<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended October 2, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File #0-18018
AEROVOX INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 76-0254329
-------- ----------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
740 Belleville Avenue, New Bedford, MA 02745
--------------------------------------------
(Address of principal executive offices) (Zip Code)
(508) 994-9661
--------------
Registrant's telephone number
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
At November 16, 1999, 6,104,866 shares of registrant's common stock (par value,
$1.00) were outstanding, 700,000 of which are restricted and redeemable under
Stockholder Agreements as described in the footnotes to the financial
statements.
<PAGE>
AEROVOX INCORPORATED
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 26,718 $ 27,384 $ 85,728 $ 89,140
Cost of sales 21,941 22,846 69,868 73,207
--------- --------- --------- ---------
Gross profit 4,777 4,538 15,860 15,933
Selling, general and administrative expenses 4,254 4,437 12,574 13,515
--------- --------- --------- ---------
Income from operations 523 101 3,286 2,418
Other income (expense):
Gain on sale of business unit - 949 - 949
Interest expense (468) (358) (1,330) (1,185)
Other income 107 136 100 349
--------- --------- --------- ---------
Income before income taxes 162 828 2,056 2,531
Provision for income taxes 58 278 822 908
--------- --------- --------- ---------
Net income $ 104 $ 550 $ 1,234 $ 1,623
========= ========= ========= =========
Basic and diluted earnings per share $ 0.02 $ 0.10 $ 0.23 $ 0.30
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
AEROVOX INCORPORATED
Condensed Consolidated Balance Sheets
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Oct. 2, Jan. 2,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,227 $ 1,149
Accounts receivable, net 16,194 14,220
Inventories:
Raw materials 9,921 9,837
Work in process 2,576 2,211
Finished goods 7,522 7,858
Prepaid expenses and other current assets 1,156 566
----------- -----------
Total current assets 38,596 35,841
Property, plant and equipment, net 32,529 30,500
Goodwill, net 2,642 -
Deferred income taxes 4,146 4,146
Other assets 188 84
----------- -----------
Total assets $ 78,101 $ 70,571
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,496 $ 9,490
Accrued compensation and related expenses 2,968 3,048
Other accrued expenses 2,518 2,374
Current maturities of long-term debt 7,003 7,376
Income taxes 450 84
----------- -----------
Total current liabilities 20,435 22,372
Deferred income taxes 5,022 5,022
Industrial revenue bond 885 1,292
Long-term debt less current maturities 15,706 9,916
Environmental costs and plant remediation 6,033 6,033
Deferred compensation 459 647
Redeemable common stock 3,033 -
Stockholders' equity:
Common stock 5,400 5,393
Additional paid-in capital 1,069 1,059
Retained earnings 20,187 19,068
Accumulated other comprehensive loss (128) (231)
----------- -----------
Total stockholders' equity 26,528 25,289
----------- -----------
Total liabilities and stockholders' equity $ 78,101 $ 70,571
=========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
AEROVOX INCORPORATED
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
Oct. 2, Sept. 26,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,234 $ 1,623
Adjustments to reconcile net income to cash
provided by operating activities:
Gain on sale of business unit - (949)
Depreciation and amortization 3,670 3,471
Loss on disposal of assets (3) -
Changes in operating assets and liabilities:
Accounts receivable (1,693) (1,519)
Inventories 1,591 (516)
Prepaid expenses and other current assets (297) (538)
Accounts payable (1,758) (941)
Accrued expenses (881) 583
Deferred executive compensation (103) -
Environmental costs and plant remediation (133) (381)
Income taxes payable 301 783
---------- ----------
Net cash provided by operating activities 1,928 1,616
---------- ----------
Cash flows from investing activities:
Proceeds from sale of business unit - 2,000
Cash paid to acquire Capacitores, net of cash acquired (1,721) -
Acquisition of plant and equipment (2,056) (941)
Other 87 (252)
---------- ----------
Net cash (used in) provided by investing activities (3,690) 807
---------- ----------
Cash flows from financing activities:
Net repayments under lines of credit (1,665) (608)
Proceeds from issuance of term debt 12,671 -
Repayment of long-term debt (9,156) (1,763)
Proceeds from employee stock purchase
plan and exercise of stock options 16 10
---------- ----------
Net cash (used in) provided by financing activities 1,866 (2,361)
---------- ----------
Effects of exchange rate on cash (26) (130)
---------- ----------
Increase (decrease) in cash 78 (68)
Cash at beginning of year 1,149 693
---------- ----------
Cash at end of period $ 1,227 $ 625
========== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
AEROVOX INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
These unaudited, condensed, consolidated financial statements should be
read in conjunction with Aerovox Inc.'s ("the Company") Annual Report on
Form 10-K for the fiscal year ended January 2, 1999, and the financial
statements and footnotes included therein. In the opinion of management,
the accompanying financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the
consolidated financial position, results of operations and cash flows of
the Company. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to Securities
and Exchange Commission rules and regulations. The balance sheet data as of
January 2, 1999, included herein, is derived from the Company's audited
financial statements as of January 2, 1999.
Fiscal 1999 consists of 52 weeks, and will end on January 1, 2000.
<PAGE>
(2) EARNINGS PER SHARE (BASIC AND DILUTED)
Net income per share is computed based on the weighted average number of
common and common equivalent shares outstanding during the year, calculated
under the treasury stock method.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Three Months Ended For the Nine Months Ended For the Nine Months Ended
October 2, 1999 September 26, 1998 October 2, 1999 September 26, 1998
- -------------------------------------------------------------------------------------------------------------------------------
Net Shares Per Net Shares Per Net Shares Per Net Shares Per
income share income share income share income share
amount amount amount amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings
Per Share $ 104 5,398,537 $ 0.02 $ 550 5,388,235 $ 0.10 $1,234 5,396,354 $ 0.23 $1,623 5,386,721 $ 0.30
- -------------------------------------------------------------------------------------------------------------------------------
Dilutive Securities:
- -------------------------------------------------------------------------------------------------------------------------------
Options 505 7,247 505 15,009
- -------------------------------------------------------------------------------------------------------------------------------
Diluted
Earnings Per $ 104 5,399,042 $ 0.02 $ 550 5,395,482 $ 0.10 $1,234 5,396,859 $ 0.23 $1,623 5,401,730 $ 0.30
Share
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 740,875 shares of common stock at prices ranging from
$2.813 to $9.625 per share were outstanding at October 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 of
common shares during the three months ended October 2, 1999. Options to
purchase 6,000 shares of common stock at the price of $2.50 were
outstanding at October 2, 1999, and were included in the calculation of
dilutive shares under the treasury stock method because they had a dilutive
effect on earnings per share for the three months ended October 2, 1999.
Options to purchase 686,375 shares of common stock at prices ranging from
$3.375 to $9.625 per share were outstanding at September 26, 1998 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 during the three months ended September 26, 1998. Options to
purchase 92,500 shares of common stock at the price of $3.00 per share were
outstanding at September 26, 1998 and were included in the calculation of
dilutive shares under the treasury stock method because they had a dilutive
effect on earnings per share for the three months ended September 26, 1998.
Redeemable common stock was issued in the acquisition of Capacitores
Unidos, S.A. de C.V. (See Note 5.) The 700,000 shares are anti-dilutive as
the Company's book value at October 2, 1999, exceeds the average market
value of its outstanding common stock for the quarter ending October 2,
1999.
<PAGE>
(3) COMPREHENSIVE INCOME
The Company's comprehensive earnings were as follows:
<TABLE>
<CAPTION>
(In Thousands) For the Three Months For the Nine Months
Ended Ended
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
------- --------- ------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 104 $ 550 $ 1,234 $ 1,623
Foreign currency translation adjustment 389 55 103 (101)
------- --------- ------- ---------
Total comprehensive income $ 493 $ 605 $ 1,337 $ 1,522
======= ========= ======= =========
</TABLE>
(4) NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 1999, SFAS 137
"Deferral of the Effective Date of SFAS 133" was issued to amend the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000.
The Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Under the new Statement,
the accounting for changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and the
resulting designation. The Company will adopt SFAS 133 for its fiscal year
beginning December 31, 2000. Management estimates that the effect of
adopting SFAS 133 would not be material to the consolidated financial
statements.
(5) ACQUISITION
On April 5, 1999, the Company purchased all of the outstanding capital
stock of Capacitores Unidos, S.A. de C.V. ("Capacitores"), a corporation
organized under the laws of Mexico, pursuant to several agreements (each a
"Stock Purchase Agreement" and collectively, the "Stock Purchase
Agreements"), dated as of April 5, 1999, by and among the Company and each
of Bires Investments B.V., Hobir Holding B.V., Kasri Holding B.V., Kato
Holding B.V., Renko Investments B.V., and Tako Holding B.V., all
corporations organized under the laws of The Netherlands (collectively, the
"Sellers"). In a prior transaction, Capacitores had previously acquired the
assets of the capacitor business of Compania General Electronica S.A. de
C.V., ("CGE"), a Mexican corporation. These assets consisted primarily of
inventory and machinery and equipment related to the capacitor business of
CGE, along with an assignment of employees, and all technical know-how,
customer lists, and other intangible assets related to the business. During
1998, the capacitor business accounted for $11.5 million of the sales of
CGE, and approximately $1.4 million of earnings before interest and taxes.
CGE purchased approximately $1.5 million of high-purity aluminum capacitor
foil from the Company during 1998 for use in AC-rated motor start
capacitors.
<PAGE>
The president of CGE, Enrique Sanchez Aldunate, was appointed president of
Capacitores, and has additionally assumed the title of Senior Vice
President of the Company, and was elected to the board of the Company.
After the purchase, Capacitores began operations as "CGE Aerovox".
The aggregate consideration of $7,826,643 paid for the capital stock of
Capacitores consisted of (i) the assumption of obligations of Capacitores
arising from its purchase of assets from CGE, principally three notes
totaling $3,470,000, one of which, in the amount of $1,750,000, was paid by
the Company on April 6, 1999; the remaining two notes are in the amounts of
$1,509,000 and $211,000, and bear interest at 5.10% and 5.22% per annum
respectively, and mature at April 1, 2000 and April 1, 2001 respectively,
(ii) notes of the Company aggregating $1,089,000, accruing interest at a
rate of 5.22% per annum and payable in full on April 4, 2001, (iii) notes
of the Company aggregating $350,000, accruing interest at a rate of 5.32%
per annum and payable in full on April 5, 2002, and (iv) 700,000 shares of
common stock of the Company (the "Registrant Stock"). Each of the Sellers
executed a Stockholders Agreement, dated as of April 5, 1999, with the
Company which provides for certain restrictions on the transfer of the
Registrant Stock and provides that, in certain circumstances and at a date
not earlier than April 5, 2003, nor later than May 5, 2003, the holders of
such Registrant Stock may require the Company to purchase the Registrant
Stock at the then current book value of the Company. The total of
$2,917,643 was ascribed to the Registrant Stock which was composed of the
fair market value of the stock on the date of the transaction, and the
amount ascribed to the right of the Sellers to require the Company to
repurchase the stock at a future date at the then current book value. As of
October 2, 1999, the fair value of the right of the Sellers to require the
Company to repurchase the stock was approximately $1,080,000.
The foregoing description is qualified in its entirety by reference to the
Stock Purchase reference, and the Stockholders Agreement, a copy of which
was filed on Form 8-K on April 14, 1999.
The acquisition has been accounted for under the purchase method of
accounting; the operating results of Capacitores have been included in the
Company's consolidated statement of operations from April 5, 1999. Excess
of cost over the fair value of net assets acquired ($2,781,000) is being
amortized on a straight-line basis over ten years.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Three Months Ended October 2, 1999 compared to Three Months Ended September 26,
1998.
Net sales for the third quarter of 1999 totaled $26.7 million compared with
$27.4 million for the third quarter of 1998, a decrease of $0.7 million or 2.4%.
The reduction in revenue for the quarter was a result of lower sales within
North American operations and at BHC Aerovox Ltd. ("BHC"), the Company's UK
subsidiary, partially offset by sales at CGE Aerovox ("CGE"), the Company's
subsidiary in Mexico City, which was acquired on April 5, 1999.
Gross profits for the third quarter of 1999 totaled $4.8 million or 17.9% of net
sales compared with $4.5 million or 16.6% of net sales, for the same period in
1998. Gross profits improved due to cost control programs within the North
American plants, improved volume in the more profitable lines of business, and
the selective reduction of business among less profitable accounts and product
lines. At BHC, gross margins were 14.0% of sales during the third quarter of
1999 compared with 16.6% during the third quarter of 1998 principally due to
lower volumes of sales and production.
Selling, general and administrative expenses for the third quarter of 1999
totaled $4.3 million compared with $4.4 million for the same period in 1998.
Expenses incurred within the CGE operation, approximately $0.5 million, were
offset primarily by reductions of consulting expenses related to the Company's
implementation of its new information systems in 1998.
Income from operations during the third quarter of 1999 increased 418% to $0.5
million from the third quarter a year earlier due to improved margins and a
reduction in selling, general and administrative spending.
During the third quarter of 1998, the Company had a one-time gain of $0.9
million from the sale of its Power Factor Correction ("PFC") systems business.
Interest expense for the third quarter of 1999 was $0.5 million, compared with
$0.4 million in the same period of 1998. The increase was due to higher levels
of outstanding debt during the third quarter of 1999 compared with the same
period last year. Other income of $0.1 million was primarily due to exchange
rate gains.
Income before taxes was $0.1 million or 0.6% of net sales compared with $0.8
million or 3.0% of net sales for the third quarter of 1998.
The provision for income taxes for the third quarter of 1999 was $0.6 million,
reflecting statutory rates plus adjustments for certain credits, compared with
$0.3 million in the third quarter of 1998.
Net income for the quarter was $0.1 million or $0.02 per common share - basic
and diluted, compared with net income in the third quarter of 1998 of $0.6
million or $0.10 per common share - basic and diluted.
<PAGE>
Nine Months Ended October 2, 1999 compared to Nine Months Ended September 26,
1998.
Net sales for the nine months ended October 2, 1999 were $85.7 million, compared
with net sales of $89.1 million during the first three quarters of 1998, a
decline of 3.8%. Weak demand within the European capacitor industry led to a
decline of approximately 20% in sales by BHC. In North America, sales from CGE
offset lower sales resulting from the 1998 sale of the PFC systems business and
lower prices for lighting and motor run capacitors.
Gross profits for the first three quarters of 1999 were $15.9 million, 0.5%
lower than the comparable period in 1998. In the North American plants, gross
profits improved due to cost control programs, improved volume in the more
profitable lines of business and the selective reduction of business among less
profitable accounts and product lines. As a percentage of sales, gross margins
increased to 19.3% for the nine months ended October 2, 1999 from 17.9% for the
nine months ended September 26, 1998. At BHC, gross margins were down
significantly due to lower volumes of sales and production.
Selling, general, and administrative expenses were $12.6 million during the nine
months ended October 2, 1999, a 7.0% decrease from $13.5 million for the nine
months ended September 26, 1998. As a percentage of net sales, selling, general,
and administrative spending was 14.7% during the first three quarters of 1999
compared with 15.2% during the three quarters of 1998. These costs included $1.0
million of selling, general and administrative expense from CGE during 1999.
Selling, general, and administrative expenses for the three quarters of 1998
included costs associated with the conversion to new information systems, which
are now operational.
Income from operations increased 35.8% during the first three quarters of 1999
to $3.3 million, compared with $2.4 million during the first three quarters of
1998. Operating income from North American operations increased 221% to $3.5
million, while in the UK, a loss of $0.2 million was incurred compared with a
profit of $1.3 million during the same period a year earlier.
During the first three quarters of 1998, the Company had a one-time gain of $0.9
million from the sale of the PFC systems business.
Interest expense for the first three quarters of 1999 was $1.3 million, compared
with $1.2 million during the same period of 1998. The increase was due to a
higher level of outstanding debt during the first three quarters of 1999
compared with the same period last year. Other income was $0.1 million for the
nine months ended October 2, 1999, compared with $0.3 million for the nine
months ended September 26, 1998.
Income before taxes during the first three quarters of 1999 was $2.1 million, or
2.4% of sales compared to $2.5 million, or 2.8% of sales during the first nine
months of 1998.
The provision for income taxes for the first three quarters of 1999 was $0.8
million compared with $0.9 million during the comparable period in 1998. This
reflects statutory rates plus adjustments for certain credits.
Net income for the nine months ended October 2, 1999 was $1.2 million, or $0.23
per common share - basic and diluted, compared with net income of $1.6 million,
or $0.30 per common share during the first three quarters of 1998.
<PAGE>
Liquidity and Capital Resources
Cash at the end of the third quarter of 1999 totaled $1.2 million compared with
$1.1 million as of January 2, 1999. Working capital totaled $18.1 million on
October 2, 1999, and was $13.5 million at January 2, 1999. Current ratio at
October 2, 1999 was 1.9:1, compared with a ratio of 1.6:1 at January 2, 1999. At
the end of the third quarter of 1999, the Company had borrowings of $23.6
million compared with $18.6 million at January 2, 1999. Of the increase,
approximately $5.4 million represents notes and increases in bank credits
incurred as a result of the CGE acquisition.
During the second quarter of 1999, the Company renewed or replaced its Revolving
Credit Agreements. BHC reached agreement with a lender for a credit line of 4.0
million British Pounds ($6.4 million at quarter-end exchange rates), consisting
of term and revolving debt. This line was executed in May 1999, and was used to
pay off the existing bank debt. At October 2, 1999, $4.9 million was outstanding
under the new BHC credit agreements, compared with $5.3 million outstanding at
January 2, 1999 under prior BHC credit agreements.
The Company's Revolving Credit Agreement with a U.S. bank was renewed and
amended on June 30, 1999, providing for a credit line of $14.4 million to the
Company, secured by certain accounts receivable and inventory. The agreement,
which extends to May 31, 2002, provides for interest payable in arrears at the
bank's base rate. In addition, the Company has the option to convert from a bank
base rate loan into a Eurodollar loan at the Eurodollar (LIBOR) rate plus 2% per
annum. The Company also has the option to convert up to $4.0 million of loans to
a Bankers Acceptance facility at interest rates equal to the per annum average
discount rate quoted to the bank on the date of request for such facility, plus
1.75% per annum. The outstanding balance of loans under this agreement was $5.2
million at October 2, 1999. At October 2, 1999, the Company was in compliance
with all financial covenants specified in the agreements.
The Company also has a term loan for $12.0 million, collateralized by certain
equipment in the U.S. At October 2, 1999, $8.1 million was outstanding under
this agreement, bearing interest at 7.80% annually, and with 65 remaining
monthly principal payments of $125,000. At October 2, 1999, the Company was in
compliance with all financial covenants specified in the agreement.
An Industrial Revenue Bond was issued in July 1982 to finance the acquisition of
equipment. Principal and interest, at an annual rate of 7.42%, are payable
monthly to July 1, 2002. On October 2, 1999, the bond balance outstanding under
this agreement was $1.3 million compared with $1.8 million on January 2, 1999.
Management believes existing cash and short-term investments together with funds
generated from operations will be sufficient to meet operating requirements for
the next 12 months.
Acquisition
On April 5, 1999, the Company purchased all of the outstanding capital stock of
Capacitores Unidos, S.A. de C.V. ("Capacitores"), a corporation organized under
the laws of Mexico, pursuant to several agreements (each a "Stock Purchase
Agreement" and collectively, the "Stock Purchase Agreements"), dated as of April
5, 1999, by and among the Company and each of Bires Investments B.V., Hobir
Holding B.V., Kasri Holding B.V., Kato Holding B.V., Renko Investments B.V., and
Tako Holding B.V., all corporations organized under the laws of The Netherlands
(collectively, the "Sellers"). In a
<PAGE>
prior transaction, Capacitores had previously acquired the assets of the
capacitor business of Compania General Electronica S.A. de C.V., ("CGE"), a
Mexican corporation. These assets consisted primarily of inventory and machinery
and equipment related to the capacitor business of CGE, along with an assignment
of employees, and all technical know-how, customer lists, and other intangible
assets related to the business. During 1998, the capacitor business accounted
for $11.5 million of the sales of CGE, and approximately $1.4 million of
earnings before interest and taxes. CGE purchased approximately $1.5 million of
high-purity aluminum capacitor foil from the Company during 1998 for use in AC-
rated motor start capacitors.
The president of CGE, Enrique Sanchez Aldunate was appointed president of
Capacitores, and has additionally assumed the title of Senior Vice President of
the Company, and was elected to the board of the Company. After the purchase,
Capacitores began operations as "CGE Aerovox".
The aggregate consideration of $7,826,643 paid for the capital stock of
Capacitores consisted of (i) the assumption of obligations of Capacitores
arising from its purchase of assets from CGE, principally three notes totaling
$3,470,000, one of which, in the amount of $1,750,000, was paid by the Company
on April 6, 1999; the remaining two notes are in the amounts of $1,509,000 and
$211,000, and bear interest at 5.10% and 5.22% per annum respectively, and
mature at April 1, 2000 and April 1, 2001 respectively, (ii) notes of the
Company aggregating $1,089,000, accruing interest at a rate of 5.22% per annum
and payable in full on April 4, 2001, (iii) notes of the Company aggregating
$350,000, accruing interest at a rate of 5.32% per annum and payable in full on
April 5, 2002, and (iv) 700,000 shares of common stock of the Company (the
"Registrant Stock"). Each of the Sellers executed a Stockholders Agreement,
dated as of April 5, 1999, with the Company which provides for certain
restrictions on the transfer of the Registrant Stock and provides that, in
certain circumstances and at a date not earlier than April 5, 2003, nor later
than May 5, 2003, the holders of such Registrant Stock may require the Company
to purchase the Registrant Stock at the then current book value of the Company.
The total of $2,917,643 was ascribed to the Registrant Stock which was composed
of the fair market value of the stock on the date of the transaction, and the
amount ascribed to the right of the Sellers to require the Company to repurchase
the stock at a future date at the then current book value. As of October 2,
1999, the fair value of the right of the Sellers to require the Company to
repurchase the stock was approximately $1,080,000.
The foregoing description is qualified in its entirety by reference to the Stock
Purchase reference, and the Stockholders Agreement, a copy of which was filed on
Form 8-K on April 14, 1999.
The acquisition has been accounted for under the purchase method of accounting;
the operating results of Capacitores have been included in the Company's
consolidated statement of operations from April 5, 1999. Excess of cost over the
fair value of net assets acquired ($2,781,000) is being amortized on a straight-
line basis over ten years.
Other Matters
PLANT CONSOLIDATION
On August 5, 1999, the Company disclosed its plans to consolidate its Mexican
manufacturing operations. The Company announced that it will consolidate its
Juarez maquiladora operations into the larger of its two existing plants there.
In addition, capacity for the production of AC motor start capacitors and
certain AC film capacitors for lighting applications will be expanded at CGE
Aerovox, in Mexico City.
<PAGE>
PATENT INFRINGEMENT SUIT
On September 28, 1999 the Company announced that it has filed a patent
infringement suit in Los Angeles, CA against several Korean manufacturers and
their U.S. affiliates. The lawsuit names Korean manufacturers Samwha Capacitor
Company Ltd., Kuk Kwang Electric Company Ltd. and Dae Yeong Company Ltd. Also
named are the companies' American associates, Samwha U.S.A. and Pacific Rim
Components Corporation.
The suit alleges the named parties have, and continue to, infringe its patent
for the impregnation and encapsulation of motor run capacitors. The Company is
seeking a permanent injunction against all of the defendants and unspecified
damages.
YEAR 2000 ISSUE
Many currently installed computer systems, software products and other equipment
utilizing microprocessors are coded to accept only two-digit entries in the date
code's "year" field. These date code fields will need to accept four digit
entries to distinguish twenty-first century dates from twentieth century dates.
This is commonly referred to as the "Year 2000" or "Y2K" issue.
The Company commenced a program in 1997 to identify, remediate, test and develop
contingency plans for the Year 2000 issue. As part of this program, the Company
has completed implementation of a state-of-the-art and Y2K-compliant enterprise
resource planning ("ERP") system at all Company locations. The ERP system
includes the principal accounting, manufacturing, and customer service
information processing systems for the Company. Additional projects are underway
to upgrade or replace other equipment or software identified in its review. All
such identified equipment and software were in compliance with Y2K software by
September 30, 1999. In addition, the Company is continually evaluating 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.
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
fail to achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected.
ENVIRONMENTAL STATUS
On October 4, 1999, the Company announced that it has reached a final agreement
with the U.S. Environmental Protection Agency regarding the remediation of
polychlorinated biphenyls ("PCBs") present in its New Bedford facility.
Under the agreement, the Company has agreed to relocate its Belleville Avenue
operations to another area within 16 months, demolish the existing building and
cap the site by November 2011, and continue safety measures implemented in 1997,
which reduce employees' contact with PCBs in the workplace.
At year-end 1997, the Company posted a provision of $13.0 million for
environmental costs, plant remediation and impairment of assets. The provision
included a $7.2 million reserve for environmental remediation and associated
consulting, legal and engineering costs posted as a result of the identification
of PCBs in the plant. From that date through October 2, 1999, $0.6 million was
charged to the reserve,
<PAGE>
primarily for legal and engineering expenses.
Management believes the reserve is adequate for the cost of activities described
above.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). In June 1999, SFAS 137 "Deferral of the
Effective Date of SFAS 133" was issued to amend the effective date of SFAS 133
to fiscal years beginning after June 15, 2000. The Statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. Under the new Statement, the accounting for changes in the fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. The Company will adopt SFAS 133 for
its fiscal year beginning December 31, 2000. Management estimates that the
effect of adopting SFAS 133 would not be material to the consolidated financial
statements.
SAFE HARBOR STATEMENT
This form 10-Q contains forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include expectations regarding the
Company's expenditures and improved operations resulting from the Millennium
Project and Mexican plant consolidation. Such statements are based on
management's current expectations and are subject to a number of uncertainties
and risks that could cause actual results to differ materially from those
described in the forward-looking statements. Such risks include, but are not
limited to, complications resulting the lack of preparedness of its vendors,
suppliers, and/or customers.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6 (a). Exhibits: None
6 (b). Reports on Form 8-K: On August 30, 1999, the Company filed Form 8-K
relating to the resignation of Chief Financial Officer, Jeffrey A. Templer. On
September 17, 1999, the Company filed Form 8-K relating to the appointment of
Martin A. Zelbow as Interim Chief Financial Officer. On October 4, 1999, the
Company filed Form 8-K relating to its patent infringement lawsuit against
several Korean manufacturers and their U.S. associates. On October 21, 1999, the
Company filed Form 8-K relating to the extension of its Shareholder Rights Plan
and appointment of a new Rights Agent.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AEROVOX INCORPORATED
DATE November 16, 1999 BY /S/ ROBERT D. ELLIOTT
------------------------
Robert D. Elliott
President and Chief Executive Officer
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