EXHIBIT 13 PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED JUNE 30, 1997, INCORPORATED BY REFERENCE. PAGE 10 OF ANNUAL REPORT FINANCIAL CONDITION: The Company has financed its working capital requirements and capital spending with cash from operating revenues. Total outstanding debt, including capital lease obligations, was reduced by approximately $5,200,000 in 1997. Debt reduction was achieved as a result of favorable cash flows generated from improved operational performances, including margin improvements in the Company's power distribution products and aerospace operations. Lower inventory and receivable requirements in the Company's electronics operation further contributed to the reduction. The total working capital of the Company was decreased by approximately $4,376,000 as of June 30, 1997. This reduction in working capital is attributable, in part, to the continued success of improved manufacturing flow techniques and vendor management programs, leading to both lower inventory level requirements in support of operations and better utilization of trade credit. Approximately $3,000,000 of the $4,376,000 working capital reduction is due to inventory, receivable and payable conversions to cash, as sales and related production of electronic products declined in the second half of the fiscal year. The Company has made appropriate adjustments in its electronics business to minimize the economic impact associated with the lower sales levels, while still maintaining the needed resources to develop new customer programs. During the fourth quarter of the fiscal year, the Company concluded the sale of its West Jordan, Utah, facility. The Company also sold 80,000 shares of treasury stock to the Retirement Plan for Salaried Employees of Acme Electric Corporation at fair market value on June 27, 1997. These two transactions provided combined proceeds of approximately $1,070,000. ____________________________________________________________ Dollars in thousands ____________________________________________________________ Years ended June 30 1997 1996 1995 ____________________________________________________________ Working Capital $16,719 $21,095 $22,599 ____________________________________________________________ Average Working Capital, as a percent of sales 20.0% 22.6% 23.0% ____________________________________________________________ Cash provided from (used in) Operations 5,748 3,549 (605) ____________________________________________________________ Current Ratio 2.3:1 2.8:1 2.5:1 ____________________________________________________________ Long-Term Debt to Equity 1.2:1 1.5:1 1.5:1 ____________________________________________________________ Capital expenditures and foreign investment combined were $2,531,000, $3,963,000 and $4,272,000 for 1997, 1996 and 1995, respectively. Included in the 1997 and 1996 expenditures is approximately $1,200,000 and $3,000,000, respectively, relating to the new business information system, of which $2,640,000 was financed through third-party lease arrangements. The fiscal 1995 expenditures included $1,500,000 of the Cuba, New York, plant construction costs. The Company anticipates capital expenditures will approximate $2,200,000 in 1998. The Company expects that operating activities in 1998 will produce net cash to fund these capital expenditures and any increase in working capital caused by increased business. At June 30, 1997, the Company had two secured term loans with a combined outstanding balance of $5,344,000, with interest terms of the lower of prime plus 1.5%, or 3% above the London Interbank Eurodollar rate, and a secured line of credit allowing for revolving loans and letters of credit up to $21,000,000 with interest at the lower of prime plus 1.0%, or the London Interbank Eurodollar rate plus 2.5%, with an outstanding balance of $9,788,000. The credit agreement, as amended, provides for a maturity date on the line of credit of December 31, 1998, while the $3,711,000 and $1,633,000 term loans have principal payments due through January 2, 2000, and July 1, 2001, respectively. The Company has purchased an interest-rate protection instrument that provides for a maximum interest rate of 9.6% on $15,000,000 of notional principal debt, currently expiring December 1, 1997, which will be renewed through December 31, 1998. The credit agreement contains certain restrictive covenants, including, but not limited to, interest coverage and debt-to-worth ratios and an annual capital expenditure threshold. At June 30, 1997, the Company was in compliance with the covenants under the credit agreement. Management believes that current financing will provide adequate liquidity in the near term, with intentions to negotiate longer term facility commitments for the future. In the fourth quarter of fiscal 1997, the Company settled the Cuba, New York, landfill matter with the New York State Department of Environmental Conservation (DEC) upon payment of $725,000. The Company also negotiated favorable modifications with McDonnell Douglas Corporation (MDC) concerning the MD-90 aircraft program, in return for which the Company will pay to MDC $237,000 over a six-month period, commencing July 1997. In addition, the Company concluded negotiations, resulting in an agreement with a second existing aerospace customer. The agreement contains performance incentive payments to be made to the Company, contingent upon meeting certain requirements, including but not limited to delivery schedules. The Company anticipates that the impact on fiscal 1998 cash flows related to these incentives will approximate $900,000. PAGES 11 - 12 OF ANNUAL REPORT RESULTS OF OPERATIONS: Acme Electric Corporation reported net income of $136,000, or $.03 per share, on net sales of $94,062,000 for the year ended June 30, 1997, compared with a net loss of $280,000, or $.06 per share, and net income of $992,000, or $.20 per share, for 1996 and 1995, respectively. Net loss from sales to the military/aerospace market for 1997 was $717,000, compared with losses of $1,699,000 and $1,219,000 in 1996 and 1995, respectively. The Company has continued to improve the effectiveness of its Tempe, Arizona, manufacturing operation, thereby better supporting customer product requirements. Sales to the military/aerospace market in 1997 were $8,645,000 compared to sales of $7,698,000 and $6,535,000 in 1996 and 1995, respectively. The Company's ability to generate profits from sales to the military/aerospace markets will be greatly dependent on its ability to continue improvements in manufacturing throughput and process variability at its Tempe facility. The Company realized an operating profit from its aerospace operations in the fourth quarter of the fiscal year ended June 30, 1997. The overall fourth quarter of fiscal year 1997 resulted in a net loss of $178,000 on quarterly sales of $23,355,000, or a net loss per share of $.03, compared with the results of the prior year's quarter of $24,040,000 sales, $148,000 net income and net income per share of $.03. The pre-tax loss for the quarter ended June 30, 1997, of $290,000 included the $725,000 Cuba-landfill settlement expense, the $237,000 contract settlement with the McDonnell Douglas Company associated with the MD-90 aircraft program, and a $60,000 loss incurred on the sale of the idle facility in West Jordan, Utah. These costs were partially offset by $300,000 of favorable fourth quarter events, including reduced accrued vacation charges due to personnel reductions and certain favorable resolutions of doubtful customer receivable balances. In a quarter-to-quarter comparison between fourth quarter 1997 and fourth quarter 1996, after excluding the unusual one-time type expenses (1996: $621,000), the 1996 fourth quarter performance (pre- tax income) bettered the current year quarter result by approximately $380,000. This was primarily a result of the decline in sales experienced by the Company's electronics business in the fourth quarter of fiscal 1997. QUARTERLY UNAUDITED FINANCIAL INFORMATION Dollars in thousands - ------------------------------------------------------------------------ Fiscal Year 1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. - ------------------------------------------------------------------------ Net Sales $23,223 $23,478 $24,006 $23,355 Net Income (Loss) 6 84 224 (178) - ------------------------------------------------------------------------ Annual sales decreased $2,489,000, or 2.6%, from the previous year, compared with an increase of $5,424,000, or 5.9%, in 1996 over 1995 levels. The decline in net sales is attributable to a declining sales trend experienced in the Company's electronics business, where sales decreased nearly $5,500,000 from 1996 levels. Management has currently addressed this situation and resized the work force consistent with current sales levels, with strategies in place to re-establish a positive sales trend, though improvement may be several quarters away. Improvement in both sales and profitability for the overall Company is anticipated through 1998, as favorable results are being produced from Demand Flow Technology implementation and management product strategies. Growth in sales will be dependent upon several factors, including the Company's ability to grow sales of its core line of products sold through distribution, both domestically and internationally, along with the ability to minimize the short-term operational disruptions associated with the continued implementation of advanced manufacturing techniques and the new business system. The Company's sales progression will further be contingent upon continued operational improvements at its Tempe, Arizona, manufacturing facility and its ability to attract new customer programs. Cost of sales as a percentage of sales was 76.2% in 1997, 77.6% in 1996, and 74.4% in 1995. The gross margin percentage improved from 22.3% in 1996 to 23.8% in 1997. This improvement reflects the Company's ability to increase prices on products sold through distribution and improved manufacturing performance at the Tempe, Arizona, facility. The Company's continued improvement in profit margins will be closely tied to the success of its efforts in growing the sales of its core products (transformers) sold through distribution, continued improvement in meeting customer delivery demands for its products sold to the military/aerospace market, and the success of its strategies to attract new customer programs in the electronics market. Research and engineering efforts were relatively constant in the three-year comparison, as expenses as a percent of sales were 4.8% in 1997, compared to 4.9% in 1996 and 5.2% in 1995. Selling and administrative expenses as a percentage of sales were 16.9% in 1997, compared with 15.5% in 1996 and 16.5% in 1995. Included in the 1997 expenses are the DEC settlement ($725,000), MD-90 contract modification costs ($237,000), and performance incentive costs accrued in excess of 1996 amounts (increase of $350,000) relating to the product distribution business performance. The percentage of sales decrease from 1995 to 1996 was mostly due to the increased sales levels in 1996 over 1995 without a corresponding increase in selling costs. Interest expense decreased nearly $570,000 from 1996 to 1997. The lower interest expense is the result of lower average outstanding debt balances maintained during 1997 in support of lower average working capital requirements. Interest expense increased by $400,000 from 1995 to 1996 due to higher average outstanding debt balances incurred in 1996. The Company's long-term debt originates from financing the military/aerospace business over the past ten years. Effective tax (benefit) rates for the most recent three years were 44.6%, (29.7%) and 38.4%, respectively. The fluctuations in the effective rates are generally reflective of the year-to-year variations in the permanent book-to-tax differences as a percent of pre-tax earnings (loss) and the Company's estimations as to the probable realizations of certain deferred state tax assets and minimum tax effects thereon. The Company did not record tax benefit for the loss from its 50%-owned foreign joint- venture and, as such, has generated a higher effective tax (or lower effective benefit) PAGE 13 OF ANNUAL REPORT FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA Dollars in thousands (except per share, employee data and per square-foot amounts) _______________________________________________________________________________________________ Years ended June 30 1997 1996 1995 1994 1993 _______________________________________________________________________________________________ Net Sales $94,062 $96,551 $91,127 $76,233 $75,812 Income (Loss) before cumulative effect of a change in accounting principle 136 (280) 992 (5,659) (673) Cumulative effect of a change in accounting principle -- -- -- -- 219 Net Income (Loss) 136 (280) 992 (5,659) (454) Income (Loss) per common share before cumulative effect of a change in accounting principle .03 (.06) .20 (1.17) (.14) Cumulative effect of a change in accounting principle -- -- -- -- .05 Net Income (Loss) per common share .03 (.06) .20 (1.17) (.09) _______________________________________________________________________________________________ At end of year: Total assets $50,144 $54,180 $56,178 $46,505 $50,053 Working capital 16,719 21,095 22,599 19,319 23,455 Average working capital, as a percent of sales 20.0% 22.6% 23.0% 28.1% 30.3% Ratio of current assets to current liabilities 2.3:1 2.8:1 2.5:1 3.1:1 4.1:1 Investment in property, plant and equipment - net 16,039 16,469 14,657 12,669 15,561 Long-term debt 19,198 24,394 24,419 19,590 21,293 Total shareholders' equity 16,488 15,684 15,849 14,566 20,108 Equity per common share 3.27 3.18 3.22 3.02 4.19 Weighted average number of shares outstanding used to compute income (loss) per common share 4,971,789 4,955,626 4,924,887 4,854,061 4,812,429 _______________________________________________________________________________________________ Average number of hourly employees 473 534 505 444 436 Average number of salaried employees 229 248 251 252 267 Sales per full-time employee equivalent (000's) $ 134 $ 123 $ 120 $ 109 $ 108 Square footage occupied 339,000 339,000 361,000 372,000 465,000 Sales per square foot (000's) $ 277 $ 285 $ 252 $ 205 $ 164 PAGE 14 OF ANNUAL REPORT STATEMENT OF OPERATIONS Dollars in thousands (except per share amounts) _________________________________________________________________________ Years ended June 30 1997 1996 1995 _________________________________________________________________________ Net Sales $94,062 $96,551 $91,127 Costs and Expenses Cost of sales 71,681 74,964 67,837 Research and engineering expenses 4,552 4,735 4,791 Selling and administrative expenses 15,896 14,992 15,023 Interest expense 1,688 2,258 1,866 _________________________________________________________________________ Total Costs and Expenses 93,817 96,949 89,517 _________________________________________________________________________ Income (Loss) Before Income Taxes 245 (398) 1,610 Income Tax Expense (Benefit) 109 (118) 618 _________________________________________________________________________ Net Income (Loss) $ 136 $ (280) $ 992 _________________________________________________________________________ Net Income (Loss) per Common Share $ .03 $ (.06) $ .20 _________________________________________________________________________ The accompanying notes are an integral part of these financial statements. PAGE 15 OF ANNUAL REPORT BALANCE SHEET Dollars in thousands ___________________________________________________________________________ JUNE 30, 1997 JUNE 30, 1996 ___________________________________________________________________________ ASSETS Current Assets ___________________________________________________________________________ Cash $ 398 $ 828 Accounts receivable, net 14,019 15,445 Inventories, net 13,540 15,008 Deferred income taxes 1,238 1,093 Other current assets 499 684 ___________________________________________________________________________ Total Current Assets 29,694 33,058 ___________________________________________________________________________ Property, plant and equipment, at cost: Land and buildings 10,334 11,283 Machinery and equipment 27,169 23,700 ___________________________________________________________________________ Total property, plant and equipment 37,503 34,983 Less accumulated depreciation and amortization (21,464) (19,495) Facilities held for sale, net -- 981 ___________________________________________________________________________ Property, plant and equipment, net 16,039 16,469 ___________________________________________________________________________ Other assets 4,411 4,653 ___________________________________________________________________________ TOTAL ASSETS $50,144 $54,180 ___________________________________________________________________________ ___________________________________________________________________________ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities ___________________________________________________________________________ Accounts payable $ 6,495 $ 6,045 Accrued compensation and other 3,918 3,712 Current portion of long-term debt 2,562 2,206 ___________________________________________________________________________ Total Current Liabilities 12,975 11,963 ___________________________________________________________________________ Long-term debt 19,198 24,394 Other long-term liabilities 1,483 2,139 ___________________________________________________________________________ TOTAL LIABILITIES 33,656 38,496 ___________________________________________________________________________ SHAREHOLDERS' EQUITY ___________________________________________________________________________ Common Stock, $1 par value authorized 8,000,000 shares, issued 5,040,834 and 5,020,153 shares 5,040 5,020 Capital in excess of par value 19,014 18,910 Accumulated deficit (7,558) (7,352) ___________________________________________________________________________ Total capital & accumulated deficit 16,496 16,578 Less treasury stock, at cost: 699 and 80,699 shares 8 894 ___________________________________________________________________________ Total Shareholders' Equity 16,488 15,684 ___________________________________________________________________________ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $50,144 $54,180 ___________________________________________________________________________ The accompanying notes are an integral part of these financial statements. PAGE 16 OF ANNUAL REPORT STATEMENT OF CASH FLOWS Dollars in thousands _________________________________________________________________________ Years ended June 30 1997 1996 1995 _________________________________________________________________________ Cash flows from operating activities: Net Income (Loss) $ 136 $ (280) $ 992 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization 1,979 2,040 2,066 Loss on sale/retirement of fixed assets 58 -- 18 Deferred income taxes 93 (134) 542 Change in assets and liabilities: Accounts receivable, net 1,426 1,808 (2,007) Inventories, net 1,468 2,344 (6,860) Other assets 158 245 1,046 Prepaid and accrued income taxes 31 294 (82) Accounts payable 450 (3,262) 5,075 Reserves for restructuring, net -- -- (896) Accrued compensation and other (51) 494 (499) _________________________________________________________________________ Net cash provided from (used in) operating activities 5,748 3,549 (605) _________________________________________________________________________ Cash flows from investing activities: Additions to property, plant and equipment (2,531) (3,852) (4,072) Proceeds from dispositions of fixed assets 525 -- -- Investment in joint-venture -- (111) (200) _________________________________________________________________________ Net cash used in investing activities (2,006) (3,963) (4,272) _________________________________________________________________________ Cash flows from financing activities: Increase of long-term debt 9,438 14,984 21,445 Reduction of long-term debt (14,278) (14,243) (16,633) Proceeds from employee stock purchase and stock option plans 124 120 773 Sale (purchase) of treasury stock 544 (5) (482) _________________________________________________________________________ Net cash provided from (used in) financing activities (4,172) 856 5,103 _________________________________________________________________________ Net increase (decrease) in cash (430) 442 226 _________________________________________________________________________ Cash at beginning of year 828 386 160 _________________________________________________________________________ Cash at end of year $ 398 $ 828 $ 386 _________________________________________________________________________ Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest $ 1,943 $ 2,413 $ 1,999 Income Taxes $ (14) $ (278) $ 158 _________________________________________________________________________ The accompanying notes are an integral part of these financial statements. PAGE 17 OF ANNUAL REPORT STATEMENT OF SHAREHOLDERS' EQUITY Dollars in thousands ___________________________________________________________________________ Capital Common in stock excess Treasury $1 par of par Accumulated stock, value value deficit at cost ___________________________________________________________________________ Balance June 30, 1994 $4,876 $18,161 $(8,064) $407 ___________________________________________________________________________ Stock options exercised 123 610 ___________________________________________________________________________ Purchase of treasury shares 482 ___________________________________________________________________________ Sales of authorized shares: Employee Stock Purchase Plan 1 8 Employee Savings Plan (401[K]) 3 28 ___________________________________________________________________________ Net Income 992 ___________________________________________________________________________ Balance June 30, 1995 5,003 18,807 (7,072) 889 ___________________________________________________________________________ Stock options exercised 6 23 ___________________________________________________________________________ Purchase of treasury shares 5 ___________________________________________________________________________ Sales of authorized shares: Employee Stock Purchase Plan 2 67 Employee Savings Plan (401[K]) 9 13 ___________________________________________________________________________ Net Loss (280) ___________________________________________________________________________ Balance June 30, 1996 5,020 18,910 (7,352) 894 ___________________________________________________________________________ Stock options exercised 7 23 ___________________________________________________________________________ Sale of treasury shares (342) (886) ___________________________________________________________________________ Sales of authorized shares: Employee Stock Purchase Plan 3 15 Employee Savings Plan (401[K]) 10 66 ___________________________________________________________________________ Net Income 136 ___________________________________________________________________________ Balance June 30, 1997 $5,040 $19,014 $(7,558) $ 8 ___________________________________________________________________________ None of the Company's authorized 500,000 shares of $10 par value preference stock has been issued. The accompanying notes are an integral part of these financial statements. PAGES 18 - 23 OF ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES: a. Acme Electric Corporation designs, manufactures and markets power conversion equipment for electronic and electrical systems. Principal markets encompass computers, test equipment, information systems, military, aerospace, telecommunications and a variety of industrial, commercial and residential applications requiring conversion of electrical energy from one useable state to another. b. The Company was a 50% owner in the Irish-based joint-venture, Acme Electric Limited (AEL). The parties to this venture dissolved and ceased joint operations effective October 1996. Prior to this date, the investment was recorded under the equity method of accounting. The Company's share of cumulative losses from inception, December 1994, approximated $420,000. c. 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. Certain prior year balances have been reclassified to conform to the current year presentation. The major areas in which the Company utilizes estimates include deferred tax assets, reserves for insurance and legal claims, environmental liabilities, product warranty reserves, revenue recognition on long-term contracts, and the net realizable value of certain assets. The amounts contained within these financial statements represent management's best estimate of expected outcomes based on available information. However, the Company realizes that certain events could occur or fail to occur which would impact the estimates by a material amount in the future. d. The Company files a federal income tax return and various state returns. The Company follows the asset and liability approach in accounting for income taxes. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial carrying values and the tax bases of the related assets and liabilities and operating loss and tax credit carry forwards. The deferred income tax provision for the period is the difference in the assets and liabilities as of the beginning and end of the period. e. Inventories are costed at the lower of cost or market and determined on a FIFO (first in, first out) basis. f. The Company utilizes the percentage-of-completion method for long- term contracts in its aerospace business. Revenues are recognized on the percentage-of-completion basis, measured by the percentage of material, labor and overhead costs incurred to date to total estimated material, labor and overhead costs for each long-term contract. g. Depreciation of property, plant and equipment is computed on the straight-line and the sum-of-the-years'-digits methods over the estimated service lives of the assets. At the time of retirement or other disposition of properties, the cost and accumulated depreciation are removed from the accounts and any gains or losses are reflected in income. Maintenance and repairs are charged to expense as incurred; renewals and betterments are capitalized. The range of lives used as a basis for calculating depreciation is as follows: Years ______________________________________ Buildings 20-45 ______________________________________ Machinery and equipment 5-12 ______________________________________ Furniture and fixtures 8-10 ______________________________________ Automobiles and trucks 3-4 ______________________________________ h. Net income (loss) per common share computations are based upon the weighted average number of shares outstanding during each year as adjusted for outstanding stock options. In February 1997, Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," was issued. SFAS No. 128 alters the computation and presentation of reported earnings per share. The Statement is required to be adopted for the interim reporting period ending December 1997. Earlier application is not permitted. The Company does not expect SFAS No. 128 to have a material affect on reported earnings per share. 2. ACCOUNTS RECEIVABLE: _____________________________________________________________ Dollars in thousands 1997 1996 _____________________________________________________________ Billed $14,291 $14,938 Unbilled 251 896 _____________________________________________________________ Subtotal $14,542 $15,834 Less allowance for doubtful accounts (523) (389) _____________________________________________________________ Accounts receivable, net $14,019 $15,445 _____________________________________________________________ Unbilled receivables are comprised of revenue amounts on long-term contracts which have been earned, but not yet billed. Management anticipates that unbilled receivables at June 30, 1997, will be substantially billed and collected in fiscal year 1998. 3. INVENTORIES: __________________________________________ Dollars in thousands 1997 1996 __________________________________________ Raw Material $ 7,144 $ 6,733 Work in Process 2,365 3,876 Finished Goods 4,031 4,399 __________________________________________ Total Inventories $13,540 $15,008 __________________________________________ Inventories are reported net of the reserves for obsolescence of $546,000 and $399,000 in 1997 and 1996, respectively. 4. LONG-TERM DEBT: _____________________________________________________ Dollars in thousands 1997 1996 _____________________________________________________ Secured revolving loan $ 9,788 $13,288 Secured term loan with quarterly principal installments of $337,360 each, and interest paid monthly at the lower of prime plus 1.5%, or the Eurodollar (London Interbank Eurodollar) rate plus 3.0% through January 2, 2000. 3,711 4,723 Secured term loan with monthly principal installments of $33,333 each, and interest paid monthly at the lower of prime plus 1.5%, or the Eurodollar (LIBOR) rate plus 3.0% through July 1, 2001. 1,633 2,000 Secured loan on the Cuba facility payable over 20 years, with monthly payments for the first four years of interest only of $6,666, with monthly payments of $14,120, consisting of principal and interest at 4%, commencing September 1, 1997, and continuing over the remaining sixteen years. 2,000 2,000 Secured loan on the Cuba facility payable, with interest only at 1% through September 1, 1998, 36 monthly principal and interest payments of $9,396 at 3%, commencing October 1, 1998, and 168 monthly principal and interest payments of $11,347 at 6% due through September 2015. 1,500 1,500 Capital lease secured by new busi- ness information system equipment and a $900,000 letter of credit, payable in monthly installments of $42,662, consisting of principal and interest at 10.09%, maturing December 2001. 1,474 1,818 Capital lease secured by new busi- ness information system equipment with monthly installments of $20,546, consisting of principal and interest at 9.85%, maturing November 1999. 528 -- Capital lease obligation secured by related building, machinery and equipment at the Cuba, New York, facility, payable in quarterly principal installments of $5,208, with interest paid monthly on the unpaid balance at a rate of prime plus 1.5% through April 1, 2017. 427 448 Other debt 699 823 _____________________________________________________ Total debt 21,760 26,600 Current portion (2,562) (2,206) _____________________________________________________ Long-term portion $19,198 $24,394 _____________________________________________________ The Company has a credit agreement with a banking institution, which provides for borrowings and letters of credit up to a maximum of $26,344,000. This credit agreement is comprised of two secured term loans in the amount of $3,711,000 and $1,633,000 and a $21,000,000 secured revolving loan. The revolving loan carries an interest rate equal to the lower of prime plus 1.0%, or the London Interbank Eurodollar rate plus 2.5%, with a maturity date of December 31, 1998. The Company maintains interest rate protection, which allows for a maximum interest rate of 9.6% on $15,000,000 of notional principal debt. Outstanding borrowings against the revolving credit facility are limited by formula to specified amounts of accounts receivable and inventory, reduced by outstanding term debt. The Company pays a maximum annual commitment fee of 1/4 of 1% per annum on the unused portion. Under the terms of the credit agreement, the Company is required to meet certain restrictive covenants with respect to interest coverage and debt-to-worth ratios. The covenants further limit the Company's annual capital expenditure to a maximum of $2,200,000. At June 30, 1997, the Company was in compliance with the covenants under the credit agreement. During the next five years, long-term debt matures as follows: 1998 - $2,562,000, 1999 - $2,691,000, 2000 - $2,257,000, 2001 - $924,000, and 2002 - - $220,000. These amounts do not include any maturities relating to the revolving loan. 5. STOCK OPTION PLANS: Options were granted under the 1981 Incentive Stock Option Plan at the fair market value on the day preceding the date of the grant and are exercisable in varying amounts through 1999. The 1981 Plan expired in October, 1992. Options granted under the 1981 Plan expire in accordance with their respective terms. Options are granted under the 1989 Incentive Stock Option Plan at the fair market value on the day preceding the date of the grant and are exercisable in varying amounts through 2006, with vesting at 25% a year from date of grant. An amendment of the 1989 Stock Option Plan was approved at the annual meeting of shareholders held on October 27, 1995, to apply a formula for the award of further options after each year of profitable operation and to increase the number of shares subject to the Plan from 225,000 to 450,000. In accordance with the formula, options will be granted for the fiscal year ended June 30, 1997. The 1996 Directors' Stock Option Plan was adopted on April 29, 1996, by the Company's Board of Directors and approved by the Company's shareholders on October 31, 1996. Options are granted quarterly to each eligible director in lieu of Director Fees and are exercisable a full six months after the date of grant. The option price and number of shares optioned are determined by formula to replace the value of cash directors' fees otherwise due for the preceding quarter. A total of 50,000 shares of Common Stock are available for grant under the Plan. ______________________________________________________________ 1981 Plan 1989 Plan 1996 Directors' Shares Shares Plan Shares ______________________________________________________________ Options outstanding July 1, 1996 16,547 91,500 - Options granted - - 5,426 Options exercised - (6,500) - Options cancelled (5,512) (14,000) - ______________________________________________________________ Options outstanding 11,035 71,000 5,426 June 30, 1997 ______________________________________________________________ Options exercisable at June 30, 1997 11,035 43,250 - ______________________________________________________________ Exercise prices per share $5.72- $4.06- $1.89- $8.56 $11.25 $2.06 Shares available for options at June 30, 1997 - 268,004 44,574 ___________________________________________________________ The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations in accounting for the stock option plans. Accordingly, no compensation expense was recognized in 1997, 1996 or 1995 for stock option awards made from the 1989 Stock Option Plan, since the exercise price of the stock options granted under the Stock Option Plan was not less than the fair market value of the Common Stock at date of grant. Had compensation expense for stock option awards granted in 1997 and 1996 been determined consistent with SFAS No. 123, net income and earnings per share would be reduced to the pro forma amounts indicated below: Dollars in thousands (except per share amounts) ______________________________________________________ Years ended June 30 1997 1996 ______________________________________________________ Net income (loss) As reported $136 $(280) Pro forma 66 (330) Net income (loss) per common share As reported $.03 $(.06) Pro forma .01 (.07) The Company used the Black Scholes pricing model to estimate the grant date present value of stock options granted in 1997 and 1996. The estimated value per option was approximately $3.80 for those options granted in 1997 and $4.60 for options granted in 1996. The values were calculated using the following assumptions: (i) an option term of 5.5 years (representing the estimated period between grant date and exercise date based on historical data); (ii) a risk-free interest rate approximating 6.48% in 1997 and 6.07% in 1996 (representing the yield on a U.S. Treasury Security with remaining term equal to the expected option term); (iii) expected volatility of 58% for 1997 and 1996; (iv) no future dividends paid; and (v) a 30% forfeiture rate used to reflect the estimate of the probability of forfeiture prior to vesting. The pro forma effects presented above are in accordance with the requirements of SFAS No. 123, however, such effects are not representative of the effects to be reported in future years due to the fact that options vest over several years, and additional awards generally are made each year. 6. LEASES: The Company leases certain manufacturing facilities and equipment, described in Note 4, under lease agreements which have been capitalized, and various other equipment under operating leases. Under the terms of the capital leases, the Company has included $4,436,000 and $3,798,000 in the cost of property, plant and equipment at June 30, 1997, and 1996, respectively. Accumulated depreciation on such assets was $1,074,000 and $1,040,000 at June 30, 1997, and 1996, respectively. Total rental expense under operating leases, which includes the headquarters facility, was $829,000, $1,038,000 and $1,130,000 in 1997, 1996 and 1995, respectively. Minimum future rental commitments under non-cancelable operating leases are approximately $589,000 in 1998; $444,000 in 1999; $326,000 in 2000; $279,000 in 2001; and $275,000 in 2002. 7. INCOME TAXES: The provision for income taxes includes the following: Years Ended June 30 ____________________________________________________________ Dollars in thousands 1997 1996 1995 ____________________________________________________________ Current Federal Expense $ -- $ -- $ 49 State Expense 16 16 27 ____________________________________________________________ Deferred Federal Expense (Benefit) 130 (117) 518 State Expense (Benefit) (37) (17) 24 ____________________________________________________________ Total Provision (Benefit) $ 109 $ (118) $ 618 ____________________________________________________________ Total income tax expense (benefit) for fiscal years 1997, 1996 and 1995 resulted in effective tax (benefit) rates of 44.6%, (29.7%) and 38.4%, respectively. Differences between the statutory federal income tax rate and the effective income tax rate are as follows: _____________________________________________________________ 1997 1996 1995 _____________________________________________________________ Statutory rate (benefit) 34.0% (34.0%) 34.0% Foreign losses not tax effected 5.8% 18.2% 3.4% State taxes, net of federal benefit (5.6%) (.1%) 2.1% Reduction of accumulated reserve -- (17.0%) -- Other 10.4% 3.2% (1.1%) _____________________________________________________________ Effective tax (benefit) rate 44.6% (29.7%) 38.4% _____________________________________________________________ At June 30, the deferred tax assets (liabilities) were comprised of the following: _____________________________________________________________ Dollars in thousands 1997 1996 1995 _____________________________________________________________ Deferred tax assets: Accounts receivable $ 206 $ 156 $ 180 Inventory 446 376 285 Property, plant and equipment -- 186 330 Accrued expenses 696 744 554 Restructuring and impairment charges 463 779 1,028 Loss contingencies -- -- 224 Supplemental Executive Retirement 415 402 383 Other 201 89 139 Loss carry forward 1,511 1,111 754 _____________________________________________________________ 3,938 3,843 3,877 _____________________________________________________________ Deferred tax liabilities: Pensions (1,023) (915) (885) State taxes (207) (195) (189) Property, plant and equipment (81) -- -- _____________________________________________________________ (1,311) (1,110) (1,074) _____________________________________________________________ Net deferred tax asset $2,627 $2,733 $2,803 _____________________________________________________________ The Company has certain federal and state loss carry forwards available to offset future taxable income. The federal tax loss carry forward of $3,500,000 will have portions expire, if unused, in 2009. Portions of the state loss carry forwards, if not used, will expire in 1998. 8. EMPLOYEE BENEFITS RETIREMENT PLANS: The Company maintains three noncontributory defined benefit pension plans covering substantially all employees. The plan covering salaried employees provides pension benefits based upon the employee's individual yearly compensation. Plans covering hourly employees provide benefits of stated amounts for each year of credited service. It is the Company's policy to fund for each qualified plan at least an amount necessary to satisfy the minimum requirements of the Employee Retirement Income Security Act. The amount to be funded is subject to annual review by management and its consulting actuary. In recent years, funding contributions have been restricted due to application of Internal Revenue Code full-funding limitations to one or more of the plans. The Company also maintains a nonqualified Supplemental Executive Retirement Plan (SERP) for elected executive officers of the Company. The SERP provides benefits based upon an executive's compensation in the last year of service and is reduced by benefits received from the salaried plan. Six participants of this plan are retired and receiving payments under the plan. Approximately 5% of the plans' assets are invested in cash and equivalents, 47% are invested in equities, and the remaining 48% are invested in fixed-income securities and annuities. Net periodic pension expense for the three years ended June 30, 1997, included the following components: _________________________________________________________________ Dollars in thousands 1997 1996 1995 _________________________________________________________________ Service cost - Benefits earned during the period $ 630 $ 518 $ 521 Interest cost on projected benefit obligation 1,537 1,521 1,441 Actual return on assets (2,203) (4,666) (1,398) Net amortization, deferral and curtailment gain 46 2,885 (505) _________________________________________________________________ Net periodic pension expense $ 10 $ 258 $ 59 _________________________________________________________________ For plans where: June 30, 1997 June 30, 1996 Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets _________________________________________________________________ Actuarial present value of benefit obligations: Vested benefit obligation $(20,233) $(1,121) $(18,568) $(1,359) Accumulated benefit obligation (20,467) (1,376) (18,718) (2,751) Projected benefit obligation (21,933) (1,413) (20,082) (2,771) Plan assets at fair value 27,511 -- 25,172 1,350 _________________________________________________________________ Funded Status: Assets in excess of (or less than) projected benefit obligation 5,578 (1,413) 5,090 (1,421) Transition (asset) or obligation (551) 263 (645) 273 Unrecognized prior service cost 2,809 42 2,947 161 Unrecognized net (gain) or loss (5,272) 74 (5,107) (73) _________________________________________________________________ Prepaid (accrued) pension cost $ 2,564 $(1,034) $ 2,285 $(1,060) _________________________________________________________________ Pursuant to the provisions of Statement of Financial Accounting Standard No. 87, "Employers' Accounting for Pensions" (SFAS 87), the Company has recorded $342,000 of additional unfunded accumulated benefit obligation attributable to the SERP plan at June 30, 1997. These unfunded obligations are recorded in other long-term liabilities. In addition, an intangible asset of the same amount has also been recorded. At June 30, 1997, and 1996, the discount rate for the benefit obligations was 7.0%, the assumed annual rate of increase in future compensation used in determining the actuarial present value of projected benefit obligations was 4.5% for plans covering the salaried employees for both years, and the expected long-term annual rate of return on plan assets was 8.5% for plan years 1997 and 1996. OTHER POST-RETIREMENT BENEFITS: The Company maintains a non-qualified benefits plan to include post- retirement health care for elected officers of the Company. Six participants of this plan are retired and receiving payments under the plan. The Accumulated Post-Retirement Benefit Obligation at June 30, 1997, and 1996, was comprised of $390,000 and $453,000, respectively, attributable to retirees, and $59,000 and $57,000, respectively, attributable to eligible and other active plan participants, for combined totals of $449,000 and $510,000, respectively. At June 30, 1997, and 1996, the unrecognized amount of the Accumulated Post-Retirement Benefit Obligation was $347,000 and $368,000, respectively. The fiscal 1997 Net Periodic Post-Retirement Benefit Cost associated with the plan was $57,000, comprised of $5,000 service costs, $30,000 interest costs, and $22,000 amortization of the transition obligations. The fiscal 1996 Net Periodic Post-Retirement Benefit Cost associated with the plan was $68,000, comprised of $6,000 services costs, $38,000 interest costs, $22,000 amortization of the transition obligations and $2,000 amortization of unrecognized net loss. The accrued Post-Retirement Benefit Cost recognized in the balance sheet at June 30, 1997, was $107,000 as compared to June 30, 1996, of $86,000. At June 30, 1997, and 1996, the assumed discount rate was 7.0% used in the calculation of the benefit obligations, assumed annual health-care trend rate is 5.0% for both years, with claim costs to increase based upon age, ranging from .5% to 6.0% per annum. 9. MAJOR CUSTOMERS: Power conversion equipment sales encompass markets wherein the demands of any one customer may vary greatly due to changes in technology and market strategy. One customer of the Company accounted for 16.2% and 14.8%, respectively, of fiscal 1997 and 1996 sales and 10.0% and 8.2%, respectively, of June 30, 1997 and 1996 accounts receivable. In comparison, two customers accounted for 13.4% and 10.6%, respectively, of fiscal 1995 sales, one of which also accounted for 10.6% of June 30, 1995, accounts receivable. 10. SHAREHOLDERS' RIGHTS PLAN: The Company's Board of Directors has adopted a shareholders' rights plan (the "Rights Plan") and declared a dividend of one Right for each two shares of the Company's Common Stock outstanding at December 6, 1993. Each Right entitles the registered holder to purchase one share of Common Stock at a purchase price of $50.00 per share. In the event that, at any time following Distribution of the rights, (i) the Company is the surviving corporation in a merger with a third party and its Common Stock is not changed or exchanged, (ii) a Person becomes the beneficial owner of more than 20% of the then outstanding shares of Common Stock ("Acquiring Person"), (iii) an Acquiring Person engages in one or more "self-dealing" transactions as set forth in the Rights Agreement between the Company and its transfer agent, or (iv) during such time as there is an Acquiring Person, an event occurs which results in such Acquiring Person's ownership interest being increased by more than 1% (e.g., a reverse stock split), each holder of the Rights, other than the Acquiring Person, will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Rights. 11. COMMITMENTS AND CONTINGENCIES: The Company was informed by the New York State Department of Environmental Conservation (DEC) on December 5, 1994, that the Municipal Waste Landfill, Cuba, New York, had been listed in the New York State Registry of Inactive Hazardous Waste Disposal Sites as a Class "2" site requiring remediation. Acme Electric Corporation had been determined by the DEC to be a potentially responsible party (PRP) by virtue of its disposal of wastes at the site. As a PRP, the Company was subject to liability for the cost of site investigation and remediation. This matter was settled on June 27, 1997, upon payment by the Company of $725,000 to the DEC. The Company did have insurance policies in effect during the period that waste was disposed of at the site, which the Company will pursue for possible recovery. 12. RELATED PARTY TRANSACTIONS On June 27, 1997, the Retirement Plan for Salaried Employees of Acme Electric Corporation ("Plan") purchased 80,000 shares of Common Stock of the Company from its treasury at the then fair market value of $6.81 per share. The shares are held by the Plan trustee for the exclusive benefit of the beneficiaries of the Plan. The transaction occurred pursuant to Regulation D of the U.S. Securities Exchange Commission. PAGE 23 OF THE ANNUAL REPORT REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Acme Electric Corporation In our opinion, the accompanying balance sheet and the related statements of operations, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Acme Electric Corporation at June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, 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. /s/ Price Waterhouse Buffalo, New York August 12, 1997 PAGE 24 OF THE ANNUAL REPORT COMMON STOCK PRICES AND DIVIDEND INFORMATION Stock price _________________________________________________________________ Year Ended June 30, 1997 High Low Dividends Paid _________________________________________________________________ Fourth Quarter 7 5/8 6 1/4 -- Third Quarter 9 7/8 6 3/8 -- Second Quarter 8 1/2 6 3/4 -- First Quarter 8 5/8 6 7/8 -- _________________________________________________________________ Year Ended June 30, 1996 _________________________________________________________________ Fourth Quarter 12 7/8 6 1/8 -- Third Quarter 8 7/8 6 -- Second Quarter 9 5/8 7 5/8 -- First Quarter 30 3/4 9 1/2 -- Acme Electric Corporation's Common Stock is traded on the New York, Chicago, and Philadelphia Stock Exchanges. The approximate number of shareholders of record at June 30, 1997, was 1,275.