such expenditures are probable and reasonably estimable.
Accruals for estimated costs of environmental remediation obligations generally
are recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances 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 (LOSS) PER SHARE (BASIC AND DILUTED)
Net income (loss) 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.
Options to purchase 743,375 shares of common stock at prices ranging from $3.00
to $9.625 per share were outstanding at January 2, 1999 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
19
<PAGE>
of common shares.
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.
NEW PRONOUNCEMENTS
In March 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The Company plans to adopt the SOP in the fiscal
year ending January 1, 2000. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company currently expenses such costs
as incurred. Management has determined that the effect of the SOP 98-1 will be
immaterial to the Company's consolidated financial position, results of
operations and cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activity" ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter. The Company
has yet to determine its date of adoption. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges of underlying transactions must be adjusted
through fair value through income. If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Management has determined that SFAS 133 will have an immaterial effect on the
Company's consolidated financial statements.
20
<PAGE>
NOTE 2 - INVENTORIES:
Inventories consist of the following (in thousands):
JANUARY 2, 1999 DECEMBER 27, 1997
DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL
------------------------------------------------------------
Raw materials $ 7,309 $ 2,528 $ 9,837 $ 7,697 $ 2,060 $ 9,757
Work in process 1,935 276 2,211 2,450 343 2,793
Finished goods 7,021 837 7,858 4,914 712 5,626
------------------------------------------------------------
$ 16,265 $ 3,641 $19,906 $ 15,061 $ 3,115 $18,176
------------------------------------------------------------
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 ($7,302,000 at year-end
exchange rates) line of credit to BHC Aerovox, Ltd. ("BHC"), a wholly-owned
subsidiary of the Company. Amendment Seven to the Agreement was issued on
September 28, 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 the third and fourth
quarters of 1998. 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
$4,000,000 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.
The bank has indicated to the Company their intention to renew the credit line
under similar terms, although they have not committed to do so. The Company
believes that other lenders will be willing to enter into similar credit
arrangements with the Company should the present lending bank decline to renew
the credit line. A commitment fee, equal to one-quarter percent per annum will
be charged on the unused portion of the total commitment. At January 2, 1999,
borrowings outstanding under this Agreement were $14,506,000, including
3,194,000 British Pounds ($5,284,000 at year-end exchange rates); and at
December 27, 1997 the amount was $12,693,000, including 2,440,000 British Pounds
($4,097,000 at year-end exchange rates). Net availability under this line at
January 2, 1999 was $5,900,000.
On February 22, 1999, BHC Aerovox entered into an agreement with a bank which
provides for 1) a ten-year mortgage on real property in the amount of 500,000
British Pounds, 2) a five-year loan secured by machinery and equipment in the
amount of 1,000,000 British Pounds, and 3) an "Overdraft" credit line allowing
borrowings in British Pounds, European Currency Units, or US Dollars up to
equivalent of 2,500,000 British Pounds. It is the Company's intention to use
these new credit arrangements to repay existing bank debt of BHC, and to fund
future working capital needs of that company.
A ten-year Industrial Revenue Bond was issued by the Massachusetts Industrial
Finance Agency in
21
<PAGE>
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 ten-year amortization schedule. $458,000 of principal
is payable in 1999. On January 2, 1999 and December 27, 1997, the bond balance
outstanding under this agreement was $1,750,000 and $2,175,000, 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 monthly. At
January 2, 1999, borrowings outstanding under this agreement were $2,328,000 at
annualized interest rates ranging from 7.16% to 8.13%, and maturing at various
dates through the year 2002; and at December 27, 1997, $3,764,000 at annualized
interest rates ranging from 7.36% to 8.18%. 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 January 2, 1999. The lender waived, on February 10, 1999, its right
to accelerate payment of this debt for violations of these financial covenants.
On February 26, 1999, the Company amended its agreement with the equipment
financing company noted above. Under this amendment, the balances outstanding at
that date were repaid and additional funds borrowed under a new promissory note
and security agreement in the amount of $9,000,000, payable monthly over six
years, and bearing interest at a rate of 7.8%. Principal payments due under that
note in 1999 are $1,250,000, and $1,500,000 per year thereafter.
Total maturities of long-term debt over the next five years are:
YEAR
------------------------------------------------------
1999 $ 7,376,000
2000 2,405,000
2001 2,440,000
2002 2,185,000
2003 1,912,000
Thereafter 2,266,000
NOTE 4 - SALE OF BUSINESS UNIT
On July 29, 1998, the Company sold its Power Factor Correction ("PFC") Systems
business to a unit of General Electric Company. The PFC unit manufactured and
sold equipment used to enhance the efficient use of power by large industrial
plants. Proceeds from the sale were $2,000,000. Included in income for the third
quarter was a gain of $949,000 on the sale of the business.
NOTE 5 - OTHER ACCRUED EXPENSES:
Other accrued expenses consist of the following at January 2, 1999 and December
27, 1997 (in thousands):
22
<PAGE>
1998 1997
--------------------------------
Warranty $ 654 $ 840
Duty 550 370
Environmental cost and
plant remediation 730 1,200
Other 440 620
--------------------------------
$2,374 $3,030
--------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
The Company leases manufacturing space, equipment and software under various
non-cancelable operating leases. Rental expense amounted to $1,717,000 in 1998,
$1,721,000 in 1997, and $1,672,000 in 1996. On January 2, 1999, future minimum
annual rental payments under all leases are as follows:
YEAR
----------------------------------------------------
1999 $1,154,560
2000 $ 842,213
2001 $ 760,952
2002 $ 708,390
2003 $ 612,008
Thereafter $ 524,940
The Company leases, and in turn sublets, office space in North Dartmouth,
Massachusetts. Since rental income from the sublease substantially offsets
rental expense under the lease, 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
$359,000 in 1998, $352,000 in 1997, and $307,000 in 1996, 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 US employees. The Company is liable for claims up
to $150,000 per employee and aggregate claims up to a maximum of $1,875,000
(based on average monthly enrollment) for 1998. 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 $1,816,000 in 1998, $1,867,000 in 1997, and $1,883,000 in
1996.
NOTE 7 - 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.
23
<PAGE>
At January 2, 1999 the Company held foreign currency forward contracts with
costs totaling approximately $1,509,000 (910,000 British Pounds Sterling).
These contracts matured on various dates through February, 1999. The fair
value of these contracts at January 2, 1999 $1,523,000.
At December 27, 1997, the Company held foreign currency forward contracts with
costs totaling approximately $485,000 (289,000 British Pounds Sterling). These
contracts matured on December 29, 1997. The fair value of these contracts at
December 27, 1997 $371,000.
NOTE 8 - 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 ten years from the date of grant (five years in the
case of a 10% shareholder) with respect to ISOs and ten 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, 1998, 1997, and 1996, with respect to the
Plan, is as follows:
24
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
SHARES WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 471,000 $5.59 500,000 $5.59 446,000 $5.57
Granted 239,000 $3.48 67,000 $4.50 140,000 $6.80
Exercised -- -- (61,500) $3.00 (7,000) $3.00
Canceled (66,500) $4.55 (34,500) $8.01 (79,000) $7.88
---------------------------------------------------------------------------------------
Outstanding at end of year 643,500 $4.91 471,000 $5.59 500,000 $5.59
=======================================================================================
Options exercisable at
year-end 265,300 $5.50 257,300 $4.95 293,000 $4.46
=======================================================================================
Options available for
future grant 117,000 289,500 322,000
=======================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
January 2, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
EXERCISE PRICE OUTSTANDING AT AVERAGE REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE JANUARY 2, 1999 CONTRACTUAL LIFE EXERCISE PRICE JANUARY 2, 1999 EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$3.00 - $4.50 404,500 7.0 $3.57 121,700 $3.38
$4.51 - $6.75 105,000 6.2 $5.97 60,000 $5.91
$6.76 - $9.00 134,000 6.3 $8.16 83,600 $8.32
- -------------------------------------------------------------------------------------------------------------------------------
$3.00 - $9.00 643,500 6.7 $4.91 265,300 $5.51
===============================================================================================================================
</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 January 2, 1999, options
for 20,000 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
25
<PAGE>
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 1998, 1997, and 1996, with respect to the
Directors Plan, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 43,875 $6.00 34,375 $6.41 31,665 $6.14
Granted 6,000 $3.50 9,500 $4.50 6,000 $6.50
Exercised -- -- -- -- -- --
Canceled -- -- -- -- (3,290)
-------------------------------------------------------------------------------------------
Outstanding at end of year 49,875 $5.70 43,875 $6.00 34,375 $6.41
===========================================================================================
Options exercisable at
year-end 43,875 $6.00 34,375 $6.42 26,539 $6.29
===========================================================================================
Options available
future grant 18,292 24,292 33,792
===========================================================================================
</TABLE>
The following table summarizes information about stock options outstanding
at January 2, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
RANGE JANUARY 2, 1999 CONTRACTUAL LIFE PRICE JANUARY 2, 1999 PRICE
<S> <C> <C> <C> <C> <C>
$3.00 - $4.50 24,125 5.8 $3.79 18,125 $3.88
$4.51 - $6.75 11,500 5.9 $6.54 11,500 $6.54
$6.76 - $9.63 14,250 5.7 $8.27 14,250 $8.27
---------------------------------------------------------------------------------------------------
49,875 5.8 $5.70 43,875 $6.00
===================================================================================================
</TABLE>
26
<PAGE>
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 1998, 1997 and 1996 was $2.09, $2.83 and $3.83
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 1998, 1997 and 1996: risk-free interest rates as of the grant
dates from 5.13% to 7.14%; no dividend yields; a volatility factor of the
expected market price of the Company's common stock of 38.28%, 33.82%, and
30.97%, respectively; and a weighted average expected life of the options of
9.79, 9.81 , 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 1998, 1997, and 1996 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>
JANUARY 2, 1998 DECEMBER 27, 1997 DECEMBER 28, 1996
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $1,786 $1,673 $(11,499) $(11,784) $(1,347) $(1,493)
Basic earnings (loss)
per share $ 0.33 $ 0.31 $ (2.15) $ (2.20) $ (0.25) $ (0.28)
Diluted earnings (loss)
per share $ 0.33 $ 0.31 $ (2.15) $ (2.20) $ (0.25) $ (0.28)
</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.
27
<PAGE>
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 1998, 1997, and 1996, 8,842,
7,884, and 9,254 shares, respectively, were sold under the ESPP. There were
5,092 shares qualified for future sale on January 2, 1999.
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 January 2, 1999 was approximately $2,496,000.
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 $639,000 in 1998, $506,000 in 1997, and $471,000 in 1996.
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 Section 401k of
the Revenue Code of the United States. Under the Deferred Supplemental Savings
Plan, the Company will make a matching contribution in
28
<PAGE>
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 1998, $85,000 in 1997, and
$252,000 in 1996.
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 are paid an aggregate of $160,000 per year.
NOTE 9 - 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 January 2, 1999, 55,000 shares of Series A Preferred were reserved for
issuance for stock purchase rights (see Note 10). No such rights have become
exercisable and no shares of Series A Preferred have been issued.
NOTE 10 - 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
29
<PAGE>
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.
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 11 - SEGMENT INFORMATION:
The Company is engaged in one operating segment, the manufacture of capacitors
and EMI filters. The Company adopted SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information" during the fourth quarter of 1998.
Statement No. 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also established standards for related disclosures about
products, services and geographic areas.
Information about the Company's operations by geographic area is as follows (in
thousands):
30
<PAGE>
OPERATIONS BY GEOGRAPHIC AREA:
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM MEXICO ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 2, 1999
Sales to unaffiliated customers $ 89,348 $26,465 $ 381 $ $116,194
Transfer between geographic areas 3,981 - 7,073 (11,054) -
-----------------------------------------------------------------------------------------
Total sales $ 93,329 $26,465 $7,454 $(11,054) $116,194
=========================================================================================
Operating profit (loss) $ 872 $ 1,474 $ 302 $ - $ 2,648
Interest expense (1,530)
Interest income 1,520
-----------------------------------------------------------------------------------------
Income before income taxes $ 2,638
=========================================================================================
Identifiable assets $ 60,166 $16,569 $1,806 $ (7,970) $ 70,571
=========================================================================================
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
-----------------------------------------------------------------------------------------
Loss before income taxes $(13,992)
=========================================================================================
Identifiable assets $ 63,103 $15,362 $1,030 $ (7,936) $ 71,559
=========================================================================================
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 $ (1,680) $ 1,077 $ 342 $ - $ (261)
Interest expense (2,263)
Interest income 73
-----------------------------------------------------------------------------------------
Loss before income taxes $ (2,451)
=========================================================================================
Identifiable assets $ 75,535 $15,901 $1,162 $ (7,622) $ 84,976
=========================================================================================
</TABLE>
Transfers between geographic areas are accounted for at cost plus
15% in 1998, 1997, and 1996, except for transfers of etched and
formed foil in 1998 and 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 1998 included a special gain on the sale of certain
assets related to a product line, and 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.
31
<PAGE>
NOTE 12 - PROVISION FOR INCOME TAXES:
The provision for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
JAN. 2, 1999 DEC. 27, 1997 DEC. 28, 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
Federal $(315) $ - $
State - 58
Foreign 352 338 (118)
---------------------------------------------------------------------
Total Current 37 338 (60)
DEFERRED:
Federal 691 (1,974) (1,074)
State 124 (950) (190)
Foreign 93 220
---------------------------------------------------------------------
Total deferred taxes 815 (2,831) (1,044)
---------------------------------------------------------------------
Provision for (benefit from) income taxes $ 852 $(2,493) $(1,104)
=====================================================================
Deferred income taxes arise from (in thousands):
Environmental reserve $ 350 $(2,901) $ -
Accelerated depreciation (355) (2,477) 1,196
Net operating losses 42 (633) (2,033)
Inventory valuation (25) (363) 577
Allowance for doubtful accounts 4 26 4
Compensation related costs 162 286 (71)
Warranty reserve 74 210 (492)
Other 509 (95) (335)
Tax credits 133 (22) (28)
Valuation allowance (79) 3,138 138
---------------------------------------------------------------------
$ 815 $(2,831) $(1,044)
=====================================================================
Income taxes are reconciled to the United States
statutory corporate tax rate as follows (in thousands):
United States corporate tax at statutory rate $ 897 $(4,756) $ (832)
Increase (decrease) arising from:
State taxes 124 (934) (190)
Foreign taxes (193) 50 (218)
Other 103 9 (2)
Change in valuation allowance (79) 3,138 138
---------------------------------------------------------------------
$ 852 $(2,493) $(1,104)
=====================================================================
</TABLE>
32
<PAGE>
The components of the Company's deferred tax assets and liabilities as of
January 2, 1999 and December 27, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, 1999 DECEMBER 27, 1997
DEFERRED TAXES: ASSETS LIABILITIES ASSETS LIABILITIES
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net operating loss carryforwards $ 3,025 $ -- $ 3,067 $ --
Compensation related cost 261 -- 422 --
Allowance for doubtful accounts 173 -- 177 --
Depreciation -- 5,091 -- 5,446
Environmental reserve 2,551 -- 2,901 --
Equipment reserve -- -- 66 --
Inventory reserves 160 -- 135 --
Warranty reserves 208 -- 282 --
Tax credit carry forwards 1,043 -- 1,177 --
Valuation allowance (3,275) -- (3,354) --
Other (69) 512 --
-------------------------------------------------------------------
Total $ 4,146 $ 5,022 $ 5,385 $5,446
===================================================================
</TABLE>
The change in valuation allowance is due to the expiration of foreign tax
credits. At January 2, 1999, the Company had a net operating loss carry-forward
of approximately $7,534,000 for tax purposes, which begin to expire in 2007. At
January 2, 1999, the Company also had $1,043,000 of foreign and other tax
credits which expire from 1999 to 2012.
NOTE 13 - 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, $6,033,000 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. During 1998, the EPA
approved the Company's plan to dismantle and dispose
33
<PAGE>
of the building, and the Company is currently engaged in discussions with the
EPA regarding the timing of the planned dismantling and disposal activity.
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.
NOTE 14 - FOREIGN OPERATIONS:
Summarized financial information for the Company's foreign operations is as
follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
1999 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $10,122 $ 9,045 $ 9,132
Non-current assets 7,826 7,470 8,132
-----------------------------------------
$17,948 $16,515 $17,264
=========================================
Current liabilities $ 5,808 $ 3,138 $ 2,126
Due to parent 428 238 659
Deferred income taxes 824 835 744
Long-term debt 2,465 4,097 6,113
Stockholders' equity 8,423 8,207 7,622
-----------------------------------------
$17,948 $16,515 $17,264
=========================================
Net sales $26,846 $25,880 $24,311
=========================================
Net income $ 1,005 $ 720 $ 840
=========================================
</TABLE>
34
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
JAN. 2, DEC. 27, DEC. 28, DEC. 30, DEC. 31,
(Amounts in thousands, except per share data) 1999 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income statement data:
Net sales $116,194 $119,658 $125,975 $129,311 $126,532
Income (loss) from operations 2,648 (12,574) 143 4,666 6,262
Net income (loss) 1,786 (11,499) (1,347) 1,601 3,024
Basic earning (loss) per share 0.33 (2.15) (0.25) 0.31 0.60
Diluted earnings (loss) per share 0.33 (2.15) (0.25) 0.30 0.56
Balance sheet data:
Total assets $ 70,571 $ 71,559 $ 84,976 $ 89,331 $ 78,397
Long-term obligations 17,888 23,808 23,806 28,777 22,466
Total stockholders' equity 25,289 23,766 35,073 35,505 34,054
</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 January 2, 1999
Net sales $29,528 $32,228 $27,384 $ 27,054
Gross profit 5,227 6,168 4,538 4,199
Net income 325 748 550 163
Earnings per share - basic and diluted 0.06 0.14 0.10 0.03
YEAR ENDED DECEMBER 27, 1997
Net sales $32,616 $34,185 $26,126 $ 26,731
Gross profit 5,923 5,641 2,495 2,868
Net income (loss) 513 340 (838) (11,514)
Earnings (loss) per share - basic and diluted 0.09 0.06 (0.16) (2.14)
</TABLE>
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF AEROVOX INCORPORATED:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Aerovox
Incorporated (the "Company") at January 2, 1999 and December 27, 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 1999 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP (signed)
Boston, Massachusetts
February 23, 1999, except for certain
information presented in Note 3 for which the
date is February 26, 1999
36
<PAGE>
(Aerovox Logo)
740 Belleville Avenue
New Bedford, Massachusetts 02745-6194
www.aerovox.com
- ---------------
37
<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, 333-03693 and 333-11615) of our reports dated February 23,
1999, except for certain information presented in Note 3 for which the date is
February 26, 1999, on our audits of the consolidated financial statements and
the financial statement schedule of Aerovox Incorporated as of January 2, 1999
and December 27, 1997, and for the years ended January 2, 1999, December 27,
1997 and December 28, 1996 which reports are included or incorporated by
reference in this Annual Report on Form 10-K.
BY /S/ PRICEWATERHOUSECOOPERS LLP
--------------------------------
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> SEP-26-1998
<CASH> 1,149
<SECURITIES> 0
<RECEIVABLES> 14,826
<ALLOWANCES> 606
<INVENTORY> 19,906
<CURRENT-ASSETS> 35,841
<PP&E> 66,838
<DEPRECIATION> 36,338
<TOTAL-ASSETS> 70,571
<CURRENT-LIABILITIES> 19,511
<BONDS> 0
0
0
<COMMON> 5,393
<OTHER-SE> 19,895
<TOTAL-LIABILITY-AND-EQUITY> 70,571
<SALES> 116,194
<TOTAL-REVENUES> 116,194
<CGS> 96,062
<TOTAL-COSTS> 113,546
<OTHER-EXPENSES> (1,520)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,530
<INCOME-PRETAX> 2,638
<INCOME-TAX> 852
<INCOME-CONTINUING> 1,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,786
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
