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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[X] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
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AMERICAN PRECISION INDUSTRIES INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: $30,000,000
(5) Total fee paid: $6,000
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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American Precision Industries Inc.
2777 Walden Avenue, Buffalo, New York
September , 1997
Dear Fellow Shareholders:
I am pleased to report to you that on July 8, 1997 American Precision
Industries Inc. completed its acquisition of Portescap, a European manufacturer
of motors. With Portescap now part of the Company's Motion Technology Group, I
believe we are better positioned to compete in the global market for high
quality motion control products.
The Company purchased Portescap with a combination of cash in the amount of
$3.8 million, shares of our convertible preferred stock with an initial
liquidation value of $21.2 million and a $5 million note which can be exchanged
for additional shares of our convertible preferred stock. We have structured the
note so that we can avoid having to pay any principal or interest on it by
having it automatically exchanged for the additional shares of convertible
preferred stock. However, in order for the Company to realize this result, it is
necessary for us to both increase our authorized common and preferred stock and
to obtain shareholder approval of the issuance of voting shares which represent
20% or more of our currently outstanding shares. Therefore, we have called a
special meeting of shareholders for October 30, 1997, to allow you to vote on
the two proposals set forth in the attached Proxy Statement.
Your Board of Directors unanimously recommends that you vote in favor of
each proposal. Your vote is important, and I urge you to either attend the
special meeting in person and vote or, if you are not able to attend the
meeting, to vote by signing, dating and returning the enclosed proxy card in the
envelope provided.
Your continued support of the Company and its management is appreciated.
Very truly yours,
Kurt Wiedenhaupt
Chairman, President and
Chief Executive Officer
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AMERICAN PRECISION INDUSTRIES INC.
2777 WALDEN AVENUE
BUFFALO, NEW YORK
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of American Precision Industries Inc. ("API" or the "Company") will
be held at the Company's offices at 2777 Walden Avenue, Buffalo, New York, on
October 30, 1997 at 9:30 a.m. to consider and take action upon the following
matters:
1. A proposal to approve the issuance of up to 1,538,603 Common Shares upon
the conversion of preferred shares of API which have been and may be
issued under the Amended and Restated Stock Purchase Agreement dated
July 3, 1997 by and among Inter Scan Holding Ltd. ("Inter Scan"),
Portescap, API Portescap Inc., and API, pursuant to which API has
acquired all of Inter Scan's shares of Portescap, a European
manufacturer of motors.
2. A proposal to amend API's Restated Certificate of Incorporation (i) to
increase the number of authorized Common Shares from 10,000,000 to
30,000,000; and (ii) to authorize 1,250,000 shares of Series B Seven
Percent (7%) Cumulative Convertible Preferred Stock.
All persons who were holders of record of Common Shares and Series A Seven
Percent (7%) Cumulative Convertible Preferred Stock at the close of business on
September 23, 1997, and no others, shall be entitled to vote at the Meeting.
Holders of Common Shares and Series A Seven Percent (7%) Cumulative
Convertible Preferred Stock are not entitled to appraisal rights in connection
with the transactions described in the attached Proxy Statement.
James J. Tanous
Secretary
Dated: September , 1997
SHAREHOLDERS ARE URGED TO VOTE BY SIGNING, DATING AND RETURNING THE ENCLOSED
PROXY IN THE ENCLOSED ENVELOPE TO WHICH NO POSTAGE NEED BE AFFIXED IF MAILED IN
THE UNITED STATES.
<PAGE> 4
AMERICAN PRECISION INDUSTRIES INC.
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of American Precision Industries Inc. (hereinafter
referred to as "API" or the "Company") of proxies to be used at the Special
Meeting of Shareholders to be held on October 30, 1997 (the "Meeting").
Every duly signed proxy in the accompanying form will be voted at the
Meeting, in accordance with the instructions indicated in such proxy, unless
previously revoked by the shareholder. Every shareholder giving a proxy has the
power to revoke it at any time before it is exercised. The right to revoke a
proxy is not limited and is not subject to compliance with any formal procedure.
Shareholders that have given a proxy may revoke it any time prior to the Meeting
by giving written notice thereof to the Secretary of API, by signing and
returning a proxy card bearing a later date, or by attending the Meeting,
withdrawing the proxy and voting in person.
Holders of API's common shares, par value $.66 2/3 per share (the "Common
Shares") and Series A Seven Percent (7%) Cumulative Convertible Preferred Stock,
$50.00 par value per share ("Series A Shares"), outstanding at the close of
business on September 23, 1997 (the "Record Date"), are entitled to vote.
Holders of Common Shares are entitled to one vote per share. As of the Record
Date, there were Common Shares outstanding and entitled to
vote. As of the Record Date, there were 20,000 Series A Shares outstanding, all
of which were owned by Inter Scan Holding Ltd., a privately owned Swiss
corporation which was the owner of Portescap. Pursuant to the terms of the
Series A Shares as set forth in the Company's Restated Certificate of
Incorporation, the holder of the Series A Shares is entitled to vote with the
holders of Common Shares on all matters submitted to holders of Common Shares
(except the election of directors and ratification of accountants) with the
holder of the Series A Shares having the number of votes equal to the number of
Common Shares into which the Series A Shares held are convertible. See "The
Stock Purchase Transaction -- Terms of the Preferred Shares" and "Description of
the Capital Stock of API." The 20,000 Series A Shares are presently convertible
into 1,244,485 Common Shares, and, therefore, Inter Scan has the right pursuant
to the terms of the Series A Shares to cast 1,244,485 votes on each proposal to
be voted on at the Meeting. However, because the Company's shareholders are
being asked to approve certain features of the transaction pursuant to which
Inter Scan received the Series A Shares, Inter Scan has determined that,
although its Series A Shares will be counted as present for purposes of
determining whether there is a quorum, it would not be appropriate for it to
vote on those proposals and, accordingly, has agreed with the Company that it
will not vote its Series A Shares at the Meeting.
Although the holder of the Series A Shares has class voting rights on
certain matters (see "The Stock Purchase Transaction -- Terms of the Preferred
Shares"), it does not have any right to vote as a class on the proposals to be
presented at the Meeting, and, therefore, the adoption of those proposals is not
subject to the approval of the holder of the Series A Shares voting as a
separate class.
A quorum for the conduct of business at the Meeting will consist of the
presence, either in person or by proxy, of holders as of the Record Date of at
least votes, which represents a majority of the total of the
outstanding Common Shares plus the 1,244,485 votes held by the
holder of the Series A Shares. Therefore, the holders of at least
Common Shares must be present at the Meeting either in person or by proxy in
order for there to be a quorum. Abstentions and broker non-votes, as well as the
Series A Shares, will be considered as being present or represented at the
Meeting, but not as votes for or against a proposal.
As required by rule 312.03(c) and rule 312.05 of the New York Stock
Exchange, Inc. (the "NYSE"), the affirmative vote of a majority of votes cast,
provided that the total vote cast on the proposal represents over fifty percent
in interest of all securities entitled to vote on the proposal (which includes
the votes held by Inter Scan as the holder of the Series A Shares), is required
to adopt the proposal to approve the issuance of up to 1,538,603 Common Shares
upon the conversion of the Series A Shares and the conversion of the Series B
Seven Percent (7%) Cumulative Convertible Preferred Stock, $1.00 par value per
share ("Series B Shares") of API issued in exchange for an exchangeable
promissory note (the "Note"). The Series A Shares and the Note were issued under
the Amended and Restated Stock Purchase Agreement dated July 3, 1997 (the "Stock
Purchase Agreement"), by and among API, API Portescap Inc. ("API Portescap"),
Inter Scan
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Holding Ltd. ("Inter Scan"), and Portescap, pursuant to which API acquired all
of Inter Scan's shares of Portescap. See "Proposal No. 1 -- Approval of the
Issuance of up to 1,538,603 Common Shares." As a result of these voting
requirements under the NYSE's rules, and given the fact that Inter Scan has
agreed not to cast any of its 1,244,485 votes, the affirmative vote of holders
of at least Common Shares ( % of the Common Shares outstanding as
of the Record Date) is required to approve Proposal No. 1, assuming that a
quorum is present at the Meeting.
The affirmative vote of a majority of the votes represented by the
outstanding shares entitled to vote ( Common Shares entitled to one
vote each and 20,000 Series A Shares entitled to 1,244,485 votes) is required to
approve and adopt the proposal to amend API's Restated Certificate of
Incorporation (the "Charter"), to increase the number of authorized Common
Shares and to authorize the Series B Shares. See "Proposal No. 2 -- Amendment of
the Charter to Increase the Number of Authorized Shares." Given the fact that
Inter Scan has agreed not to cast any of its 1,244,485 votes, the affirmative
vote of holders of at least Common Shares ( % of the Common Shares
outstanding as of the Record Date) is required to approve Proposal No. 2.
Representatives of the firm of Price Waterhouse LLP, independent public
accountants and auditors of the Company, are expected to be present at the
Meeting, be available to respond to appropriate questions and have the
opportunity to make a statement if they so desire.
This Proxy Statement and the accompanying form of proxy will be sent to the
shareholders on or about September , 1997.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. Certain statements made in this Proxy Statement constitute
forward-looking statements based upon current expectations and are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve certain assumptions, risks and
uncertainties that could cause actual results to differ materially from those
included in or contemplated by the statements. These assumptions, risks and
uncertainties include, but are not limited to, the possibility that the benefits
of cross-selling and the leveraging of product development teams are not
realized, that the sales revenues are not achieved or maintained, that the other
benefits described under "The Stock Purchase Transaction -- API Directors'
Reasons for Effecting the Transaction" are not realized or are not achieved in a
timely manner, as well as the risks and uncertainties associated with general
economic cycles in North America, Europe or the Far East.
2
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TABLE OF CONTENTS
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PROXY STATEMENT SUMMARY............................................................... 5
The Companies....................................................................... 5
The Stock Purchase Transaction -- Terms of the Transaction.......................... 5
THE STOCK PURCHASE TRANSACTION........................................................ 7
General Terms of the Stock Purchase Transaction..................................... 7
Purchase Price...................................................................... 7
Terms of the Preferred Shares....................................................... 7
Terms of the Note................................................................... 9
Representations and Warranties...................................................... 11
Certain Covenants................................................................... 11
Indemnification..................................................................... 11
Taxes............................................................................... 12
Regulatory Requirements -- Hart-Scott-Rodino Filing................................. 12
Other Agreements.................................................................... 12
Non-Competition..................................................................... 14
Interim Management of Portescap..................................................... 15
Background of the Transaction....................................................... 15
API Directors' Reasons for Effecting the Transaction................................ 17
Conflicts of Interest............................................................... 18
Material Federal Income Tax Consequences of the Transaction......................... 18
Accounting Treatment................................................................ 18
Absence of Appraisal Rights......................................................... 18
DESCRIPTION OF THE CAPITAL STOCK OF API............................................... 19
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS....................................... 20
SECURITY OWNERSHIP OF MANAGEMENT...................................................... 21
SELECTED FINANCIAL DATA............................................................... 22
Summary Historical Financial Data................................................... 22
Unaudited Pro Forma Selected Financial Data......................................... 24
Selected Comparative Per Share Data................................................. 24
MARKET PRICE OF COMMON SHARES......................................................... 25
PROPOSAL NO. 1 -- APPROVAL OF THE ISSUANCE OF UP TO 1,538,603 COMMON SHARES........... 26
PROPOSAL NO. 2 -- AMENDMENT OF THE CHARTER TO INCREASE THE NUMBER OF AUTHORIZED
SHARES.............................................................. 27
INFORMATION CONCERNING API............................................................ 29
Business............................................................................ 29
Competition......................................................................... 30
Backlog............................................................................. 31
Suppliers........................................................................... 31
Patents and Licenses................................................................ 31
Customers........................................................................... 31
Research and Product Development.................................................... 31
Environmental Matters............................................................... 31
Employees........................................................................... 32
Lines of Business and Industry Segment Information.................................. 32
Foreign Operations.................................................................. 33
Properties.......................................................................... 34
Legal Proceedings................................................................... 35
Selected Financial Data............................................................. 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Year Ended January 3, 1997.................................... 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Six Months Ended July 4, 1997................................. 37
Components of Consolidated Statement of Earnings Expressed as a Percentage of
Revenues......................................................................... 40
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INFORMATION CONCERNING PORTESCAP...................................................... 41
Business............................................................................ 41
Competition......................................................................... 41
Backlog............................................................................. 41
Suppliers........................................................................... 41
Patents and Licenses................................................................ 41
Customers........................................................................... 41
Research and Product Development.................................................... 42
Environmental Matters............................................................... 42
Employees........................................................................... 43
Foreign Operations.................................................................. 43
Properties.......................................................................... 44
Legal Proceedings................................................................... 45
Selected Financial Data............................................................. 45
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Year Ended December 31, 1996.................................. 45
OTHER MATTERS AND PROXY SOLICITATION.................................................. 47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-1
APPENDIX A Amended and Restated Stock Purchase Agreement dated July 3, 1997 by and among
American Precision Industries Inc., API Portescap Inc., Inter Scan Holding Ltd.
and Portescap
APPENDIX B Proposed Charter Amendments
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PROXY STATEMENT SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement and the appendices hereto relating to the transactions
described herein. This summary does not purport to contain all material
information relating to the transactions, and is qualified in its entirety by
the more detailed information and financial statements contained in this Proxy
Statement. SHAREHOLDERS OF API SHOULD READ CAREFULLY THIS PROXY STATEMENT AND
THE APPENDICES ATTACHED HERETO IN THEIR ENTIRETY. Unless the context indicates
otherwise, all references to API or the Company and Portescap include their
respective subsidiaries.
THE COMPANIES
API. API is a diversified manufacturing company whose principal lines of
business include the production and sale of heat transfer products, motion
control devices and electronic components. Sales of these products are primarily
to customers in industrialized nations both domestic and foreign. API currently
conducts its operations through its subsidiaries. API Portescap is a subsidiary
of API formed on April 4, 1997 for the purpose of effecting the transactions set
forth in this Proxy Statement. API's principal executive offices are located at
2777 Walden Avenue, Buffalo, New York 14225. Its telephone number is (716)
684-9700. See "Information Concerning API."
Portescap. Portescap develops, manufactures and markets motors and related
components with sales of its products made to customers worldwide. Portescap's
customers encompass numerous industries including the automation, medical,
telecommunications, aviation, computer peripherals and instrumentation
industries. Portescap has manufacturing facilities in Switzerland and England,
and sales and service offices in Japan, Germany, France, Switzerland, the United
States, the United Kingdom, Sweden and Poland, as well as independent sales
representatives in most other industrialized countries. Prior to its acquisition
by API, Portescap was a subsidiary of Inter Scan, a privately held company. The
principal executive offices of Portescap are located at 157, rue Jardiniere,
2301 La Chaux-de-Fonds 1, Switzerland. Its telephone number is 41-32-925-61-11.
See "Information Concerning Portescap."
THE STOCK PURCHASE TRANSACTION -- TERMS OF THE TRANSACTION
API and Inter Scan had originally reached an agreement in principle on
October 30, 1996, pursuant to which API would acquire all of Portescap's shares
owned by Inter Scan in exchange for total consideration of 48,000,000 Swiss
francs ("CHF"), consisting of 9,900,000 CHF in cash, preferred shares with a
face value and liquidation value of 29,500,000 CHF which would be convertible
into approximately 1,375,000 Common Shares at $17.00 per share, and a note in
the principal amount of 8,600,000 CHF which would be exchangeable into
convertible preferred shares. If all of the preferred stock were converted,
including the preferred shares issuable in exchange for the note, it would have
represented at that time approximately 24.6% of API's Common Shares outstanding
before the conversion and 19.7% of API's Common Shares outstanding after giving
effect to the conversion.
After further negotiations and due diligence, API and Inter Scan signed an
agreement on April 11, 1997, which reflected an agreed upon reduction in the
base purchase price to 37,500,000 CHF, which would be paid entirely in preferred
shares of API convertible into Common Shares at $17.00 per share, which, if
converted, would represent approximately 21% of the Common Shares outstanding
before the conversion and 17.4% of the Common Shares outstanding after giving
effect to the conversion. In addition to the base price, under this agreement
API could have been required to pay Inter Scan a cash payment dependent on
Portescap's shareholders' equity and bank debt at March 31, 1997, plus, at Inter
Scan's option, either 1,000,000 CHF at closing in cash or up to an additional
6,800,000 CHF in cash over the period from closing through December 31, 1999 if
certain inventory ("Excess Inventory") was used by Portescap during that period.
In order to expedite the closing, API and Inter Scan agreed to amend the
agreement to provide for a fixed purchase price and to eliminate any cash
payment related to the Excess Inventory. This agreement was set forth in the
Amended and Restated Stock Purchase Agreement dated July 3, 1997 (the "Stock
Purchase Agreement"). See "The Stock Purchase Transaction -- Background of the
Transaction."
The Stock Purchase Agreement, a copy of which is attached hereto as
Appendix A, provided for the acquisition by API of all of Inter Scan's shares of
the capital stock of Portescap. At the closing on July 8, 1997 (the "Closing"),
API paid to Inter Scan total consideration equal to 43,000,000 CHF, which had a
face or
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initial liquidation value of approximately $30,000,000 (U.S. dollars) on the
date of Closing based on an agreed upon currency exchange rate as of that date,
in exchange for Inter Scan's shares of the capital stock of Portescap. See "The
Stock Purchase Transaction -- Purchase Price." Payment was made by API to Inter
Scan through the delivery of (i) the Note in the principal amount of $5,000,000
which, subject to approval of Proposals No. 1 and No. 2 in this Proxy Statement
by API's shareholders, will automatically be exchanged upon the Company's
shareholders' approval of Proposals No. 1 and 2 for 236,337 Series B Shares with
an aggregate liquidation value of $5,000,000, which may be further converted at
Inter Scan's option into 294,118 Common Shares at an initial conversion price of
$17.00 per share (see "The Stock Purchase Transaction -- Terms of the Note");
(ii) 5,500,000 CHF (approximately $3,800,000) paid in cash at the Closing by
wire transfer; and (iii) 20,000 Series A Shares, with an aggregate liquidation
value of $21,156,250 which by their terms are convertible at Inter Scan's option
into 1,244,485 Common Shares at an initial conversion price of $17.00 per share
(see "The Stock Purchase Transaction -- Terms of the Preferred Shares"). See
"The Stock Purchase Transaction -- Purchase Price." The closing price of the
Common Shares on the NYSE on July 7, 1997, the day prior to the Closing, was
$19 9/16. See "Market Price of Common Shares." Also at Closing, API Portescap
purchased the indebtedness owed by Portescap to two companies affiliated with
Inter Scan for $1,218,000 which equalled the principal and interest owed by
Portescap at Closing. This indebtedness had been incurred by Portescap prior to
Inter Scan's agreement to sell its Portescap shares to API. See "The Stock
Purchase Transaction -- Purchase Price."
The automatic exchange of the Series A Shares and the Note for Series B
Shares upon the Company's shareholders' approval of Proposals No. 1 and 2, and
the conversion of such Series B Shares into Common Shares at the option of Inter
Scan at any time after their issuance, are subject to approval by the
shareholders of API of (i) certain amendments to the Charter increasing the
number of authorized shares thereunder (see "Proposal No. 2 -- Amendment of the
Charter to Increase the Number of Authorized Shares"); and (ii) the issuance of
up to 1,538,603 Common Shares (see "Proposal No. 1 -- Approval of the Issuance
of up to 1,538,603 Common Shares").
If the shareholders approve Proposals No. 1 and 2, the Note and the Series
A Shares will automatically be exchanged for Series B Shares which can then be
converted, in whole or in part, at any time at Inter Scan's option, at an
initial conversion price of $17.00 per share, into 1,538,603 Common Shares.
Those shares would represent approximately % of the Common Shares
outstanding before the conversion and % of the Common Shares outstanding after
giving effect to the conversion, assuming that the number of shares outstanding
on the date of conversion was equal to the number outstanding on the Record Date
for this Meeting, thereby diluting the combined voting power of the Common
Shares outstanding prior to any such conversion. See "The Stock Purchase
Transaction -- Terms of the Preferred Shares." If the shareholders do not
approve both Proposals, the Note will be due and payable by API on May 1, 1998
and the Series A Shares will remain outstanding and can be converted, in whole
or in part, at any time at Inter Scan's option, at an initial conversion price
of $17.00 per share, into 1,244,485 Common Shares. Those shares would represent
approximately % of the Common Shares outstanding before the conversion and
% of the Common Shares outstanding after giving effect to the conversion,
assuming that the number of shares outstanding on the date of conversion was
equal to the number outstanding on the Record Date for this Meeting, thereby
diluting the combined voting power of the Common Shares outstanding prior to any
such conversion. See, "The Stock Purchase Transaction --Terms of the Note."
Also, if the shareholders do not approve both Proposals, certain class voting
rights held by holders of the Series A Shares will violate certain listing rules
of the NYSE and may, therefore, cause the Common Shares to be delisted for
trading on the NYSE. See "The Stock Purchase Transaction -- Terms of the
Preferred Shares."
The Company's Board of Directors unanimously recommends that the Company's
shareholders approve both Proposals. By doing so, the Note will automatically be
exchanged for Series B Shares and the Company will not have to make any payments
of principal or interest on the Note and will avoid certain other payments it
could be required to make if Inter Scan were to sell either the Series A Shares
or Common Shares issued on conversion of the Series A Shares for less than
certain designated amounts (see "The Stock Purchase Transaction -- Other
Agreements -- Shareholder Agreement"). Also if the shareholders approve both
Proposals, the Series A Shares will be retired upon the issuance of the Series B
Shares, thereby removing the possibility that certain class voting rights held
by the holders of Series A Shares will cause the Company's Common Shares to be
delisted from the NYSE. Mr. Holger Hjelm, an affiliate of Inter Scan and its
nominee on API's Board of Directors, has an interest in the matters covered by
the Proposals to be voted on at the Meeting. See "The Stock Purchase
Transaction -- Conflicts of Interest."
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THE STOCK PURCHASE TRANSACTION
GENERAL TERMS OF THE STOCK PURCHASE TRANSACTION
The Stock Purchase Agreement provided for the acquisition by API Portescap
of all of Inter Scan's shares of the capital stock of Portescap. The discussion
and description of the material terms of the Stock Purchase Agreement in this
Proxy Statement are subject to and qualified in their entirety by reference to
the Stock Purchase Agreement, a copy of which is attached hereto as Appendix A
and which is incorporated herein by this reference. Pursuant to the Stock
Purchase Agreement, API has agreed to guarantee the payment of and performance
by API Portescap of API Portescap's obligations under the Stock Purchase
Agreement. Prior to the Closing of the acquisition of Portescap, API Portescap
transferred its right to acquire Portescap to API. After the Closing, API
transferred all of the shares of Portescap to API's wholly-owned subsidiary, API
Motion Inc., which in turn contributed those shares to its wholly-owned
subsidiary, API Portescap.
PURCHASE PRICE
At the Closing, API purchased all of the shares of Portescap held by Inter
Scan in exchange for which API paid to Inter Scan total consideration equal to
43,000,000 CHF (the "Purchase Price"). The Purchase Price was paid by API to
Inter Scan through the delivery at Closing of (i) the Note in the principal
amount of $5,000,000 which, subject to approval of Proposals No. 1 and No. 2 in
this Proxy Statement by the Company's shareholders, will automatically be
exchanged for 236,337 Series B Shares which may further be converted into
294,118 Common Shares at an initial conversion price of $17.00 per share; (ii)
5,500,000 CHF in immediately available funds; and (iii) 20,000 Series A Shares,
with an aggregate liquidation value of $21,156,250, which by their terms are
convertible into 1,244,485 Common Shares at an initial conversion price of
$17.00 per share and which, by their terms, are automatically exchangeable for
1,000,000 Series B Shares if Proposals No. 1 and No. 2 are approved by the
shareholders of API. Also at Closing, API Portescap purchased the indebtedness
owing by Portescap to Societe Privee de Gerance S.A., the parent company of
Inter Scan, and STC Scandanavian Trading Company Interfinans AB, a company in
which Inter Scan is a minority shareholder (the "Debt to Affiliates"), for an
aggregate purchase price of $1,218,000 which equalled the outstanding principal
and interest owed by Portescap as of the Closing. The Debt to Affiliates had
been incurred by Portescap prior to Inter Scan's agreement to sell its Portescap
shares to API.
The cash portion of the Purchase Price and the payment for the purchase of
the Debt to Affiliates was made at an exchange rate equal to $.6831 (U.S.
dollar). The portion of the Purchase Price paid in API securities had a value of
approximately $26,156,000 based on a Swiss franc's currency exchange rate being
equal to an agreed upon value of $.6975 (U.S. dollar).
In the event shareholder approval of Proposals No. 1 and No. 2 is not
obtained by April 30, 1998, API will be required to repay the Note at a premium
price (see "-- Terms of the Note") and will have certain payment obligations to
Inter Scan if Inter Scan sells some or all of the Series A Shares (or Common
Shares) during the ten-year period after the Closing for less than 115% of the
liquidation value or conversion price (see "-- Other Agreements -- Shareholder
Agreement").
TERMS OF THE PREFERRED SHARES
The 20,000 Series A Shares issued to Inter Scan at Closing pursuant to the
Stock Purchase Agreement have a liquidation value per share of $1,057.8125 (the
"Series A Liquidation Value"). The Series A Shares will be automatically
exchanged, assuming shareholder approval of Proposals No. 1 and No. 2, into
1,000,000 Series B Shares. The Series B Shares will have a liquidation value of
$21.15625 per share (the "Series B Liquidation Value"). Upon the exchange of the
Series A Shares for Series B Shares or the conversion of the Series A Shares
into Common Shares, API will reclassify the Series A Shares as authorized
preferred stock of API, the rights, preferences and designations of which may be
determined by the Board of Directors. See "Description of the Capital Stock of
API."
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The Series A Shares and the Series B Shares (collectively, the "Preferred
Shares") issued pursuant to the Stock Purchase Agreement are entitled to receive
cumulative cash dividends at the rate of seven percent of the Series A
Liquidation Value (or the Series B Liquidation Value, if applicable) per annum,
and no more, accruing and becoming cumulative on and after January 1, 1999 and
payable on the first days of January, April, July and October, commencing April
1, 1999. Any arrearages will not bear interest. The dividends will be paid when
and as declared by the Board of Directors but only out of surplus legally
available for the payment of dividends. Such dividends will be payable before
any dividends (other than a stock dividend in shares of the same class of stock)
are paid or set aside for payment to holders of Common Shares.
After the Charter has been amended to authorize the Series B Shares and
upon notice to the holder of Preferred Shares given 45 calendar days prior to
the date fixed for redemption, the Preferred Shares may be redeemed at the
option of the Board of Directors of API at any time for an amount per share
equal to the sum of the Series A Liquidation Value (or Series B Liquidation
Value, if applicable) and an amount computed at the annual rate of seven percent
of the applicable liquidation value per annum per share from and after the date
on which dividends on such share became cumulative to and including the date
fixed for such redemption, less the aggregate of the dividends paid during the
same period, but computed without interest.
Pursuant to the terms of the Preferred Shares, the holder of the Preferred
Shares may convert them into Common Shares based on an adjustable conversion
price, described below. The holder of Preferred Shares may elect to convert all
or only a part of the Preferred Shares. No fractional Common Shares will be
issued upon any conversion. Instead, and in lieu thereof, cash payments in an
amount equal to the same fraction of the market price per Common Share at the
close of business on the date of conversion will be made.
The number of Common Shares issuable upon conversion of the Preferred
Shares will be determined by adding the Series A Liquidation Value (or the
Series B Liquidation Value, if applicable) and seven percent of the per share
Series A Liquidation Value (or Series B Liquidation Value, if applicable) per
annum from and after the date on which dividends on such shares became
cumulative to and including the date of conversion less the aggregate of the
dividends paid during the same period, computed without interest, and
multiplying such sum by the number of Preferred Shares to be converted, then
dividing such figure by the conversion price for a Common Share.
The conversion price will be $17.00 per share, subject to adjustment. If
API at any time changes its outstanding Common Shares into a greater number of
shares or pays a dividend in Common Shares on then outstanding Common Shares or
combines or subdivides its outstanding Common Shares into a smaller number of
shares or issues or sells Common Shares for less than $17.00 per share (plus or
minus the previous adjustments), (except Common Shares reserved or issued
pursuant to bona fide stock option or benefit plans for directors, officers
and/or employees of API), then the conversion price will be equal to the number
of Common Shares outstanding immediately prior to the adjusting event times
$17.00 per share (plus or minus all previous adjustments), plus the value of the
consideration received by API for the issuance or sale, requiring adjustments,
of Common Shares for less than $17.00 per share (plus or minus all previous
adjustments), divided by the number of Common Shares outstanding after the
adjusting event.
The conversion price of $17.00 per share will also be adjusted if any
reorganization or reclassification of the capital stock of API, or any merger or
consolidation of API with another corporation is effected. In such case, the
holder of Preferred Shares will receive upon the exercise of conversion rights,
the number and kind of shares of stock, securities or assets which the holder
would have been entitled to receive in connection with such reorganization,
reclassification, merger or consolidation if such holder had been a holder of
Common Shares of API issuable upon conversion of the Preferred Shares
immediately prior to the time such event became effective. Assuming the
conversion price is $17.00 per share with no adjustments, and assuming the Note
is exchanged into 236,337 Series B Shares, a total of 1,538,603 Common Shares
will be issued upon conversion of the Preferred Shares (1,244,485 Common Shares
on conversion of the 20,000 Series A Shares and 294,118 Common Shares on
conversion of the Series B Shares exchanged for the Note).
The holder of Preferred Shares will be entitled to vote on all matters
submitted to holders of Common Shares (except the election of directors and
ratification of accountants) with the holder of Preferred Shares having the
number of votes equal to the number of Common Shares into which the Preferred
Shares held are
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convertible; however, Inter Scan, as the holder of all Series A Shares
outstanding, has agreed not to vote its shares on the two proposals to be voted
on at the Meeting. The holder of Preferred Shares will have the right to vote in
the election of directors and to call a special meeting and participate in such
special meeting and any annual meeting in addition to all other rights to which
they are entitled, if API breaches any obligations owed to such holder of
Preferred Shares.
The holder of the Series A Shares may also vote as a class on the following
transactions: (i) the merger or consolidation of API with or into another
corporation or a partnership, trust or other entity; (ii) the sale of all or
substantially all of the assets of API; (iii) the dissolution of API; (iv) any
amendment to the Charter that would amend, change, modify or revoke the rights,
preference or limitations applicable to the Preferred Shares; and (v) any other
proposal or transaction required by the General Corporation Law of the State of
Delaware (the "DGCL"), to be approved by the holders of Series A Shares, voting
as a class.
If API's shareholders fail to approve both proposals set forth in this
Proxy Statement, the Series A Shares will remain outstanding unless they are
converted into Common Shares, which conversion is at the sole discretion of the
holder of the Series A Shares. The listing requirements of the NYSE indicate
that a class of stock may not be eligible for continued listing if the issuer
has a class of stock which is entitled to a class vote on certain proposals such
as mergers, sale of assets or dissolution. In the event the Series A Shares
remain outstanding, the class voting rights held by the holder of Series A
Shares with respect to mergers, consolidations, sale of assets and dissolution
will have to be eliminated in order for the Common Shares to remain qualified to
be listed on the NYSE. In that event, API intends to request the holder of
Series A Shares to agree to the elimination of such class voting rights, or in
the alternative attempt to redeem the Series A Shares or request the NYSE to
waive its requirements. There is no assurance that API would be able to convince
the holder of the Series A Shares to agree to the elimination of those class
voting rights or agree to sell all Series A Shares to API, or have the NYSE
waive its rules with respect to the Series A Shares. In that event, API's Common
Shares would be delisted from trading on the NYSE and the holders of Common
Shares would be adversely affected as a result of the loss of the trading
liquidity available from having the Common Shares listed on the NYSE.
The holder of the Series B Shares will also have the right to vote as a
class but only on those transactions described in clauses (iv) and (v) above.
The presence of these class voting rights in the Series B Shares will not affect
the listing of the Common Shares on the NYSE. On matters for which it is
entitled to vote as a class, the holder of Preferred Shares will have one vote
per share and the approval of a majority of the Preferred Shares issued and
outstanding and entitled to vote will be required to adopt a proposal, in
addition to any approvals required by the holders of Common Shares.
Notwithstanding the previous paragraph, the holder of Preferred Shares will
have no class voting rights (other than those required under the DGCL) to the
extent the number of Preferred Shares issued and outstanding is less than 25
percent of (i) the number of Series A Shares initially issued; or (ii) the
number of Series B Shares (if converted into such shares) that would have been
issued to the holder if the Series B Shares had initially been issued to the
holder in lieu of the Series A Shares.
Upon liquidation, dissolution or winding up of API, the holder of the
Preferred Shares will be entitled to receive payment prior to any distribution
or payment to holders of Common Shares. Such payment will equal the Series A
Liquidation Value (or Series B Liquidation Value, if applicable), plus a sum
computed at a dividend rate of seven percent per annum from and after the date
on which dividends on such shares became cumulative to and including the date
fixed for such payment, less the aggregate of the dividends already paid, during
the same period, but computed without interest. A consolidation or merger, for
these purposes, will not be considered a liquidation, dissolution or winding up
of API.
TERMS OF THE NOTE
At the Closing, API delivered to Inter Scan a Note in the principal amount
of $5,000,000. The Note will automatically be exchanged for 236,337 Series B
Shares with a liquidation value of $21.15625 per share if at any time from the
Closing to and including April 30, 1998, the Charter is amended to authorize
1,250,000 Series B Shares and to increase the authorized Common Shares by at
least 1,000,000 shares. See "-- Terms
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of the Preferred Shares." The Note bears interest of 15% per annum from July 8,
1997; however, no interest will accrue on the principal balance of the Note
prior to April 30, 1998 if such amendment is made to the Charter by April 30,
1998 and if no event of default, as described below, has occurred which has not
been remedied prior to such date.
If the amendment to the Charter has not been filed with the Secretary of
State of the State of Delaware by April 30, 1998, principal and interest
evidenced by the Note will be immediately due and payable, without notice, in
which event API will be required to pay to Inter Scan on May 1, 1998 the greater
of (i) an amount equal to (a) the number of Common Shares the Note would
represent the right to acquire on April 30, 1998 assuming it were exchanged for
Series B Shares (e.g. 294,118 Common Shares at the initial conversion price of
$17.00 per share), multiplied by (b) the average closing price of Common Shares
on the NYSE for the ten trading days prior to April 30, 1998 that such stock
actually traded on the NYSE; or (ii) $5,753,683, which represents an amount
equal to (a) the number of Common Shares the Note would represent the right to
acquire on April 30, 1998 assuming it were exchanged for Series B Shares (e.g.
294,118 Common Shares at the initial conversion price of $17.00 per share),
multiplied by (b) the closing price of Common Shares on the NYSE on the last day
prior to the date of the Note that the stock traded on the NYSE (i.e. $19.5625
on July 7, 1997).
If the amendment to the Charter is not filed by April 30, 1998, then in
addition to any amount payable under clauses (i) or (ii) in the preceding
paragraph, if Inter Scan elects to purchase any Common Shares during the two
month period from May 1, 1998 through and including June 30, 1998, API will
reimburse Inter Scan for any costs incurred in acquiring such shares in excess
of the price of Common Shares used in calculating the applicable amount payable
under clause (i) or clause (ii), multiplied by the number of shares actually
purchased by Inter Scan during that two month period, subject to the maximum
number of shares equal to the number of shares calculated under (a) in clause
(i) or clause (ii), whichever is applicable (e.g. a maximum of 294,118 shares at
the initial conversion price of $17.00 per share). Upon API's payment to Inter
Scan of any amount owing, API's obligations under the Note will cease.
Should any of the following events of default occur prior to May 1, 1998,
the entire unpaid principal balance of the Note, together with interest thereon
accrued at the annual rate of 15% from July 8, 1997 through the date of payment,
will become immediately due and payable at Inter Scan's option. The events of
default include: (i) the failure of API to maintain its corporate existence in
good standing; (ii) the liquidation of API, or the discontinuance of the normal
operations of API; (iii) the merger or consolidation of API with or into any
other corporation unless (a) API is the surviving entity or (b) the surviving
entity, which will be reasonably acceptable to Inter Scan, agrees in writing to
assume all of API's obligations under the Note; (iv) the sale, lease or
conveyance by API of all or substantially all of its property, assets or
business to any other party, unless the other party, which will be reasonably
acceptable to Inter Scan, agrees in writing to assume all of API's obligations
under the Note; (v) the making of a general assignment by API for the benefit of
creditors, or the institution by API of any type of bankruptcy, reorganization
or insolvency proceeding under any state or federal law or of any formal or
informal proceeding for the dissolution or liquidation of, settlement of claims
against or winding up of the affairs of API; or (vi) the appointment of a
receiver or trustee for API or for any assets of API or the institution against
API of any type of bankruptcy, reorganization or insolvency proceeding for the
liquidation or winding up of the affairs of API and the failure to have such
appointment vacated, or such proceeding dismissed within 45 days. If Inter Scan
exercises its option to accelerate the payment of principal and interest upon
the occurrence of any of the above events of default prior to May 1, 1998, then
Inter Scan's right and obligation to exchange the Note for Series B Shares will
terminate upon API's payment in full.
The Note may not be prepaid without Inter Scan's written consent with any
permitted partial prepayment being first applied to principal and then to
accrued and unpaid interest to the date of the prepayment. API will pay Inter
Scan the reasonable expenses incurred by Inter Scan in connection with the
enforcement of Inter Scan's rights under the Note, including reasonable fees and
disbursements of counsel.
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Inter Scan's right to sell the Note or any interest in the Note is subject
to the terms and conditions of the Shareholder Agreement by and between API and
Inter Scan (the "Shareholder Agreement"). See "-- Other
Agreements -- Shareholder Agreement."
REPRESENTATIONS AND WARRANTIES
The Stock Purchase Agreement contains various representations and
warranties relating to, among other things: (i) the due organization, power,
authority and standing of Inter Scan, Portescap and its subsidiaries, API and
API Portescap; (ii) the authorization, execution, delivery and enforceability of
the Stock Purchase Agreement; (iii) the capital structure, ownership and certain
other corporate information of Portescap and its subsidiaries, and API and its
subsidiaries; (iv) the directors and officers of Portescap and its subsidiaries,
and API and its subsidiaries; (v) conflicts under organizational documents, laws
and regulations, violations of any instruments and required consents or
approvals; (vi) financial statements; (vii) liabilities; (viii) taxes; (ix)
inventories and receivables; (x) intellectual property; (xi) the operations and
use of properties; (xii) licenses; (xiii) insurance; (xiv) environmental
matters; (xv) employees, compliance with labor laws and employee benefit plans;
(xvi) compliance with product labeling, product safety and public health and
safety laws; (xvii) the validity and existence of certain agreements to which
Portescap and its subsidiaries or API and its subsidiaries are parties; (xviii)
capitalized leases; (xix) guaranties; (xx) litigation; (xxi) management
personnel; (xxii) the conduct of business in the ordinary course and the absence
of certain changes or material adverse effects; (xxiii) exhibits to the Stock
Purchase Agreement; (xxiv) customers and suppliers; (xxv) assets; (xxvi) the
truth of the representations and warranties contained in the Stock Purchase
Agreement; and (xxvii) compliance with securities laws. The representations and
warranties contained in the Stock Purchase Agreement did not survive Closing.
CERTAIN COVENANTS
API agreed that following Closing it would (i) use its best efforts to
accomplish each of the following by April 30, 1998, (a) have its Board of
Directors and shareholders adopt amendments to the Charter authorizing 1,250,000
Series B Shares and increasing the Common Shares of API by at least 1,000,000
shares, (b) have that amendment duly filed with the Secretary of State of the
State of Delaware, and (c) have its shareholders approve the issuance of all
Common Shares issuable upon the conversion of all Series B Shares issued to
Inter Scan pursuant to the Stock Purchase Agreement; (ii) make any payments,
conversions, redemptions and exchanges as required under the Stock Purchase
Agreement; (iii) ensure that any Common Shares issued upon conversion of the
Preferred Shares will be duly authorized, validly issued and outstanding, fully
paid and non-assessable; and (iv) exclude as a "triggering event" under any
"take-over defenses" or "shareholders' rights" plan which may be implemented by
API on or after Closing, the acquisition or ownership by Inter Scan of the
Preferred Shares (or the Common Shares upon the conversion of the Preferred
Shares), and in the event of an occurrence of a "triggering event," API will
treat Inter Scan like its other shareholders (other than any person, shareholder
or group whose acquisition of API securities is deemed to be a "triggering
event") with respect to the Preferred Shares (or the Common Shares upon the
conversion of the Preferred Shares). The covenants contained in the Stock
Purchase Agreement survived the Closing of the transactions thereunder.
In addition to the covenants contained in the Stock Purchase Agreement, API
and Inter Scan have agreed to certain covenants in the Shareholder Agreement
(see "-- Other Agreements -- Shareholder Agreement").
INDEMNIFICATION
Inter Scan has agreed to indemnify and hold harmless API Portescap, API,
Portescap and its subsidiaries from any liabilities, losses, claims, demands,
damages, out-of-pocket costs and expenses ("Losses"), arising out of (i) any
breach or violation of any covenant or agreement by Inter Scan or Portescap
contained in the Stock Purchase Agreement; (ii) any violation of any
environmental laws or any disposal or release of hazardous substances or wastes
occurring in connection with the prior operations of Portescap U.S. Inc. or
Transicoil Inc., a former U.S. subsidiary of Portescap U.S. Inc., at or from any
facilities or sites owned, leased
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or used by such entities located at or around the North Penn Area 12 site in
Worcester Township, Montgomery County, Pennsylvania (the "North Penn Site"); and
(iii) Portescap's or any of its subsidiaries' failure to properly obtain any
required licenses for computer software programs or systems. Losses which are
recoverable in connection with a claim asserted in connection with the North
Penn Site will be limited to amounts payable as a result of the settlement of,
in accordance with the terms of the Stock Purchase Agreement, or any judgments,
orders or other similar relief rendered in connection with, any third party
claims asserted with regard to such matters.
API and API Portescap have agreed to indemnify and hold harmless Inter Scan
from any and all Losses arising out of any breach or violation of any covenant
or agreement by API Portescap or API contained in the Stock Purchase Agreement.
A party from whom indemnification is requested is required to indemnify the
party seeking indemnification only to the extent the aggregate amount of all
Losses exceeds 100,000 CHF. This deductible will not apply, however, to any
claims for indemnification concerning taxes and brokers or finders in connection
with the Stock Purchase Agreement. To the extent claims are made against Inter
Scan in connection with the North Penn Site, or claims are made relating to
Portescap's failure to obtain any required licenses for computer software
programs or systems, the liability of Inter Scan will be limited to 2,000,000
CHF and, to the extent any such claims are asserted after the date which is one
year and three months after Closing, 1,000,000 CHF, and, within these limits,
all claims concerning the use and licensing of computer software will be limited
to an aggregate amount of 300,000 CHF. Notwithstanding the 100,000 CHF
deductible described above, any claim for indemnification from Inter Scan for
Losses related to computer software licenses will be subject to a deductible of
150,000 CHF, and with respect to such claim, Inter Scan's maximum liability of
300,000 CHF will not arise unless and until Portescap has expended a total of
150,000 CHF to acquire valid computer software licenses.
TAXES
Inter Scan is liable and will indemnify API and its subsidiaries for all
taxes due and payable for periods ending on or before the Closing, only to the
extent the amount of such taxes exceeds the amount reserved therefor in certain
financial statements of Portescap (the "Financial Statements"). For all those
payments due, and periods commencing, after the Closing, API and API Portescap
will be liable and will indemnify Inter Scan for such taxes. Refunds or credits
attributable to the period prior to Closing and not reflected on the Financial
Statements will be for the account of Inter Scan. All refunds and credits
attributable to periods ending after the Closing are attributable to the account
of API Portescap.
REGULATORY REQUIREMENTS -- HART-SCOTT-RODINO FILING.
Inter Scan will make any filings and pay all associated filing fees
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), required in connection with any conversion of the
Preferred Shares into Common Shares. API will cooperate with Inter Scan as
reasonably requested by Inter Scan in connection with any such filings under the
HSR Act.
OTHER AGREEMENTS
Shareholder Agreement. The following discussion describes the Shareholder
Agreement, a copy of which is attached as Exhibit 5.1(d)(1) to the Stock
Purchase Agreement which is attached hereto as Appendix A. This discussion is
qualified in its entirety by the more detailed provisions contained in the
Shareholder Agreement.
Under the Shareholder Agreement, which has a term of three years from the
date of Closing, provision is made for the appointment of an Inter Scan
representative to the Board of Directors of API for a term expiring at the
annual meeting of API's shareholders in the year 2000, subject to that person's
reelection to the balance of that term by API's shareholders, at the next annual
meeting of API's shareholders and for the appointment of such person to the
Nominating Committee of the Board of Directors. Effective at the Closing, Holger
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Hjelm, Inter Scan's nominee, was appointed as a member of API's nine-person
Board of Directors and a member of API's five-person Nominating Committee, in
fulfillment by API of these requirements.
The Shareholder Agreement provides that on all matters submitted to API's
shareholders for a vote, Inter Scan will vote all of its Preferred and Common
Shares in accordance with the recommendations of API's Board of Directors, and
in this regard Inter Scan will give its irrevocable proxy to API's Board of
Directors. However, Inter Scan has agreed not to vote any of its Preferred or
Common Shares at the Meeting.
Inter Scan has granted a right of first refusal to API to match any
purchase offers for its shares of API or for all or a portion of the Note that
may be received during the term of the Shareholder Agreement. The Shareholder
Agreement also provides that Inter Scan has the right to participate in certain
private placements of the shares of API to the extent necessary to maintain
Inter Scan's percentage ownership of API.
Pursuant to the Shareholder Agreement, if the amendment to the Charter
authorizing 1,250,000 Series B Shares and increasing the number of Common Shares
by at least 1,000,000 shares has not been filed with the Secretary of State of
the State of Delaware by April 30, 1998, and if Inter Scan elects to sell some
or all of the Series A Shares (or the Common Shares, if applicable) at any time
between May 1, 1998 and a date ten years after the date of the Shareholder
Agreement to a non-affiliate of Inter Scan, then API will pay the difference, if
any, between the net proceeds received by Inter Scan and 115% of the liquidation
value of the Series A Shares so sold, plus any accrued unpaid dividends, or 115%
of the conversion price of any Common Shares issued upon conversion of the
Series A Shares, which Common Shares are so sold. This obligation of API will be
limited to a total of 20,000 Series A Shares and 1,244,485 Common Shares if
Common Shares are issued on conversion of the Series A Shares.
The Shareholders Agreement also imposes certain restrictions on Inter Scan,
which Inter Scan has agreed will be binding on its affiliates, concerning
certain matters including, among others, (i) the solicitation of proxies
concerning matters submitted to the vote of API shareholders; (ii) the
acquisition of securities of API; (iii) the making of a proposal to merge with
or acquire the assets of API; (iv) the submission of shareholder proposals to
API; (v) the participation in a "group" as such term is used in Section 13(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
connection with any of the above; (vi) compliance with securities laws; and
(vii) any transfer of Preferred Shares or Common Shares.
Registration Agreement. None of the Company's securities issued to Inter
Scan pursuant to the Stock Purchase Agreement have been registered with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Securities Act") or with any state or other jurisdiction under
any of their registration or qualification laws. The Company has relied on the
exemption set forth in Section 4(2) of the Securities Act for sales not
involving a public offering in not registering its securities issued to Inter
Scan. The securities issued to Inter Scan contain a legend indicating that they
may not be resold unless they are registered with the SEC or are resold pursuant
to an exemption from such registration. Also, Inter Scan may be deemed to be an
affiliate of API as a result of the percentage of stock it owns and because it
is controlled by Mr. Hjelm who is its representative on API's Board of
Directors. If Inter Scan is an affiliate of API then any securities of API that
it owns may be considered to be control shares and could be resold only pursuant
to a registration statement filed with the SEC or pursuant to Rule 144 of the
Securities Act which limits the time, volume and manner of sale of any resales.
Because of these restrictions, the Company has granted Inter Scan certain rights
relating to its resale of the Company's securities. The following discussion
describes the Registration Agreement (the "Registration Agreement"), a copy of
which is attached as Exhibit 5.1(d)(2) to the Stock Purchase Agreement which is
attached hereto as Appendix A. This discussion is qualified in its entirety by
the more detailed provisions contained in the Registration Agreement.
Pursuant to the Registration Agreement, Inter Scan has Demand Registration
Rights, as defined below, during the ten year period after the initial issuance
of the Note and the Series A Shares, with respect to two separate public
offerings of the Preferred Shares (or Common Shares, if converted), provided
that there will be an interval of at least one year between each such public
offering. Inter Scan has the following rights (the "Demand Registration
Rights"): (i) to have API file a registration statement on an appropriate form
with the SEC, covering a proposed public offering; (ii) to have API use its best
efforts to have the registration
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statement declared effective and kept current and in compliance with the
Securities Act, until completion of the public offering; and (iii) to have API
use its best efforts to effect qualification and compliance with the securities
laws of such states as Inter Scan may reasonably designate in which the public
offering is to be made. Inter Scan shall be responsible for all registration and
filing fees, its attorney's and auditor's fees, any selling commissions or
discounts to any underwriter, expenses and taxes incurred upon its exercise of
its Demand Registration Rights; API shall be responsible for the other costs
incurred in preparing the registration statement, including its attorney's and
auditor's fees and the cost of printing.
In addition to its Demand Registration Rights, Inter Scan also has
so-called "piggy-back" rights. If during the four year period after the initial
issuance of the Note and the Preferred Shares, API proposes to register under
the Securities Act any of its equity securities for sale to the public pursuant
to a registration statement on Forms S-1, S-2 or S-3, Inter Scan will have the
option of including any or all of the Preferred Shares or Common Shares in such
registration. If the managing underwriter of such offering advises API that the
number of shares to be included in such offering exceeds the number that can be
sold, then the number of shares to be sold by API, Inter Scan and any other
shareholder who may have registration rights will be reduced ratably. Inter Scan
may be required to agree to offer and sell its shares through an underwriter
selected by API under substantially the same terms (except as to expenses other
than underwriting discounts) as those under which the other securities included
in such registration statement are to be offered and to comply with any
arrangements related to such underwriting. If Inter Scan refuses to so agree,
API will not have to include those shares in the registration. Also API will not
be required to include shares proposed to be offered and sold by Inter Scan in a
registration statement to be used in any state which refuses to permit the
Preferred Shares or Common Shares to be offered or which imposes additional
requirements which would unreasonably inhibit or delay the offering. The costs
and expenses associated with the registration of shares will generally be paid
by API with Inter Scan paying the expenses of the registration directly related
to the proposed sale of the Preferred Shares or Common Shares owned by it. API
will not pay any selling commissions or discounts to any underwriter, expenses
or taxes with respect to the sale of the Preferred Shares or Common Shares
included in the registration statement by Inter Scan pursuant to its so-called
"piggy-back" rights.
Any additional Preferred Shares or Common Shares that Inter Scan acquires
by reason of any stock split, stock dividend or conversion will be deemed to be
shares forming part of the Preferred Shares or Common Shares for purposes of the
Registration Agreement. To the extent the shares are registered or exempt from
registration (as evidenced by a "no-action" letter from the SEC or an opinion of
counsel reasonably satisfactory to API), API will provide to Inter Scan
certificates for the shares without any restrictive legend which will be
returned to API by Inter Scan should a stop order be issued in respect of a
registration statement relating to the Preferred Shares or Common Shares or a
withdrawal of any such registration statement in exchange for certificates
bearing a restrictive legend.
Each party to the Registration Agreement has agreed to indemnify the other
party, its directors, officers who sign any registration statement and, to a
limited extent, API will indemnify any underwriter for Inter Scan in connection
with any registration statement filed pursuant to the Registration Agreement,
and each controlling person of Inter Scan or its underwriter and Inter Scan will
indemnify each controlling person of API, against losses caused by any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement registering Inter Scan's Preferred Shares or Common
Shares pursuant to the Registration Agreement, or arising out of, or based upon,
any omission or alleged omission to state in such registration statement a
material fact required to be stated in such document or necessary to make the
statements contained in the registration statement not misleading.
NON-COMPETITION
Pursuant to the terms of the Stock Purchase Agreement, Inter Scan agreed
not to, directly or indirectly, for a period of three years and six months
following Closing, (i) have any interest in, accept employment from, or serve in
any capacity with, any person or entity (other than API Portescap) engaged in
the business of selling or distributing anywhere in the world any of the types
of products or services that were manufactured or distributed by Portescap or
its subsidiaries at any time during the one year period prior to Closing (the
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<PAGE> 18
"Products"); or (ii) sell Products to or solicit purchases of Products by
customers who were customers of Portescap or any of its subsidiaries at the time
of Closing or during the five-year period prior thereto. The above limitations
do not prohibit or restrict (i) the passive ownership by Inter Scan or its
affiliates, in the aggregate beneficially or of record, of less than five
percent of any class of outstanding securities of any company the securities of
which are listed on a national securities exchange or are publicly traded on the
NASDAQ National Market or (ii) Holger Hjelm from maintaining his existing
investment in Feintechnik Bertsch GmbH & Co., a German company engaged in the
motor business. Additionally, Inter Scan agreed not to disclose the identity of
any customers, engineering drawings, know-how, sales policies, strategies and
employee training and operating practices of Portescap and its subsidiaries
without the written consent of API Portescap or unless required to do so by
legal process.
INTERIM MANAGEMENT OF PORTESCAP
From April 11, 1997, the date of the initial stock purchase agreement,
until the Closing, API managed the day-to-day operations of Portescap and its
subsidiaries. API had full and exclusive management responsibility subject only
to those major decisions which were required to be approved by a representative
of Inter Scan as provided in the Stock Purchase Agreement. These major decisions
included (i) the sale of assets or entering into contracts other than in the
ordinary course of business; (ii) the granting of rights or options to acquire
any or all of the assets of Portescap or any of its subsidiaries; (iii) the
execution by Portescap or any of its subsidiaries of any employment, collective
bargaining or similar agreement; (iv) the adoption of, termination of or
material modification or amendment to any employee benefit plan of Portescap;
(v) the issuance of notes or other evidences of indebtedness by Portescap or any
of its subsidiaries; (vi) the granting of any guarantees by Portescap or any of
its subsidiaries; (vii) the initiation of bankruptcy or similar proceedings by
Portescap or any of its subsidiaries; (viii) the termination of employees of
Portescap or its subsidiaries not previously agreed upon; (ix) other actions the
approval of which is customarily obtained by the Board of Directors of a U.S.
company; and (x) other actions which Swiss law requires be approved by the Board
of Directors or shareholders.
BACKGROUND OF THE TRANSACTION
As part of its on-going acquisition strategy, API conducts research into
other companies' products and distribution systems, as well as retains
consultants to identify potential acquisitions. It was as a result of this
process that in 1995 API identified that there were three manufacturers of
micro-motors in Europe whose product quality and reputation would complement
those of API. One of these companies was Portescap. API held preliminary
discussions with each of the other two companies. One of those companies
indicated that it was not interested in pursuing a sale, acquisition or joint
venture, and API concluded that it was not timely to pursue a transaction with
the other company given API's interest in Portescap.
The President and Chief Executive Officer of API, Kurt Wiedenhaupt, and the
President of API's Motion Technology Group, Richard Warzala, had an opportunity
to meet with representatives of Portescap in April 1995. Prior to this, there
were no affiliations among Inter Scan or Portescap, on the one hand, and the
Company, on the other hand, or any members of their management. Based on that
meeting, API concluded that Portescap's product line would be complementary to
API's motion technology product line.
Following this introductory meeting, Mr. Wiedenhaupt and Mr. Warzala met
with Max Endre, a representative of Portescap, at Portescap's facilities in La
Chaux-de-Fonds, Switzerland on October 11, 1995, to explore whether some type of
joint marketing venture between API and Portescap was feasible. After that
meeting, Mr. Warzala wrote to Mr. Endre suggesting that the two companies pursue
a closer working relationship, and there then began a period when engineers and
marketing personnel from each company met to discuss each company's products and
marketing and distribution systems.
Throughout this period while API and Portescap were discussing a possible
joint venture, API had expressed an interest in acquiring Portescap. This
interest ultimately led Mr. Wiedenhaupt to contact Holger Hjelm, the controlling
person of Inter Scan, which was the owner of Portescap. Mr. Hjelm at first was
reluctant to consider selling Portescap, preferring instead to focus on some
type of joint venture with API.
15
<PAGE> 19
However, after further discussions with Mr. Wiedenhaupt, Mr. Hjelm agreed to
consider a sale of Portescap if a transaction could be structured in which Inter
Scan would receive equity securities of API as part of the selling price.
As a follow-up to these discussions, API signed a confidentiality letter
and in early December 1995 Portescap provided API with further information on
its business. API responded on December 14, 1995 by indicating that it would be
interested in purchasing the net operating assets of Portescap, exclusive of
Portescap's bank debt, for approximately 50 million CHF in cash, assuming that
API's due diligence review of Portescap did not disclose any unacceptable
problems. Inter Scan rejected this proposal because it preferred to structure
the transaction as a stock sale rather than an asset sale, and because in its
opinion the valuation was too low.
At this stage of the negotiations it was not certain that a transaction
could be agreed on that would meet each party's interests. However, over the
next several months in 1996, Mr. Wiedenhaupt and Mr. Hjelm continued to discuss
the possibility and the advantages of combining Portescap's motor business with
API's growing motion technology business. After numerous discussions, the two
companies reached an agreement in principle on October 30, 1996, pursuant to
which API would acquire all of Portescap's shares owned by Inter Scan in
exchange for total consideration of 48 million CHF, consisting of 9.9 million
CHF in cash, preferred shares with a face value and liquidation value of 29.5
million CHF and convertible into approximately 1,375,000 Common Shares at $17.00
per share, and a note in the principal amount of 8.6 million CHF which would be
exchangeable into convertible preferred shares, representing approximately 24.6%
of API's Common Shares outstanding before the conversion and 19.7% of the Common
Shares outstanding after giving effect to the conversion. On November 4, 1996,
the day prior to the public announcement of this agreement in principle, the
closing price of API's Common Shares on the NYSE was $14.125.
The parties then proceeded to conduct further due diligence in preparation
for the signing of a definitive agreement. During this process, in December 1996
API concluded that a proposed reorganization of a significant portion of
Portescap's product line, which had been considered by Portescap prior to its
reaching the agreement in principle with API, would most likely, in API's
opinion, not produce the financial results that were originally contemplated by
Portescap. This led the parties to renegotiate the price and structure of the
proposed acquisition, and on April 11, 1997, at a meeting in London, the parties
signed a stock purchase agreement, which reflected an agreed upon reduction in
the base purchase price to 37.5 million CHF, which would be paid in preferred
shares of API convertible into API Common Shares at $17.00 per share, which
could represent approximately 21% of API's Common Shares if converted. In
addition to the preferred shares, there could have been a cash payment owed to
Inter Scan depending on the amount of Portescap's shareholders' equity and bank
debt as of March 31, 1997. Under both the original agreement in principle and
the April 11, 1997 stock purchase agreement, API would indirectly be responsible
for Portescap's bank debt and other liabilities, because the transaction in both
instances would take the form of a stock purchase. Also, under the terms of the
April 11, 1997 stock purchase agreement, Inter Scan would have had the option to
receive either 1 million CHF at closing in cash or up to an additional 6.8
million CHF over the period from closing through December 31, 1999 if the Excess
Inventory was used by Portescap during that period. In addition, under both
agreements Mr. Hjelm, as a representative of Inter Scan, would be added to API's
Board of Directors. The April 11, 1997 stock purchase agreement was presented to
API's Board of Directors and unanimously approved by the Board at its meeting on
April 25, 1997.
The April 11, 1997 stock purchase agreement contemplated that prior to
closing API would hold a special shareholders meeting to obtain approval to
amend its Charter to increase its authorized preferred and common stock, which
were needed to comply with its payment obligations to Inter Scan. As mentioned
above, the April 11, 1997 stock purchase agreement contemplated that the
purchase price could be adjusted based on Portescap's shareholders' equity and
bank debt at March 31, 1997. The preparation of the unaudited balance sheet as
of March 31, 1997 in accordance with International Accounting Standards ("IAS")
consistent with Portescap's historical audited financial statements, was delayed
due to the need to provide a reconciliation from IAS to U.S. generally accepted
accounting principles. During this delay, Inter Scan and API identified certain
matters which each believed should be taken into account in computing the final
purchase price. These matters involved accounting issues affecting inventory
valuation and the depreciation of new product
16
<PAGE> 20
production equipment. Rather than delay the closing until these matters were
resolved, Inter Scan and API agreed to a fixed purchase price and the payment of
the purchase price through a combination of preferred stock, a note and cash,
all as described under "The Stock Purchase Transaction -- Purchase Price,"
thereby eliminating the need for the March 31, 1997 unaudited balance sheet and
for a special meeting of API's shareholders prior to a closing. The parties also
agreed to eliminate any adjustment to the purchase price API would have paid
Inter Scan for any Excess Inventory, as had been provided for in the April 11,
1997 agreement, a specific currency exchange rate was agreed upon, the parties'
representation and warranties would expire at the Closing rather than one year
after closing, and the class voting rights on mergers, consolidations, sale of
assets and dissolution for holders of Series B Shares were eliminated (see
"Proposal No. 2 -- Amendment of the Charter to Increase the Number of Authorized
Shares"). These changes, together with minor changes related to the timing for
the delivery of disclosure schedules, were embodied in the Stock Purchase
Agreement, which amended and restated the April 11, 1997 stock purchase
agreement in its entirety.
The Stock Purchase Agreement was approved by API's Board of Directors on
July 2, 1997, by their unanimous written consent, and the parties closed the
transaction on July 8, 1997 on the terms set forth in the Stock Purchase
Agreement.
API DIRECTORS' REASONS FOR EFFECTING THE TRANSACTION
The Board of Directors of API believes that the acquisition of Portescap
pursuant to the terms of the Stock Purchase Agreement and the transactions
contemplated by both Proposals presented to the Company's shareholders in this
Proxy Statement are fair to and in the best interests of API and its
shareholders. ACCORDINGLY, THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
STOCK PURCHASE AGREEMENT AND THE TRANSACTIONS THEREUNDER AND UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS OF API APPROVE BOTH PROPOSALS CONTAINED IN THIS
PROXY STATEMENT. Mr. Holger Hjelm, an affiliate of Inter Scan and its nominee on
API's Board of Directors, has an interest in the matters covered by the
Proposals to be voted on at the Meeting. See "The Stock Purchase
Transaction -- Conflicts of Interest."
In reaching its decision, the Board of Directors of API consulted with API
management, as well as its financial advisors and legal counsel, and considered
a number of factors. No reports or opinions from third parties concerning the
fairness of the terms of the transaction were received by the Board of
Directors. The material factors considered by API's Board of Directors in
reaching the foregoing conclusions are described below.
In making its determination, the Board of Directors evaluated the following
matters, all of which the Board deemed favorable, in approving the Stock
Purchase Agreement and the transactions thereunder.
Product Line. Portescap's product line, particularly its micro-motors,
will enhance and complement API's motion technology product line.
Technology. Portescap's technology and know-how will enable API to improve
and expand its technology base in a shorter time frame and at a substantial cost
savings when compared to what API's time frame and cost would be if this
technology and know-how had to be developed independently by API.
Customers and Channels to Markets. Portescap's customer base and channels
to markets offer API the opportunity to cross-sell other API motion technology
products, such as resolvers, electromagnetic clutches and brakes, electronic
drives, and larger size motors manufactured by API.
European Market. Portescap's manufacturing facilities in Switzerland and
the United Kingdom, and its other European sales and service operations, offer
API a substantial presence in Europe that would be difficult, time consuming and
expensive to achieve if API attempted to enter the European market on its own.
17
<PAGE> 21
Presence in Japan. Prior to its acquisition of Portescap, API's products
had a limited presence in the Japanese market. With the addition of Portescap's
Japanese subsidiary, API has significantly increased its presence in that
market.
Benefits of Size. The acquisition of Portescap will assist API in reaching
a sufficient volume in motion technology sales and world-wide presence to be
able to compete on a global basis with its major competitors.
There was no single factor, or combination of factors, that the Board of
Directors considered unfavorable in approving the Stock Purchase Agreement,
although it did recognize the relative risks and challenges associated with
acquiring a business the size of Portescap with operations located throughout
the world. However, those risks and challenges were consistent with API's
ongoing acquisition strategy and, therefore, were acceptable to the Board of
Directors.
CONFLICTS OF INTEREST
At no time prior to the commencement of API's negotiations with Inter Scan
in April 1995 or the Closing were there any affiliations between Inter Scan,
Portescap, Holger Hjelm or any of their affiliates, on the one hand, and API or
any of its officers, directors or other affiliates, on the other hand. Other
than the Series A Shares and Note acquired by Inter Scan at the Closing, neither
Inter Scan, Mr. Hjelm nor any of their affiliates owns any equity securities,
capital stock or indebtedness issued by API or any of its subsidiaries. Mr.
Hjelm may be deemed to be the beneficial owner of the Series A Shares and Note
owned of record by Inter Scan. See "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Management." Effective immediately after the
Closing of API's acquisition of Portescap on July 8, 1997, Mr. Hjelm was
appointed to API's nine-person Board of Directors and the Nominating Committee
of that Board. See "The Stock Purchase Transaction -- Other
Agreements -- Shareholder Agreement." Because Mr. Hjelm was admitted to the
Board of Directors after the Closing, he did not vote on, or participate in the
discussions concerning, API's acquisition of Portescap or the Proposals to be
voted on at the Meeting. Because of Inter Scan's ownership of the Series A
Shares and Note and Mr. Hjelm's affiliation with Inter Scan they can be
considered to have an interest in the Proposals to be voted on at the Meeting.
However, Inter Scan has agreed not to vote any of its Series A Shares at the
Meeting.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
Although the transaction is structured as an acquisition of shares of
Portescap in exchange for Series A Shares, the Note and cash, API intends to
make an election available to it under the Internal Revenue Code of 1986, as
amended, to treat the acquisition as an acquisition of the assets of Portescap
and its foreign subsidiaries. This election will enable Portescap and its
foreign subsidiaries to obtain a tax basis based on the Purchase Price allocated
to their assets for U.S. tax (earnings and profits) purposes, and eliminate
preacquisition earnings and profits of Portescap and its foreign subsidiaries.
No opinion of counsel was sought in connection with these tax matters.
ACCOUNTING TREATMENT
API will account for the transactions under the Stock Purchase Agreement as
a "purchase" transaction in accordance with Accounting Principles Board Opinion
No. 16. Using purchase accounting, the fair value of the consideration (cash,
stock, debt securities, etc.) given by the acquiring entity is used as the
valuation basis for the transaction. The assets and liabilities of the acquired
entity are revalued to their respective fair values at the acquisition date. The
pro forma financial statements included in this Proxy Statement give effect to
the transactions under the Stock Purchase Agreement on the basis described in
the notes thereto.
ABSENCE OF APPRAISAL RIGHTS
API's shareholders do not have appraisal rights in connection with the
Stock Purchase Agreement and the transactions thereunder. Shareholders of API
who vote against (or abstain or fail to vote at all) the proposals considered in
this Proxy Statement will nevertheless be bound by the results of the vote if
the required number of API's shareholders approve the proposals.
18
<PAGE> 22
DESCRIPTION OF THE CAPITAL STOCK OF API
API is currently authorized to issue up to 10,000,000 Common Shares and
20,000 Series A Shares. If the proposal to amend the Charter to increase the
number of authorized shares is adopted, API will be authorized to issue up to
30,000,000 Common Shares and 1,250,000 Series B Shares, of which 1,236,337
shares will be automatically exchanged for all outstanding Series A Shares and
the Note issued to Inter Scan. Upon the exchange of the Series A Shares for
Series B Shares or the conversion of the Series A Shares into Common Shares, the
Series A Shares so exchanged or converted will be reclassified as authorized
preferred shares of API. Such reclassified shares may be issued in series, and
the Board of Directors of API has the authority pursuant to the Charter to fix,
before the issuance of any series, the rights, preferences and limitations
pertaining to such series.
Other than the rights granted to Inter Scan under the Shareholder Agreement
(see "The Stock Purchase Transaction -- Other Agreements -- Shareholder
Agreement"), no shareholder of API will have the right to purchase or subscribe
for any part of any unissued shares or any additional shares to be issued by
reason of any increase of the authorized capital stock of API, or the issuance
of bonds, certificates of indebtedness, debentures or other securities
convertible into shares of API. Any such unissued shares or options to purchase
shares may be issued and disposed of pursuant to a resolution of the Board of
Directors, to such persons, firms, corporations or associations as the Board of
Directors deems advisable.
As of September 23, 1997, there were Common Shares and 20,000
Series A Shares issued and outstanding, all of which are fully paid and
non-assessable. Holders of Common Shares are entitled to one vote for each
share. The holder of the Series A Shares, Inter Scan, is entitled to 1,244,485
votes and to a class vote, on certain matters; however, it has agreed not to
vote its shares on the two proposals to be voted on at the Meeting (see "The
Stock Purchase Transaction -- Terms of the Preferred Shares"). During the three
year period covered by the Shareholder Agreement, the Company's Board of
Directors has the right to vote all of the Series A Shares, Series B Shares and
any Common Shares issued on conversion of Series A Shares or Series B Shares
(see "The Stock Purchase Agreement -- Other Agreements -- Shareholder
Agreement").
19
<PAGE> 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows the number of Common Shares owned by each person
or group (as that term is used in Section 13(d)(3) of the Exchange Act) known to
API to be the beneficial owner of more than 5% of its Common Shares as of
September 11, 1997, unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
COMMON SHARES COMMON SHARES
OUTSTANDING OUTSTANDING
PRIOR TO THE ASSUMING
STOCK PROPOSALS
NAME AND ADDRESS OF AMOUNT AND NATURE OF PURCHASE NO. 1 AND 2
BENEFICIAL OWNER BENEFICIAL OWNERSHIP TRANSACTION ADOPTED(1)
---------------------- -------------------- ------------- -------------
<S> <C> <C> <C>
Robert J. Fierle........................... 701,702(2) 9.5% 7.8%
East Aurora, NY 14052
Dimensional Fund Advisors Inc. ............ 428,674(3) 5.8% 4.8%
1299 Ocean Avenue
Santa Monica, CA 90401
Inter Scan Holding Ltd..................... 1,244,485(4)(5) 0% 17.2%(5)
Schifflande 5
CH-8001 Zurich
Switzerland
</TABLE>
- ---------------
(1) Based on the assumption that the Note is exchanged for Series B Shares which
are then converted into 294,118 Common Shares and the Series A Shares are
converted into 1,244,485 Common Shares.
(2) Includes 5,000 Common Shares owned by Mr. Fierle's spouse. Mr. Fierle
disclaims beneficial ownership of all such Common Shares.
(3) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 428,674 Common Shares as
of December 31, 1996, all of which Common Shares are held in portfolios of
DFA Investment Dimensions Group Inc., a registered open-end investment
company, or in a series of DFA Investment Trust Company, a Delaware business
trust, or the DFA Group Trust and DFA Participating Group Trust, investment
vehicles for qualified employee benefit plans, for all of which Dimensional
serves as investment manager. Dimensional disclaims beneficial ownership of
all such Common Shares.
(4) Inter Scan owns 20,000 Series A Shares; the number in the table above
represents the number of Common Shares into which the 20,000 Series A Shares
are presently convertible; Mr. Hjelm may be deemed to be the beneficial
owner of those shares (see "Security Ownership of Management").
(5) If the Proposals presented in this Proxy Statement are approved by the
Company's shareholders, Inter Scan would own Series B Shares convertible
into 1,538,603 Common Shares.
20
<PAGE> 24
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the number of Common Shares beneficially owned as
of September 11, 1997 by (i) each director, the Chief Executive Officer and the
three other most highly compensated executive officers in 1996; and (ii) all
directors and executive officers of API as a group.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
COMMON SHARES COMMON SHARES
OUTSTANDING OUTSTANDING
PRIOR TO THE ASSUMING
STOCK PROPOSALS
NAME OF INDIVIDUAL AMOUNT AND NATURE OF PURCHASE NO. 1 AND 2
OR DESCRIPTION OF GROUP BENEFICIAL OWNERSHIP(1)(2) TRANSACTION(3) ADOPTED(3)(4)
------------------------- -------------------------- ------------- -------------
<S> <C> <C> <C>
John M. Albertine......................... 19,168
Holger Hjelm.............................. 1,244,485(5) 17.2%(5)
Bernard J. Kennedy........................ 8,816
Douglas J. MacMaster, Jr.................. 8,561
Klaus K. Oertel........................... 2,850
William P. Panny.......................... 14,986
Victor A. Rice............................ 4,017
Jerre L. Stead............................ 6,379
Kurt Wiedenhaupt.......................... 234,493 3.1% 2.6%
James W. Bingel........................... 15,526
John M. Murray............................ 50,578
Richard S. Warzala........................ 50,050
All directors and executive officers as a
group, including those named above...... 1,674,991(5) 5.5% 21.2%(5)
</TABLE>
- ---------------
(1) Each individual has sole voting and investment power over the Common Shares
indicated as owned by that individual unless otherwise noted.
(2) The total includes 350,493 Common Shares that the executive officers and
directors of API as a group have the right to acquire pursuant to options
that are currently exercisable or become exercisable within the next 60
days, including those in the following table:
<TABLE>
<S> <C>
Dr. Albertine.................................................. 4,712
Mr. Kennedy.................................................... 5,035
Mr. MacMaster.................................................. 4,561
Mr. Oertel..................................................... 2,350
Mr. Panny...................................................... 4,666
Mr. Rice....................................................... 3,018
Mr. Stead...................................................... 1,379
Mr. Wiedenhaupt................................................ 220,523
Mr. Bingel..................................................... 12,987
Mr. Murray..................................................... 49,662
Mr. Warzala.................................................... 28,250
</TABLE>
(3) Unless otherwise indicated, each of the directors and executive officers
named in the table owns less than 1% of the Common Shares outstanding.
(4) Based on the assumption that the Note is exchanged for Series B Shares which
are then converted into 294,118 Common Shares and the Series A Shares are
converted into 1,244,485 Common Shares.
(5) Inter Scan owns 20,000 Series A Shares; the number in the table above
includes the 1,244,485 Common Shares into which the 20,000 Series A Shares
are presently convertible (see "Security Ownership of Certain Beneficial
Owners") which represents 14.4% of the currently outstanding Common Shares;
if the Proposals presented in this Proxy Statement are approved, Inter
Scan's Note and Series A Shares would be exchanged for Series B Shares
convertible into 1,538,603 Common Shares, which would represent 17.2% of the
currently outstanding Common Shares; Mr. Hjelm may be deemed the beneficial
owner of those shares.
21
<PAGE> 25
SELECTED FINANCIAL DATA
SUMMARY HISTORICAL FINANCIAL DATA
Set forth below is certain selected data relating to the operations and
financial condition of API for the past five years and the first six months of
1997 and 1996.
API -- Five Year Selected Financial Data -- Operations.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................... $117,110,000 $82,660,000 $65,265,000 $51,334,000 $51,295,000
Interest and debt expense.......... $ 1,295,000 $ 238,000 $ 220,000 $ 244,000 $ 293,000
Depreciation and amortization...... $ 3,785,000 $ 2,594,000 $ 2,275,000 $ 1,712,000 $ 1,531,000
Net earnings....................... $ 6,525,000 $ 4,731,000 $ 3,431,000 $ 2,050,000 $ 2,387,000
Net earnings per Common Share...... $.91 $.67 $.49 $.29 $.34
Net earnings per Common Share --
fully diluted*................... $.86 $.65 -- -- --
Cash dividends declared per Common
Share............................ $.26 $.2575 $.2475 $.235 $.215
</TABLE>
- ---------------
* Anti-dilutive in 1994, 1993 and 1992.
API -- Five Year Selected Financial Data -- Financial Condition.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current assets..................... $40,986,000 $31,615,000 $25,113,000 $21,347,000 $20,447,000
Current liabilities................ $16,794,000 $13,152,000 $10,916,000 $ 5,362,000 $ 4,896,000
Working capital.................... $24,192,000 $18,463,000 $14,197,000 $15,985,000 $15,551,000
Current ratio...................... 2.4 2.4 2.3 4.0 4.2
Property, plant and equipment,
net.............................. $27,206,000 $12,269,000 $10,202,000 $ 8,353,000 $ 8,200,000
Total assets....................... $82,012,000 $57,791,000 $45,344,000 $38,081,000 $37,369,000
Long-term liabilities.............. $24,674,000 $10,292,000 $ 3,523,000 $ 3,507,000 $ 3,761,000
Shareholders' equity............... $40,544,000 $34,347,000 $30,905,000 $29,212,000 $28,712,000
Shareholders' equity per Common
Share............................ $5.56 $4.82 $4.38 $4.14 $4.07
Number of Common Shares outstanding
at year-end...................... 7,292,000 7,128,000 7,064,000 7,058,000 7,055,000
</TABLE>
22
<PAGE> 26
API -- Selected Financial Data for the six months ended July 4, 1997 and June
28, 1996.
<TABLE>
<CAPTION>
JULY 4, 1997 JUNE 28, 1996
------------ -------------
<S> <C> <C>
Revenues....................................... $ 75,479,000 $ 53,563,000
Interest and debt expense...................... $ 1,083,000 $ 522,000
Net earnings................................... $ 3,855,000 $ 2,972,000
Net earnings per Common Share.................. $0.53 $0.42
Current assets................................. $ 53,566,000 $ 40,335,000
Current liabilities............................ $ 31,500,000 $ 17,500,000
Working capital................................ $ 22,066,000 $ 22,835,000
Current ratio.................................. 1.7 2.3
Property, plant and equipment, net............. $ 36,495,000 $ 23,696,000
Total assets................................... $103,595,000 $ 79,635,000
Long-term debt................................. $ 24,600,000 $ 23,528,000
Shareholders' equity........................... $ 45,232,000 $ 37,016,000
Shareholders' equity per Common Share.......... $6.12 $5.14
Number of Common Shares outstanding............ 7,394,769 7,201,402
</TABLE>
Set forth below is certain selected data relating to the operations and
financial condition of Portescap for the past five years. The information is
presented in Swiss francs (CHF) and in accordance with International Accounting
Standards.
Portescap -- Five Year Selected Financial Data.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues........................... 92,197,000 85,358,000 78,638,000 76,782,000 71,698,000
Operating profit................... 7,554,000 6,534,000 843,000 2,378,000 4,160,000
Interest and debt expense.......... 1,746,000 1,794,000 1,966,000 2,196,000 1,877,000
Depreciation and amortization...... 4,316,000 2,360,000 2,946,000 2,497,000 2,958,000
Net profit (loss).................. 3,710,000 3,035,000 (2,830,000) (1,070,000) 1,345,000
Current assets..................... 51,126,000 49,435,000 44,760,000 47,222,000 47,457,000
Current liabilities................ 25,226,000 27,829,000 24,550,000 30,048,000 28,075,000
Working capital.................... 25,900,000 21,606,000 20,210,000 17,174,000 19,382,000
Current ratio...................... 2.0 1.8 1.8 1.6 1.7
Property, plant and equipment,
net.............................. 16,372,000 17,049,000 18,145,000 19,094,000 17,612,000
Total assets....................... 68,536,000 67,585,000 64,191,000 67,824,000 66,108,000
Long-term liabilities.............. 15,186,000 16,901,000 18,334,000 12,894,000 12,228,000
Shareholders' equity............... 28,124,000 22,855,000 21,307,000 24,882,000 25,805,000
</TABLE>
23
<PAGE> 27
UNAUDITED PRO FORMA SELECTED FINANCIAL DATA
The selected pro forma financial data that appears below (prepared in
accordance with U.S. generally accepted accounting principles) is based on API's
and Portescap's historical financial data as adjusted to give effect to the
transactions pursuant to the Stock Purchase Agreement on the basis described in
the notes to the Pro Forma Financial Statements. This information is not
necessarily indicative of the results that actually would have occurred and
should be read in conjunction with the Pro Forma Financial Statements included
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JULY 4, 1997 JANUARY 3, 1997
-------------------- ---------------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Pro Forma Operating Data:
Revenues.......................................... $106,054 $ 192,391
Interest and debt expense......................... 2,089 3,129
Net earnings...................................... 1,361 8,532
Net earnings per Common Share..................... 0.15 0.98
Net earnings per Common Share -- fully diluted.... 0.15 0.93
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 4, 1997
--------------------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Pro Forma Balance Sheet Data:
Current assets.................................... $ 83,522
Current liabilities............................... 53,114
Working capital................................... 30,408
Property, plant and equipment, net................ 54,453
Total assets...................................... 170,352
Long-term debt.................................... 39,642
Shareholders' equity.............................. 71,912
Shareholders' equity per Common Share............. 8.05
Number of Common Shares outstanding............... 8,933
</TABLE>
SELECTED COMPARATIVE PER SHARE DATA
The following tables set forth certain information concerning Common
Shares. Entries captioned "API pro forma consolidated" is API's and Portescap's
historical data combined and adjusted to give effect to the transactions
pursuant to the Stock Purchase Agreement on the basis described in the notes to
the Pro Forma Financial Statements. The following data should be read in
conjunction with the Pro Forma Financial Statements included elsewhere in this
Proxy Statement and API's Consolidated Financial Statements included elsewhere
in this Proxy Statement.
<TABLE>
<CAPTION>
AS OF JULY 4, 1997
------------------
<S> <C>
Book value per Common Share:
API historical ....................................................... $ 6.12
API pro forma consolidated ........................................... $ 8.05
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED FOR THE YEAR ENDED
JULY 4, 1997 JANUARY 3, 1997
--------------------- ------------------
<S> <C> <C>
Net income per Common Share:
API historical................................. $ 0.53 $ 0.91
API pro forma consolidated..................... $ 0.15 $ 0.98
Net income per Common Share --
fully diluted:
API historical................................. $ 0.50 $ 0.86
API pro forma consolidated..................... $ 0.15 $ 0.93
</TABLE>
24
<PAGE> 28
MARKET PRICE OF COMMON SHARES
API's Common Shares are listed on the NYSE under the symbol "APR." The
following table sets forth, for the quarters indicated, the high and low sales
prices of Common Shares reported by the NYSE.
<TABLE>
<CAPTION>
DIVIDEND
DECLARED PER
QUARTER HIGH LOW COMMON SHARE
-------------------------------------------------- ------ ------ ------------
<S> <C> <C> <C>
First Quarter 1995................................ $ 9.63 $ 7.63 $ 0.0625
Second Quarter 1995............................... 11.13 8.50 0.0650
Third Quarter 1995................................ 14.75 10.13 0.0650
Fourth Quarter 1995............................... 13.88 10.75 0.0650
First Quarter 1996................................ 13.13 10.75 0.0650
Second Quarter 1996............................... 13.75 11.50 0.0650
Third Quarter 1996................................ 13.13 11.38 0.0650
Fourth Quarter 1996............................... 20.25 12.25 0.0650
First Quarter 1997................................ 20.50 16.75 0
Second Quarter 1997............................... 20.50 16.125 0
Third Quarter 1997
(through September , 1997).................... 0
</TABLE>
As of January 3, 1997, there were 1,015 shareholders of record. During 1995
and 1996 API declared cash dividends on its Common Shares of $0.2575 and $0.26
per share, respectively. API has decided to eliminate its quarterly cash
dividend, effective in the first quarter of 1997, and to retain the cash for
corporate expansion and acquisitions. On November 4, 1996, the trading day prior
to the public announcement of the agreement in principle between API and Inter
Scan regarding the stock purchase transaction, the closing price for Common
Shares on the NYSE was $14.125 per share. As of September , 1997, the most
recent trading day as to which it is practicable to provide market price
information, the closing price for Common Shares on the NYSE was $ per
share.
25
<PAGE> 29
PROPOSAL NO. 1 -- APPROVAL OF THE ISSUANCE OF UP TO 1,538,603 COMMON SHARES
At the Meeting, the shareholders of API will be asked to vote on a proposal
to approve the issuance of up to 1,538,603 Common Shares. This approval is
required by rule 312.03(c) of the NYSE which requires shareholders approval when
Common Shares are to be issued which have, upon issuance, voting power equal to
or in excess of 20% of the voting power outstanding prior to such issuance or
the number of Common Shares to be issued will be in excess of 20% of the number
of Common Shares outstanding prior to such issuance. Pursuant to rule 312.05 of
the NYSE, the affirmative vote of a majority of votes cast on the proposal is
required to adopt the proposal provided that the total vote cast on the proposal
represents over fifty percent in interest of all securities entitled to vote on
the proposal. Inter Scan, the holder of all Series A Shares outstanding, has
agreed not to vote its shares on this proposal.
If the shareholders fail to approve this proposal and Proposal No. 2 by
April 30, 1998, API will be required to pay Inter Scan the greater of (i) an
amount equal to the number of Common Shares the Note represents the right to
acquire on April 30, 1998 multiplied by the average closing price on the NYSE
for the ten trading days prior to April 30, 1998; or (ii) $5,753,683, which
represents an amount equal to the number of Common Shares the Note represents
the right to acquire on April 30, 1998 multiplied by $19.5625, which was the
closing market price of API's Common Shares on the day prior to the acquisition
of Portescap. Also, if the proposals are not approved by April 30, 1998, then in
addition to any amount owed under clauses (i) or (ii), if Inter Scan elects to
purchase any Common Shares between May 1 and June 30, 1998, API must reimburse
it for any costs it incurs in purchasing such shares in excess of the market
price referred to in clause (i) or (ii), whichever is applicable, multiplied by
the number of shares actually purchased, subject to a maximum of 294,118 shares.
The Board of Directors of API unanimously recommends a vote FOR approval of
the issuance of up to 1,538,603 Common Shares. Unless otherwise instructed,
proxies will be voted FOR approval of this proposal. See "The Stock Purchase
Transaction." Mr. Holger Hjelm, an affiliate of Inter Scan and its nominee on
API's Board of Directors, has an interest in the matters covered by this
Proposal (see "The Stock Purchase Transaction -- Conflicts of Interest").
26
<PAGE> 30
PROPOSAL NO. 2 -- AMENDMENT OF THE CHARTER
TO INCREASE THE NUMBER OF AUTHORIZED SHARES
At the Meeting, the shareholders of API will be asked to vote on a proposal
to amend API's Charter to (i) increase the number of authorized Common Shares
from 10,000,000 shares to 30,000,000 shares and (ii) authorize 1,250,000 Series
B Shares (collectively, the "Charter Amendments"). Under the DGCL, the
affirmative vote of a majority of the outstanding shares entitled to vote is
required to approve and adopt the Charter Amendments. Inter Scan, the holder of
all Series A Shares outstanding, has agreed not to vote its shares on this
proposal. The Board of Directors of API unanimously recommends a vote FOR
approval of the Charter Amendments. Unless otherwise instructed, proxies will be
voted FOR approval of the Charter Amendments. The discussion and description of
the material terms of the Charter Amendments herein are qualified in their
entirety by reference to the Charter Amendments, a copy of which is attached
hereto as Appendix B and which is incorporated herein by this reference.
The Charter currently provides that API may issue up to 10,000,000 Common
Shares and 20,000 Series A Shares. As of Closing, API has issued or reserved for
issuance 9,987,011 Common Shares and 20,000 Series A Shares. If Proposal No. 1
to approve the issuance of twenty percent or more of the Common Shares
outstanding and this Proposal No. 2 are adopted, then the Note will be
immediately exchanged for Series B Shares which may be converted into Common
Shares and all of the 20,000 Series A Shares initially issued under the Stock
Purchase Agreement will be exchanged for 1,000,000 Series B Shares. If the
Charter Amendments are adopted, 30,000,000 Common Shares and 1,250,000 Series B
Shares will be authorized and available for issuance. Upon the exchange of the
Series A Shares for Series B Shares or the conversion of the Series A Shares
into Common Shares, the Series A Shares so exchanged or converted will be
reclassified as 20,000 authorized preferred shares of API (see "Description of
the Capital Stock of API").
The terms and rights of the additional Common Shares to be authorized if
the Charter Amendments are approved will be identical to those of presently
outstanding Common Shares. If the Charter Amendments and Proposal No. 1 are
approved, 1,236,337 shares of the authorized 1,250,000 Series B Shares will be
issued to Inter Scan in exchange for the Series A Shares and the Note. For a
description of the Preferred Shares to be issued pursuant to the Stock Purchase
Agreement see "The Stock Purchase Transaction -- Terms of the Preferred Shares"
and "The Stock Purchase Agreement -- Terms of the Note" above.
If the Charter Amendments are not filed in Delaware by April 30, 1998, API
will have certain payment obligations to Inter Scan if Inter Scan sells some or
all of the Series A Shares (or Common Shares) during the ten year period after
Closing for less than 115% of the liquidation value (or conversion price). See
"The Stock Purchase Transaction -- Other Agreements -- Shareholder Agreement."
Also, if the Charter Amendments are not approved the Series A Shares will remain
outstanding unless they are converted into Common Shares. If they remain
outstanding, their class voting rights on mergers, consolidations, sale of
assets or dissolution will cause the Common Shares to no longer meet the NYSE's
listing requirements. See "The Stock Purchase Transaction -- Terms of the
Preferred Stock." API had reviewed the general terms of the preferred stock,
including its voting rights, with the NYSE shortly after it reached a
preliminary agreement with Inter Scan in October 1996. The terms of the proposed
acquisition of Portescap changed throughout the negotiations from October 1996
to April 1997 (see "The Stock Purchase Transaction -- Background of the
Transaction"). API did not review the final terms of the Series A or Series B
Shares with the NYSE until after API had reached its agreement with Inter Scan
in early July 1997. At that time the NYSE indicated that the class voting rights
on mergers, consolidations, sale of assets and dissolution held by owners of the
Series A and Series B Shares were not in compliance with the NYSE's rules. API
then requested that Inter Scan eliminate those class voting rights in the Series
B Shares and Inter Scan agreed to that change. However, those class voting
rights remained in the Series A Shares. In order to close the acquisition as
scheduled, and because shareholder approval of the issuance of the Series B
Shares would eliminate the issue, API decided to proceed with the Closing with
the class voting rights of the Series A Shares unchanged. The Board of Directors
of API recommends the approval of this Proposal No. 2 in order to avoid the
payments described above and the possibility of the Common Shares being delisted
from the NYSE. Mr. Holger Hjelm, an affiliate of Inter Scan and its nominee on
API's Board of Directors, has an interest in the matters covered by this
Proposal (see "The Stock Purchase Transaction -- Conflicts of Interest").
27
<PAGE> 31
The Board of Directors also believes that it is important to have the
additional shares of Common Shares available for issuance as and when needed in
order to avoid the delay and expense incident to obtaining shareholder approval
at a later date and to provide API greater flexibility in the consideration of
future stock dividends or stock splits, sales of Common Shares or convertible
securities to enhance capital and liquidity, possible future acquisitions and
other corporate purposes.
The increase in authorized capital and issuance of the Series B Shares to
Inter Scan in exchange for the Note and the Series A Shares which may further be
converted into Common Shares, and to the extent that the additional authorized
Common Shares and Series B Shares are issued in the future, will cause the
existing shareholders' percentage ownership to decrease and, depending on the
price at which the Common Shares and Series B Shares are issued, could have the
effect of diluting the earnings per share and book value per share of
outstanding Common Shares. The holders of Common Shares have no preemptive
rights. The Company may issue some or all of the additional Common Shares and
some or all of the unissued Series B Shares authorized upon approval of Proposal
No. 2, and the 20,000 Series A Shares which would be returned to the Company
upon the exchange of Series A Shares for Series B Shares on approval of Proposal
No. 2, in connection with a merger or acquisition or the purchase of assets of
another company, to raise capital through a sale of those shares in a public or
private offering, in connection with employee and director stock option plans
adopted by the Company (although the Company has no plans to issue any Preferred
Shares in connection with any such stock option plans), in connection with the
Company's adoption of a shareholders' rights plan, and for other purposes
permitted under its Charter and the DGCL. The increase in the authorized capital
and the subsequent issuance of Common Shares, Series B Shares or the 20,000
preferred shares could have the effect of delaying or preventing a change in
control of API without further action by the shareholders by diluting the stock
ownership or voting rights of a person seeking to obtain control of API.
28
<PAGE> 32
INFORMATION CONCERNING API
BUSINESS
Through its subsidiaries API conducts operations in three major industrial
classifications, namely, heat transfer technology, motion technologies and
electronic components. API directs its efforts towards major sales drives for
current products in its served markets and target markets. In addition, API
seeks profitable growth by enhancing and complementing its existing technology
base.
API Heat Transfer Inc. API Heat Transfer Inc., which is comprised of API
Basco Inc., API Airtech Inc., API Ketema Inc., and most recently API
Schmidt-Bretten GmbH and API Schmidt-Bretten Inc., engineers and manufactures a
broad range of industrial heat transfer equipment. API's heat transfer business
serves the heat transfer needs of a wide range of industries including power,
chemical, petrochemical, HVAC, and food and dairy, and many of their support
industries. Products range from small standard units to large custom-designed
heat exchangers.
API Basco Inc. manufactures a full line of standard and custom shell and
tube heat exchangers, plate fin intercoolers and aftercoolers, and Centraflow
steam surface condensers.
API Airtech Inc. manufactures a complete line of aluminum air to air, air
to liquid, and liquid to liquid heat exchangers. The liquid to liquid heat
exchanger provides the refrigeration market with a more advantageous evaporation
and condenser combination through reduced piping, smaller footprint and more
efficient heat transfer surface. In December 1996, API Airtech Inc. moved into a
new 82,000 square foot facility which will accommodate current and planned
growth.
Both API Basco Inc. and API Airtech Inc. achieved ISO 9001 certification
during 1996, an important factor in API's plans for international growth. ISO
9001 sets forth quality standards that a supplier must meet in order to achieve
certification. Many customers, particularly in the European marketplace, require
that their suppliers be ISO 9001 certified. By having this certification, API
Basco Inc. and API Airtech Inc. increase their prospects for obtaining orders
from international customers.
API Ketema Inc., which was acquired on April 1, 1996, has a strong position
in both the general industrial and refrigeration heat transfer marketplace. This
subsidiary manufactures shell and tube heat exchangers, chiller barrels,
condensers, flooded evaporators and industrial packaged chillers.
API Schmidt-Bretten GmbH, which was acquired on January 31, 1997, is a
plate and frame heat exchanger manufacturer with a solid position in the
chemical and food markets in Germany and the Netherlands. The addition of API
Schmidt-Bretten GmbH, which is located in Germany, and the establishment of API
Schmidt-Bretten Inc. in the U.S., not only adds a new dimension to the group's
heat transfer capabilities, but also establishes a conduit to move plate
products into the U.S. market and, at the same time, move heat transfer products
manufactured at various domestic locations into European markets.
API Motion Inc. API Motion Inc., comprised of API Controls Inc., API
Deltran Inc., API Deltran (St. Kitts) Ltd., API Gettys Inc., API Harowe Inc.,
API Harowe (St. Kitts) Ltd. and API Portescap, is a designer and manufacturer of
high performance motion control products and systems.
API Controls Inc. offers complete lines of step and servo drives and
packaged drive systems for a wide variety of motion control applications
including factory automation, semiconductor equipment, printing, packaging and
winding equipment, positioning tables and electronics assembly applications. In
1996, API Controls Inc. developed and introduced three major new product lines
and a new software development tool to assist customers in the installation of
products so there is little or no start-up learning curve. The completely new
Intelligent MicroStepper and Intelligent Servo drives and controllers and new
line of Centennial all-digital drives address the needs of original equipment
manufacturers that require high-performance single- or multi-axis solutions.
API Deltran Inc. designs and manufactures high quality, precision
electromagnetic clutches, brakes and clutch/brake assemblies used in
sophisticated rotary motion control applications. During 1996, API Deltran
29
<PAGE> 33
Inc. developed a new line of servo motor brakes primarily to meet the needs of
servo motor manufacturers and for use in factory automation applications.
Furthermore, an adjunct to the API Harowe Inc. manufacturing facility in St.
Kitts was started for API Deltran Inc., providing the ability to produce volume
clutches at competitive prices.
API Gettys Inc., which was acquired on April 19, 1996, designs and
manufactures precision servo and step motors for a broad range of industrial
drive applications including DC brush and AC brushless servo motors and
NEMA-standard step motors with linear actuating assemblies. API Gettys Inc.
developed and introduced a new line of Turbo Stepper motors in 1996, offering a
variety of sizes of high torque motors for use in semiconductor, factory
automation, packaging and medical instrumentation markets. A new line of high
torque Turbo Servo motors was also introduced for semiconductor, machine tool,
factory automation, medical instrumentation and packaging markets. During 1996,
the electronics portion of API Gettys Inc. was consolidated within the API
Controls Inc. operation, enabling API Gettys Inc., as a motors-only facility, to
focus better on its core products.
API Harowe Inc., which was acquired on June 30, 1994, designs and
manufactures high performance resolvers, encoders, brushless motors, gearmotors
and other specialty rotating electromagnetic components for industrial, medical,
military and commercial aerospace applications. In 1996, API Harowe Inc.
developed a new line of small frame brushless DC motors that can be provided in
over 4,500 different model variations. The new line enables API to respond
quickly to the needs of a wide variety of markets. The digital resolver
electronics package was also introduced in 1996. It was developed for
applications that require the ruggedness of a resolver with a digital output
signal.
API Electronic Components Inc. API Electronic Components Inc., which is
comprised of API Delevan Inc. and API SMD Inc., designs, manufactures and
markets an extensive line of quality inductors, chokes and magnetics to satisfy
various electrical and electronic filtering requirements. This group
concentrates on producing high performance inductive devices to meet stringent
government and customer specifications relating to product quality, reliability
and dependability. Global competitive forces continue to push the market towards
improved product quality with lower product costs. This competition from
off-shore manufacturing is being neutralized through major improvements in the
group's manufacturing capabilities. In 1996, API Delevan Inc. and API SMD Inc.
completed automation and process improvement projects that enabled them to
produce quality products at a lower cost than in any previous year.
During 1996, both API Delevan Inc. and API SMD Inc. introduced additional
new products and expanded existing product designs to enhance further their
presence in both the high frequency and the power markets, including various
leaded and surface mountable magnetics that have been developed to grow product
offerings in the broad power market. By expanding product offerings with
competitively priced inductors, the group is able to serve existing customer
needs better while attracting new customers.
COMPETITION
In each of its segments API faces substantial competition from a number of
companies, some of which have off-shore manufacturing facilities and many of
which are larger and have greater resources. In the electronic components
market, several of API's domestic competitors have become part of a single
organization through a series of acquisitions. The inductor market continues to
be faced with strong global competition and trends towards product
miniaturization and lower costs. API relies primarily on the quality of its
products and service to meet competition. Although API is not aware of
definitive industry statistics by manufacturer for the products it makes, in the
opinion of management, API is a significant competitive factor in the markets
for high quality electronic-magnetic motion control components, industrial heat
exchangers and micro-miniature electronic coils.
30
<PAGE> 34
BACKLOG
API's backlog of unfilled orders believed to be firm at January 3, 1997 was
approximately $39,216,000. All backlog orders are expected to be completed in
the current fiscal year. The following table shows the backlog of orders for
products associated with the three business segments as of the date indicated:
<TABLE>
<CAPTION>
HEAT MOTION ELECTRONIC
TRANSFER TECHNOLOGIES COMPONENTS TOTAL
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
July 4, 1997.................... $28,882,000 $ 17,253,000 $3,240,000 $49,375,000
January 3, 1997................. $20,639,000 $ 15,924,000 $2,653,000 $39,216,000
June 28, 1996................... $20,972,000 $ 16,752,000 $2,565,000 $40,289,000
December 29, 1995............... $13,778,000 $ 14,229,000 $2,434,000 $30,441,000
</TABLE>
Backlogs have increased for the heat transfer and motion technologies
segments primarily due to a focused strategic account sales program and the
general business climate, combined with the acquisition of API Ketema Inc., API
Schmidt-Bretten GmbH and API Gettys Inc. While the electronic components segment
sales have increased, the backlog has remained steady and is the result of
reduced lead times for delivery required by customers.
SUPPLIERS
API is not dependent upon any single supplier for any of the raw materials
used in manufacturing its products and has not encountered significant
difficulties in purchasing sufficient quantities of raw materials on the open
market.
PATENTS AND LICENSES
API has patents covering the design and certain manufacturing processes for
some of its surface mounted inductors which management believes may be material
to the electronic components segment over the next several years. These patents
have a remaining duration in excess of ten years. Otherwise, no single patent or
group of patents is material to the operations of any industry segment or to the
business as a whole.
CUSTOMERS
During 1996, no single customer accounted for more than 10 percent of
consolidated sales.
RESEARCH AND PRODUCT DEVELOPMENT
API charges earnings directly for research and product development
expenses. Costs for API-sponsored programs, excluding capital expenditures, were
approximately $1,759,000, $1,111,000 and $888,000 in 1996, 1995 and 1994,
respectively.
ENVIRONMENTAL MATTERS
In 1990, the U.S. Environmental Protection Agency (the "EPA"), named API a
potentially responsible party ("PRP"), with respect to hazardous substances
disposed of at the Envirotek II Site (the "Site"), in Tonawanda, New York. API
is a member of a steering committee which was formed to facilitate discussions
with the EPA. API was named a de minimis participant with respect to the first
phase of the clean-up action and was relieved of any potential liability for the
first phase clean-up with the payment of a minor fee. The EPA has since advised
API that its name had been removed from the PRP list. However, the State of New
York has also indicated to the Envirotek II PRP group its intention to pursue
additional remedial measures at a site which surrounds the Site. Based upon the
small percentage of costs incurred to date which were allocated to API,
management expects API's share of the total costs of the remedial phase action
at the Site and the potential clean-up of the surrounding area to be a small
percentage of such costs and not material to its financial condition or results
of operations.
31
<PAGE> 35
EMPLOYEES
At January 3, 1997, 1,309 persons were employed by API.
LINES OF BUSINESS AND INDUSTRY SEGMENT INFORMATION
API's operations in 1996 were carried on through seven divisions and five
subsidiaries. As of January 4, 1997, the seven divisions were legally
restructured into operating subsidiaries. Operations are classified into three
industry segments based upon the characteristics of manufacturing processes and
the nature of markets served. The operating units which currently comprise the
segments and their principal products are as follows:
<TABLE>
<S> <C>
API HEAT TRANSFER INC.:
API Airtech Inc............................ Air-to-air aluminum heat exchangers
API Basco Inc.............................. Shell and tube heat exchangers
API Ketema Inc............................. Packaged chillers, refrigeration
condensers, and shell and tube heat
exchangers
API Schmidt-Bretten GmbH................... Plate heat exchangers
API Schmidt-Bretten Inc.................... Plate heat exchangers and evaporators
API MOTION INC.:
API Controls Inc........................... Servo and stepper motor drives, power
supplies and motion controllers
API Deltran Inc............................ Electro-magnetic clutches and brakes
API Deltran (St. Kitts) Ltd................ Electro-magnetic clutches and brakes
API Gettys Inc............................. AC and DC servo motors and stepper
motors
API Harowe Inc............................. Resolvers and DC motors
API Harowe (St. Kitts) Ltd................. Resolvers and DC motors
API Portescap Inc. ........................ DC and disc magnet stepper motors
API ELECTRONIC COMPONENTS INC.:
API Delevan Inc............................ Axial-leaded inductors
API SMD Inc................................ Surface mounted inductors
</TABLE>
API conducts operations in three major industrial classifications: heat
transfer technology, motion technologies and electronic components. The
operations of the heat transfer technology segment include the production and
sale of water and air-cooled heat transfer equipment to industrial customers.
Operations of the motion technologies segment comprises production and sale of
electro-magnetic clutches and brakes, high performance servo motors, stepper
motors, controllers and resolvers. Operations of the electronic components
segment involve production and sale of inductors and coils.
Total revenues by segment consist entirely of sales to unaffiliated
customers. Operating profit is total revenue less operating expenses. Operating
profit does not include the following items: general corporate income and
expense, investment income, interest expense, other income and expense, or
income taxes. Identifiable assets by segment consist of those assets that are,
or will be, used in the segmental operations. Corporate assets are principally
cash, cash equivalents, marketable securities, investments and other assets.
32
<PAGE> 36
Information about API's operations in different industries, stated in
thousands of dollars, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
REVENUES
Heat Transfer............................................. $ 63,536 $40,819 $33,276
Motion.................................................... 40,016 28,599 19,674
Electronic Components..................................... 13,231 12,985 11,946
General Corporate......................................... 327 257 369
-------- ------- -------
Consolidated................................................ $117,110 $82,660 $62,265
-------- ------- -------
OPERATING PROFIT
Heat Transfer............................................. $ 8,230 $ 5,542 $ 5,331
Motion.................................................... 3,908 2,466 614
Electronic Components..................................... 2,300 2,058 1,790
-------- ------- -------
Combined............................................... 14,438 10,066 7,735
-------- ------- -------
General Corporate expense, net............................ (3,149) (2,607) (2,210)
Interest and debt expense................................. (1,295) (238) (220)
-------- ------- -------
Earnings before income taxes................................ $ 9,994 $ 7,221 $ 5,305
-------- ------- -------
IDENTIFIABLE ASSETS
Heat Transfer............................................. $ 42,357 $23,673 $14,607
Motion.................................................... 22,274 15,179 12,370
Electronic Components..................................... 6,488 6,821 6,071
General Corporate......................................... 10,893 12,118 12,296
-------- ------- -------
Total assets................................................ $ 82,012 $57,791 $45,344
-------- ------- -------
DEPRECIATION
Heat Transfer............................................. $ 1,378 $ 877 $ 735
Motion.................................................... 1,593 964 637
Electronic Components..................................... 534 558 598
General Corporate......................................... 58 61 62
-------- ------- -------
Total depreciation.......................................... $ 3,563 $ 2,460 $ 2,032
-------- ------- -------
NET CAPITAL EXPENDITURES
Heat Transfer............................................. $ 5,878 $ 1,789 $ 1,358
Motion.................................................... 842 2,218 188
Electronic Components..................................... 575 449 259
General Corporate......................................... 77 33 10
-------- ------- -------
Total net capital expenditures.............................. $ 7,372 $ 4,489 $ 1,815
-------- ------- -------
</TABLE>
FOREIGN OPERATIONS
Export sales, principally to Europe, Canada, Mexico and Asia, were
approximately 15%, 14% and 17% of consolidated sales for 1996, 1995 and 1994,
respectively. The foreign sales are not believed to be subject to any risks
other than those normally associated with the conduct of business in friendly
nations having stable governments.
33
<PAGE> 37
PROPERTIES
The location of API's facilities and their approximate size in terms of
floor area are as follows:
<TABLE>
<CAPTION>
FLOOR AREA
LOCATION (SQUARE FEET)
- --------------------------------------------------------- -------------
<S> <C>
API HEAT TRANSFER INC.
API Basco Inc., Buffalo, New York 115,600
(Walden Avenue)
API Airtech Inc., Arcade, New York 82,000
(North Street)
API Ketema Inc., Grand Prairie, Texas 150,000
(West Marshall Drive)
API Schmidt-Bretten GmbH, Bretten, Germany 100,000
(Pforzheim Strasse)
API Schmidt-Bretten Inc., Bohemia, New York 2,000
(Central Avenue)
API MOTION INC.
API Harowe Inc., West Chester, Pennsylvania 34,500
(Westtown Road)
API Controls Inc. and API Deltran Inc., 43,652
Amherst, New York
(Hazelwood Drive)
API Gettys Inc., Racine, Wisconsin 88,000
(North Green Bay Road)
API Harowe (St. Kitts) Ltd. and 8,500
API Deltran (St. Kitts) Ltd., St. Kitts, West Indies
(Bourkes Road)
API ELECTRONIC COMPONENTS INC.
API Delevan Inc., East Aurora, New York 50,000
(Quaker Road)
API SMD Inc., Arcade, New York 23,500
(North Street)
</TABLE>
The Walden Avenue (API Basco Inc.), Quaker Road (API Delevan Inc.), North
Street (API Airtech Inc. and API SMD Inc.), West Marshall Drive (API Ketema
Inc.) and North Green Bay Road (API Gettys Inc.) facilities are owned by API.
The facilities leased by API are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
ANNUAL LEASED
FACILITY LOCATION RENTAL UNTIL
- ------------------------------------------------- ----------- ------
<S> <C> <C>
Bourkes Road (API Harowe (St. Kitts) Ltd. and $ 24,000 2003
API Deltran (St. Kitts) Ltd.)
Hazelwood Drive (API Controls Inc. and $ 130,000 2002
API Deltran Inc.)
Westtown Road (API Harowe Inc.) $ 168,000 2001
Pforzheim Strasse (API Schmidt-Bretten GmbH) $ 198,000 2001
Central Avenue (API Schmidt-Bretten Inc.) $ 12,000 1998
</TABLE>
API believes all of its existing properties are well maintained, are
suitable for the operation of its business and are capable of handling
production for the coming year.
34
<PAGE> 38
LEGAL PROCEEDINGS
Other than the environmental matter described above under "-- Environmental
Matters," API is not a party to any material pending legal proceedings.
SELECTED FINANCIAL DATA
See "Selected Financial Data -- Summary Historical Financial Data."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED JANUARY 3, 1997
Financial Review -- Operations.
Revenues. Consolidated revenues increased 41.7% as compared to the prior
year. Sales within the heat transfer segment increased 55.7% in 1996 and reflect
higher sales of the extended surface heat transfer equipment which continues to
surpass 1995 levels, as well as increased sales volume of the air cooled product
line to new and existing customers. The 1996 results of the heat transfer
segment were also impacted favorably by sales of approximately $16.4 million
from API Ketema Inc., which was acquired by API on April 1, 1996. The electronic
components segment sales increased 1.9% in 1996 as compared to 1995; the
increase was primarily the result of a slight increase in sales volume to
existing customers. The increase of 39.9% in sales of the motion technologies
segment was the result of higher sales of electromagnetic clutches and brakes
and motion control devices to new and existing customers, combined with an
increase in the market share of products offered by Harowe Servo Controls Inc.
The 1996 results of the motion technologies segment were also favorably impacted
by sales of approximately $7.3 million from API Gettys Inc., which was acquired
by API on April 19, 1996.
In 1995, consolidated revenues increased 26.7% as compared to 1994. Sales
within the heat transfer segment increased 22.6% in 1995; the increase is
attributable to increased sales of traditional water cooled heat exchangers to
existing customers, as well as significant growth in the air cooled heat
exchanger product line. The electronic components segment sales increased 8.7%
due to a higher sales volume in a specific axial-leaded product, offset by
completion of a major sales order to one customer in 1994 which did not recur in
1995. The increase of 45.4% in sales of the motion technologies segment was the
result of the acquisition of Harowe Servo Controls Inc. in June 1994, as well as
a slightly higher sales volume of previously existing motion control products.
API's consolidated backlog of firm orders at January 3, 1997 was
$39,216,000, up 28.8% from the prior year. This reflects a 49.8% increase in the
heat transfer segment, a 9.0% increase in the electronic components segment, and
an 11.9% increase in the motion technologies segment. A focused strategic
account sales program, the favorable general business climate and the
acquisitions of API Ketema Inc. and API Gettys Inc. all contributed to the
increase. Under the focused strategic account sales program, API identifies
desirable prospective customers for its products. A sales campaign is then
designed to introduce and promote to each target customer the relevant products,
including samples, prototypes and product demonstrations.
Investment income increased $70,000 or 27.2% in 1996 as compared to 1995.
This increase was attributable primarily to investment income earned on the
undisbursed proceeds from the Air Technologies Industrial Revenue Bond
financing, which was concluded in December 1995.
Investment income declined $112,000 or 30.4% in 1995 as compared to 1994.
The decline reflects lower average investment asset balances resulting from the
sale of various bonds to fund both current operations and the purchase of Harowe
Servo Controls Inc. in June 1994 combined with lower average interest rates.
Selling and Administrative Expenses. Selling and administrative expenses
increased $7,609,000 or 40.5% in 1996 as compared to 1995. The majority of the
increase was due to (i) the inclusion of API Ketema Inc. and API Gettys Inc.
administrative expenses since the dates of acquisition; (ii) increased
commission expenses as a result of the increased sales revenue; (iii) increased
provision for bonus under API's incentive
35
<PAGE> 39
plans; and (iv) compensation expense recorded in connection with stock
appreciation rights granted to the Chief Executive Officer in 1992.
Selling and administrative expenses increased $3,219,000 or 20.7% in 1995
as compared to 1994 primarily as the result of (i) increased commission expense
due to increases in sales revenue; (ii) the inclusion of the selling and
administrative expenses of Harowe Servo Controls Inc. for the full year in 1995
and only six months in 1994; and (iii) higher bonus provision under API's
incentive plans.
In spite of these increases, selling and administrative expenses continue
to decline when expressed as a percent of net sales.
Research and Product Development. Research and product development expenses
increased $648,000 or 58.3% in 1996 as compared to 1995 and $223,000 or 25.1% in
1995 as compared to 1994. The increase in 1996 over 1995 for research and
product development costs reflects the acquisition of API Gettys Inc., as well
as increased activities in the motion technologies segment relative to future
new product offerings. The acquisition of Harowe Servo Controls Inc. impacted
the increase in 1995. The increase in both periods reflects management's
continued commitment to the design of new products and improvement of existing
products.
Interest and Debt Expense. Interest and debt expense increased $1,057,000
or 444% in 1996 as compared to 1995. This increase was due to the outstanding
debt associated with the industrial revenue bond financings secured for the
expansion of the Air Technologies facility and the purchase of API Ketema Inc.
Also contributing to the increase in interest and debt expense was the debt
incurred under the revolving credit agreement in connection with the acquisition
of API Ketema Inc. and API Gettys Inc.
Interest and debt expense increased $18,000 or 8.2% in 1995 as compared to
1994. The increase was due to lower average principal balances in 1995, offset
by slightly higher interest rates. While total debt increased in 1995 due to the
industrial revenue bond financing of $6,660,000 there was only a minor impact on
interest and debt expense because this financing was obtained on December 22,
1995. Another contributing factor was the increased activity in short-term
borrowings in 1995 as compared to 1994.
Income Taxes. Income taxes expressed as a percent of earnings before taxes
were 34.7%, 34.5% and 35.3% in 1996, 1995 and 1994, respectively. The lower
rates in 1996 and 1995 can be attributed to the undistributed earnings of API
Harowe (St. Kitts) Ltd., API's foreign subsidiary, for which no federal tax has
been provided since it is the intention of API to reinvest those earnings in the
operations of that entity for an indefinite period of time.
Net Earnings. Net earnings increased 37.9% in 1996 as compared to 1995 and
37.9% in 1995 as compared to 1994. A substantial part of these increases can be
attributed to the increased net sales as discussed previously, offset by higher
selling and administrative, research and product development costs, and interest
and debt expense.
Financial Position. API's liquidity is generated primarily from operations.
In addition, short-term lines of credit totaling $4,232,000 and revolving credit
of $7,000,000 were available at January 3, 1997. Information on API's liquidity
position for the past three years is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net working capital......................... $24,192,000 $18,463,000 $14,197,000
Current ratio............................... 2.4 2.4 2.3
Cash flow from operations................... $ 7,755,000 $ 3,786,000 $ 3,267,000
Cash, cash equivalents and marketable
securities................................ $ 2,412,000 $ 5,979,000 $ 3,841,000
Capital expenditures........................ $ 8,319,000 $ 4,585,000 $ 1,857,000
</TABLE>
The credit available under the revolving credit was reduced to $2.4 million
following the consummation of the Schmidt-Bretten acquisition on January 31,
1997. Future acquisitions may require API to arrange additional credit
facilities with lenders or procure financing through the issuance of debt or
equity securities.
36
<PAGE> 40
The increase in cash flow from operations from 1996 as compared to 1995 is
the combined result of increased sales and net income, as well as the positive
effects generated from the acquisition of API Ketema Inc. and API Gettys Inc.
The increase in cash flow from operations from 1995 as compared to 1994 is
principally the result of a 27% increase in sales volume and a resulting 38%
increase in net income.
The increase in capital expenditures in 1996 as compared to 1995 reflects
the new building associated with the Air Technologies expansion program, as well
as significant investments in new machinery and equipment. Also reflected in
capital expenditures are investments in new machinery and equipment acquired by
API Ketema Inc. and API Gettys Inc. since their respective dates of acquisition.
The increase in capital expenditures in 1995 as compared to 1994 reflects
API's investment in new machinery and equipment and computer systems at both the
heat transfer and motion technologies groups.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE SIX MONTHS ENDED JULY 4, 1997
Revenues. Consolidated revenues for the second quarter and first six months
of 1997 increased 25.6% and 40.9%, respectively, as compared to the same periods
of the preceding year.
Sales within the Heat Transfer segment increased 37.8% and 60.4%,
respectively, over the comparable quarter and six months of 1996. The second
quarter increase is totally attributable to the sales of Schmidt-Bretten, which
was acquired on January 31, 1997. The six months increase not only reflects the
Schmidt-Bretten sales but also includes sales of API Ketema Inc., acquired April
1, 1996, for a full six months, accounting for most of the period to period
increase. API Airtech Inc. also had a significant rise in sales in 1997 over
1996.
The Motion Technologies segment sales increased 13.9% and 24.6%,
respectively, over the comparable quarter and six months of 1996. All of the
subsidiaries comprising this segment had increased sales in the 1997 periods.
Also, the 1997 results include sales of API Gettys Inc. for six months while
1996 results include sales of API Gettys for May and June only, accounting for
about one-third of the sales increase in the six month period of 1997 over the
same period in 1996.
Sales within the Electronic Components segment for the second quarter of
1997 increased 4.4% over the second quarter of 1996 and sales for the six months
grew by 8.3% over the comparable period in 1996. The increases applied to both
axial-leaded and surface mounted products.
Bookings of customer orders in the second quarter and first half of 1997
were $41.2 million and $81.5 million, respectively, up 35.0% and 45.9% over
bookings in the same periods last year. The Company's consolidated backlog of
firm orders at July 4, 1997 was $47.7 million, up 22.1% from $39.0 million on
June 28, 1996. The backlog at July 4, 1997 includes $4.6 million for
Schmidt-Bretten.
Cost of Products Sold. The Company's gross profit percentage was 30.9% in
the second quarter and 31.2% for the six months of 1997, down from 32.1% and
32.6% for the comparable periods in 1996. While margins improved in both the
Motion and Electronic Components segments, the Heat Transfer segment had a
decline in margins due to increases in direct labor, direct engineering, and
manufacturing overhead. A portion of these cost increases is attributable not
only to moving into and starting up production in the new API Airtech facility
at the beginning of the year but also to a significant increase in orders and
shipments during the first half of 1997. API Basco also saw a decline in margins
which accompanied a slight decline in sales this year following three successive
years of sales increases exceeding 16.5%. Efforts were initiated at API Basco in
the second quarter to reduce costs to levels commensurate with current order and
shipment levels.
Selling and Administrative Expenses. Selling and administrative expenses,
expressed as a percentage of net sales, declined both for the second quarter and
the six months of 1997 as compared with the comparable periods in 1996. An
increase in sales commissions of $664,000 combined with increases of $3,178,000
related
37
<PAGE> 41
to acquired companies account for more than the total dollar increase in selling
and administrative expenses in the first half of 1997 over the same period last
year.
The Company is currently in the process of evaluating its computer software
and databases to ensure that any modifications required to be year 2000
compliant are made in a timely manner. Management does not expect the financial
impact of such modifications to be material to the Company's financial position
or results of operations in any given year.
Interest and Debt Expense. The increase in interest and debt expense is
principally due to the increase in average outstanding debt incurred in
connection with the acquisitions of Ketema, Gettys, and Schmidt-Bretten.
Interest on bank debt of Schmidt-Bretten also contributed to the increase.
Research and Product Development. The increase in research and product
development in the second quarter and first half of 1997 of 78.8% and 92.8%,
respectively, reflects the additional activity of acquired entities as well as
the Company's commitment to the continued improvement of existing products and
the design of new products.
Net Earnings. Net earnings increased 25.2% in the second quarter of 1997
and 29.7% in the first half of 1997 as compared to similar periods in 1996,
which is primarily due to the increased level of sales discussed above, offset
by higher interest and debt expense.
Financial Position. On March 29, 1996, the Company concluded a Credit
Agreement with Marine Midland Bank which provides a Revolving Credit facility of
$16,000,000. The Revolving Credit matures on March 29, 1999, at which time the
Company may convert the amount outstanding under the Revolving Credit to a term
loan payable over a four year term. The interest rate on the Revolving Credit as
of July 4, 1997, under the LIBOR Rate Option in the Credit Agreement, was 6.6%.
To fund the DM 13,000,000 purchase price for Schmidt-Bretten GmbH, the
Company's subsidiary, API Schmidt-Bretten GmbH ("ABG") borrowed DM 10,000,000
($6,111,000) from the Company and issued a note payable for DM 3,000,000
($1,791,000) to the seller, which is due and payable on December 31, 1997 and
bears interest at 5.5%. The Company borrowed the funds for the advance to ABG
under its Revolving Credit facility.
On June 10, 1997 ABG entered into a loan agreement with a German bank under
which ABG borrowed DM 10,000,000 to repay the acquisition loan from the Company.
The Company, in turn, applied these proceeds to reduce the outstanding balance
under the Revolving Credit facility.
ABG's obligations to the German bank and seller aggregating DM 13,000,000
have been guaranteed by the Company.
In connection with the acquisition of Portescap on July 8, 1997, the
Company borrowed under the Revolving Credit facility in order to pay the
$3,800,000 cash portion of the purchase price, bringing total borrowing under
the Revolving Credit to $15,500,000. The balance of the purchase price was
satisfied through the issuance of Class A convertible preferred stock with a
liquidation value of $21,156,250 and an exchangeable note for $5,000,000.
The Company also has a $5,000,000 short-term line of credit which it
utilizes from time to time to fund current operations, of which approximately
$4,088,000 was available at July 4, 1997. Future acquisitions may require the
Company to arrange additional credit facilities with lenders or procure
financing through issuance of debt or equity securities.
38
<PAGE> 42
Comparative information on the Company's liquidity position follows ($000
omitted):
<TABLE>
<CAPTION>
JULY 4, 1997 JUNE 28, 1996
------------ -------------
<S> <C> <C>
Net working capital................................................. $ 22,066 $22,835
Current ratio....................................................... 1.7 2.3
Cash, cash equivalents and marketable securities.................... $ 1,827 $ 1,067
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------
JULY 4, 1997 JUNE 28, 1996
------------ -------------
<S> <C> <C>
Cash flow (deficit) from operations................................. $ (779) $ 2,075
Capital expenditures................................................ $ 4,333 $ 2,872
</TABLE>
Investments reflected in the Company's balance sheet at July 4, 1997 and January
3, 1997 represent the remaining proceeds of a bond financing concluded on
December 22, 1995 for the construction of the new API Airtech Inc. facility.
39
<PAGE> 43
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
COMPONENTS OF CONSOLIDATED STATEMENT OF EARNINGS
EXPRESSED AS A PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
SECOND QUARTER ENDED
------------------------------
JULY 4, 1997 JUNE 28, 1996
------------ -------------
<S> <C> <C>
Revenues............................................................ 100.0 100.0
----- -----
Costs and Expenses
Cost of products sold............................................. 69.0 67.7
Selling and administrative........................................ 19.6 21.8
Research and product development.................................. 2.0 1.4
Interest and debt expense......................................... 1.6 1.2
----- -----
92.2 92.1
----- -----
Earnings before Income Taxes........................................ 7.8 7.9
Federal and State Income Taxes...................................... 2.8 2.9
Net Earnings........................................................ 5.0 5.0
===== =====
Federal and State Income Taxes as a percentage
of Earnings Before Income Taxes................................... 36.0 37.0
===== =====
</TABLE>
40
<PAGE> 44
INFORMATION CONCERNING PORTESCAP
BUSINESS
Portescap participates in the market for high performance electromechanical
drive systems. It develops, manufacturers and markets ironless DC motors,
brushless DC motors, disc magnet stepper motors, reduction gearboxes, DC
tachogenerators, and integrated optical and magnetic encoders. In addition,
Portescap markets high power range motors, iron core DC motors, hybrid steppers
and electronic drive circuits which are manufactured for Portescap and branded
with its name throughout Europe.
Portescap sells its own produced products worldwide. Sales are made
directly by Portescap in all main markets and through agents and distributors
elsewhere. Portescap's products are used by a number of business sectors. The
products appeal to customers who, in comparison to ordinary and typically
cheaper but less reliable motors, look for products with features including (i)
small size and light weight relative to the power output; (ii) low inertia which
allows the motor to reach high speed in a very short time; (iii) low electrical
energy consumption; and (iv) reliable and long life time.
Although Portescap was, prior to its acquisition by API, a subsidiary of
Inter Scan, it operated autonomously of Inter Scan, having its headquarters in
La Chaux-de-Fonds, Switzerland from where Portescap's subsidiaries were managed,
its distributors directed and from where it also carried on the activities in
the Swiss market. Portescap's three production units are situated in La
Chaux-de-Fonds and Marly/Fribourg in Switzerland and in Ringwood, England. All
three facilities are certified ISO 9001.
COMPETITION
In the opinion of management, there are three main manufacturers serving
the industrial micro-motor market. These three companies include Portescap,
Faulhaber GmbH & Co. and Maxon Motor GmbH. Faulhaber and Maxon are also both
based in Europe and, in the opinion of management, have a slightly larger market
share than Portescap. Portescap is not aware of definitive industry statistics
by manufacturer for the products that it makes.
BACKLOG
Portescap's backlog of unfilled orders believed to be firm at March 31,
1997 was approximately 27,400,000 CHF, the equivalent of approximately four to
five months of production.
SUPPLIERS
Portescap is not dependent upon any single supplier for any raw materials
used in manufacturing its products and has not encountered significant
difficulties in purchasing sufficient quantities of raw materials on the open
market.
PATENTS AND LICENSES
Portescap has patents in multiple foreign jurisdictions covering the design
of certain of its products including, in particular, its disc magnet motor. In
addition, Portescap's escap(R) tradename is registered in multiple foreign
jurisdictions. Portescap's proprietary software tradename, S.O.A.P. (System
Optimization Assistance Program), is also registered in multiple foreign
jurisdictions.
CUSTOMERS
During 1996, no single customer accounted for more than 10 percent of
consolidated sales. Portescap's customers, in general, are mostly original
equipment manufacturers of machinery, control or measurement equipment. These
customers account for approximately 95 percent of Portescap's sales, with such
sales occurring at different stages in the value-adding chain. Approximately
five percent of Portescap's products are delivered to end-users, with a majority
of those sales consisting of spare parts and the remainder consisting of
retrofit sales.
41
<PAGE> 45
RESEARCH AND PRODUCT DEVELOPMENT
The research and development expenses of Portescap are charged to the
profit and loss account when incurred. Such expenses include salaries, wages and
other related personnel expenses, the cost of materials and services consumed,
the depreciation of equipment and facilities to the extent they are used for
these activities, and the overhead and other expenses related to research and
development activities. Research and development expenses were 2,340,000 CHF in
1996, 2,018,000 CHF in 1995 and 2,211,000 CHF in 1994.
ENVIRONMENTAL MATTERS
In 1987, Transicoil Inc., which was formerly owned by Portescap U.S. Inc.,
was notified that the North Penn site in Pennsylvania on which its operations
were located was nominated for inclusion on the EPA's National Priorities List
of hazardous waste sites pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). In 1988, Portescap U.S. Inc., as well
as Transicoil, Eagle-Picher Industries, Inc. (the owner of Transicoil at that
time), other prior owners and the then owner of the North Penn Site, were named
by the EPA as "potentially responsible parties" ("PRPs") under CERCLA which
imposes joint and several liability on each PRP for the cleanup of the site.
Portescap U.S. Inc. denied liability and denied that it was a proper PRP. An
investigation of the North Penn Site, performed by independent consultants at
the request of the EPA, revealed the presence of contamination. In 1989,
Eagle-Picher, Transicoil and the EPA entered into an administrative consent
order, pursuant to which Eagle-Picher and Transicoil agreed to prepare a
Remedial Investigation Report and a Feasibility Study of the North Penn Site.
However, in 1991, prior to completion of either the Remedial Investigation
Report or the Feasibility Study, Eagle-Picher and Transicoil filed for
bankruptcy and were subsequently discharged from any liability for environmental
contamination at the North Penn Site. In mid-1995, Portescap U.S. Inc. agreed in
principle with one of the prior owners and operators of the North Penn Site to
pay, on an equal shares basis, up to $15,000 toward installation of drinking
water filtration systems at several homes in the vicinity of the North Penn
Site. In August 1995, the EPA issued a unilateral order requiring certain prior
and present owners and operators of the North Penn Site to undertake various
remedial actions. The EPA, however, did not name Portescap U.S. Inc. as a party
to that order, although it subsequently served Portescap U.S. Inc. with a formal
request for information concerning its past relationship with Transicoil and the
North Penn Site. In October 1995 Portescap U.S. Inc. received notice of an
indemnification claim asserted against it by a prior owner of the North Penn
Site. Portescap U.S. Inc. informed the entity that asserted the indemnification
claim that it denies liability under that claim and that it will vigorously
defend itself against that claim.
In early 1996 the EPA released the Remedial Investigation Report which
indicated the presence and nature of contamination at the North Penn Site. The
Feasibility Study was concluded in early 1997, and in July 1997 the EPA released
its proposed Remedial Action Plan in which it recommends two alternatives for
remediating the environmental problems associated with the North Penn Site,
which involve a combination of ground water treatment and the connection of
residents around the North Penn Site to a public water supply. The EPA estimates
that the ground water treatment alternative would cost approximately $830,000
and the proposal to connect residents to a public water supply would cost
approximately $2,340,000. The EPA has held a public hearing on these matters and
will make a final determination as to which alternative or combination of
alternatives, if any, to adopt. Once the EPA selects a remediation plan, it is
likely to assert a claim against the PRPs named in its August 1995 unilateral
order to recover the costs of remediation. Those PRPs may assert a claim against
Portescap U.S. Inc. for contribution. In that event, Portescap intends to deny
any liability, and to assert a counterclaim for contribution against the other
PRPs. However, there is no assurance that it will prevail on either its denial
of liability or its claim for contribution.
Based on the facts known by Portescap at December 31, 1996, no provision
for any material liability was recorded in Portescap's consolidated financial
statements for the fiscal year ended December 31, 1996. Inter Scan has agreed to
indemnify API, Portescap and its subsidiaries for any Losses, as defined, up to
a maximum of 2,000,000 CHF, which arise out of any violation of environmental
laws or disposal of hazardous waste at the North Penn Site. See "The Stock
Purchase Transaction -- Indemnification."
42
<PAGE> 46
EMPLOYEES
The number of Portescap's active employees (full time equivalent) at
December 31, 1996 and 1995 in relation to their function was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Production.............................................................. 331 340
Other................................................................... 246 245
--- ---
Total................................................................. 577 585
=== ===
</TABLE>
Portescap also employed 35 temporary employees in 1996 and 25 temporary
employees in 1995.
FOREIGN OPERATIONS
Annual sales are divided between Portescap's main geographical markets
during the last three years as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Europe......................................................... 73% 73% 72%
North America.................................................. 19% 17% 19%
Others......................................................... 8% 10% 9%
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
The foreign sales are not believed to be subject to any risks other than
those normally associated with the conduct of business in friendly nations
having stable governments.
43
<PAGE> 47
PROPERTIES
The location of Portescap's offices and facilities and the operations at
each such facility are listed below.
<TABLE>
<CAPTION>
COMPANY NAME AND LOCATION(1) PRODUCTS/OPERATIONS AT LOCATION
------------------------------------------------- -------------------------------------
<S> <C>
Portescap D.C. motors
157, rue Jardiniere Sales office
La Chaux-de-Fonds,
Switzerland
Portescap Disc magnet motors
Route de Chesalles 1
Marly/Fribourg, Switzerland
Portescap (UK) Limited Gearboxes and Actuators
Headlands Business Park Sales office
Ringwood, England
Portescap U.S. Inc. Sales office
36 Central Avenue
Hauppauge, NY, USA
Portescap Deutschland GmbH Sales office
Gulichstrasse 12
Pforzheim, Germany
Portescap France SA Sales office
3/5, voie Felix-Eboue
Creteil, France
Portescap Japan Ltd. Sales office
7-10, Nihombashi-honcho
4-chome
Tokyo, Japan
Portescap Scandinavia AB Sales office
Grev Turegatan 20
Stockholm, Sweden
</TABLE>
- ---------------
(1) Portescap is the holding company of Portescap International SA. The
non-Swiss subsidiaries listed are held by Portescap International SA. All of
the remaining indicated companies are wholly-owned subsidiaries of
Portescap.
The La Chaux-de-Fonds, Switzerland, Marly/Fribourg, Switzerland and
Ringwood, England facilities are owned by Portescap.
The facilities leased by Portescap are as follows:
<TABLE>
<CAPTION>
FACILITY LOCATION ANNUAL RENTAL RATE LEASED UNTIL
- ------------------------------------- ------------------- ------------
<S> <C> <C>
Portescap U.S., Inc $69,849 U.S. 1999
Hauppauge, New York
Portescap Deutschland GmbH 61,656 DM 1998
Pforzheim, Germany
Portescap France SA 200,000 FF 2002
Creteil, France
Portescap Japan Ltd 15,093,540 Yen 1998
Tokyo, Japan
Portescap Scandinavia AB 270,000 SEK 1998
Stockholm, Sweden
</TABLE>
44
<PAGE> 48
Portescap believes all of its existing properties are well maintained, are
suitable for the operation of its business and are capable of handling
production for the coming year.
LEGAL PROCEEDINGS
Other than the environmental matter described above under "-- Environmental
Matters," Portescap is not a party to any material pending legal proceedings.
SELECTED FINANCIAL DATA
See "Selected Financial Data -- Summary Historical Financial Data."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
The following discussion reflects adjustments made to conform to U.S.
generally accepted accounting principles.
Results of Operations -- 1996 Compared to 1995.
In 1996 sales increased 8% as a result of strong market conditions. Sales
were not affected by changes in product prices as no price increases were
introduced in 1996.
Portescap's gross profit margin declined in 1996 to 34.2% from 36.4% in
1995. The majority of this decline resulted from the 1996 adjustment of
1,500,000 CHF to modify past depreciation on certain fixed assets relating to
new product generation from a capacity utilization basis to a straight-line
basis. The gross profit margin in 1996, before this adjustment, was 35.9% and
was negatively impacted by a cost of living adjustment required under a labor
contract and other performance-related salary increases. Also, margins were
adversely affected by increases in manufacturing overhead, principally related
to additions to the engineering staff.
Research and development spending increased in 1996 by 16.0%, primarily as
a result of staff increases made to strengthen the research and development
function.
General and administrative expenses declined in 1996 by 14.6%. There were
certain restructuring and other nonrecurring costs reflected in both 1996
(1,472,000 CHF) and 1995 (1,712,000 CHF).
Although marketing and sales expenses increased 9.5% in 1996, the increase
is generally consistent with the higher level of sales. Other operating income,
which primarily consists of shipping and insurance charges billed to customers,
also increased due to the increase in sales.
Financial income and charges, primarily interest on borrowed funds,
declined slightly in 1996. This decline reflects the reduction in outstanding
bank debt which took place in 1996.
Portescap is subject to income taxes in seven different countries, and in
1996 and 1995 the majority of the income tax expense was incurred by
subsidiaries outside of Switzerland. The reductions in income tax expense
realized through the utilization of tax loss carry-forwards, primarily in
Switzerland, totaled 475,000 CHF in 1996 and 1,057,000 CHF in 1995. The overall
effective income tax rates were 28% in 1996 and 30% in 1995.
The effective income tax rates after the U.S. generally accepted accounting
principles ("GAAP") adjustments are significantly higher, 50.8% in 1996 and
62.5% in 1995. This results from (i) the amortization of the purchase accounting
pushdown in the amount of approximately 1,280,000 CHF each year which does not
produce a related tax benefit and (ii) the provisions for deferred taxes of
790,000 CHF in 1996 and 846,000 CHF in 1995 not recognized currently under
International Accounting Standards. Under U.S. GAAP the benefit expected to be
realized from tax loss carry-forwards is recognized as income in the year the
loss is incurred and reflected as an asset in the balance sheet. Consequently,
when the tax loss carry-forward is utilized, the asset is diminished but the
current year's tax provision under U.S. GAAP is not affected.
45
<PAGE> 49
Results of Operations -- 1995 Compared to 1994.
As a result of improved market conditions, sales in 1995 increased by 8.5%
over 1994. Only minor price changes were made in certain countries.
Portescap's gross profit margin improved from 33.9% in 1994 to 36.4% in
1995. Portescap reduced manufacturing overhead and, as a result of both higher
sales and these cost savings, improved productivity in Switzerland in terms of
production and sales per indirect employee.
Research and development spending was reduced by 8.7% in 1995, reflecting a
reduction of approximately three employees devoted to this activity.
General and administrative expenses declined by 3.0% in 1995 which resulted
primarily from a reduction in reorganization and severance costs and various
other nonrecurring charges.
Marketing and sales expenses declined 3.9% in 1995 even though sales
increased during the year. The decline in expenses was primarily the result of a
reduction of four employees in this function.
Financial charges declined by 6.5% in 1995, principally reflecting an 8.7%
decline in interest expense. Although interest-bearing debt increased by
1,232,000 CHF during 1995, average outstanding debt in 1995 was lower. In
addition, there was a reduction in interest rates on certain loans in 1995.
Most of the income taxes in 1995 and 1994 were incurred by the subsidiaries
outside of Switzerland. There was no 1995 tax liability in Switzerland due to
utilization of net operating loss carryforwards. In 1994, operations in
Switzerland generated a loss, and no benefit from that loss was recognized in
the 1994 financial statements. As a result, on a consolidated basis, 1994 shows
a pre-tax loss of 1,369,000 CHF and income taxes of 1,461,000 CHF, producing a
net loss of 2,830,000 CHF.
Financial Condition.
Portescap's principal source of liquidity has been cash provided from
operations. Portescap does not currently have significant unused credit
facilities with its lenders. Information on Portescap's liquidity position for
1996 and 1995 is shown below:
<TABLE>
<CAPTION>
CHF
-----------------
(IN THOUSANDS)
1996 1995
------ ------
<S> <C> <C>
Net working capital.............................................. 25,900 21,606
Current ratio.................................................... 2.0 1.8
Cash flow from operations........................................ 6,535 2,371
Cash............................................................. 3,251 1,540
Capital expenditures............................................. 3,101 1,690
</TABLE>
The increase in cash flow from operations and cash balances for 1996 are
largely attributable to the higher earnings in that year. Net income in 1996 was
impaired by the aforementioned adjustment to depreciation of 1,500,000 CHF, but
this adjustment did not diminish cash flow.
As of December 31, 1996 Portescap had no material commitments for capital
expenditures. Proposed capital expenditures for 1997 of approximately 1,100,000
CHF had been approved by Portescap management, each of which was less than 10%
of the total.
46
<PAGE> 50
OTHER MATTERS AND PROXY SOLICITATION
There are no other matters to come before the Meeting. The cost of
preparing, assembling and mailing proxy statements and other material furnished
to shareholders in connection with the solicitation of proxies will be borne by
API. API has retained Regan & Associates, Inc., a proxy soliciting firm, to
assist in the solicitation of proxies. The fee for these services will be
approximately $5,250, plus expenses. Arrangements will be made with brokerage
houses, nominees, fiduciaries and other custodians to send proxies and proxy
material to beneficial owners of API's Common Shares, and API will reimburse
them for their expenses in so doing. Proxies may be solicited personally or by
telephone, fax, or mail by directors, officers, and regular employees of API
without additional compensation for such services.
By order of the Board of Directors
James J. Tanous
Secretary
September , 1997
47
<PAGE> 51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF API
Pro Forma Financial Statements....................................................... F-2
Pro Forma Combined Statement of Earnings (Unaudited) -- Fiscal Year Ended January 3,
1997.............................................................................. F-3
Pro Forma Combined Balance Sheet (Unaudited) as of July 4, 1997...................... F-5
Pro Forma Combined Statement of Earnings (Unaudited) -- Six Months Ended July 4,
1997.............................................................................. F-8
CONSOLIDATED FINANCIAL STATEMENTS OF API
Report of Independent Accountants.................................................... F-9
Consolidated Balance Sheet -- 1996 and 1995.......................................... F-10
Consolidated Statement of Earnings -- 1996, 1995 and 1994............................ F-11
Consolidated Statement of Shareholders' Equity -- 1996, 1995 and 1994................ F-12
Consolidated Statement of Cash Flows -- 1996, 1995 and 1994.......................... F-13
Notes to Consolidated Financial Statements........................................... F-14
API CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JULY 4, 1997
Consolidated Statement of Earnings (Unaudited) -- Periods Ended July 4, 1997 and June
28, 1996.......................................................................... F-25
Consolidated Balance Sheet -- July 4, 1997 (Unaudited) and January 3, 1997.......... F-26
Consolidated Statement of Cash Flows (Unaudited) -- Six Months Ended July 4, 1997 and
June 28, 1996..................................................................... F-28
Notes to Consolidated Financial Statements........................................... F-29
CONSOLIDATED FINANCIAL STATEMENTS OF PORTESCAP
Report of the Independent Auditors................................................... F-32
Consolidated Balance Sheet as of December 31, 1996 and 1995.......................... F-34
Consolidated Income Statement for the Years Ended December 31, 1996, 1995 and 1994... F-35
Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and
1994.............................................................................. F-36
Consolidated Statement of Changes in Shareholder's Equity for 1994, 1995 and 1996.... F-37
Summary of Significant Accounting Policies........................................... F-38
Notes to Consolidated Financial Statements........................................... F-41
List of Subsidiaries of Portescap SA, La Chaux-de-Fonds, at December 31, 1996........ F-49
Summary of Differences Between International Accounting Standards and United States
Generally Accepted Accounting Principles.......................................... F-50
</TABLE>
F-1
<PAGE> 52
PRO FORMA FINANCIAL STATEMENTS
On July 8, 1997, American Precision Industries Inc. ("API" or the
"Company") completed its acquisition of Portescap, a manufacturer of motors and
other precision motion control products, from Inter Scan Holding Ltd. ("Inter
Scan"), a Swiss holding company. The purchase price paid by API consisted of a
cash payment to Inter Scan of 5.5 million Swiss francs ($3.8 million), the
issuance to Inter Scan of preferred stock of API, with an initial liquidation
value of approximately $21.2 million, and a $5 million note of API, which will
automatically be exchanged for API preferred stock following API shareholders'
approval of those shares of preferred stock at a special meeting which must be
held prior to May 1, 1998. The preferred stock issued to Inter Scan, including
the shares to be issued in exchange for the $5 million note, are convertible
into API common stock at $17.00 per share (1,538,602 shares). In addition to the
consideration paid to Inter Scan, API also purchased from two companies
affiliated with Inter Scan debt owed to them by Portescap in the amount of 1.8
million Swiss francs ($1.2 million).
The following unaudited pro forma financial statements give effect to the
acquisition by API of all of the shares of Portescap held by Inter Scan in a
transaction accounted for as a purchase. The unaudited pro forma combined
balance sheet is based upon the individual balance sheets of API as of July 4,
1997 and Portescap as of June 30, 1997 and has been prepared to reflect the
acquisition of Portescap as of July 4, 1997. The unaudited pro forma combined
statements of earnings are based upon the individual statements of income of API
and Portescap and combine the results of operations of API and Portescap for the
periods ended July 4, 1997 and January 3, 1997 as if the acquisition had
occurred at the beginning of the fiscal year ended January 3, 1997. These
unaudited pro forma financial statements should be read in conjunction with the
historical financial statements and notes thereto of API and Portescap included
elsewhere in this Proxy Statement.
The Company has made a preliminary determination and allocation of the
purchase price. The excess of the cost of the acquired entity over the fair
value of identifiable assets acquired less liabilities assumed has been recorded
as goodwill and amounted to approximately $14 million. Such goodwill is being
amortized on a straight-line basis over thirty years. Amounts will be finalized
upon additional analysis and asset valuation determinations to be made by the
Company with assistance from an outside appraisal firm. The final changes will
be recorded in fiscal 1997, and are not expected to have a material impact on
the pro forma combined balance sheet or pro forma combined statements of
earnings presented herein.
The financial statements of Portescap have been converted from Swiss francs
(CHF) to U.S. dollars using the average exchange rate for the relevant period
for the Pro Forma Combined Statements of Earnings and the exchange rate on July
4, 1997 for the Pro Forma Combined Balance Sheet.
The pro forma amounts do not purport to be indicative of the results that
actually would have been obtained had the transaction identified above actually
taken place at the beginning of each of the periods, nor are they intended to be
a projection of future results.
Portescap's customer orders began to decline in early 1996, and backlog
diminished throughout 1996, resulting in a 9% reduction in sales in the first
half of 1997 as compared to the first half of 1996. Further, some of the
products shipped from the inventory of Portescap's foreign subsidiaries were not
replenished, lowering inventory levels in the subsidiaries over the six months
by 16%. As a result, the level of production in Switzerland was reduced without
a commensurate reduction in manufacturing costs and overhead. The decline in
orders and sales and the reduced production level were the primary causes of the
net loss incurred by Portescap in the first quarter of 1997 and the small net
profit realized in the second quarter of 1997.
This adverse trend in orders and backlog was reversed in January 1997, and
backlog has improved in each of the months of February through June 1997.
API assumed responsibility for the day-to-day management of Portescap's
operations on April 11, 1997. During the second quarter, a long-range strategy
for Portescap was developed, the organizational structure was streamlined, and
cost reduction opportunities were identified, which management of API believes
will improve the outlook for Portescap for the third and fourth quarters of
1997.
F-2
<PAGE> 53
AMERICAN PRECISION INDUSTRIES INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS (UNAUDITED)
FISCAL YEAR ENDED JANUARY 3, 1997
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------------------------------
US GAAP ACQUISITION AS
ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
API PORTESCAP (NOTE 1) (NOTE 2) COMBINED ADJUSTED COMBINED
-------- --------- ----------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES......................... $116,783 $75,281 $ -- $ -- $192,064 $ $192,064
INVESTMENT INCOME................. 327 327 327
-------- ------- ------- ------- -------- ------ --------
REVENUES.......................... 117,110 75,281 192,391 192,391
-------- ------- ------- ------- -------- ------ --------
COSTS AND EXPENSES:
Cost of products sold........... 77,652 49,733 (275) (1,133)(a) 126,450 126,450
473(c)
Selling and administrative...... 26,410 18,260 427 (427)(b) 44,845 44,845
175(c)
Research and product
development................... 1,759 1,918 (28) 3,649 3,649
Goodwill amortization........... 621 (621)(b) 413 413
413(d)
Other income.................... (580) (580) (580)
Exchange gains and losses....... 11 11 11
Interest and debt expense....... 1,295 1,431 403(e) 3,129 3,129
-------- ------- ------- ------- -------- ------ --------
107,116 70,773 745 (717) 177,917 177,917
-------- ------- ------- ------- -------- ------ --------
EARNINGS BEFORE INCOME TAXES...... 9,994 4,508 (745) 717 14,474 14,474
(37)
INCOME TAXES...................... 3,469 1,468 684 385(f) 5,942 5,942
-------- ------- ------- ------- -------- ------ --------
NET EARNINGS...................... $ 6,525 $ 3,040 $(1,392) $ 359 $ 8,532 $ 8,532
======== ======= ======= ======= ======== ====== ========
NET EARNINGS PER COMMON SHARE..... $ 0.91 $ 0.98
======== ========
NET EARNINGS PER COMMON SHARE --
FULLY DILUTED................... $ 0.86 $ 0.93
======== ========
AVERAGE COMMON SHARES
OUTSTANDING..................... 7,190 1,539(g) 8,729
======== ====== ========
AVERAGE COMMON SHARES
OUTSTANDING -- FULLY DILUTED.... 7,605 1,589(g) 9,194
======== ====== ========
</TABLE>
NOTE 1
The pro forma combined statement of earnings (unaudited) has been prepared to
include adjustments to conform to U.S. Generally Accepted Accounting Principles.
For the details relating to these adjustments, reference should be made to the
"Summary of Differences between International Accounting Standards and United
States Generally Accepted Accounting Principles" contained in Note 6 to the
Portescap Consolidated Financial Statements for the years ended 31 December 1996
included elsewhere herein.
NOTE 2
The pro forma combined statement of earnings (unaudited) has been prepared to
reflect the acquisition of Portescap by API. Pro forma adjustments are made to:
(a) Reflect as a prior period adjustment additional depreciation expense which
pertains to years prior to 1996. In the years 1993, 1994 and 1995 Portescap
depreciated certain equipment acquired for the manufacture of a group of new
products based on production levels rather than useful life. During these
three years production levels of these products did not reach expectations,
and in 1996 Portescap revised depreciation for these three prior years to
reflect useful life as follows:
1993-$407,000; 1994-$419,000; 1995-$307,000
(b) Eliminate the push-down goodwill and depreciation which resulted from the
acquisition of Portescap by Inter Scan in 1990. In evaluating the fair value
of the Portescap assets, no value was assigned to the goodwill which
resulted from the previous acquisition.
(c) Adjust depreciation based on estimated fair value of assets over estimated
lives.
(d) Amortize goodwill over 30 years.
F-3
<PAGE> 54
(e) Reflect interest expense at 6.15% on funds borrowed for the cash portion of
the purchase price and the cash expenses and fees incurred in connection
with the acquisition. The interest rate is the average rate API paid in 1996
under its Revolving Credit Agreement. This rate of interest is variable and
a one-eighth of one percent change in the interest rate would have an $8,000
impact on interest expense per annum on a pre-tax basis.
(f) Reflect income taxes on acquisition adjustments.
(g) Reflect the total number of API common shares to be issued to Inter Scan in
connection with the acquisition, as follows:
(A) Shares issued upon conversion of the preferred stock issued to Inter
Scan at the closing of the transaction; plus
(B) Following API shareholder approval of the increase in authorized common
and preferred stock, shares issued to Inter Scan after the exchange of
the note for preferred stock and upon conversion of that preferred stock.
The pro forma shares outstanding for the fully diluted calculation include
warrants to acquire 50,000 shares of API common stock issued to API's investment
banker in connection with the Portescap acquisition.
NOTE 3
On January 31, 1997, API Schmidt-Bretten GmbH, a wholly-owned subsidiary of API,
acquired all of the shares of Schmidt-Bretten GmbH in a transaction accounted
for as a purchase. The unaudited pro forma combined statement of earnings for
the year ended January 3, 1997 does not give effect to the acquisition of
Schmidt-Bretten GmbH since the acquisition does not meet the "significant
subsidiary" criteria test pursuant to Article 11 of Regulation S-X.
F-4
<PAGE> 55
AMERICAN PRECISION INDUSTRIES INC.
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
JULY 4, 1997
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------------------------------------------------------------------
AS
U S GAAP ACQUISITION AS AS FURTHER
ADJUSTMENTS ADJUSTMENTS AS ADJUSTED FURTHER ADJUSTED
API PORTESCAP (NOTE 1) (NOTE 2) COMBINED ADJUSTED COMBINED ADJUSTED COMBINED
-------- --------- ----------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash
equivalents..... $ 1,827 $ 4,026 $ -- $ -- $ 5,853 $ 5,853 $ 5,853
Accounts
receivable,
net............. 24,249 9,279 33,528 33,528 33,528
Marketable
securities...... -- -- --
Inventories...... 23,235 19,442 (4,447)(a) 38,230 38,230 38,230
Prepaid
expenses........ 2,161 1,656 3,817 3,817 3,817
Deferred income
tax benefit..... 2,094 2,094 2,094 2,094
-------- ------- -------- ------- -------- -------- --------
TOTAL CURRENT
ASSETS....... 53,566 34,403 -- (4,447) 83,522 83,522 83,522
-------- ------- -------- ------- -------- -------- --------
INVESTMENTS....... 649 649 649 649
OTHER ASSETS,
NET.............. 12,885 720 (157) 13,448 13,448 13,448
DEFERRED TAXES.... 1,136 3,347(b) 4,483 4,483 4,483
GOODWILL
(PRELIMINARY).... 7,008 (7,008)(c) 13,797 13,797 13,797
13,797(d)
PROPERTY, PLANT
AND EQUIPMENT
Land............. 742 547 1,635(e) 2,924 2,924 2,924
Buildings and
improvements.... 14,406 4,413 5,861 (5,861)(f) 20,613 20,613 20,613
1,794(e)
Machinery,
equipment and
furniture....... 42,077 5,571 3,386(e) 51,034 51,034 51,034
Construction in
process......... 2,285 612 2,897 2,897 2,897
-------- ------- -------- ------- -------- -------- --------
59,510 11,143 5,861 954 77,468 77,468 77,468
Less accumulated
depreciation.... 23,015 23,015 23,015 23,015
-------- ------- -------- ------- -------- -------- --------
NET PROPERTY,
PLANT AND
EQUIPMENT........ 36,495 11,143 5,861 954 54,453 54,453 54,453
-------- ------- -------- ------- -------- -------- --------
$103,595 $46,266 $13,848 $ 6,643 $170,352 $170,352 $170,352
======== ======= ======== ======= ======== ======== ========
</TABLE>
F-5
<PAGE> 56
AMERICAN PRECISION INDUSTRIES INC.
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
JULY 4, 1997 (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------------------------------------------------------------------
AS
U S GAAP ACQUISITION AS AS FURTHER
ADJUSTMENTS ADJUSTMENTS AS ADJUSTED FURTHER ADJUSTED
API PORTESCAP (NOTE 1) (NOTE 2) COMBINED ADJUSTED COMBINED ADJUSTED COMBINED
-------- ------- -------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT
LIABILITIES
Short-term
borrowings...... 8,995 7,644 $ -- $ -- $16,639 $16,639 $16,639
Accounts
payable......... 11,296 3,982 15,278 15,278 15,278
Accrued
compensation and
payroll taxes... 6,851 41(g) 6,892 6,892 6,892
Other accrued
expenses........ 3,043 7,029 2,918(g) 12,990 12,990 12,990
Dividends
payable......... -- -- --
Current portion
of long-term
obligations..... 1,309 1,309 1,309 1,309
Federal and state
income taxes.... 6 6 6 6
-------- ------- -------- ------- -------- -------- --------
TOTAL CURRENT
LIABILITIES... 31,500 18,655 -- 2,959 53,114 53,114 53,114
-------- ------- -------- ------- -------- -------- --------
LONG-TERM
OBLIGATIONS, less
current
portion.......... 24,600 9,483 5,559(i) 39,642 39,642 39,642
DEFERRED INCOME
TAXES............ 1,417 1,758 (1,758)(h) 4,484 4,484 4,484
3,067(b)
OTHER NONCURRENT
LIABILITIES...... 846 152 202 1,200 1,200 1,200
EXCHANGEABLE
NOTE............. 5,000(j) 5,000 (5,000) (l) -- --
SERIES A
CONVERTIBLE
PREFERRED
STOCK............ 21,156(j) 21,156 (21,156) (l) -- --
SHAREHOLDERS'
EQUITY
Series B
convertible
preferred
stock........... 26,156 (l ) 26,156 (26,156) (m) --
Common Stock par
value $.66 2/3
per share:
Authorized -
10,000,000
shares
Issued - 7,769,031
shares......... 5,179 7,663 (7,663) (k) 5,179 5,179 1,026 (m) 6,205
Additional
paid-in-capital.. 11,832 28,283 (13,496) (k) 12,356 12,356 25,130 (m) 37,486
(14,263) (k)
Retained
earnings........ 31,180 10,313 (16,395) 16,395(k) 31,180 31,180 31,180
(10,313) (k)
Equity adjustment
from foreign
currency
translation..... (47) (47) (47) (47)
Minimum pension
liability, net
of tax.......... (74) (74) (74) (74)
-------- ------- -------- ------- -------- -------- -------- -------- --------
48,070 17,976 11,888 (29,340) 48,594 -- 74,750 -- 74,750
Less cost of
374,262 treasury
shares.......... 2,838 2,838 2,838 2,838
-------- ------- -------- ------- -------- -------- -------- -------- --------
TOTAL
SHAREHOLDERS'
EQUITY....... 45,232 17,976 11,888 (29,340) 45,756 -- 71,912 -- 71,912
-------- ------- -------- ------- -------- -------- -------- -------- --------
$103,595 $46,266 $ 13,848 $ 6,643 $170,352 $ -- $170,352 $ -- $170,352
======== ======= ======== ======= ======== ======== ======== ======== ========
</TABLE>
F-6
<PAGE> 57
- ---------------
NOTE 1
The pro forma combined balance sheet (unaudited) has been prepared to include
adjustments to conform to U.S. Generally Accepted Accounting Principles.
NOTE 2
The pro forma combined balance sheet (unaudited) has been prepared to reflect
the acquisition of Portescap by API. Pro forma adjustments are made to:
<TABLE>
<S> <C>
(a) Adjust inventory to reflect fair value based on API's product design review and planned product redesign, in particular
related to the DC Motor line. The planned redesign effort is expected to place Portescap in a more competitive position in
terms of product price and superior performance.
(b) Provide for the deferred taxes associated with certain opening balance sheet assets and liabilities.
(c) Eliminate the push-down goodwill which resulted from the acquisition of Portescap by Inter Scan in 1990. In evaluating the
fair value of the Portescap assets, no value was assigned to the goodwill which resulted from the previous acquisition.
(d) Reflect the excess of acquisition cost over the fair value of net assets acquired (goodwill) as a result of the
acquisition of Portescap by API.
(e) Adjust property, plant and equipment to reflect estimated fair market values.
(f) Eliminate the remaining unamortized step-up in value of buildings which resulted from the acquisition of Portescap by
Inter Scan in 1990. See also Note 2(c) above.
(g) Establish certain opening balance sheet liabilities in accordance with pronouncement 95-3 of the Emerging Issues Task
Force of the FASB, primarily comprised of severance benefits arising from a restructuring plan.
(h) Eliminate the remaining deferred taxes associated with the adjustment in (f) above. See also Note 2(c) above.
(i) Reflect the debt incurred to cover the cash portion of the purchase price and the cash expenses and fees incurred in
connection with the acquisition in the amount of $1,802,000.
(j) Reflect the issuance of 20,000 shares of Series A convertible preferred stock and an exchangeable promissory note upon the
closing of the Portescap acquisition.
(k) Reflect adjustments (a) through (j) and eliminate the equity accounts of Portescap as a result of the consolidation with
API.
(l) Reflect the exchange of the Series A convertible preferred stock and the note for 1,236,337 shares of Series B convertible
preferred stock following the approval of the proposals presented at the Special Meeting of Shareholders.
(m) Reflect the conversion by Inter Scan of 1,236,337 shares of the Series B convertible preferred stock into 1,538,603 shares
of common stock.
</TABLE>
F-7
<PAGE> 58
AMERICAN PRECISION INDUSTRIES INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS (UNAUDITED)
SIX MONTHS ENDED JULY 4, 1997
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------------------------------
US GAAP ACQUISITION AS
ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
API PORTESCAP (NOTE 1) (NOTE 2) COMBINED ADJUSTED COMBINED
------- --------- ----------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales.................................. $75,415 $30,575 $ $ $105,990 $105,990
Investment Income.......................... 64 64 64
------- ------- ----- ------ ------- --------
Revenues................................... 75,479 30,575 106,054 106,054
------- ------- ----- ------ ------- --------
Costs and Expenses:
Cost of products sold.................... 51,869 21,865 217(a) 73,951 73,951
Selling and administrative............... 15,099 8,855 433 (444)(b) 24,001 24,001
58(a)
Research and product development......... 1,506 919 2,425 2,425
Goodwill amortization.................... 206(c) 206 206
Other income............................. (126) (126) (126)
Exchange gains and losses................ (172) (172) (172)
Interest and debt expense................ 1,083 825 181(d) 2,089 2,089
------- ------- ----- ------ ------- --------
69,557 32,166 433 217 102,373 102,373
------- ------- ----- ------ ------- --------
Earnings before Income Taxes............... 5,922 (1,591) (433) (217) 3,681 3,681
(54)(e)
Income Taxes............................... 2,067 683 (170) (205)(e) 2,320 2,320
------- ------- ----- ------ ------- --------
Net Earnings............................... $ 3,855 $(2,274) $(263) $ 42 $ 1,361 $ 1,361
======= ======= ===== ====== ======= ========
Net Earnings per Common Share.............. $ 0.53 $ 0.15
======= ========
Net Earnings per Common Share -- Fully
Diluted.................................. $ 0.50 $ 0.15
======= ========
Average Common Shares Outstanding.......... 7,341 1,539(f) 8,880
======= ===== ========
Average Common Shares Outstanding -- Fully
Diluted.................................. 7,712 1,589(f) 9,301
======= ===== ========
</TABLE>
- ---------------
NOTE 1
The pro forma combined statement of earnings (unaudited) has been prepared to
include adjustments to conform to U.S. Generally Accepted Accounting Principles.
NOTE 2
The pro forma combined statement of earnings (unaudited) has been prepared to
reflect the acquisition of Portescap by API. Pro forma adjustments are made to:
(a) Adjust depreciation based on estimated fair value of assets over estimated
lives.
(b) Eliminate amortization of goodwill on step-up in value of assets which
resulted from the acquisition of Portescap by Inter Scan. In evaluating the
fair value of the Portescap assets, no value was assigned to the goodwill
which resulted from the previous acquisition.
(c) Amortize goodwill over 30 years.
(d) Reflect interest expense at 6.5% on funds borrowed for the cash portion of
the purchase price and the cash expenses and fees incurred in connection
with the acquisition. The interest is the average rate API paid during the
six month period under its Revolving Credit Agreement. This rate of interest
is variable and a one-eighth of one percent change in the interest rate
would have a $7,000 impact on interest expense per annum on a pre-tax basis.
(e) Reflect income taxes on acquisition adjustments.
(f) Reflect the total number of API common shares to be issued to Inter Scan in
connection with the acquisition, as follows:
(A) Shares issued upon conversion of the preferred stock issued to Inter Scan
at the closing of the transaction; plus
(B) Following API shareholder approval of the increase in authorized common
and preferred stock, shares issued to Inter Scan after the exchange of
the note for preferred stock and upon conversion of that preferred stock.
The pro forma shares outstanding for the fully diluted calculation include
warrants to acquire 50,000 shares of API common stock issued to API's
investment banker in connection with the Portescap acquisition.
NOTE 3
The income taxes of Portescap in the six months ended June 30, 1997 primarily
relate to earnings of Portescap's foreign subsidiaries in Germany, Japan, and
the United States. The loss incurred by Portescap in Switzerland does not
generate a current tax benefit. Therefore, on a consolidated basis, Portescap
had a pre-tax loss combined with income tax expense, resulting in a 71%
effective tax rate for API and Portescap on a pro forma combined basis.
F-8
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
American Precision Industries Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of American
Precision Industries Inc. and its subsidiaries at January 3, 1997 and December
29, 1995, and the results of their operations and their cash flows for each of
the three years in the period ended January 3, 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.
Price Waterhouse LLP
Buffalo, New York
February 17, 1997
F-9
<PAGE> 60
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................ $ 2,412,000 $ 2,486,000
Accounts receivable less allowance for doubtful accounts of
$487,000 and $264,000......................................... 17,912,000 12,691,000
Marketable securities............................................ -- 3,493,000
Inventories...................................................... 17,431,000 10,589,000
Prepaid expenses................................................. 1,137,000 967,000
Deferred income tax benefit...................................... 2,094,000 1,389,000
----------- -----------
TOTAL CURRENT ASSETS.......................................... 40,986,000 31,615,000
----------- -----------
INVESTMENTS........................................................ 3,279,000 6,277,000
OTHER ASSETS
Costs in excess of net assets acquired, net of accumulated
amortization.................................................. 4,472,000 2,153,000
Prepaid pension costs............................................ 2,104,000 2,140,000
Net cash value of life insurance................................. 2,655,000 2,222,000
Other............................................................ 1,310,000 1,115,000
----------- -----------
TOTAL OTHER ASSETS............................................ 10,541,000 7,630,000
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land............................................................. 665,000 211,000
Buildings and improvements....................................... 13,549,000 6,183,000
Machinery, equipment and furniture............................... 32,589,000 22,265,000
Construction in process.......................................... 1,502,000 1,450,000
----------- -----------
48,305,000 30,109,000
Less accumulated depreciation...................................... 21,099,000 17,840,000
----------- -----------
NET PROPERTY, PLANT AND EQUIPMENT............................. 27,206,000 12,269,000
----------- -----------
$82,012,000 $57,791,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings............................................ $ -- $ 2,602,000
Accounts payable................................................. 8,511,000 5,136,000
Accrued compensation and payroll taxes........................... 5,167,000 3,566,000
Other accrued expenses........................................... 1,341,000 757,000
Dividends payable................................................ 471,000 463,000
Current portion of long-term obligations......................... 1,292,000 628,000
Federal and state income taxes................................... 12,000 --
----------- -----------
TOTAL CURRENT LIABILITIES..................................... 16,794,000 13,152,000
----------- -----------
DEFERRED INCOME TAXES.............................................. 1,417,000 1,251,000
OTHER NONCURRENT LIABILITIES....................................... 1,046,000 413,000
LONG-TERM OBLIGATIONS,
less current portion............................................. 22,211,000 8,628,000
SHAREHOLDERS' EQUITY
Common stock, par value $.66 2/3 per share:
Authorized -- 10,000,000 shares
Issued -- 7,666,011 and 7,502,000 shares......................... 5,110,000 5,001,000
Additional paid-in capital......................................... 11,065,000 9,532,000
Retained earnings.................................................. 27,281,000 22,629,000
Minimum pension liability change, net of tax....................... (74,000) --
Net unrealized gain on marketable securities....................... -- 23,000
----------- -----------
43,382,000 37,185,000
Less cost of 374,262 treasury shares............................... 2,838,000 2,838,000
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................... 40,544,000 34,347,000
----------- -----------
$82,012,000 $57,791,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE> 61
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES.......................................... $116,783,000 $ 82,403,000 $ 64,896,000
INVESTMENT INCOME.................................. 327,000 257,000 369,000
------------ ------------ ------------
REVENUES........................................... 117,110,000 82,660,000 65,265,000
------------ ------------ ------------
COSTS AND EXPENSES
Cost of products sold............................ 77,652,000 55,289,000 43,270,000
Selling and administrative....................... 26,410,000 18,801,000 15,582,000
Research and product development................. 1,759,000 1,111,000 888,000
Interest and debt expense........................ 1,295,000 238,000 220,000
------------ ------------ ------------
107,116,000 75,439,000 59,960,000
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES....................... 9,994,000 7,221,000 5,305,000
FEDERAL AND STATE INCOME TAXES..................... 3,469,000 2,490,000 1,874,000
------------ ------------ ------------
NET EARNINGS....................................... $ 6,525,000 $ 4,731,000 $ 3,431,000
============ ============ ============
NET EARNINGS PER COMMON SHARE...................... $ .91 $ .67 $ .49
============ ============ ============
NET EARNINGS PER COMMON SHARE --
FULLY DILUTED*..................................... $ .86 $ .65 $ --
============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING.................. 7,190,000 7,090,000 7,062,000
AVERAGE COMMON SHARES OUTSTANDING -- FULLY
DILUTED*......................................... 7,605,000 7,330,000 --
</TABLE>
- ---------------
* Anti-dilutive in 1994.
See notes to consolidated financial statements.
F-11
<PAGE> 62
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN
(LOSS)
COMMON STOCK ADDITIONAL ON MINIMUM TREASURY SHARES
----------------------- PAID-IN RETAINED MARKETABLE PENSION ---------------------
SHARES AMOUNT CAPITAL EARNINGS SECURITIES LIABILITY SHARES AMOUNT
--------- ---------- ----------- ----------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1993.................... 7,436,103 $4,958,000 $ 9,073,00 $18,043,000 $ -- $ -- 378,262 $2,862,000
Net earnings -- 1994.... -- -- -- 3,431,000 -- -- -- --
Stock options exercised,
net................... 5,945 3,000 25,000 -- -- -- -- --
Cash dividends declared,
$.2475 per share...... -- -- -- (1,748,000) -- -- -- --
Net unrealized (loss) on
marketable
securities............ -- -- -- -- (18,000) -- -- --
--------- ---------- ------------ ------------ -------- -------- ------- ----------
BALANCE AT DECEMBER 30,
1994.................... 7,442,048 4,961,000 9,098,000 19,726,000 (18,000) -- 378,262 2,862,000
Net earnings--1995...... -- -- -- 4,731,000 -- -- -- --
Stock options exercised,
net................... 59,952 40,000 422,000 -- -- -- -- --
Treasury shares issued
as bonus.............. -- -- 12,000 -- -- -- (4,000) (24,000)
Cash dividends declared,
$.2575 per share...... -- -- -- (1,828,000) -- -- -- --
Net unrealized gain on
marketable
securities............ -- -- -- -- 41,000 -- -- --
--------- ---------- ------------ ------------ -------- -------- ------- ----------
BALANCE AT DECEMBER 29,
1995.................... 7,502,000 5,001,000 9,532,000 22,629,000 23,000 -- 374,262 2,838,000
Net earnings -- 1996.... -- -- -- 6,525,000 -- -- -- --
Stock options exercised,
net................... 164,011 109,000 1,533,000 -- -- -- -- --
Cash dividends declared,
$.26 per share........ -- -- -- (1,873,000) -- -- -- --
Minimum pension
liability changes, net
of tax................ -- -- -- -- -- (74,000) -- --
Net unrealized (loss) on
marketable
securities............ -- -- -- -- (23,000) -- -- --
--------- ---------- ------------ ------------ -------- -------- ------- ----------
BALANCE AT JANUARY 3,
1997.................... 7,666,011 $5,110,000 $11,065,000 $27,281,000 $ -- $(74,000) 374,262 $2,838,000
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE> 63
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings........................................ $ 6,525,000 $ 4,731,000 $ 3,431,000
Adjustments to reconcile net income to cash and cash
equivalents provided by operating activities:
Depreciation and amortization.................... 3,785,000 2,594,000 2,275,000
Gain on sale of investments/fixed assets......... 46,000 42,000 --
Increase in supplemental benefit program......... 100,000 125,000 176,000
Recognition of pension expense (income) under
FASB #87....................................... 36,000 (136,000) (280,000)
Stock compensation programs...................... 582,000 202,000 --
Change in various allowance accounts............. (639,000) (95,000) 91,000
Treasury stock issued as bonus................... -- 36,000 --
(Increase) Decrease in:
Accounts receivable.............................. (472,000) (2,028,000) (2,168,000)
Inventories...................................... (2,006,000) (1,785,000) (1,267,000)
Prepaid expenses................................. (115,000) (75,000) (199,000)
Prepaid federal and state income taxes........... 6,000 -- 58,000
Deferred income taxes............................ (691,000) (386,000) (267,000)
Prepaid pension cost............................. -- -- (24,000)
Net cash value of life insurance................. (433,000) (571,000) (548,000)
Other assets, net................................ (459,000) (475,000) (140,000)
Increase (Decrease) in:
Accounts payable................................. 1,613,000 373,000 953,000
Accrued expenses................................. (385,000) 902,000 1,062,000
Federal and state income taxes................... 12,000 (79,000) (93,000)
Deferred income taxes............................ 199,000 376,000 31,000
Other noncurrent liabilities..................... 51,000 35,000 176,000
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 7,755,000 3,786,000 3,267,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in API Gettys & API Ketema net of cash
and cash equivalents acquired.................... (17,359,000) -- --
Purchases of investments and marketable
securities....................................... (127,000) (6,233,000) (2,546,000)
Additions to property, plant and equipment.......... (8,319,000) (4,585,000) (1,857,000)
Proceeds from investments and marketable
securities....................................... 6,609,000 1,797,000 7,225,000
Investment in Harowe Servo Controls Inc............. -- -- (5,195,000)
Proceeds from sale of fixed assets.................. 46,000 36,000 7,000
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES................. (19,150,000) (8,985,000) (2,366,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options........................... 1,642,000 462,000 28,000
Payments of long-term obligations, including current
maturities....................................... (1,785,000) (368,000) (519,000)
Dividends paid...................................... (1,865,000) (1,806,000) (1,730,000)
Increase in long-term debt.......................... 15,931,000 6,660,000 --
(Decrease) increase in short-term borrowings........ (2,602,000) 602,000 2,000,000
----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES...... 11,321,000 5,550,000 (221,000)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS......................................... (74,000) 351,000 680,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........ 2,486,000 2,135,000 1,455,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. $ 2,412,000 $ 2,486,000 $ 2,135,000
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995, AND DECEMBER 30, 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Nature of Operations. American Precision Industries Inc. (the "Company") is
a diversified manufacturing company whose principal lines of business
include the production and sale of heat transfer products, motion control
devices, and electronic components. Sales of these products are primarily
to customers in industrialized nations both domestic and foreign.
(2) Consolidation. The accounts of all subsidiaries are included in the
consolidated financial statements. The fiscal years consisted of 52 weeks,
except for 1996 which consisted of 53 weeks and ended on January 3, 1997.
The Statement of Earnings and Statement of Cash Flows include the results
of API Ketema and API Gettys since April 1, 1996 and April 19, 1996,
respectively, the dates of acquisition. The Consolidated Statement of
Earnings and Statement of Cash Flows also includes the results of Harowe
Servo Controls Inc. since June 30, 1994, the date of acquisition.
(3) Inventories. Inventories are valued at the lower of cost or market, net of
progress payments. At January 3, 1997 and December 29, 1995 inventories
comprising approximately 61% and 50%, respectively, of total inventories
were valued using the last-in, first-out (LIFO) method. Other inventories
are priced using the first-in, first-out (FIFO) method.
(4) Property, Plant and Equipment. These assets are stated at cost and are
depreciated over their estimated useful lives; building and
improvements -- 10 to 45 years; machinery, equipment, and furniture -- 2 to
15 years.
Expenditures for maintenance and repairs are charged to expense; renewals
and betterments are capitalized and depreciated. Properties are removed
from the accounts when they are disposed of, and the related cost and
accumulated depreciation are eliminated from the accounts. Associated gains
and losses, if any, are included in consolidated net earnings.
The Company adopted the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" on January 1, 1996. Adoption of this Statement had no impact on the
Company's financial position, results of operations, or liquidity.
(5) Goodwill. The excess of the purchase cost over the fair value of net assets
acquired in an acquisition (goodwill) is separately disclosed, net of
accumulated amortization, and is being amortized over 25 years on a
straight-line basis. Amortization expense amounted to $163,000 in 1996 and
$102,000 in 1995. Accumulated amortization of goodwill at January 3, 1997
was $309,000.
(6) Income Taxes. The Company provides for deferred income taxes under the
asset and liability approach. This method requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and tax
basis of assets and liabilities. No provision has been made for United
States income taxes applicable to undistributed earnings of a foreign
subsidiary as it is the intention of the Company to indefinitely reinvest
those earnings in the operations of that entity.
(7) Employee Benefit Plans. Benefits under the Company's salaried defined
benefit and supplemental benefit plans are based upon years of service and
average compensation during an individual's last years of employment for
the defined benefit plan and final pay for the supplemental benefit plan.
Benefits under the salaried defined benefit plan are funded annually based
upon the maximum contribution deductible for federal income tax purposes.
The supplemental benefit program is funded through company-owned life
insurance contracts on the lives of the participants, but the benefit
obligation to certain participants will be offset by the participant's
interest in a split-dollar insurance contract.
F-14
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Benefits under the hourly defined benefit plan of Harowe are based upon
years of service, not to exceed 35, times a fixed rate specified in the
union contract. Benefits under this plan are funded annually based upon
funding recommendations of the plan actuaries.
All union employees are covered under defined contribution plans. The
Company's contribution to these plans are set forth under the provisions of
the specific union contracts.
(8) Stock Options. Proceeds from the sale of common stock issued under employee
stock option plans are credited to capital accounts. There are no charges
to income with respect to the plans; however, compensation expense is
recorded with respect to the increase in value of stock appreciation
rights. The Company has adopted certain disclosure requirements as
prescribed by FASB Statement No. 123.
(9) Earnings per Share. Earnings per share are based on the weighted average
number of shares outstanding during each year. Net earnings per common
share are based on the weighted average number of common shares outstanding
during the respective years. The effect of common stock equivalents,
consisting of stock options, on net earnings per common share is not
material except on a fully diluted basis in 1996.
(10) Advertising. The Company expenses the production costs of advertising in
the year in which the advertising takes place. Total advertising expense in
1996, 1995, and 1994 was $879,000, $874,000, and $664,000, respectively.
(11) 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
these estimates.
B. BUSINESS ACQUISITIONS
Business Acquisitions. On April 1, 1996, API Ketema Inc., a wholly-owned
subsidiary of the Company, acquired the assets and assumed certain liabilities
of the Heat Transfer Division (HTD) of Ketema, Inc. at a cost of approximately
$12,000,000. HTD manufactures shell and tube heat exchangers, refrigeration
condensers, and packaged chillers.
On April 19, 1996, API Gettys Inc., a wholly-owned subsidiary of the
Company acquired the assets and assumed certain liabilities of Gettys
Corporation and Gettys Property Corporation (Gettys) at a cost of approximately
$4,800,000. Gettys manufactures AC and DC servo motors, amplifiers, and control
electronics.
On June 30, 1994, the Company acquired 100% of the stock of Harowe Servo
Controls, Inc. (HSC), a Delaware corporation and Harowe Servo Controls (St.
Kitts) Limited (HSC Limited), a corporation organized under the laws of the
Island of St. Christopher and Nevis, from Hawker Siddeley Holdings Inc., at a
cost of approximately $5,200,000.
The following table presents unaudited pro forma results of operations as
if the acquisition of HSC and HSC Limited had occurred on January 1, 1994 and
1993, respectively, and the acquisition of HTD and Gettys had occurred on
January 1, 1996 and 1995, respectively, after giving effect to certain
adjustments, including amortization of goodwill, loss of interest income on
tax-exempt municipal bonds sold to fund the purchase cost, adjusted depreciation
of fair value of assets acquired, addition of interest expense on additional
debt required to fund the acquisitions, and the related income tax effects. The
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions
occurred at the beginning of 1995 for Gettys and Ketema and 1993 for HSC and HSC
Limited or of results which may occur in the future. Furthermore, no effect has
been given in the pro forma information for operating and synergistic benefits
that are expected to be realized through the combination of the entities because
precise estimates of such benefits cannot be quantified.
F-15
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1996 1995 1994 1993
-------- -------- -------- --------
THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues........................................ $125,778 $116,762 $ 69,631 $ 61,195
Earnings before Income Taxes.................... $ 10,416 $ 4,585 $ 5,641 $ 3,681
Net Earnings.................................... $ 6,863 $ 2,972 $ 3,517 $ 2,335
Net Earnings Per Common Share................... $ .95 $ .42 $ .50 $ .33
Net Earnings Per Common Share -- Fully
diluted....................................... $ .90 $ .41 $ -- $ --
</TABLE>
C. CASH EQUIVALENTS, MARKETABLE SECURITIES, AND INVESTMENTS
(1) Cash equivalents consist of money market funds, commercial paper, and
certificates of deposit with original maturities of three months or less.
Marketable securities, consisting of municipal bonds, are carried at market.
Investments primarily consist of marketable municipal bonds, which are
carried at market. Included in Investments in 1996 and 1995 is $3,272,000
and $6,233,000 of funds obtained under industrial revenue bond financing.
Use of these funds is restricted and can only be applied to the purchase of
capital assets for the related expansion program.
For the purpose of determining gross realized gains and losses, the cost of
securities sold is based upon specific identification.
The Company classifies debt and equity securities not classified as either
held-to-maturity or trading as "available for sale" and reported at market
value. Unrealized gains and losses are reported as a separate component of
shareholders' equity.
(2) Additional information pertaining to the Consolidated Statement of Cash
Flows is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................................... $1,038,000 $ 225,000 $ 184,000
Income taxes net of tax refunds.................... $3,598,000 $2,513,000 $2,145,000
</TABLE>
D. INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Finished goods.............................................. $ 3,867,000 $ 995,000
Work in process............................................. 3,834,000 2,538,000
Raw materials............................................... 9,730,000 7,056,000
----------- -----------
$17,431,000 $10,589,000
=========== ===========
</TABLE>
Had the cost of all inventories at January 3, 1997 and December 29, 1995
been determined by the FIFO method, the amounts thereof would have been greater
by $1,147,000 and $1,187,000, respectively.
E. OTHER NONCURRENT LIABILITIES
In 1996 and 1995, other noncurrent liabilities consist of the noncurrent
portion of bonus obligations under the Company's incentive plans, deferred
compensation associated with the stock appreciation rights granted to the Chief
Executive Officer in 1992, and discount on options granted to certain members of
the Board of Directors of the Company in lieu of certain directors' fees.
F. SHORT AND LONG-TERM OBLIGATIONS
(1) Short-Term Obligations. There were no significant short-term borrowings
during 1996. As of December 29, 1995, the Company had $2,602,000 outstanding
on its line of credit. This amount was outstanding
F-16
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
for four business days. The Company had available unsecured, short-term
lines of credit totaling $4,232,000 and $7,398,000 at the prime rate on
January 3, 1997 and December 29, 1995, respectively.
(2) Long-Term Obligations. Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Industrial revenue bonds.............................. $13,405,000 $8,112,000
Revolving credit debt................................. 9,000,000 --
Supplemental benefit program.......................... 1,098,000 1,144,000
----------- ----------
23,503,000 9,256,000
Less current obligations.............................. 1,292,000 628,000
----------- ----------
Long-term obligations................................. $22,211,000 $8,628,000
</TABLE>
During 1996 the Company entered into a Credit Agreement with Marine Midland
Bank which provides an unsecured Revolving Credit facility of $16,000,000.
The Revolving Credit matures on March 29, 1999, at which time the Company
may convert the amount outstanding under the Revolving Credit to a term loan
payable over a four year term. The interest rate on the Revolving Credit as
of January 3, 1997, under the LIBOR Rate Option in the Credit Agreement, was
6.33%.
During the third quarter of 1996, the Company concluded a $6,000,000 15-year
industrial revenue bond (IRB) financing with the Grand Prairie Industrial
Development Authority. Substantially all of the proceeds were used in
connection with the purchase of the Heat Transfer Division of Ketema, Inc.
on April 1, 1996.
During the fourth quarter of 1995, the Company obtained adjustable rate IRB
capital lease financing of $6,660,000 for asset purchases associated with
its Air Technologies expansion program.
Unexpended revenue bond proceeds of $3,272,000 were held and invested by a
trustee at the end of 1996 and are included in Investments in the
accompanying consolidated balance sheet. Such amount is restricted and can
only be applied to the purchase of capital assets for the related expansion
program, and such assets will be pledged as collateral for the bonds.
The adjustable rate IRB capital lease financing is collateralized by assets
with a depreciated value of $11,314,000 at January 3, 1997.
The interest rate on the IRBs approximates 60% of the prime rate and is
adjustable every seven days in order for the Remarketing Agent to sell the
bonds at par value.
The following are the weighted average interest and debt expense rates for
1996:
Industrial Revenue Bonds...................................5.51%
Revolving Credit Debt......................................6.13%
All the industrial revenue bonds are subject to mandatory sinking fund
repayment schedules with various dates extending through 2015. The Revolving
Credit and each of the IRBs are subject to various restrictive covenants,
with respect to which the Company is in compliance.
Under the supplemental benefit program, the Company provides retirement or
death benefits to directors and certain officers meeting specified service
requirements. Directors are entitled to an annual benefit of $10,000 per
year for ten years. Participating officers are provided an annual benefit
equal to 20% of their current salary payable over fifteen years, except for
the Chief Executive Officer whose annual benefit, payable over fifteen
years, is currently approximately $112,000 and indexed to the Consumer Price
Index. In the case of several executives, these benefits will be partially
or totally funded through split-dollar life insurance contracts. The
estimated future benefits to be paid directly by the Company under this
program are accrued over the participants' service lives by estimating the
present value of such future benefits assuming a 9% rate of interest. The
Company has also invested in company-owned life insurance
F-17
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
contracts on the lives of the participants, the cash surrender values of
which are recorded in Other Assets. It is actuarially assumed that over the
term of this program all costs will be offset by benefits provided from the
underlying contracts.
Over the next five years, the Company will make long-term obligation
payments of approximately $1,292,000 in 1997, $1,322,000 in 1998, $1,358,000
in 1999, $1,378,000 in 2000, and $1,371,000 in 2001. Such amounts exclude
the revolving credit.
G. OPERATING LEASES
The Company leases certain office and manufacturing facilities and
automotive and other equipment through operating leases. Certain of these
provide for the payment of taxes, insurance and maintenance costs and most
contain renewal options. Net future minimum lease commitments do not have a
material impact on the consolidated financial statements. Total rental expense
for 1996, 1995, and 1994, was $730,000, $587,000, and $568,000, respectively.
H. EMPLOYEE BENEFITS
Retirement Plans. In addition to the aforementioned supplemental benefit
program, the Company has a defined benefit retirement plan covering all nonunion
employees ("Salaried Plan") and makes contributions to union-sponsored plans.
Harowe has a defined benefit retirement plan covering all hourly employees in
its West Chester, Pennsylvania location ("HSC Hourly Plan"). The total expense
for such plans, net of the recognition of net periodic pension income was
$392,000, $227,000, and $44,000, in 1996, 1995, and 1994, respectively.
The following summarizes the funded status of the Company's and Harowe's
defined benefit retirement plans:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
HSC HSC
HOURLY SALARIED HOURLY SALARIED
PLAN PLAN PLAN PLAN
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations
Vested benefits................................ $ 724,000 $5,401,000 $ 712,000 $4,649,000
Nonvested benefits............................. 10,000 106,000 17,000 74,000
---------- ---------- ---------- ----------
Accumulated benefit obligations.................. 734,000 5,507,000 729,000 4,723,000
---------- ---------- ---------- ----------
Projected benefit obligations.................... 724,000 6,556,000 729,000 5,646,000
Plan assets at fair value........................ 385,000 10,396,000 393,000 9,336,000
---------- ---------- ---------- ----------
Assets in excess of (less than) projected benefit
obligation..................................... (339,000) 3,840,000 (336,000) 3,690,000
Unrecognized prior service cost.................. 30,000 187,000 -- 13,000
Less:
Accumulated unrecognized net loss.............. -- -- 20,000 --
Unrecognized net gain (loss) at transition
being recognized over 15 years.............. (77,000) 491,000 -- 614,000
Additional minimum liability................... 107,000
Unrecognized net gain arising since
transition.................................. -- 1,492,000 -- 973,000
---------- ---------- ---------- ----------
(Accrued) prepaid pension cost................... $(339,000) $2,044,000 $(316,000) $2,116,000
</TABLE>
F-18
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Net periodic pension (cost) income associated with the salaried plan and
the HSC Hourly Plan for 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1996 1995
--------------------- --------------------
HSC HSC
HOURLY SALARIED HOURLY SALARIED
PLAN PLAN PLAN PLAN
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Service costs -- benefits earned during the
period........................................... $ (21,000) $(577,000) $(19,000) $(347,000)
Interest on projected benefit obligations.......... (51,000) (440,000) (51,000) (392,000)
Actual return on assets............................ 14,000 831,000 24,000 754,000
Amortization of transition assets and deferrals.... 7,000 113,000 -- 121,000
--------- --------- --------- --------
Net periodic pension (cost) income................. $ (51,000) $ (73,000) $(46,000) $ 136,000
</TABLE>
An assumed discount rate of 7.75%, a rate increase in future compensation
of 4.0%, and an expected long-term rate of return of 9.0% have been used in
determining the actuarial present value of projected benefit obligations of the
Salaried Plan for 1996 and 1995. The HSC Hourly Plan includes an assumed
discount rate and expected long-term rate of return of 7.5% for 1996 and 1995.
I. FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standard No. 107, "Disclosures about Fair Value of Financial
Instruments". This statement requires that companies disclose the estimated
"fair value" of their financial instruments. Financial instruments primarily
consist of trade receivables and payables, investments in municipal bond funds,
and debt facilities with various third party lenders. At January 3, 1997,
management believes the carrying amounts of financial instruments, approximates
fair value.
J. SHAREHOLDERS' EQUITY
(1) Preferred Stock. None of the Company's authorized 20,000 shares of preferred
stock (par value $50 a share) have been issued.
(2) Stock Options. The Company has granted incentive stock options (ISO) to
officers and other key employees and nonqualified options (NQO) for 100
common shares to most other employees after one year of employment. The
grants were made at an exercise price of not less than 100% of the market
value on the date of grant. Options may be exercised in cumulative annual
increments of 20% for ISOs and 50% for NQOs beginning one year from the date
of grant. All options expire ten years from date of grant.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, no compensation expense has been charged to earnings for
options granted in 1996 and 1995 since all such options have an exercise
price equal to 100% of market value on the date of grant. Had the Company
adopted the provisions of FASB Statement No. 123, compensation expense for
options granted in 1996 and 1995 would have reduced the Company's net
earnings and earnings per share to the pro forma amounts shown below.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net earnings:
As reported............................................... $6,525,000 $4,731,000
Pro forma................................................. $6,217,000 $4,636,000
Earnings per share:
As reported -- per common share........................... $ .91 $ .67
As reported -- fully diluted.............................. $ .86 $ .65
Pro forma -- per common share............................. $ .86 $ .65
Pro forma -- fully diluted................................ $ .82 $ .63
</TABLE>
F-19
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The fair value of each option granted in 1996 and 1995 was estimated using
the Black-Scholes option pricing model with the following assumptions for 1996
and 1995, respectively:
risk-free interest rates of 6.6% and 7.1%; dividends of 0 and $.19;
expected term of 9.2 years and 9.2 years; annual standard deviation
(volatility) of 25% and 24%.
The weighted average fair value of options granted in 1996 and 1995 was
$6.32 and $4.67, respectively.
A summary of the status of options granted under all employee plans and
pursuant to the employment of the Company's Chief Executive Officer is presented
below.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
SUBJECT TO OPTIONS ($)
------------------ ----------------
<S> <C> <C>
Outstanding December 31, 1993............................... 781,826 8.18
Granted in 1994............................................. 157,500 6.84
Exercised in 1994........................................... (7,059) 5.11
Forfeited in 1994........................................... (41,277) 8.20
--------- -----
Outstanding December 30, 1994............................... 890,990 8.05
Granted in 1995............................................. 214,350 9.22
Exercised in 1995........................................... (79,430) 7.76
Forfeited in 1995........................................... (14,085) 7.49
--------- -----
Outstanding December 29, 1995............................... 1,011,825 8.33
Granted in 1996............................................. 212,500 12.48
Exercised in 1996........................................... (181,081) 8.58
Forfeited in 1996........................................... (41,287) 8.04
--------- -----
Outstanding January 3, 1997................................. 1,001,957 9.15
========= =====
</TABLE>
The number of shares subject to options exercisable at the end of 1996,
1995 and 1994 were 488,087, 470,970, and 486,315, respectively.
The following table summarizes information about options outstanding at
January 3, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------- --------------------------------
WEIGHTED AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES($) OUTSTANDING CONTRACTUAL LIFE PRICE($) EXERCISABLE PRICE($)
- ------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
6.625-9.76 709,046 6.1 years 7.93 419,026 7.87
10.50-13.00 288,911 7.8 years 12.00 69,061 10.95
17.625 4,000 9.9 years 17.63 0 --
</TABLE>
On June 16, 1992, the Company's new Chief Executive Officer was granted
options to acquire 200,000 shares of the Company's common stock, along with
50,000 stock appreciation rights (SARs) which must be exercised in tandem with
the exercise of the options at the rate of one SAR for each four options
exercised. The options and SARs have a term of ten years, are exercisable at
$7.75 per share or right, the fair market value at date of grant, and become
exercisable over a five year period at the rate of 20% per year. Data related to
the CEO options are included in the tables above. The Company recorded
compensation expense of $452,000 and $148,000 in 1996 and 1995, respectively, in
connection with the increase in value of the SARs.
Beginning on July 1, 1995, the Company has granted stock options to certain
directors of the Company on the first day of each calendar quarter under the
1995 Directors Stock Option Plan. Under this plan, a director
F-20
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
may elect to receive options in lieu of his annual cash retainer and meeting
fees. The option exercise price is 30% of the fair market value of a share on
the date of grant, and the cash fees foregone by the director are equivalent to
70% of the fair market value. Options become exercisable six months after date
of grant and expire ten years from date of grant. Options outstanding January 3,
1997 totaled 23,336 shares, of which 16,179 were exercisable on that date and
26,664 shares were available for future grants of options under the plan.
K. INVESTMENT INCOME
Investment income consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Gain on sale of investments........................ $ 27,000 $ -- $ 2,000
Interest and dividend income....................... 300,000 257,000 367,000
-------- -------- --------
$327,000 $257,000 $369,000
======== ======== ========
</TABLE>
L. INCOME TAXES
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current...................................... $3,434,000 $2,114,000 $1,830,000
Deferred..................................... (421,000) 4,000 (187,000)
State:
Current...................................... 527,000 368,000 280,000
Deferred..................................... (71,000) 4,000 (49,000)
---------- ---------- ----------
$3,469,000 $2,490,000 $1,874,000
========== ========== ==========
</TABLE>
The provision for income taxes for 1996 does not include the tax benefit of
$346,000 associated with the exercise of stock options which has been credited
to paid in capital.
Deferred tax liabilities (assets) at January 3, 1997 and December 29, 1995
are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accelerated depreciation.................................. $ 662,000 $ 662,000
Pension................................................... 780,000 844,000
Other..................................................... 340,000 311,000
----------- -----------
Gross deferred tax liabilities............................ 1,782,000 1,817,000
----------- -----------
Deferred compensation..................................... (803,000) (623,000)
Various reserves.......................................... (824,000) (634,000)
Other..................................................... (832,000) (698,000)
----------- -----------
Gross deferred tax assets................................. (2,459,000) (1,955,000)
----------- -----------
Deferred tax assets valuation allowance................... -- --
----------- -----------
$ (677,000) $ (138,000)
=========== ===========
</TABLE>
F-21
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The provision for income tax differs from the federal statutory rate of 34%
due to the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate................................................. 34.0% 34.0% 34.0%
State income taxes, less federal effect........................ 2.9 3.3 2.9
Nontaxable investment income................................... (0.6) (0.9) (1.7)
Effect of undistributed net earnings of foreign subsidiaries... (1.3) (2.2) --
Other.......................................................... (0.3) 0.3 0.1
---- ---- ----
Effective tax rate............................................. 34.7% 34.5% 35.3%
==== ==== ====
</TABLE>
The Company has not recorded deferred income taxes applicable to
undistributed earnings of a foreign subsidiary that are indefinitely reinvested
in foreign operations. Undistributed earnings amounted to approximately $978,000
at January 3, 1997. If the earnings of such foreign subsidiary were not
reinvested, a deferred tax liability of approximately $374,000 would have been
required.
M. SUBSEQUENT EVENT
On January 31, 1997, API Schmidt-Bretten GmbH, a newly formed wholly-owned
subsidiary of the Company organized under the laws of the Federal Republic of
Germany, acquired all of the shares of Schmidt-Bretten GmbH from Deutz
Aktiengessellschaft, formerly Klockner-Humboldt-Deutz AG, and KHD Humboldt Wedag
Aktiengessellschaft, both stock corporations organized under the laws of the
Federal Republic of Germany. Neither seller is affiliated with the Company or
any of its affiliates. The purchase price of DM 13,000,000 (approximately
$7,900,000) was based upon the unaudited balance sheet of Schmidt-Bretten GmbH
at December 31, 1996. An amount of DM 10,000,000 (approximately $6,100,000) was
paid in cash on January 31, 1997 and a note for DM 3,000,000 (approximately
$1,800,000) is due and payable on December 31, 1997. Payment of this final
installment, which is subject to interest at a per annum rate of 5.5% commencing
as of January 31, 1997, is guaranteed by the Company. The acquisition will be
accounted for as a purchase in 1997 in accordance with APB No. 16 Business
Combinations.
The Company funded this transaction with funds borrowed under an existing
Credit Agreement with Marine Midland Bank dated March 29, 1996.
N. BUSINESS SEGMENT DATA
The Company conducts operations in three major industrial classifications:
Heat Transfer Technology, Motion Technologies, and Electronic Components. The
operations of the Heat Transfer Technology segment include the production and
sale of water and air-cooled heat transfer equipment to industrial customers.
Operations of the Motion Technologies segment comprises production and sale of
electro-magnetic clutches and brakes, high performance servo motors, stepper
motors, controllers, and resolvers. Operations of the Electronic Components
segment involve production and sale of inductors and coils.
Total revenues by segment consist entirely of sales to unaffiliated
customers. Operating profit is total revenue less operating expenses. Operating
profit does not include the following items: general corporate income and
expense, investment income, interest expense, other income and expense, or
income taxes. Identifiable assets by segment consist of those assets that are,
or will be, used in the segmental operations. Corporate assets are principally
cash, cash equivalents, marketable securities, investments, and other assets.
Export sales, principally to Europe, Canada, and Asia, were approximately
15% of consolidated sales for 1996. In 1995 and 1994, export sales were 14% and
17%, respectively of consolidated sales.
F-22
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Information about the Company's operations in different industries, stated
in thousands of dollars, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
REVENUES
Heat Transfer.............................................. $ 63,536 $40,819 $33,276
Motion..................................................... 40,016 28,599 19,674
Electronic Components...................................... 13,231 12,985 11,946
General Corporate.......................................... 327 257 369
-------- ------- -------
Consolidated................................................. $117,110 $82,660 $62,265
-------- ------- -------
OPERATING PROFIT
Heat Transfer.............................................. $ 8,230 $ 5,542 $ 5,331
Motion..................................................... 3,908 2,466 614
Electronic Components...................................... 2,300 2,058 1,790
-------- ------- -------
Combined................................................ 14,438 10,066 7,735
General Corporate expense, net............................. (3,149) (2,607) (2,210)
Interest and debt expense.................................. (1,295) (238) (220)
-------- ------- -------
Earnings before income taxes................................. $ 9,994 $ 7,221 $ 5,305
-------- ------- -------
IDENTIFIABLE ASSETS
Heat Transfer.............................................. $ 42,357 $23,673 $14,607
Motion..................................................... 22,274 15,179 12,370
Electronic Components...................................... 6,488 6,821 6,071
General Corporate.......................................... 10,893 12,118 12,296
-------- ------- -------
Total assets................................................. $ 82,012 $57,791 $45,344
-------- ------- -------
DEPRECIATION
Heat Transfer.............................................. $ 1,378 $ 877 $ 735
Motion..................................................... 1,593 964 637
Electronic Components...................................... 534 558 598
General Corporate.......................................... 58 61 62
-------- ------- -------
Total depreciation........................................... $ 3,563 $ 2,460 $ 2,032
-------- ------- -------
NET CAPITAL EXPENDITURES
Heat Transfer.............................................. $ 5,878 $ 1,789 $ 1,358
Motion..................................................... 842 2,218 188
Electronic Components...................................... 575 449 259
General Corporate.......................................... 77 33 10
-------- ------- -------
Total net capital expenditures............................... $ 7,372 $ 4,489 $ 1,815
-------- ------- -------
</TABLE>
F-23
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL YEAR
------- ------- ------- ------- -----------
(THOUSANDS EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
1996
Revenues................................ $22,022 $31,541 $31,658 $31,889 $117,110
Gross profit............................ 7,380 10,102 10,613 11,036 39,131
Net earnings............................ 1,399 1,573 1,736 1,817 6,525
Net earnings per common share........... .20 .22 .24 .25 .91
Net earnings per common share -- fully
diluted............................... .19 .021 .23 .24 .86
Cash dividends declared per share....... .065 .065 .065 .065 .26
1995
Revenues................................ $19,289 $20,360 $20,850 $22,161 $ 82,660
Gross profit............................ 6,254 6,410 7,264 7,186 27,114
Net earnings............................ 1,042 1,122 1,200 1,367 4,731
Net earnings per common share........... .15 .16 .17 .19 .67
Net earnings per common share -- fully
diluted............................... .15 .16 .16 .19 .65
Cash dividends declared per share....... .0625 .065 .065 .065 .2575
</TABLE>
F-24
<PAGE> 75
AMERICAN PRECISION INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------- ---------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................. $39,572,000 $31,432,000 $75,415,000 $53,379,000
INVESTMENT INCOME......................... 36,000 110,000 64,000 184,000
----------- ----------- ----------- -----------
REVENUES.................................. 39,608,000 31,542,000 75,479,000 53,563,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of products sold................... 27,351,000 21,330,000 51,869,000 35,990,000
Selling and administrative.............. 7,752,000 6,883,000 15,099,000 11,632,000
Research and product development........ 803,000 449,000 1,506,000 781,000
Interest and debt expense............... 625,000 382,000 1,083,000 522,000
----------- ----------- ----------- -----------
36,531,000 29,044,000 69,557,000 48,925,000
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES.............. 3,077,000 2,498,000 5,922,000 4,638,000
FEDERAL AND STATE INCOME TAXES............ 1,107,000 924,000 2,067,000 1,666,000
----------- ----------- ----------- -----------
NET EARNINGS.............................. $ 1,970,000 $ 1,574,000 $ 3,855,000 $ 2,972,000
=========== =========== =========== ===========
NET EARNINGS PER COMMON SHARE (1)......... $ 0.27 $ 0.22 $ 0.53 $ 0.42
=========== =========== =========== ===========
NET EARNINGS PER COMMON SHARE -- FULLY
DILUTED................................. $ 0.25 $ 0.21 $ 0.50 $ 0.40
=========== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING......... 7,365,000 7,179,000 7,341,000 7,161,000
=========== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING -- FULLY
DILUTED................................. 7,740,000 7,418,000 7,712,000 7,406,000
=========== =========== =========== ===========
</TABLE>
- ---------------
(1) Net earnings per common share outstanding is not materially affected by
common stock equivalents used in the determination of primary earnings per
share.
F-25
<PAGE> 76
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JULY 4, JANUARY 3,
1997 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................... $ 1,827,000 $ 2,412,000
Accounts receivable less allowance for doubtful accounts of
$566,000 and $487,000....................................... 24,249,000 17,912,000
Inventories.................................................... 23,235,000 17,431,000
Prepaid expenses............................................... 2,161,000 1,137,000
Deferred income tax benefit.................................... 2,094,000 2,094,000
------------ -----------
TOTAL CURRENT ASSETS........................................ 53,566,000 40,986,000
INVESTMENTS...................................................... 649,000 3,279,000
OTHER ASSETS
Cost in excess of net assets acquired.......................... 5,882,000 4,472,000
Prepaid pension cost........................................... 2,057,000 2,104,000
Net cash value of life insurance............................... 2,733,000 2,655,000
Other.......................................................... 2,213,000 1,310,000
------------ -----------
12,885,000 10,541,000
PROPERTY, PLANT AND EQUIPMENT
Land........................................................... 742,000 665,000
Buildings and improvements..................................... 14,406,000 13,549,000
Machinery equipment and furniture.............................. 42,077,000 32,589,000
Construction in process........................................ 2,285,000 1,502,000
------------ -----------
59,510,000 48,305,000
Less accumulated depreciation.................................... 23,015,000 21,099,000
------------ -----------
NET PROPERTY, PLANT AND EQUIPMENT.............................. 36,495,000 27,206,000
------------ -----------
TOTAL ASSETS................................................... $103,595,000 $82,012,000
============ ===========
</TABLE>
F-26
<PAGE> 77
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JULY 4, JANUARY 3,
1997 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings.......................................... $ 8,995,000 $ --
Accounts payable............................................... 11,296,000 8,511,000
Accrued compensation and payroll taxes......................... 6,851,000 5,167,000
Other accrued expenses......................................... 3,043,000 1,341,000
Dividends payable.............................................. -- 471,000
Current portion of long-term obligations....................... 1,309,000 1,292,000
Federal and state income taxes................................. 6,000 12,000
------------ -----------
TOTAL CURRENT LIABILITIES................................... 31,500,000 16,794,000
DEFERRED INCOME TAXES............................................ 1,417,000 1,417,000
OTHER NONCURRENT LIABILITIES..................................... 846,000 1,046,000
LONG-TERM OBLIGATIONS, LESS CURRENT PORTION...................... 24,600,000 22,211,000
SHAREHOLDERS' EQUITY
Common stock, par value $.66 2/3 a share:
Authorized -- 10,000,000 shares
Issued -- 7,769,031 and 7,666,011 shares.................... 5,179,000 5,110,000
Additional paid-in capital....................................... 11,832,000 11,065,000
Retained earnings................................................ 31,180,000 27,281,000
Equity adjustment from foreign currency translation.............. (47,000) --
Minimum pension liability, net of tax............................ (74,000) (74,000)
------------ -----------
48,070,000 43,382,000
Less cost of 374,262 treasury shares............................. 2,838,000 2,838,000
------------ -----------
TOTAL SHAREHOLDERS' EQUITY.................................. 45,232,000 40,544,000
------------ -----------
$103,595,000 $82,012,000
============ ===========
</TABLE>
F-27
<PAGE> 78
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JULY 4, JUNE 28,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income.................................................... $ 3,855,000 $ 2,972,000
Adjustments to reconcile net income to cash and cash
equivalents provided by operating activities:
Depreciation and amortization............................ 2,651,000 1,779,000
Write-off of fixed assets................................ 7,000 --
Gain (Loss) on sale of investments/fixed assets.......... (44,000) (16,000)
Increase in supplemental benefit program................. 48,000 49,000
Recognition of pension expense under SFAS 87............. 47,000 --
Stock compensation programs.............................. 62,000 322,000
Change in various allowance accounts..................... 13,000 201,000
(Increase) Decrease in:
Accounts receivable........................................ (3,834,000) (1,345,000)
Inventories................................................ (563,000) (2,675,000)
Prepaid expenses........................................... (976,000) (127,000)
Deferred income taxes...................................... (33,000) (590,000)
Net cash value of life insurance........................... (78,000) (294,000)
Other assets, net.......................................... (645,000) 202,000
Increase (Decrease) in:
Accounts payable........................................... 895,000 1,959,000
Accrued expenses........................................... (1,948,000) 34,000
Federal and state income taxes............................. 26,000 --
Other noncurrent liabilities............................... (262,000) (396,000)
----------- ------------
Net cash (used) provided by Operating Activities......... (779,000) 2,075,000
----------- ------------
Cash Flows from Investing Activities
Investment in API Schmidt-Bretten, net of cash acquired.... (5,927,000) --
Investment in Ketema and Gettys, net of cash acquired...... -- (17,292,000)
Costs related to acquisitions.............................. (446,000) --
Purchases of marketable securities......................... (31,000) (60,000)
Additions to property, plant and equipment................. (4,333,000) (2,872,000)
Proceeds from marketable securities and sale of fixed
assets................................................... 2,758,000 3,846,000
----------- ------------
Net cash (used) provided by Investing Activities......... (7,979,000) (16,378,000)
=========== ============
Cash Flows from Financing Activities
Exercise of stock options..................................... 835,000 586,000
Payments of long-term obligations, including current
maturities................................................. (651,000) (313,000)
Dividends paid................................................ (471,000) (928,000)
Increase in long-term borrowings.............................. 3,011,000 15,216,000
Increase (decrease) in short-term borrowings.................. 5,506,000 (1,927,000)
----------- ------------
Net cash provided (used) by Financing Activities........... 8,230,000 12,634,000
----------- ------------
Effect of Exchange Rate Changes................................. (57,000) --
----------- ------------
Net (Decrease) in Cash and Cash Equivalents..................... (585,000) (1,669,000)
Cash and Cash Equivalents at Beginning of Year.................. 2,412,000 2,486,000
----------- ------------
Cash and Cash Equivalents at End of Period...................... $ 1,827,000 $ 817,000
=========== ============
</TABLE>
F-28
<PAGE> 79
AMERICAN PRECISION INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER ENDED JULY 4, 1997
NOTE A CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Balance Sheet as of July 4, 1997, and the Consolidated
Statement of Earnings, and the Consolidated Statement of Cash Flows for the
periods ended July 4, 1997 and June 28, 1996 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and changes in cash flow at July 4, 1997 and
for all periods presented have been made. The Consolidated Balance Sheet as of
June 28, 1996 includes the assets, liabilities, and resulting goodwill of API
Ketema Inc. ("Ketema") and API Gettys Inc. ("Gettys") acquired as of April 1,
1996 and April 29, 1996, respectively. The Consolidated Balance Sheet as of July
4, 1997 includes the assets, liabilities, and resulting goodwill of API
Schmidt-Bretten GmbH ("Schmidt-Bretten") acquired as of January 31, 1997. The
Consolidated Statements of Earnings and Cash Flows include the results of
Ketema, Gettys, and Schmidt-Bretten since the dates of acquisition.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Generally Accepted Accounting Principles
have been condensed or omitted. It is suggested these condensed consolidated
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's January 3, 1997 Annual Report to
Shareholders.
NOTE B INVENTORIES
It is not practical to determine raw material, work in process, and
finished goods inventories during interim periods.
NOTE C LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
JULY 4, 1997
-----------------------------------------
OUTSTANDING CURRENT LONG-TERM
------------ ---------- ------------
<S> <C> <C> <C>
Industrial Revenue Bonds............................... $12,847,000 $1,120,000 $11,727,000
Supplemental Benefit Program........................... 1,061,000 189,000 872,000
Revolving Credit Debt.................................. 12,001,000 -- 12,001,000
----------- ---------- -----------
$25,909,000 $1,309,000 $24,600,000
=========== ========== ===========
</TABLE>
NOTE D EARNINGS PER SHARE
Net earnings per common share is based on the weighted average number of
common shares outstanding during the respective periods. The effect of common
stock equivalents, consisting of stock options, on net earnings per common share
is not material.
Net earnings per common share-fully diluted is based on the weighted
average number of common shares and common stock equivalents outstanding during
the respective periods.
During the first quarter of 1997, Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," was issued. SFAS No. 128
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
SFAS No. 128 replaces the presentation of primary earnings per share required by
Accounting Principles Board Opinion No. 15, "Earnings Per Share," with a
presentation of basic earnings per share. It also requires dual presentation of
basic and diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator in the basic
F-29
<PAGE> 80
AMERICAN PRECISION INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
earnings per share computation to the numerator and denominator in the diluted
earnings per share computation.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in earnings.
SFAS No. 128 is effective for financial statements for periods ending after
December 15, 1997, including interim periods. Earlier application is not
permitted. However, after the effective date all prior period earnings per share
data presented shall be restated to conform with the provisions of SFAS No. 128.
The Company has considered the potential impact of SFAS No. 128 and has
concluded that the effect of adoption will not have a material effect on
earnings per share.
NOTE E FOREIGN CURRENCY TRANSLATION
The financial statements of subsidiaries outside the United States are
measured using the local currency as the functional currency. Assets, including
goodwill, and liabilities are translated at the rates of exchange at the balance
sheet date. The resultant translation adjustments are included in equity
adjustment from foreign currency translation, a separate component of
shareholders' equity. Income and expense items are translated at average monthly
rates of exchange.
The Company utilizes forward foreign currency exchange contracts to manage
exposures resulting from fluctuations in foreign currency exchange rates on
monetary assets and liabilities denominated in foreign currencies arising from
its operations. Gains and losses on foreign currency transactions are recorded
in income and are not material during the periods presented. The Company does
not engage in foreign currency speculation.
As of January 3, 1997 and July 4, 1997 foreign exchange contracts
outstanding were insignificant.
NOTE F SELECTED SEGMENT DATA
The Company conducts operations in three major industrial classifications:
Heat Transfer Technology, Motion Technologies, and Electronic Components.
Information about the revenues and operating profit of these segments is set
forth below ($000 omitted).
F-30
<PAGE> 81
AMERICAN PRECISION INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JULY 4, 1997 JUNE 28, 1996 JULY 4, 1997 JUNE 28, 1996
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Heat Transfer........................... 23,706 17,201 44,875 27,969
Motion.................................. 12,124 10,648 23,070 18,516
Electronic Components................... 3,742 3,583 7,470 6,896
General Corporate....................... 36 110 64 182
------ ------ ------ ------
Revenues............................. 39,608 31,542 75,479 53,563
====== ====== ====== ======
Operating Profit:
Heat Transfer........................... 2,274 2,186 4,359 3,699
Motion.................................. 1,535 918 2,723 1,651
Electronic Components................... 607 650 1,253 1,115
------ ------ ------ ------
4,416 3,754 8,335 6,465
General Corporate expense, net.......... (714) (874) (1,330) (1,305)
Interest and debt expense............... (625) (382) (1,083) (522)
------ ------ ------ ------
Earnings before income taxes ........... 3,077 2,498 5,922 4,638
====== ====== ====== ======
</TABLE>
NOTE G SUBSEQUENT EVENT
On July 8, 1997, the Company acquired all the outstanding capital stock of
Portescap, a Swiss manufacturer of micro-motors and other precision motion
control products, in exchange for 20,000 shares of Series A Seven Percent (7%)
Cumulative Convertible Preferred Stock with a liquidation value of $21,156,250,
a $5,000,000 exchangeable promissory note, and cash of approximately $3,800,000.
Following approval of certain proposals to be presented at a special shareholder
meeting later this year, the Series A stock and the note will be exchanged for
1,236,337 shares of Series B Seven Percent (7%) Cumulative Convertible Preferred
Stock with a liquidation value of $26,156,250. The Series B stock will be
convertible into 1,538,603 shares of the Company's common stock at $17.00 per
share.
F-31
<PAGE> 82
Report of the Independent Auditors
to the Board of Directors of
PORTESCAP SA, LA CHAUX-DE-FONDS
Consolidated Financial Statements
for the years ended 31 December 1996
(including US GAAP reconciliation)
F-32
<PAGE> 83
REPORT OF THE INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS
We have audited the accompanying consolidated balance sheets of Portescap
SA (the Company) and subsidiaries as of 31 December 1996 and 1995, and the
related consolidated statements of income, cash flows and changes in
shareholder's equity for each of the years in the three-year period ended 31
December 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards promulgated
by the profession in Switzerland and with International Standards on Auditing
issued by the International Federation of Accountants (IFAC), which standards
are substantially equivalent to auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and subsidiaries as of 31 December 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended 31 December 1996, in conformity with International Accounting Standards.
International Accounting Standards vary in certain significant respects
from accounting principles generally accepted in the United States. Application
of accounting principles generally accepted in the United States would have
affected results of operations for the years ended 31 December 1996 and 1995,
and shareholder's equity as of 31 December 1996 and 1995, to the extent
summarized in the section entitled "Summary of Differences Between International
Accounting Standards and United States Generally Accepted Accounting Principles"
to the consolidated financial statements.
KPMG Fides Peat
E. Ittensohn B. DeBlanc
Aarau, 3 June 1997
F-33
<PAGE> 84
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
TCHF TCHF
------ ------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash at banks and on hand.................................................. 3,251 1,540
Debtors.................................................................... 15,411 17,519
Inventories................................................................ 32,464 30,376
------ ------
51,126 49,435
====== ======
FIXED ASSETS
Intangible fixed assets.................................................... 246 280
Financial assets........................................................... 792 821
Tangible fixed assets...................................................... 16,372 17,049
------ ------
17,410 18,150
------ ------
68,536 67,585
====== ======
LIABILITIES
Creditors falling due within one year...................................... 25,226 27,829
Creditors falling due after more than one year............................. 14,964 16,695
Pension and other liabilities.............................................. 222 206
Share capital and reserves................................................. 28,124 22,855
------ ------
68,536 67,585
====== ======
Commitments and contingent liabilities..................................... -- --
</TABLE>
F-34
<PAGE> 85
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
TCHF TCHF TCHF
-------- -------- --------
<S> <C> <C> <C>
NET SALES.................................................. 92,197 85,358 78,638
Cost of sales.............................................. (60,673) (54,323) (52,212)
-------- -------- --------
GROSS PROFIT............................................... 31,524 31,035 26,426
======== ======== ========
Research and development................................... (2,340) (2,018) (2,211)
General and administration................................. (9,990) (11,703) (12,064)
Marketing and sales........................................ (12,287) (11,219) (11,671)
Other operating income..................................... 647 439 363
-------- -------- --------
OPERATING PROFIT........................................... 7,554 6,534 843
Financial income/(charges)................................. (2,039) (2,080) (2,224)
Exchange gains and losses, net............................. (14) 75 12
Taxes...................................................... (1,791) (1,494) (1,461)
-------- -------- --------
NET INCOME................................................. 3,710 3,035 (2,830)
======== ======== ========
</TABLE>
F-35
<PAGE> 86
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
TCHF TCHF TCHF
------ ------ ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Consolidated net income (loss)................................... 3,710 3,035 (2,830)
Depreciation and other amounts written off -- tangible fixed
assets......................................................... 4,282 2,325 2,911
Depreciation and other amounts written off -- intangible fixed
assets......................................................... 34 35 35
Other items...................................................... 84 (64) 40
Changes in working capital:
Inventories...................................................... (1,379) (4,472) 5,056
Debtors.......................................................... 3,247 (2,220) (3,429)
Short term creditors............................................. (3,451) 3,731 (573)
Change in provisions............................................. 8 1 15
------ ------ ------
Total cash provided from operations.............................. 6,535 2,371 1,225
------ ------ ------
INVESTING ACTIVITIES
Purchases of fixed assets........................................ (3,101) (1,690) (2,326)
Purchases of financial assets.................................... -- (131) (1)
Proceeds from sales of fixed assets.............................. 54 106 140
Proceeds from sales of financial assets.......................... 47 187 186
------ ------ ------
Net effect of investing activities............................... (3,000) (1,528) (2,001)
------ ------ ------
FINANCING ACTIVITIES
Principal repayments on long-term loans.......................... (2,192) (1,507) (229)
Increases in long-term loans..................................... 237 250 1,123
------ ------ ------
Net effect of financing activities............................... (1,955) (1,257) 894
------ ------ ------
CHANGES IN CASH AT BANKS AND ON HAND............................. 1,580 (414) 118
Translation differences on cash at banks and on hand............. 131 (207) (123)
------ ------ ------
TOTAL CHANGES IN CASH AT BANKS AND ON HAND....................... 1,711 (621) (5)
====== ====== ======
</TABLE>
F-36
<PAGE> 87
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
SHARE RETAINED RESTRICTED TRANSLATION
CAPITAL EARNINGS RESERVES ADJUSTMENTS TOTAL
TCHF TCHF TCHF TCHF TCHF
------- -------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance at 1 January 1994................ 11,200 12,464 1,081 137 24,882
Net income -- 1994....................... -- (2,830) -- -- (2,830)
Translation differences.................. -- -- -- (745) (745)
Transfers................................ -- (48) 48 -- --
------ ------ ----- ------ ------
Balance at 31 December 1994.............. 11,200 9,586 1,129 (608) 21,307
Net income -- 1995....................... -- 3,035 -- -- 3,035
Translation difference................... -- -- -- (1,487) (1,487)
Transfers................................ -- (19) 19 -- --
------ ------ ----- ------ ------
Balance at 31 December 1995.............. 11,200 12,602 1,148 (2,095) 22,855
Net income -- 1996....................... -- 3,710 3,710
Translation difference................... -- -- -- 1,559 1,559
Transfers................................ -- (19) 19 --
------ ------ ----- ------ ------
Balance at 31 December 1996.............. 11,200 16,293 1,167 (536) 28,124
====== ====== ===== ====== ======
</TABLE>
F-37
<PAGE> 88
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Business
The Group (Portescap Switzerland and its wholly-owned subsidiaries) is
controlled by Portescap SA, La Chaux-de-Fonds, a company formed under the Swiss
Code of Obligations (CO). Portescap SA, in turn, is a subsidiary of Interscan
Holding Ltd., a privately held company formed under the Swiss Code of
Obligations.
The Group is active in manufacturing and selling of micro-motors and
related components for use in the automation, medical, telecommunications,
aviation, computer periferals and instrumentation industries.
Consolidation policy
The Consolidated Balance Sheet, the Consolidated Income Statement, the
Consolidated Statement of Cash Flows, the Consolidated Statement of Changes in
Shareholder's Equity and the related notes constitute the consolidated financial
statements of the Group. The consolidated financial statements have been drawn
up in accordance with International Accounting Standards (IAS).
The financial data of the group companies in which the voting rights
exceeds 50% (subsidiaries) are included in the consolidated financial statements
in full. As of December 31, 1996 the voting rights of all wholly-owned
subsidiaries were not less than 100%. All intercompany balances and
transactions, including intercompany profits on inventory, have been eliminated.
There were no minority interests for the years presented in the consolidated
financial statements.
All amounts contained within these consolidated financial statements are
stated in thousands of Swiss francs (TCHF) unless otherwise indicated.
Foreign currencies
For the purpose of consolidation, assets, provisions and liabilities of
companies whose financial data are denominated in foreign currencies are
translated at the rates of exchange existing at the balance sheet date; income
and expenses are translated at average rates that approximate the exchange rate
at the date of the transaction.
Transactions (income and expenditure) in foreign currencies are accounted
for at the current rates of exchange applicable upon occurrence.
Unless otherwise stated, exchange differences are credited or charged to
income.
Exchange differences relating to the equity value and intercompany
long-term loans of subsidiaries and associated companies, that are in effect an
extension of the parents' net investment, are credited or debited directly to
reserves. Exchange differences relating to trading intercompany balances are
included in net income.
Exchange gains and losses relating to the purchase or sale of goods are
charged to cost of sales or sales revenues on the basis that these are directly
related to those transactions.
General valuation policy
Unless otherwise indicated, assets and liabilities are stated at their
nominal values based on historical costs.
Assets, provisions and liabilities denominated in foreign currencies are
translated at the rates of exchange existing at the balance sheet date.
Taxation
In computing the tax liability, account is taken of taxes due as well as of
future tax liabilities resulting from profits consolidated through 31 December
1996.
F-38
<PAGE> 89
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Deferred tax liabilities arising from temporary differences between the
capital and reserves computed in accordance with the accounting principles and
the equity computed in accordance with tax regulations are calculated based on
current tax rates. Deferred tax liabilities, however, are accrued only if they
are estimated to become payable in the foreseeable future.
When such differences are of a permanent nature, no provision is made for
deferred taxes. In this case it is assumed that the amounts in question will
never have to be paid, due to the continuity of the enterprise or for other
reasons.
Relief for the tax carry-back facilities is taken into account in the year
in which the loss is incurred. Relief arising from the tax carry-forward
facility is taken into account as soon as there is a tax profit against which
the tax loss in question may be offset.
No provisions are made for withholding and other non-recoverable taxes
which would arise for transfers of profit from the subsidiaries to the parent
company on the basis that there is no intention to transfer profits in the next
years.
ASSETS
Debtors
Current assets include debtors which by their nature usually fall due
within one year and loans with a contractual term of one year or less. Debtors
are stated net of provision for bad debts.
Inventories
Stocks of raw materials, consumables, semi-finished and finished products
and trade items are stated at the lower of purchase price/manufacturing cost
(determined using the "first-in first-out" inventory pricing method) or market
and net realizable values respectively.
Adjustments are directly debited to the value of inventories.
Manufacturing cost embody all costs including manufacturing overhead, but
excluding research and development, administrative, selling and financial
expenses. In the valuation of inventories, due account is taken of obsolete
goods.
Tangible fixed assets
Land is stated at cost and other tangible fixed assets at cost less
accumulated depreciation.
The Company capitalizes interest incurred on funds used to construct
tangible fixed assets. Interest capitalized during 1994, 1995 and 1996 was
immaterial.
Depreciation is generally computed using the straight-line method on the
basis of the anticipated economic lives of the assets. For machinery and
equipment this is generally 3 to 10 years and for offices and industrial
buildings 25 to 50 years.
Intangible fixed assets
Patents and trade marks are not capitalized as they result mainly from
internal research and development. In 1993, internal engineering expenses
relating to the industrialisation of a new product line have been capitalised
and are being depreciated, straight-line, over 10 years.
LIABILITIES AND PROVISIONS
Creditors
Liabilities and accrued expenses due within one year are classified as
short term.
F-39
<PAGE> 90
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Pension costs and retirement plans
Most of the subsidiaries operate their own pension schemes, mainly legally
independent from the Group. Generally, they are funded by employees' and
employer's contributions.
The Group adopted the revised IAS 19 for pension plans as of 1 January 1995
and performed actuarial valuations as of this date. The cumulative effect of the
change in accounting principle is disclosed in the notes as a transitional
amount and will be recognised into income over a period not exceeding the
expected remaining working lives of the participating employees.
Provisions
Appropriate provisions are established for warranties based upon estimates
of warranty claims on goods sold through year end.
PROFITS AND LOSSES
Net sales
Net sales correspond to the invoiced amounts for goods delivered and
services rendered to third parties, excluding sales taxes and other similar
charges.
Cost of sales
Cost of sales correspond to manufacturing cost of the products included in
the net sales.
RESEARCH AND DEVELOPMENT ACTIVITIES
Research and development expenses are expensed when incurred. These include
salaries, wages and other related personnel expenses, the cost of materials and
services consumed, the depreciation of equipment and facilities to the extent
they are used for these activities and the overhead and other expenses related
to research and development activities.
F-40
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AT BANKS AND ON HAND
Cash at banks and on hand comprises cash and bank account balances. Of the
total of TCHF 3,251, TCHF 832 were denominated in Swiss francs (1995: TCHF 404).
DEBTORS
Debtors at 31 December 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
------ ------
<S> <C> <C>
Trade receivables.................................................. 12,766 13,665
Other receivables.................................................. 1,612 1,588
Prepaid expenses................................................... 1,033 2,266
------ ------
15,411 17,519
====== ======
</TABLE>
Trade receivables include TCHF 5,632 pledged by Portescap SA, La
Chaux-de-Fonds, under a syndicated loan agreement with Swiss banks.
INVENTORIES
Inventories at 31 December 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
------ ------
<S> <C> <C>
At parent, manufacturing........................................... 25,845 24,718
At Portescap (UK) Ltd, Ringwood, manufacturing..................... 2,446 1,513
At other subsidiaries, selling..................................... 4,173 4,145
------ ------
32,464 30,376
====== ======
</TABLE>
The aforementioned (note 4.2) syndicated loan agreement includes pledges of
a nonidentified amount of work-in-progress owned by Portescap SA, La
Chaux-de-Fonds.
INTANGIBLE FIXED ASSETS
This item represents the remaining unamortized book value of capitalised
internal engineering expenses relating to the industrialisation of a new product
line. Related investments in tangible fixed assets are included under
"industrial equipment". The amount originally capitalized as well as accumulated
depreciation as of 31 December 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
----- ----
<S> <C> <C>
Amount capitalised................................................. 350 350
Accumulated amortization........................................... (104) (70)
---- ---
Net book value..................................................... 246 280
==== ===
</TABLE>
F-41
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FINANCIAL ASSETS
Movements in financial assets were as follows during 1996:
<TABLE>
<CAPTION>
OTHER OTHER
INVESTMENTS LOANS TOTAL
TCHF TCHF TCHF
----------- ---- ----
<S> <C> <C> <C>
Book value at 1 January 1996............................. 48 773 821
Movements in 1996:
Decrease of long term loans.............................. -- (46) (46)
Effect of changes in rates of exchange................... -- 17 17
--
--- ---
Book value at 31 December 1996........................... 48 744 792
== === ===
</TABLE>
F-42
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
TANGIBLE FIXED ASSETS
The movements in fixed assets from 1 January 1995 through 31 December 1996
are as follows:
<TABLE>
<CAPTION>
OFFICE
LAND EQUIPMENT,
AND INDUSTRIAL COMPUTERS, ASSETS UNDER
BUILDINGS EQUIPMENT FURNITURE CONSTRUCTION TOTAL
TCHF TCHF TCHF TCHF TCHF
--------- ---------- --------- ------------ ------
<S> <C> <C> <C> <C> <C>
1995 ROLLFORWARD
Historical cost at 1 January 1995...... 11,812 30,912 5,525 485 48,734
Purchases............................ 16 385 399 373 1,173
Self constructed assets.............. -- 517 -- -- 517
Acquisition value of items sold...... (148) (132) (445) -- (725)
Translation effect................ (334) (1,256) (203) -- (1,793)
------ ------ ----- ----- ------
Historical cost at 31 December 1995.... 11,346 30,426 5,276 858 47,906
------ ------ ----- ----- ------
ACCUMULATED DEPRECIATION
Accumulated depreciation at 1 January
1995................................. 4,369 21,706 4,514 -- 30,589
Ordinary depreciation current year... 198 1,621 506 -- 2,325
Accumulated depreciation of items
sold.............................. (64) (119) (436) -- (619)
Translation effect................ (84) (1,191) (163) -- (1,438)
------ ------ ----- ----- ------
Accumulated depreciation at 31 December
95................................... 4,419 22,017 4,421 -- 30,857
------ ------ ----- ----- ------
Net Book Value at 31 December 1995..... 6,927 8,409 855 858 17,049
====== ====== ===== ===== ======
1996 ROLLFORWARD
Historical cost at 1 January 1996...... 11,346 30,426 5,276 858 47,906
Purchases............................ -- 1,677 507 160 2,344
Self constructed assets.............. -- 755 -- -- 755
Acquisition value of items sold...... -- (112) (606) -- (718)
Translation effect................ 411 340 363 -- 1,114
------ ------ ----- ----- ------
Historical cost at 31 December 1996.... 11,757 33,086 5,540 1,018 51,401
------ ------ ----- ----- ------
ACCUMULATED DEPRECIATION
Accumulated depreciation at 1 January
1996................................. 4,419 22,017 4,421 -- 30,857
Ordinary depreciation current year... 202 3389 466 225 4,282
Accumulated depreciation of items
sold.............................. -- (111) (554) -- (665)
Translation effect................ 20 233 302 -- 555
------ ------ ----- ----- ------
Accumulated depreciation at 31 December
96................................... 4,641 25,528 4,635 225 35,029
------ ------ ----- ----- ------
Net Book Value at 31 December 1996..... 7,116 7,558 905 793 16,372
====== ====== ===== ===== ======
</TABLE>
F-43
<PAGE> 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CREDITORS FALLING DUE WITHIN ONE YEAR
Creditors falling due within one year were as follows as of 31 December
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
------ ------
<S> <C> <C>
Bank loans and overdrafts.......................................... 12,614 12,794
Advances from customers............................................ 94 203
Trade creditors.................................................... 4,747 7,327
Tax liabilities.................................................... 1,753 1,123
Other creditors.................................................... 3,617 2,955
Accrued expenses................................................... 2,401 3,427
------ ------
25,226 27,829
====== ======
</TABLE>
Included in bank loans and overdrafts is an amount of TCHF 750 from a
related party in 1996 and 1995.
Bank loans and overdrafts bear interest at rates ranging from 5.75% to
10.0%.
CREDITORS FALLING DUE AFTER MORE THAN ONE YEAR
Creditors falling due after more than one year were as follows as of 31
December 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
------ ------
<S> <C> <C>
Loans from credit institutions
Mortgage loans................................................... 11,439 11,959
Other long-term loans............................................ 2,175 3,548
Others............................................................. 1,350 1,188
------ ------
14,964 16,695
====== ======
</TABLE>
The principal amounts owed to credit institutions are denominated in Swiss
Francs. Included within other long-term loans is TCHF 1,000 from related
parties.
Land and buildings have been pledged as security for long-term mortgage
loans which are charged interest at amounts ranging from 5.25% to 6.75%. A
breakdown of the book value of mortgage loans by subsidiary follows:
<TABLE>
<CAPTION>
1996 1995
COMPANY NAME MATURITY TCHF TCHF
-------------------------------------------- ------------------------ ------ ------
<S> <C> <C> <C>
Portescap SA, Switzerland................... unlimited, callable 3-6 10,349 10,967
Portescap (UK) Ltd.......................... months through 2008 938 835
Portescap Deutschland GmbH.................. through 1999 152 157
------ ------
11,439 11,959
====== ======
</TABLE>
The other long-term loans are charged interest ranging from 2.0% to 8.0%
per annum and have maturity dates through 2008.
F-44
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PENSION AND OTHER LIABILITIES
Pension and other liabilities were as follows during 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
---- ----
<S> <C> <C>
Pension liabilities.................................................. 222 194
Other................................................................ -- 12
--- ---
222 206
=== ===
</TABLE>
The Group sponsors pension plans according to the national regulations of
the countries in which it operates. Certain plans provide defined benefits on
retirement. For these plans, the benefits are primarily based on years of
service and the employee's compensation for certain periods during the last
years of employment.
As of 1 January 1995 the Group has adopted the revised IAS 19 on Retirement
Benefits Costs. As of this date, actuarial valuations were performed for all
defined benefits plans using the "Projected unit credit" Method. The cumulative
effect of this change in accounting policy resulted in a net excess of projected
benefits obligations over plan assets. This transitional amount of TCHF 2,032
has not been recorded as a liability in the Group's accounts but will be
recognized over a period not exceeding the expected remaining working lives of
the participating employees (estimated at 14 years).
Within the Group, the Swiss pension plan is the most significant defined
benefit plan. This plan is an independent legal fund which is controlled by the
Board of Plan Trustees.
This Board is, in turn, represented by 50% employee representatives and 50%
employer representatives (i.e. parity). Only this Board has the capacity to
institute changes to the plan.
A policy has been established whereby actuarial valuations will be
performed on a three-year basis and rollforwards will be conducted as at 31
December each year during the intervening period.
The assumptions used in the actuarial valuations are according to the
underlying national economic conditions of the respective countries as follows:
<TABLE>
<S> <C>
- Discount rate........................................................... 4.5%
- Expected long-term rates of return on plan assets....................... 5.0%
- Annual cost-of-living increases in pensions............................. 1.5%
- Rates of increases in compensation levels............................... 2.5-3.5%
</TABLE>
Pension costs are funded on an ongoing basis within national regulatory
limitations. By the end of 1995 the Swiss plan, which is the only material
defined benefit plan within the Group, had a positive funding status (i.e. Fair
Value of Plan Assets in excess of the Projected Benefit Obligation). The funded
status of the major defined benefit plans was as follows as of 31 December 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
------- -------
<S> <C> <C>
Projected benefits obligation............................................ (64,936) (62,953)
Plan assets at fair value................................................ 70,330 63,390
------- -------
Plan assets in excess of projected benefit obligation.................... 5,394 437
Unrecognized net gain from past experience different from that assumed... (6,563) (2,086)
Unrecognized net obligation at 1 January 1995 being recognized over 14
years.................................................................. 1,742 1,887
------- -------
Prepaid pension cost..................................................... 573 237
======= =======
</TABLE>
For the years 1996 and 1995, the actual company contributions exceeded the
net periodic pension costs after deducting employee contributions. These excess
amounts totalling TCHF 573 and TCHF 237,
F-45
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
respectively have been established as prepaid assets and then fully provided for
in the same balance sheet position. These amounts are provided for since any
such excess funds are only allowed by law to be used for the benefits of the
plan participants.
Net periodic pension cost and company pension expense for the Group's
significant defined benefit plans consists of the following for the years ended
31 December 1996 and 1995. No comparative figures are available for 1994 as IAS
19 was adopted as of 1 January 1995:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
------ ------
<S> <C> <C>
Service costs...................................................... 2,923 2,776
Interest cost on PBO............................................... 2,750 2,653
Actual return on plan assets....................................... (3,077) (2,846)
Net amortization and deferral...................................... 145 145
------ ------
Net periodic pension cost.......................................... 2,741 2,728
====== ======
</TABLE>
In Switzerland, the pension plan calls for both the employees and the
employer to make contributions to the pension plan. In order to arrive at the
pension expense recorded in the income statement, it is necessary to deduct
these employee contributions which amounted to TCHF 1,230 and TCHF 1,186 for the
years 1996 and 1995, respectively.
Total costs recognized in conjunction with plans classified as defined
contributions plans amounted to TCHF 229 and TCHF 218 during 1996 and 1995,
respectively.
SHARE CAPITAL AND RESERVES
The outstanding share capital as of 31 December 1996 and 1995 amounted to:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
------ ------
<S> <C> <C>
The share capital is structured as follows:
11,000 shares with a nominal value of CHF 500.................... 5,500 5,500
57,000 shares with a nominal value of CHF 100.................... 5,700 5,700
------ ------
Nominal value of share capital..................................... 11,200 11,200
====== ======
</TABLE>
The voting right is based on the number of shares.
The consolidated statement of changes in shareholder's equity reflects the
movements in the other components of shareholder's equity.
CONTINGENT LIABILITIES
Transicoil Inc., which was formerly owned by Portescap U.S. Inc. an
indirect wholly-owned subsidiary of the Company, was notified in 1987 that the
real estate in the United States on which its operations were located was
nominated for inclusion on the U.S. Environmental Protection Agency (EPA)
National Priorities List of hazardous waste sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA). In 1988,
Portescap U.S. Inc., as well as Transicoil, Eagle-Picher Industries, Inc. (the
owner of Transicoil at that time), other prior owners and the then owner of the
site, were named by the EPA as "potentially responsible parties" (PRPs) under
CERCLA which imposes joint and several liability on each PRP for the cleanup of
the site. Portescap U.S. Inc. denied liability and denied that it was a proper
PRP. An investigation of the site, performed by independent consultants at the
request of the EPA, revealed the presence of contamination. In 1989,
Eagle-Picher, Transicoil and the EPA entered into an administrative consent
order, pursuant to which Eagle-Picher and Transicoil agreed to prepare a
Remedial Investigation Report and a Feasibility Study of the site. However, in
1991, prior to completion of either the Report or the Study, Eagle-Picher and
Transicoil filed for bankruptcy and were subsequently discharged from any
liability for environmental contamination at the site. In mid-1995, Portescap
U.S. Inc. agreed in principle with one of
F-46
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
the prior owners and operators of the site to pay, on an equal shares basis, up
to $15,000 toward installation of drinking water filtration systems at several
homes in the vicinity of the site. In August 1995, the EPA issued a unilateral
order requiring certain prior and present owners and operators of the site to
undertake various remedial actions. The EPA, however, did not name Portescap
U.S. Inc. as a party to that order, although it subsequently served Portescap
U.S. Inc. with a formal request for information concerning its past relationship
with Transicoil and the Transicoil site. In October 1995, Portescap U.S. Inc.
received notice of an indemnification claim asserted against it by a prior owner
of the site under a sublease for a portion of the site. Portescap U.S. Inc.
informed the entity that asserted the indemnification claim that it denies
liability under that claim and that it will vigorously defend itself against
that claim. In early 1996 the EPA released the Remedial Investigation Report
which indicated the presence and nature of contamination at the site. As of
December 31, 1996, neither the ultimate outcome of the various disputes relating
to environmental conditions at the site nor the costs necessary to remediate the
site could be determined. Accordingly, no provision for any material liability
that may result upon the final outcome has been recorded in the accompanying
consolidated financial statements.
In addition, the Group assumes contingent liabilities emanating from the
ordinary conduct of its business, such as liabilities from the discount of
bills, liabilities from product warranty as well as liabilities resulting from
rental and lease agreements.
AMOUNTS COMMITTED FOR FUTURE EXPENDITURE
The Group's total commitment under non-cancellable operating leases are as
follows as of 31 December 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
---- ----
<S> <C> <C>
Operating leases which expire:
Within one year.................................................... 354 431
Within two to five years........................................... 340 461
In more than five years............................................ 8 8
--- ---
702 900
=== ===
</TABLE>
NET SALES
Net sales consist principally of products manufactured by Portescap. The
geographical break down of net sales is as follows for the years ended 31
December 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
TCHF TCHF TCHF
------ ------ ------
<S> <C> <C> <C>
Switzerland.............................................. 11,530 10,974 9,368
Germany.................................................. 20,098 20,324 18,350
France................................................... 8,184 8,112 7,807
United Kingdom........................................... 13,080 10,955 10,713
Sweden................................................... 1,935 1,832 1,617
Other EU countries....................................... 11,084 8,996 6,713
Other non EU european countries.......................... 852 1,036 2,481
United States of America, Canada, Mexico................. 17,798 14,926 15,053
Other America............................................ 7 40 116
Japan.................................................... 6,035 6,692 5,641
Other countries.......................................... 1,594 1,471 779
------ ------ ------
92,197 85,358 78,638
====== ====== ======
</TABLE>
OTHER OPERATING INCOME
Other operating income is derived essentially from shipping and insurance
invoiced to customers.
F-47
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FINANCIAL INCOME AND CHARGES
Financial income and charges amounted to the following for the years ended
31 December 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
TCHF TCHF TCHF
------ ------ ------
<S> <C> <C> <C>
Financial income......................................... 55 104 67
Discounts obtained....................................... 21 26 9
Interest charges......................................... (1,746) (1,794) (1,966)
Discounts granted to customers........................... (354) (342) (319)
Other financial charges.................................. (15) (74) (15)
------ ------ ------
(2,039) (2,080) (2,224)
====== ====== ======
</TABLE>
EXCHANGE GAINS AND LOSSES
Exchange gains and losses included in income for the years ended 31
December 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
TCHF TCHF TCHF
---- ---- ----
<S> <C> <C> <C>
Exchange gains.............................................. 27 77 32
Exchange losses............................................. (41) (2) (20)
--
--- ---
(14) 75 12
=== == ===
</TABLE>
TAXES
The detail of income tax expense is as follows for the years ended 31
December 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
TCHF TCHF TCHF
----- ----- -----
<S> <C> <C> <C>
Capital taxes............................................... 181 119 140
Taxes on current profits.................................... 1,541 1,357 1,225
Non-recoverable withholding taxes and other................. 69 18 96
----- ----- -----
1,791 1,494 1,461
===== ===== =====
</TABLE>
Accumulated tax loss carry-forwards from own and acquired units have
developed as follows:
<TABLE>
<CAPTION>
TAX LOSS ESTIMATED
CARRY-FORWARDS TAX SAVINGS
TCHF TCHF
-------------- -----------
<S> <C> <C>
31 December 1994............................................ 9,236 2,492
used in 1995................................................ (3,801) (1,057)
------ ------
31 December 1995............................................ 5,435 1,435
used in 1996................................................ (2,023) (475)
------ ------
31 December 1996............................................ 3,412 960
====== ======
</TABLE>
These tax losses have not been recognized as a debit to deferred tax as
their recovery is not assured beyond a reasonable doubt. These loss
carry-forwards are expiring through 2001.
The overall anticipated income tax rate for the Portescap Group is 34%. The
effective income tax rate for 1996 and 1995 amounted to 28% and 30%,
respectively. The main reason for the difference between the anticipated rate
and the effective rates has to do with the ability of the Group to utilize tax
loss carryforwards during 1996 and 1995 as well as the inclusion of certain
items of revenue and expense in the accounting income that do not coincide with
the period in which they are included in taxable income. The income tax expense
in 1994 relates mainly to taxable income realised in the foreign subsidiaries.
F-48
<PAGE> 99
LIST OF SUBSIDIARIES OF PORTESCAP SA, LA CHAUX-DE-FONDS, AT 31 DECEMBER 1996
<TABLE>
<S> <C> <C>
Name of subsidiary Location % held
Portescap International SA La Chaux-de-Fonds, Switzerland 100
Portescap (UK) Ltd. Ringwood, UK 100
G.J. Harris Ltd. (dormant) Ringwood, UK 100
Portescap U.S. Inc. Hauppauge, USA 100
Portescap Deutschland GmbH Pforzheim, Germany 100
Portescap France S.A. Creteil, France 100
Portescap Japan Ltd. Tokyo, Japan 100
Portescap Scandinavia AB Stockholm, Sweden 100
Portescap Polska Sp.zo.o. Warszawa, Poland 100
</TABLE>
SUMMARY OF DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
DESCRIPTION OF DIFFERENCES
A description of the accounting principles that differ in certain
significant respects from United States generally accepted accounting principles
("US GAAP") follows:
Taxation
The Group identifies and considers all temporary differences between the
financial and tax bases of assets and liabilities in its calculations of
deferred taxes. However, under the present IAS 12, deferred tax assets and
liabilities are only established for those differences which are expected to
reverse in the foreseeable future (typically defined as three years). Deferred
tax assets are established for deductible temporary differences or on tax loss
carryforwards for which there is a reasonable expectation of realization. US
GAAP requires deferred tax assets and liabilities be established on a
comprehensive basis on substantially all such temporary differences based upon
tax rates expected to be in effect when the temporary differences reverse. A
valuation allowance is established for any deferred tax asset for which
realization is not likely.
Goodwill
The purchase of the Group in 1990 by an outside investor resulted in an
excess of cost over the net assets of the Group on the acquisition date. Under
IAS 22, such excess is not required to be reported on the financial statements
of the acquired entity, and until 1995, would be written off directly by the
parent company to equity. Reporting guidelines of the Securities and Exchange
Commission require that on stand-alone financial statements of an acquired
entity such excess be capitalized and presented as excess fair market value of
assets acquired and the remainder as goodwill and that both be appropriately
depreciated and amortized, respectively. The goodwill is amortized using the
straight-line method over a period of 20 years and the necessity for write-downs
due to a permanent impairment in value is also considered. The excess fair
market value is depreciated on a straight-line basis over 40 years in line with
the Group's depreciation policy.
Intangible Assets
In 1993, the Group capitalized certain manufacturing development costs
associated with the commercialization of a new product line. Under US GAAP,
these costs would qualify as research and development costs for which
capitalization is not permitted. Accordingly, the applicable end of year balance
and related amortization are reversed.
Retirement Benefit Plans
As mentioned in note 9 to these financial statements, the Company adopted
IAS 19 in accounting for its retirement benefit plans beginning 1 January 1995.
In addition, the project unit credit method required by FAS 87 was also used in
calculating the pension liability. The transition amount as of the adoption date
is
F-49
<PAGE> 100
SUMMARY OF DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- CONTINUED
being amortized over the expected future service periods of the employees from 1
January 1995. US GAAP would have required that FAS 87 be adopted as of 1 January
1989. An adjustment is, therefore, required to reflect the amortization of the
transition liability as if FAS 87 had been applied from 1 January 1989.
Numerical reconciliation
Application of US GAAP would have the following effect on shareholder's
equity and net income as of and for the years ended 31 December 1996 and 1995:
Effect on net income
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
----- -----
<S> <C> <C>
Net income under IAS as reported..................................... 3,710 3,035
Increase (decrease) for:
Deferred taxes....................................................... (835) (920)
Purchase accounting -- pushdown Goodwill............................. (758) (759)
Excess of fair market value of fixed assets........................ (521) (521)
Capitalization of intangible assets.................................. 34 35
Retirement Benefit Plans............................................. 336 238
Tax effect of U.S. GAAP adjustments.................................. 45 74
----- -----
Net income in accordance with U.S. GAAP.............................. 2,011 1,182
===== =====
</TABLE>
Effect on shareholder's equity
<TABLE>
<CAPTION>
1996 1995
TCHF TCHF
------ ------
<S> <C> <C>
Shareholder's equity as reported in IAS accounts................... 28,124 22,855
Increase (decrease) for:
Deferred taxes..................................................... 1,331 2,166
Purchase accounting -- pushdown Goodwill........................... 10,622 11,380
Excess of fair market value of fixed assets...................... 8,827 9,348
Capitalization of intangible assets................................ (246) (280)
Retirement Benefit Plans........................................... (296) (632)
Tax effect of U.S. GAAP adjustments................................ (2,486) (2,531)
------ ------
45,876 42,306
====== ======
</TABLE>
F-50
<PAGE> 101
APPENDIX A
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
BY AND AMONG
INTER SCAN HOLDING LTD.,
PORTESCAP
AND
API PORTESCAP INC.,
AMERICAN PRECISION INDUSTRIES INC.
DATED JULY 3, 1997
<PAGE> 102
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
RECITALS ............................................................................... 1
AMENDMENT AND RESTATEMENT OF INITIAL AGREEMENT ......................................... 1
TERMS OF THIS AGREEMENT ................................................................ 1
ARTICLE I. Purchase and Sale of the Shares ............................................ 1
1.1 Purchase Price................................................................ 1
1.2 Payment of the Purchase Price................................................. 1
(a) Delivery of Preferred Stock, Exchangeable Promissory Note and Cash...... 1
(b) Exchange Rate for Calculation of Shares of Preferred Stock and Principal
Amount of Note........................................................ 2
ARTICLE II. Representations and Warranties ............................................ 2
2.1 Representations and Warranties of Inter Scan.................................. 2
(a) Corporate Standing and Authority; Binding Agreement..................... 2
(b) Capitalization of the Company........................................... 2
(c) Title to Stock.......................................................... 3
(d) Directors and Officers.................................................. 3
(e) Absence of Conflicting Agreements or Required Consents.................. 3
(f) Financial Statements.................................................... 3
(g) Securities Law Compliance............................................... 3
(h) Lack of Knowledge of Misrepresentations................................. 4
(i) Truth of Representations................................................ 4
2.2 Representations and Warranties of the Company................................. 4
(a) Subsidiaries' Corporate Standing and Authority; Binding Agreement....... 4
(b) Title to Subsidiaries' Stock............................................ 4
(c) Corporate Records....................................................... 4
(d) Liabilities............................................................. 4
(e) Taxes................................................................... 4
(f) Inventories............................................................. 5
(g) Non-Infringement of Patents, Trademarks and Other Intellectual
Property.............................................................. 5
(h) Operations and Use of Properties........................................ 5
(i) Licenses................................................................ 6
(j) Insurance............................................................... 6
(k) Environmental Matters................................................... 6
(l) Receivables............................................................. 7
(m) Employees and Labor Laws................................................ 7
(n) Product Labeling and Product Liability.................................. 7
(o) Validity and Existence of Agreements.................................... 7
(p) Employee Benefit Plans.................................................. 8
(q) Company Employee Benefit Plans.......................................... 8
(r) Related Entities........................................................ 10
(s) Multiemployer Plans..................................................... 11
(t) Capitalized Leases...................................................... 11
(u) Guaranties.............................................................. 11
(v) Litigation.............................................................. 11
(w) Management Personnel.................................................... 11
(x) Absence of Changes...................................................... 11
(y) Delivery of Exhibits.................................................... 12
(z) No Side Agreements...................................................... 12
(aa) Customers............................................................... 12
</TABLE>
i
<PAGE> 103
<TABLE>
<CAPTION>
PAGE
--------
<C> <S> <C> <C>
(bb) Suppliers............................................................... 12
(cc) Title to Assets......................................................... 12
(dd) Machinery and Equipment................................................. 12
(ee) Truth of Representations................................................ 12
2.3 Representations and Warranties of API Portescap............................... 12
(a) Corporate Standing and Authority........................................ 12
(b) Capitalization of API................................................... 13
(c) Directors and Officers.................................................. 13
(d) Absence of Conflicting Agreements or Required Consents.................. 13
(e) Financial Statements.................................................... 13
(f) API Subsidiaries' Corporate Standing and Authority; Binding Agreement... 13
(g) Title to API Subsidiaries' Stock........................................ 14
(h) Corporate Records....................................................... 14
(i) Liabilities............................................................. 14
(j) Taxes................................................................... 14
(k) Inventories............................................................. 14
(l) Non-Infringement of Patents, Trademarks and Other Intellectual
Property.............................................................. 14
(m) Operations and Use of Properties........................................ 15
(n) Licenses................................................................ 15
(o) Insurance............................................................... 15
(p) Environmental Matters................................................... 15
(q) Receivables............................................................. 16
(r) Employees and Labor Laws................................................ 16
(s) Product Labeling and Product Liability.................................. 16
(t) Validity and Existence of Agreements.................................... 16
(u) Employee Benefit Plans.................................................. 17
(v) Related Entities........................................................ 19
(w) Multiemployer Plans..................................................... 20
(x) Capitalized Leases...................................................... 20
(y) Guaranties.............................................................. 20
(z) Litigation.............................................................. 20
(aa) Management Personnel.................................................... 20
(bb) Absence of Changes...................................................... 20
(cc) Delivery of Exhibits.................................................... 21
(dd) No Side Agreements...................................................... 21
(ee) Customers............................................................... 21
(ff) Suppliers............................................................... 21
(gg) Title to Assets......................................................... 21
(hh) Machinery and Equipment................................................. 21
(ii) Truth of Representations................................................ 21
(jj) Securities Law Compliance............................................... 21
ARTICLE III. Certain Covenants of Inter Scan, the Company and Subsidiaries ... 22
3.1 Negative Covenants of Inter Scan, the Company and Subsidiaries................ 22
3.2 Affirmative Covenants of Inter Scan, the Company and Subsidiaries............. 23
ARTICLE IV. Covenants of API ... 23
4.1 Affirmative Covenants of API.................................................. 23
4.2 Additional Covenants of API................................................... 24
</TABLE>
ii
<PAGE> 104
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ARTICLE V. Closing .................................................................... 24
5.1 Conditions to Inter Scan's Obligation to Close................................ 24
(a) Representations, Warranties and Covenants............................... 24
(b) No Litigation........................................................... 25
(c) Purchase Price and Payment of Debt to Affiliates........................ 25
(d) Shareholder and Registration Agreements................................. 25
(e) Appointment of Inter Scan's Representative to API's Board............... 25
5.2 Conditions to API Portescap's Obligation to Close............................. 25
(a) Representations, Warranties and Covenants............................... 25
(b) No Litigation........................................................... 25
(c) Conveyances............................................................. 25
(d) Resignations and Releases............................................... 25
(e) Shareholder and Registration Agreements................................. 25
5.3 Time and Place................................................................ 25
5.4 Best Efforts to Satisfy Conditions............................................ 26
5.5 Waiver of Conditions.......................................................... 26
5.6 Termination of Agreement...................................................... 26
5.7 Procedure Upon Termination.................................................... 26
ARTICLE VI. Actions after the Closing ................................................. 27
6.1 Further Assurances............................................................ 27
6.2 HSR Act....................................................................... 27
ARTICLE VII. Non-Competition Agreements ............................................... 27
7.1 Non-Competition............................................................... 27
ARTICLE VIII. Taxes ................................................................... 28
8.1 Liability for Taxes........................................................... 28
(a) Taxable Periods Ending on or before the Closing Date.................... 28
(b) Taxable Periods Commencing on or after the Closing Date................. 28
(c) Definition of "Taxes.".................................................. 28
8.2 Refunds or Credits............................................................ 28
8.3 Contests...................................................................... 29
8.4 Mutual Cooperation............................................................ 30
8.5 Covenants and Agreements...................................................... 30
(a) Company's Obligation to File Returns.................................... 30
(b) API's Obligation to File Returns........................................ 30
8.6 Tax Sharing Agreement......................................................... 30
ARTICLE IX. Indemnification ........................................................... 30
9.1 Expiration of Representations and Warranties.................................. 30
9.2 Indemnification by Inter Scan................................................. 31
9.3 Indemnification by API Portescap.............................................. 31
9.4 Claims........................................................................ 31
9.5 Limitations on Indemnification................................................ 31
ARTICLE X. Management of the Company and Subsidiaries ................................. 32
10.1 Appointment of API as Manager................................................. 32
10.2 Major Decisions............................................................... 33
</TABLE>
iii
<PAGE> 105
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ARTICLE XI. Miscellaneous ............................................................. 33
11.1 Expenses...................................................................... 33
11.2 Execution in Counterparts..................................................... 33
11.3 Notices....................................................................... 34
11.4 Severability.................................................................. 34
11.5 Titles and Headings........................................................... 34
11.6 Successors and Assigns; No Third Party Beneficiaries.......................... 34
11.7 Incorporation of Exhibits..................................................... 35
11.8 Brokers and Finders........................................................... 35
11.9 Entire Agreement; Waivers and Amendments...................................... 35
11.10 Announcements................................................................. 35
11.11 Construction.................................................................. 35
11.12 Governing Law................................................................. 35
11.13 References.................................................................... 35
Signatures ............................................................................. 36
API Agreement, Guaranty and Representations and Warranties ............................. 36
</TABLE>
iv
<PAGE> 106
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
This AMENDED AND RESTATED STOCK PURCHASE AGREEMENT (this "Agreement") dated
July 3, 1997, is by and among INTER SCAN HOLDING LTD., a Swiss corporation
("Inter Scan"), PORTESCAP, a Swiss corporation (the "Company"), AMERICAN
PRECISION INDUSTRIES INC., a Delaware corporation ("API") and API PORTESCAP
INC., a New York corporation ("API Portescap").
RECITALS:
A. Inter Scan is the owner of all of the issued and outstanding capital
stock of the Company;
B. API Portescap is a wholly owned subsidiary of API;
C. Inter Scan desires to sell to API Portescap, and API Portescap desires
to purchase all of the issued and outstanding capital stock of the Company from
Inter Scan;
D. Inter Scan, the Company, API and API Portescap have entered into a Stock
Purchase Agreement dated as of April 11, 1997 (the "Initial Agreement") which
provides for Inter Scan's sale of all of the issued and outstanding capital
stock of the Company to API Portescap; and
E. Inter Scan, the Company, API and API Portescap desire to amend the
Initial Agreement in certain respects and to restate the Initial Agreement, as
so amended.
NOW, THEREFORE, in consideration of the premises and mutual terms,
conditions and covenants set forth herein and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, Inter
Scan, API Portescap, API and the Company hereby agree as follows:
AMENDMENT AND RESTATEMENT
OF INITIAL AGREEMENT
Inter Scan, the Company, API and API Portescap hereby amend and restate, as
amended, the Initial Agreement in its entirety. The Initial Agreement, as so
amended and restated, is hereinafter referred to as this "Agreement." This
Agreement, with the Exhibits referred to herein and attached hereto, hereby
replaces and supersedes the Initial Agreement, with the Exhibits referred to
therein and attached thereto, in its entirety. The Initial Agreement and all
Exhibits thereto, as replaced and superseded by this Agreement, is hereby
rendered null and void and of no force and effect, and no party to this
Agreement shall have any rights or obligations under the Initial Agreement.
TERMS OF THIS AGREEMENT
ARTICLE I.
PURCHASE AND SALE OF THE SHARES
1.1 Purchase Price. On the terms and subject to the conditions set forth
in this Agreement, on the Closing Date (as hereinafter defined), Inter Scan
shall sell, and API Portescap shall purchase all of the Shares (as defined
below) free and clear of all liens, claims and encumbrances. As consideration
for the Shares, API Portescap shall pay Inter Scan a total consideration of
Forty-three million (43,000,000) Swiss francs ("CHF") (the "Purchase Price"),
payable in accordance with Section 1.2 below.
1.2 Payment of the Purchase Price.
(a) Delivery of Preferred Stock, Exchangeable Promissory Note and
Cash. The Purchase Price shall be payable to Inter Scan as follows:
(i) API or API Portescap shall deliver to Inter Scan on the Closing
Date 20,000 shares of API's Series A seven percent (7%) cumulative
convertible preferred stock which shall have (A) an
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aggregate liquidation value of $21,156,250 (U.S. dollars) (calculated in
accordance with Section 1.2(b) below), and (B) the other rights and
privileges as described on Exhibit 1.2(a)(i) hereto (the "Series A
Preferred Stock"), including the right and obligation as set forth in
this Agreement to exchange the Series A Preferred Stock for API's Series
B seven percent (7%) cumulative convertible preferred stock (the "Series
B Preferred Stock") which shall contain the rights and privileges
described in Exhibit 1.2(a)(i) hereto;
(ii) API or API Portescap shall deliver to Inter Scan on the
Closing Date an exchangeable promissory note in the principal amount of
$5,000,000 (U.S. dollars) which will be exchangeable for shares of API's
Series B Preferred Stock, if and when such Series B Preferred Stock is
authorized by API's shareholders, and which shall be in the form of
Exhibit 1.2(a)(ii) hereto (the "Note"); and
(iii) API or API Portescap shall pay Inter Scan on the Closing Date
in Swiss francs the amount of 5,500,000 CHF in immediately available
funds by wire transfer to an account which shall be designated by Inter
Scan not less than two business days prior to the Closing Date.
(b) Exchange Rate for Calculation of Shares of Preferred Stock and
Principal Amount of Note. The number of shares and liquidation value of
Preferred Stock to be delivered pursuant to Section 1.2(a)(i) above and the
principal amount of the Note to be delivered pursuant to Section 1.2(a)(ii)
above has been calculated based upon an agreed to currency exchange rate of
a Swiss franc equal to $.6975 U.S. dollar.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of Inter Scan. Inter Scan represents
and warrants to API Portescap that:
(a) Corporate Standing and Authority; Binding Agreement. Each of
Inter Scan and the Company is a corporation duly organized and validly
existing under the laws of Switzerland and has full corporate power to own
all of its properties and assets and to conduct its business as it is now
being conducted. The execution of this Agreement and consummation of the
transactions contemplated herein will not violate any provision of the
Company's or Inter Scan's Articles of Incorporation or By-laws, and the
Company and Inter Scan have obtained all necessary authorization and
approval from their respective Boards of Directors and shareholders (if
required) for the execution of this Agreement and the consummation of the
transactions contemplated hereby. This Agreement is a legal, valid and
binding agreement of the Company and Inter Scan enforceable against each of
them in accordance with its terms, subject to the laws of bankruptcy,
insolvency and moratorium and other laws or equitable principles generally
affecting creditors' rights. Complete and correct copies of the Articles of
Incorporation and By-Laws of the Company and Inter Scan have been made
available to API.
(b) Capitalization of the Company. The capitalization of the Company
consists of 57,000 registered shares and 11,000 bearer shares (the "Common
Stock"); and Inter Scan owns all of the shares of the Common Stock (the
shares of Common Stock owned by Inter Scan are referred to as the
"Shares"), which are the only issued and outstanding securities of the
Company and all of which are duly authorized, validly issued and
outstanding, fully paid and non-assessable. The Company has no other class
of stock authorized or outstanding and has not issued any profit sharing
certificates. No shares of Common Stock and no profit sharing certificates
of the Company have been reserved for any purpose. There are no outstanding
securities of the Company that are convertible into shares of Common Stock.
Except for API Portescap's rights hereunder, there are no options,
warrants, calls, commitments, rights or understandings of any character to
purchase or otherwise acquire from the Company or Inter Scan any shares of
Common Stock, or any convertible security or other security issued or to be
issued by the Company. Except as disclosed in Exhibit 2.1(b) hereto, the
Company has no direct or indirect equity interest in and has not made
advances to any corporation, association, partnership, joint venture or
other entity (each such entity listed on Exhibit 2.1(b) hereinafter
referred to as a "Subsidiary" and such
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entities referred to collectively as "Subsidiaries"). Except for qualifying
shares held by directors, no party, other than the Company and the
Subsidiaries, has or is entitled to obtain any direct or indirect equity
interest in any of the Subsidiaries.
(c) Title to Stock. Inter Scan has good and marketable title to all
of the Shares, free and clear of all liens, claims and encumbrances. Upon
consummation of the transactions contemplated hereby, API Portescap will
acquire good and marketable title to the Shares, free and clear of all
liens, claims and encumbrances.
(d) Directors and Officers. Attached hereto as Exhibit 2.1(d) is a
list of all directors and officers of the Company and each Subsidiary.
(e) Absence of Conflicting Agreements or Required Consents. The
execution, delivery and performance of this Agreement by the Company and
Inter Scan do not and will not: (i) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to the Company, any
Subsidiary or Inter Scan or by which any of them is bound or affected, (ii)
result in any breach of or constitute a default under any note, bond,
mortgage, indenture, lease, license, franchise or other instrument or
obligation to which the Company, any Subsidiary or Inter Scan is a party,
or (iii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority,
domestic or foreign, or any person or entity not a party to this Agreement
(except for such filings as may be required under the Securities Exchange
Act of 1934 and applicable requirements if any, arising under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder, collectively the "HSR Act",
in connection with any conversion of the Preferred Stock into shares of API
common stock).
(f) Financial Statements. The Company and Inter Scan have furnished
API with: (i) the Company's and each Subsidiary's income tax returns for
the years ended December 31, 1993, 1994 and 1995; (ii) the Company's
consolidated financial statements as at December 31, 1993, 1994, 1995 and
1996, and for the years then ended audited by KPMG Fides Peat (the "Year
End Financial Statements"); and (iii) interim balance sheets and statements
of profit and loss and supporting schedules of expenses for the twelve
month period ended December 31, 1996 and for each elapsed calendar month
since December 31, 1996 through the Closing (except that the Company has
provided an interim financial statement for the 2 month period of January
and February of 1997, rather than a separate statement for each such month)
prepared by the Company and each Subsidiary from its books and records (the
"Interim Financial Statements") (the Interim Financial Statements and the
Year End Financial Statements are collectively referred to as the
"Financial Statements"). The Financial Statements have been or will be, as
the case may be, prepared in accordance with International Accounting
Standards (the "Accounting Principles") consistently applied throughout the
periods indicated. The Financial Statements fairly present or will fairly
present, as the case may be, the results of the operations of the Company
and each Subsidiary and the Company's and each Subsidiary's financial
position for the periods indicated except, with respect to the Interim
Financial Statements, for non-material changes resulting from normal,
non-material year-end adjustments.
(g) Securities Law Compliance. Inter Scan acknowledges that the
Series A and Series B Preferred Stock, the Note and the API common stock
issuable upon the conversion of the Series A and Series B Preferred Stock,
has not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or under any state or foreign securities laws. Inter
Scan is acquiring the Series A and Series B Preferred Stock, the Note and
the API common stock issuable upon the conversion of the Series A and
Series B Preferred Stock, solely for investment, with no present intention
to distribute any of such securities to any person. Inter Scan will not
sell or otherwise dispose of any of the Series A and Series B Preferred
Stock, the Note and the API common stock issuable upon the conversion of
the Series A and Series B Preferred Stock, except in compliance with the
registration requirements or exemption provisions under the Securities Act
and the rules and regulations promulgated thereunder and any other
applicable securities laws.
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(h) Lack of Knowledge of Misrepresentations. Inter Scan is not aware
of any untrue statement of a material fact in the representations and
warranties set forth in Section 2.2 below; and it is not aware of any
omission to state any material fact necessary to make the statements
contained in Section 2.2 not misleading.
(i) Truth of Representations. On the date of this Agreement and on
the date of the Closing, no representation or warranty of Inter Scan in
this Agreement, nor any written statement or certificate executed by Inter
Scan and furnished or to be furnished to API Portescap or API pursuant to
this Agreement or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary to make the statements
contained therein not misleading.
2.2 Representations and Warranties of the Company. The Company represents
and warrants (except that, with respect to the Subsidiaries, such
representations and warranties are given to the best of its knowledge) to API
Portescap that:
(a) Subsidiaries' Corporate Standing and Authority; Binding
Agreement. Each of the Subsidiaries is a corporation duly organized and
validly existing under the laws of the jurisdiction identified on Exhibit
2.2(a) hereto, has full corporate power to own all of its properties and
assets and to conduct its business as it is now being conducted. The
execution of this Agreement and the consummation of the transactions
contemplated herein will not violate any provision of any Subsidiary's
Articles of Incorporation or By-Laws. Complete and correct copies of the
Articles of Incorporation and By-Laws of each Subsidiary have been made
available to API.
(b) Title to Subsidiaries' Stock. The Company has good and marketable
title to all outstanding shares of the capital stock of Portescap
International SA, and Portescap International SA has good and marketable
title to all of the outstanding shares of the capital stock of the other
Subsidiaries, free and clear of all liens, claims and encumbrances.
(c) Corporate Records. The Company's and each Subsidiary's corporate
record books are complete, accurate and up to date with all necessary
signatures and set forth all meetings and actions taken by its shareholders
and directors. The Company's and each Subsidiary's stock transfer books and
stock ledgers are each complete, accurate and up to date with all necessary
signatures and set forth all stock and securities issued, transferred or
surrendered, together with evidence of any required stock transfer tax
information in conformity with all applicable requirements. The Company and
each Subsidiary makes and keeps accurate books and records reflecting its
assets and maintains internal accounting controls that provide reasonable
assurance that (i) transactions are executed with management's
authorization, (ii) transactions are recorded as necessary to permit
preparation of the Company's and each Subsidiary's financial statements and
to maintain accountability for its assets, (iii) access to its assets is
permitted only in accordance with management's authorization, and (iv) the
recorded accountability of its assets other than property, plant or
equipment is compared with existing assets at reasonable intervals.
(d) Liabilities. There are no liabilities or obligations of the
Company or any Subsidiary of any kind, whether accrued, absolute,
contingent or otherwise, except (i) as indicated in the Financial
Statements, (ii) as disclosed on Exhibit 2.2(d) hereto, (iii) those
incurred as the result of API's management of the Company pursuant to
Article X below or (iv) liabilities or obligations arising since the date
of the most recent Financial Statement which (A) were incurred in the
ordinary and usual course of the Company's or Subsidiary's business, (B)
individually and in the aggregate do not exceed CHF 100,000 and CHF
200,000, respectively and (C) are in types and amounts consistent with the
Company's or Subsidiary's past practices and experience.
(e) Taxes. The Company and each Subsidiary has filed all tax returns
and reports which are required by law to be filed and has paid or set up an
adequate reserve for the payment of all Taxes (as defined in Section 8.1(c)
below) required to be paid in respect of the periods covered by those
returns and reports and Taxes which have or may become due pursuant to
those returns and reports, and all assessments made and all other accrued
Taxes whether or not the returns, reports or payments are yet
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due. Exhibit 2.2(e) sets forth the most recent years during the past five
years for which income, sales and use, value added, employment and any
other material tax returns of the Company and Subsidiaries have been
examined by any taxing authority. All filed tax returns and reports of the
Company and each Subsidiary are correct and true in all material respects
and, except as disclosed in Exhibit 2.2(e), there is no outstanding claimed
deficiency with respect to any tax period, no formal or informal notice of
a proposed deficiency, no notification of any pending audit of tax returns
and reports and no waiver or extension granted to the Company or any
Subsidiary with respect to any period of limitations affecting assessment
of any Taxes.
(f) Inventories. The Company's and each Subsidiary's inventory: (i)
complies with all applicable laws and regulations (including all applicable
laws and regulations of Switzerland, the United States and each of the
states of the United States into which any such inventory may be shipped);
(ii) complies, to the extent U.S. law applies, with all legal requirements
applicable to any Hazardous Substance (as hereinafter defined) or any
substance which was the subject of a pre-manufacturing notice filed with
the United States Environmental Protection Agency under the Toxic Substance
Control Act, as amended, 15 U.S.C. sec.sec.2601 et seq., and (iii) does not
consist of any damaged or items which the Company considers obsolete
(except to the extent that a reserve therefor is included in such party's
regularly prepared financial statements). For purposes of this Agreement,
"Hazardous Substance" shall have the meaning set forth in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
42 U.S.C. sec.sec.9601 et seq., and the regulations adopted pursuant
thereto, and shall also include asbestos containing materials, urea
formaldehyde foam, petroleum, petroleum products (except cleaning supplies
used in the ordinary course of business) and any substance classified as
"hazardous" or otherwise regulated for purposes of protecting health or the
environment under applicable law, regulation or notice. The inventories
reflected in the Financial Statements have been or will be acquired in the
ordinary course of business of the Company or Subsidiary, as applicable, in
accordance with its normal inventory practices and are or will be stated in
accordance with the Accounting Principles consistently applied. None of the
Company's or any Subsidiary's inventory is stored or warehoused anywhere
other than at the locations identified in Exhibit 2.2(f) hereto.
(g) Non-Infringement of Patents, Trademarks and Other Intellectual
Property. Exhibit 2.2(g) contains a complete and correct list of all of
the patents, copyrights, trademarks, trade names, service marks and domain
names owned or used by the Company and Subsidiaries (such items, along with
any trade secrets, industrial designs and technical know how owned or used
by the Company and Subsidiaries, shall hereinafter be referred to
collectively as the "Intellectual Property"). Exhibit 2.2(g) also contains
a list of the Company's and Subsidiaries' applications and registrations in
any governmental office or registry with respect to any Intellectual
Property. Except as disclosed in Exhibit 2.2(g), the Intellectual Property
is owned by the Company and is free and clear of any license, sublicense,
lien, charge or encumbrance. The Intellectual Property owned by the Company
and Subsidiaries immediately following the Closing, will constitute all
intellectual property rights necessary to conduct the Company's and
Subsidiaries' business as it is currently conducted. None of the
Intellectual Property has a material defect or been misappropriated from
any third party. The Company and each Subsidiary is not infringing upon or
otherwise violating any intellectual property rights of any third party,
and the Company's and each Subsidiary's continued use of any and all of the
Intellectual Property after the Closing in a manner consistent with the
Company's and Subsidiaries' past practices shall not result in any such
infringement or violation. The Company and each Subsidiary is not in
default under any license or sublicense agreement with a third party. Each
of the Subsidiaries and the Company does not know of (1) any claim by a
third party that the use of the Intellectual Property infringes or violates
the intellectual property rights of said third party, (2) any infringement
or violation by a third party of the Company's or any Subsidiary's rights
in the Intellectual Property or any default by a third party under a
license or sublicense agreement with the Company or any Subsidiary or (3)
any claim for cancellation on the basis of non-use of any Intellectual
Property.
(h) Operations and Use of Properties. The Company's and each
Subsidiary's operations, business and properties, including leased
properties, are in conformity in all material respects with all applicable
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laws, ordinances, regulations or orders (including without limitation
zoning, land use and building codes and motor vehicle registration,
permitting, inspection and operation). The Company's and each Subsidiary's
assets are reasonably sufficient for the conduct of the Company's and such
Subsidiary's business as it currently is conducted. The Company and
Subsidiaries do not own or lease, directly or indirectly, any real property
other than the real property listed on Exhibit 2.2(h). With respect to such
real property, there are no (i) buildings of historic interest included
therein, (ii) public restrictions on the disposition thereof, (iii)
obligations regarding the construction, maintenance or adoption of any
highway or conduit or stipulated by public law or (iv) options or rights of
pre-emption.
(i) Licenses. The Company and each Subsidiary has all material
licenses, permits, approvals and other governmental authorizations
necessary to own all of its properties and assets and carry on its business
as now being conducted (collectively, the "Licenses"). Except as disclosed
on Exhibit 2.2(i), each License is valid and in full force and effect. The
continuation, validity and effectiveness of each License will in no way be
affected by the consummation of the transactions contemplated by this
Agreement. The Company and each Subsidiary has not breached any material
provision of, is not in default under the material terms of, and has not
engaged in any activity that would cause revocation or suspension of, any
material License and no action or proceeding looking to or contemplating
the revocation or suspension of any such License is pending or, to the
Company's or Subsidiaries' knowledge, threatened.
(j) Insurance. The Company and each Subsidiary is covered by valid
and currently effective insurance policies issued in favor of the Company
or such Subsidiary in amounts which are, in the Company's best judgment
after advice from its insurance advisers, appropriate to its situation and
operations. The Company and each Subsidiary has been insured for products
liability continuously since January 1, 1987, or, with respect to each
Subsidiary, the date of formation or acquisition of such Subsidiary, if
later.
(k) Environmental Matters. The Company and each Subsidiary has been,
and currently is, in full compliance in all material respects with all
applicable laws and regulations relating to Hazardous Substances, Hazardous
Waste (as hereinafter defined), air quality and groundwater pollution
(collectively, "Environmental Laws") (i) at all property or facilities
owned or leased by the Company and Subsidiaries (collectively, the
"Company's Facilities") and (ii) in connection with all operations of the
Company and Subsidiaries regardless of whether conducted at the Company's
Facilities. Except as disclosed on Exhibit 2.2(k), there has not been any
disposal, release or threatened release of any Hazardous Substance or
Hazardous Waste at any of the Company's Facilities that was not in
compliance with applicable Environmental Laws. To its knowledge, no
asbestos, urea-formaldehyde foam or other forms of urea formaldehyde have
been installed or are included in the furnishing or construction of any
building or other improvement at the Company's Facilities that violates any
applicable Environmental Law. Each of the Company and Subsidiaries has made
no disposal of any Hazardous Waste or Hazardous Substance at any site
currently listed pursuant to 42 U.S.C. sec.9605(a)(8)(B) (or pursuant to
any similar law or regulation identifying hazardous sites) or, to the best
knowledge of the Company and Subsidiaries, any site currently being
investigated for such listing pursuant to any such law or regulation.
Except as disclosed on Exhibit 2.2(k) hereto, there are no pending or
threatened claims with respect to Hazardous Substances or Hazardous Waste
relating to any of the Company's Facilities or relating to any operations
of the Company or Subsidiaries regardless of whether conducted at the
Company's Facilities, and neither the Company nor any Subsidiary knows of
any basis for a claim being made against the Company or Subsidiaries with
respect to any Hazardous Substance or Hazardous Waste or under any law or
regulation for the protection of the environment. For purposes of this
Agreement, "Hazardous Waste" shall have the meaning set forth in the
Resource Conservation and Recovery Act as amended, 42 U.S.C. sec.sec.9601
et seq., and the regulations adopted pursuant thereto and shall also
include polychlorinated biphenals ("PCBs") and any natural or artificial
substance (whether in solid or liquid form or in the form of a gas or vapor
and whether alone or in combination with any other substances) capable of
causing harm to man or any other living organism supported by the
environment, or damaging the environment or
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public health or welfare, including but not limited to any controlled,
special, hazardous, toxic or dangerous waste.
(l) Receivables. All accounts receivable, notes receivable and other
receivables reflected in the Financial Statements (the "Accounts
Receivable") of the Company and Subsidiaries have been properly recorded on
the Company's and Subsidiaries' books and arose in connection with the sale
of goods and services in the ordinary course of business. The reserve
established in the Company's fiscal year 1996 audited consolidated balance
sheet for doubtful Accounts Receivable was determined in accordance with
the Accounting Principles consistently applied.
(m) Employees and Labor Laws. In the last five years there have been
no strikes, lockouts or other material labor disputes or demands for
recognition of a union as collective bargaining agent for all or any part
of the Company's or Subsidiaries' employees, and each of the Company and
Subsidiaries is not a party to any collective bargaining or other labor
agreement except for those described in Exhibit 2.2(m). Except as disclosed
in Exhibit 2.2(m), each of the Company and Subsidiaries has no written
agreements of employment and no oral agreements or understandings with any
employee as to any specific period of employment. The Company and each
Subsidiary is in compliance in all material respects with all applicable
laws and regulations relating to the employment of labor, including
provisions relating to wages, fringe benefits, hours, working conditions,
occupational safety and health, safety of the premises, collective
bargaining, payment of social security and unemployment taxes, civil rights
and discrimination in hiring, retention, promotion, pay and other
conditions of employment; and the Company and each Subsidiary is not liable
for arrears on wages or any tax or penalties for failure to comply with
those laws or regulations. There are no oral agreements or understandings
with employees except as to current salary or wage rates and no other oral
agreements or understandings which will affect the Company's or any
Subsidiary's employment practices or operations.
(n) Product Labeling and Product Liability. The Company and each
Subsidiary is in compliance in all material respects with all applicable
laws and regulations relating to product labeling, product safety and
public health and safety. The Company and each Subsidiary has not received
any notice of any claim that any product now or heretofore offered for sale
or sold by it or distributed by it in connection with product sales is
injurious to the health and safety of any person or is not in conformity
with its specifications or not suitable for any purpose or application for
which it is offered for sale, sold or distributed.
(o) Validity and Existence of Agreements. Exhibit 2.2(o) sets forth
and briefly describes all the following with respect to the Company and
each Subsidiary (collectively referred to as the "Contracts"):
(1) Each written agreement, contract, arrangement, commitment,
understanding or obligation to which any of the Company or Subsidiaries
is a party or by which it or its properties is or may be bound
(including without limitation quotations by the Company or any
Subsidiary to current or potential customers which purport to be binding
on the Company or any Subsidiary for a certain time period) which (A)
was entered into in the ordinary course of business and (i) involves the
payment of consideration or delivery of goods or services by the Company
or any Subsidiary with a value in excess of CHF 500,000 or (ii) has a
remaining term of more than one year which cannot be terminated by the
Company or any Subsidiary without penalty upon one year's (or less)
notice and involves the payment of consideration or delivery of goods or
services by the Company or any Subsidiary with a value in excess of CHF
200,000 or (B) was entered into out of the ordinary course of business
and involves the payment of consideration or delivery of goods or
services by the Company or any Subsidiary with a value in excess of CHF
25,000;
(2) Each instrument (i) evidencing any liability of the Company or
any Subsidiary for borrowed money or for the obligations of any third
party, (ii) defining the terms on which any other debt of the Company or
any Subsidiary has been or may be issued or incurred; or (iii)
evidencing any liability of any third party for the obligations of the
Company or any Subsidiary.
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(3) All agreements, contracts, arrangements, commitments,
understandings or obligations, oral or written, limiting in any respect
the freedom of the Company or any Subsidiary or any of its key employees
to compete in any line of business or with any person or to do business
with any particular customers or class of customers or to carry on
business in any geographic area;
(4) All agreements, contracts, arrangements, commitments,
understandings, or obligations, oral or written, relating to the Company
or any Subsidiary, its business, operations, prospects, properties,
assets or condition (financial or otherwise) in which Inter Scan has any
interest, direct or indirect, including a description of any
transactions between the Company or any Subsidiary and Inter Scan or any
entity in which Inter Scan has any interest; and
(5) All agreements, contracts, arrangements, commitments,
understandings or obligations, oral or written, between the Company or
any Subsidiary and Inter Scan not covered in (4) above.
The Company has delivered or made available to API a true and
complete copy of each written Contract, which copies accurately reflect
the understanding of the Company with respect to the Contracts. The
Company has delivered or made available to API a fair and accurate
summary of each oral Contract listed on Exhibit 2.2(o). Each of the
Contracts listed on Exhibit 2.2(o) is a valid and binding obligation of
the parties thereto in accordance with its respective terms (except with
respect to quotations by the Company or any Subsidiary which have not
been accepted by the recipient thereof), and the Company or the
applicable Subsidiary has performed and complied in all material
respects with all the provisions of, and no party is in default or would
be in default with the lapse of time or notice under the terms of, any
of the Contracts. The execution of this Agreement and the consummation
of the transactions contemplated hereby will not violate any provision
of any of the Contracts and will not result in or create a right of
termination, cancellation or adverse modification of any of the
Contracts.
(p) Employee Benefit Plans. Exhibit 2.2(p) lists all employee pension
benefit plans, all employee welfare benefit plans, all fringe benefit
plans, and all executive compensation, retirement, supplemental retirement,
deferred compensation, incentive, bonus, severance, compensation associated
with change in control, perquisite, health care, death benefit, medical,
disability, life insurance, vacation pay, sick pay or other plans,
programs, and arrangements, whether or not government-mandated, to which
the Company or any Subsidiary is or has been a party, with respect to which
the Company or any Subsidiary has an obligation, that have been or are
maintained, contributed to, or sponsored by the Company or any Subsidiary
for the benefit of any current or former employee, officer, or director or
that relate to the Company or any Subsidiary, and are in effect or in
connection with which any obligation remains on the date of this Agreement
or that by their present terms will become effective after the date of this
Agreement (such plans, programs, and arrangements to be referred to
collectively as "Company Employee Benefit Plans").
(q) Company Employee Benefit Plans.
(1) The Company has delivered or made available to API a complete
and accurate copy of each Company Employee Benefit Plan document
(including all amendments) and a complete and accurate copy of all
documents relating to such Company Employee Benefit Plan, including, if
applicable: (A) each trust agreement, insurance or annuity contract,
investment management agreement, custodial agreement, and other
agreement relating to the funding of the Company Employee Benefit Plan,
and all amendments to them; (B) the most recent summary plan description
and any subsequent summary of material modifications or other material
disclosure information furnished to participants; (C) the three most
recently prepared or filed annual returns or reports, including all
applicable schedules; (D) if the Company Employee Benefit Plan is
intended to qualify under or satisfy requirements of the tax law of the
relevant jurisdiction, the most recent determination letter or other
notice of qualification or approval issued by the relevant government
authority, the application submitted for it, any correspondence with the
relevant government authority in connection with the determination
letter or other notice of qualification or approval, and any pending
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application for a determination letter or other notice of qualification
or approval; (E) the three most recent financial statements; and (F) the
three most recent actuarial valuation reports.
(2) Each Company Employee Benefit Plan is now and always has been
operated in all material respects in accordance with its terms and the
requirements of all applicable laws. For the purposes of Section 2.2(q),
(r), and (s), the term "law" includes, without limitation, those
particular laws to which the following provisions of Section 2.2(q),
(r), and (s) refer, laws relating to, regulating, or mandating the
provision of social welfare, pension, or other benefits for employees,
all provisions of the relevant tax law applicable to secure intended tax
consequences, securities law, and all regulations and authoritative
court and administrative rulings under such laws. All persons who
participate in the operation of the Company Employee Benefit Plans and
all Company Employee Benefit Plan fiduciaries have always acted in all
material respects in accordance with the provisions of all applicable
law of the relevant jurisdiction. The Company and the Subsidiaries have
performed all obligations required to be performed by them under, are
not in any material respect in default under or in violation of, and
have no knowledge of any material default or violation by any party to,
any Company Employee Benefit Plan. No legal action, suit, claim, or
governmental proceeding or investigation is pending or, to the knowledge
of the Company or any Subsidiary threatened or imminent with respect to
any Company Employee Benefit Plan (other than claims for benefits in the
ordinary course) and, to the knowledge of the Company or any Subsidiary
no fact or event exists that could give rise to any such action, suit,
claim, or governmental proceeding or investigation which is meritorious.
(3) The administrator of each Company Employee Benefit Plan has
complied with all applicable laws of the relevant jurisdiction regarding
reporting to the relevant government authority and disclosure to
participants and beneficiaries. Each summary plan description, summary
of material modifications, and other material disclosure information
furnished to participants and beneficiaries with respect to each Company
Employee Benefit Plan describes the plan accurately and comprehensively
in accordance with any applicable requirements of the law of the
relevant jurisdiction, and each annual report or return prepared or
filed with respect to each such plan, including all schedules and
attachments, is correct and accurate as of the date of filing.
(4) With respect to any Company Employee Benefit Plan that provides
pension or retirement or other post-employment compensation ("Pension
Plan") and that is intended to qualify under or satisfy applicable
requirements of the tax law of the relevant jurisdiction (in the case of
any plan covering U.S. employees, section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code")), each such Pension Plan qualifies
under or satisfies the applicable requirements of the tax law of the
relevant jurisdiction, and any trust through which such Pension Plan is
funded is exempt, to the extent intended, from tax; if a determination
letter or other notice of qualification or approval would be available
from a government authority to indicate that such a plan does qualify
under or satisfies the applicable requirements of the tax law of the
relevant jurisdiction, the Pension Plan as amended through the date of
this Agreement has obtained such a letter or other notice. Nothing has
occurred that could adversely affect the qualified or satisfactory or
approved status of such Pension Plan or trust under the tax law of the
relevant jurisdiction.
(5) No person has acted or failed to act in connection with any
Company Employee Benefit Plan in a manner that would subject the Company
or any Subsidiary to direct or indirect liability, by indemnity or
otherwise, for a breach of any fiduciary duty.
(6) Neither the Company nor any Subsidiary has incurred liability
for any excise tax arising under section 4971, 4972, 4980, or 4980B of
the Code, and no fact or event exists that could give rise to any such
liability.
(7) Neither the Company nor any Subsidiary has incurred liability
under Title IV of the Employee Retirement Income Security Act of 1974,
as amended, ("ERISA") (other than liability for premiums to the Pension
Benefit Guaranty Corporation ("PBGC") arising in the ordinary course),
and, to the knowledge of the Company and each Subsidiary, no fact or
event exists that
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could give rise to such liability. No complete or partial termination
has occurred within the past five years with respect to any Pension Plan
subject to Title IV of ERISA or that is intended to be qualified under
section 401(a) of the Code. No reportable event (within the meaning of
section 4043 of ERISA) or event described in section 4063(a) of ERISA
has occurred or is expected to occur with respect to any Pension Plan
subject to Title IV of ERISA. No proceeding has been instituted by the
PBGC to terminate any Pension Plan, nor has any notice of intent to
terminate any Pension Plan been filed with the PBGC. All premiums due
the PBGC have been paid in full on a timely basis.
(8) No Pension Plan subject to section 302 of ERISA or section 412
of the Code has had an accumulated funding deficiency (within the
meaning of section 302 of ERISA or section 412 of the Code), whether or
not waived. No asset of the Company or any Subsidiary is the subject of
a lien arising under section 302(f) of ERISA or section 412(n) of the
Code. Neither the Company nor any Subsidiary has been required to post
security under section 307 of ERISA or section 401(a)(29) of the Code,
and no fact or event exists that could give rise to such a lien or
requirement to post any such security.
(9) All contributions, insurance premiums, and payments required to
be made with respect to each Company Employee Benefit Plan, whether by
the terms of the plan, applicable law of the relevant jurisdiction, or
agreement with employees, have been made by their due dates. Each
Company Employee Benefit Plan has assets sufficient to satisfy any
applicable laws of the relevant jurisdiction regarding the level of
funding required in relation to the plan's obligation to pay benefits.
(10) As to each Pension Plan subject to U.S. law that is a defined
benefit plan (as defined in section 3(35) of ERISA) and that is subject
to section 302 of ERISA or section 412 of the Code, and as to each other
Pension Plan for which the applicable law of the relevant jurisdiction
requires an actuarial valuation, the most recent actuarial valuation
report accurately reflects the value of the plan assets and liabilities
as of the date of such valuation based on the funding method and
actuarial assumptions specified in the report, all employee census data
furnished to the plan's actuary in connection with such valuation and
prior valuations has been accurate and complete in all material
respects, and nothing has occurred since the date of such valuation that
would have a materially adverse effect on the funding condition of the
Pension Plan.
(11) Except as disclosed on Exhibit 2.2(q), no Company Employee
Benefit Plan, and no other commitment or agreement, provides for the
payment of separation, severance, or similar benefits to any person
solely as a result of any transaction contemplated by this Agreement or
as a result of a "change in control", however defined, and the
consummation of the transaction contemplated by this Agreement will not
accelerate the time of payment or vesting of, or increase the amount of,
any compensation or benefit due to any current or former employee.
(12) Except as indicated in the Financial Statements, neither the
Company nor any Subsidiary has any liability with respect to any
officer, director or employee or former officer, director or employee
for post-employment benefits, other than those associated with the
Pension Plans, and other than as required by section 4980B of the Code
and Part 6 of Title I of ERISA or by applicable law of the relevant
jurisdiction.
(13) There has been no representation made to or communication with
any employee that is not in accordance with the existing terms and
limitations of the Company Employee Benefit Plans. Neither the Company
nor any Subsidiary has made any commitment to modify any, or create any
other, Company Employee Benefit Plan.
(r) Related Entities. To the best of the Company's knowledge, neither
the Company nor any Subsidiary is or could become subject to any obligation
or liability with respect to a Related Entity Benefit Plan (as defined
below), whether under Title IV of ERISA, section 4980B of the Code, the
provisions of any applicable law of any relevant jurisdiction, or the terms
of any Related Entity Benefit Plan. "Related Entity Benefit Plan" means any
employee pension benefit plan, employee welfare benefit
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plan, fringe benefit plan, or executive compensation, retirement,
supplemental retirement, deferred compensation, incentive, bonus,
severance, compensation associated with change in control, perquisite,
health care, death benefit, medical, disability, life insurance, vacation
pay, sick pay or other plan, program, or arrangement, whether or not
government-mandated, to which a Related Entity (as defined in the next
sentence) is or has been a party, with respect to which a Related Entity
has an obligation, or that has been or is maintained, contributed to, or
sponsored by a Related Entity for the benefit of any current or former
employee, officer, or director, that relates to a Related Entity and is in
effect or in connection with which any obligation remains on the date of
this Agreement or that by its present terms will become effective after the
date of this Agreement. For the purposes of Section 2.2(r) and (s),
"Related Entity" means (i) a current or former member of a controlled group
including the Company or any Subsidiary (within the meaning of section
414(b) or (c) of the Code), (ii) a current or former member of an
affiliated service group including the Company or any Subsidiary (within
the meaning of section 414(m) or (o) of the Code), or (iii) any other
entity that is or was related, directly or indirectly, by common ownership
or control, with the Company or any Subsidiary, provided, however, that the
term "Related Entity" does not include the Company or the Subsidiaries.
(s) Multiemployer Plans. Neither the Company, nor any Subsidiary nor
any Related Entity has ever had any obligation to contribute to any
multiemployer plan within the meaning of section 4001(a)(3) of ERISA that
is subject to Title IV of ERISA with respect to any of its employees. Each
of the Company and Subsidiaries is not and could not become subject to any
withdrawal liability within the meaning of section 4201 of ERISA with
respect to any multiemployer plan. Neither the Company, nor any Subsidiary,
nor any Related Entity has ever been a substantial employer within the
meaning of section 4001(a)(2) of ERISA with respect to any single-employer
plan within the meaning of section 4001(a)(15) of ERISA that is subject to
Title IV of ERISA.
(t) Capitalized Leases. Except as disclosed on Exhibit 2.2(t), the
Company and Subsidiaries have no capitalized leases.
(u) Guaranties. The Company and Subsidiaries are not a party to any
guaranty, repurchase agreements or other credit accommodations which
accommodate the credit of another person.
(v) Litigation. Except as disclosed in Exhibit 2.2(v), there are no
(i) claims, suits, actions, citations, administrative or arbitration or
other proceedings or governmental investigations pending or, to the best
knowledge of the Company and Subsidiaries, threatened against the Company
or Subsidiaries or to which any of the Company or Subsidiaries is a party
or relating to any of the properties, businesses or business practices of
the Company or Subsidiaries or the transactions contemplated by this
Agreement (including but not limited to proceedings and investigations
related to Environmental Laws, civil rights, discrimination in employment
and occupational safety and health) or (ii) judgments, orders, writs,
injunctions or decrees of any court or administrative agency involving any
of the Company or Subsidiaries or affecting its assets or business.
(w) Management Personnel. To the best of the Company's and
Subsidiaries' knowledge, none of the management personnel of the Company
and Subsidiaries has been convicted of a criminal act (other than a traffic
violation) during the ten-year period immediately preceding the date of
this Agreement.
(x) Absence of Changes. Except for a decline in sales and profits as
reflected in the Company's interim financial statements dated March 18,
1997 and covering the time period from January 1, 1997 through February 28,
1997, since December 31, 1996, there has not been (i) any material adverse
change in the financial condition, assets, liabilities, business or
properties of the Company or Subsidiaries, (ii) any damage to, destruction
of or loss of property, whether or not covered by insurance, materially
adversely affecting the property or business of the Company or
Subsidiaries, (iii) any material changes in compensation or bonus payments
or arrangements for any employees of the Company or Subsidiaries, (iv) any
sale or transfer of any assets of the Company or Subsidiaries other than in
the ordinary course of its business and consistent with past practice, (v)
any cancellation or compromise of any debts or claims owed to the Company
or Subsidiaries other than in the ordinary course of its business and
consistent with past practice, (vi) any transaction not in the ordinary
course of the Company's or Subsidiaries business
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and consistent with past practice, or (vii) any amendment or termination of
any contract or agreement which materially adversely affects the assets or
business of the Company or Subsidiaries.
(y) Delivery of Exhibits. All exhibits referred to in Section 2.1 and
this Section 2.2 were prepared and delivered pursuant to the Initial
Agreement and shall be deemed to have been prepared and delivered pursuant
to this Agreement.
(z) No Side Agreements. Except for this Agreement and the items
listed in the exhibits hereto, the Company and Subsidiaries are not a party
to any agreement calling for any action by the Company or Subsidiaries
outside of the ordinary course of business; no agreement or understanding
exists calling for any payment or consideration from a customer or supplier
of the Company or Subsidiaries to an officer, director or shareholder of
the Company or Subsidiaries respecting any transaction between the Company
or Subsidiaries and such supplier or customer; and, except as disclosed in
Exhibit 2.2(o), no affiliate of the Company or Subsidiaries , directly or
through any business concern affiliated with such affiliate, transacts any
business with the Company or Subsidiaries except for employment disclosed
pursuant to Section 2.2(m) hereof.
(aa) Customers. Except as set forth in Exhibit 2.2(aa) hereto, no
single customer or group of affiliated customers has accounted for more
than ten percent of the Company's consolidated gross sales during any of
the Company's last two fiscal years.
(bb) Suppliers. No single supplier or group of affiliated suppliers
has supplied the Company or any Subsidiary with products which would
account for more than ten percent of the Company's consolidated gross
purchases during any of the Company's last two fiscal years.
(cc) Title to Assets. Except as disclosed on Exhibit 2.2(cc), there
are no liens, claims, security interests, mortgages, easements,
restrictions, charges or encumbrances affecting any of the Company's or
Subsidiaries' assets or the Company's Facilities owned by the Company or a
Subsidiary and, at the Closing, each of the Company and Subsidiaries will
have good and marketable title to or a valid leasehold interest in its
assets and the Company's Facilities.
(dd) Machinery and Equipment. All of the Company's and Subsidiaries'
machinery and equipment is in good operating condition and repair, ordinary
wear and tear excepted. The machinery and equipment owned by the Company
and each Subsidiary at the Closing will be sufficient for the conduct of
the Company's and such Subsidiary's business as now conducted and will
constitute all machinery and equipment used by the Company and such
Subsidiary in its business as of December 31, 1996, except for items which
have been replaced with newer items of equal or greater value.
(ee) Truth of Representations. On the date of this Agreement and on
the date of the Closing, no representation or warranty of the Company in
this Agreement, nor any written statement or certificate executed by the
Company and furnished or to be furnished to API Portescap or API pursuant
to this Agreement or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the
statements contained therein not misleading.
2.3 Representations and Warranties of API Portescap. API Portescap
represents and warrants (except that, with respect to the API Subsidiaries, such
representations and warranties are given to the best of its knowledge) to Inter
Scan that:
(a) Corporate Standing and Authority. Each of API and API Portescap
is a corporation duly organized and validly existing under the laws of
Delaware and New York State, respectively, and has full corporate power and
authority to carry on its current business operations and consummate the
transactions contemplated by this Agreement. The execution of this
Agreement and consummation of the transactions contemplated herein will not
violate any provision of API Portescap's or API's Certificate of
Incorporation or By-Laws. This Agreement is a legal, valid and binding
agreement of API Portescap and API enforceable against API Portescap and
API in accordance with its terms, subject to the laws of bankruptcy,
insolvency and moratorium and other laws or equitable principles generally
affecting
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creditors' rights. Each of API Portescap and API has obtained all necessary
authorization and approval by its Board of Directors for the execution of
this Agreement and the consummation of the transactions contemplated
hereby, subject to the approval of API's shareholders referred to in
Section 4.2(a) below. Complete and correct copies of the Certificates of
Incorporation and By-Laws of API and API Portescap have been made available
to Inter Scan.
(b) Capitalization of API. The capitalization of API is set forth on
Exhibit 2.3(b) hereto. Except as disclosed on Exhibit 2.3(b), (i) API has
no other class of stock authorized or outstanding, (ii) no shares of API's
capital stock have been reserved for any purpose, (iii) there are no
outstanding securities of API that are convertible into shares of API's
capital stock and (iv) there are no options, warrants, calls, commitments,
rights or understandings of any character to purchase or otherwise acquire
from API any shares of API's capital stock, or any convertible security or
other security issued or to be issued by API. Except as disclosed in
Exhibit 2.3(b) hereto and except for equity interests having a fair market
value of $5,000 or less, API has no equity interest in and has made no
advances to any corporation, association, partnership, joint venture or
other entity (each entity listed on Exhibit 2.3(b), with respect to which
API owns or controls 51% or more of the equity, hereinafter referred to as
an "API Subsidiary", and such entities referred to collectively as "API
Subsidiaries"). The shares of Series A and Series B Preferred Stock, upon
their issuance to Inter Scan in accordance with the terms hereof, and any
shares of API's common stock issued upon the conversion of any such
Preferred Stock in accordance with the terms thereof, shall be duly
authorized, validly issued and outstanding, fully paid and non-assessable.
(c) Directors and Officers. Attached hereto as Exhibit 2.3(c) is a
list of all directors and officers of API and each API Subsidiary.
(d) Absence of Conflicting Agreements or Required Consents. The
execution, delivery and performance of this Agreement by API Portescap and
API do not and will not: (i) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to API Portescap, any API
Subsidiary or API or by which any of them is bound or affected, (ii) result
in any breach of or constitute a default under any note, bond, mortgage,
indenture, lease, license, franchise or other instrument or obligation to
which API Portescap, any API Subsidiary or API is a party (except that
certain waivers will be required in connection with certain commercial loan
indebtedness owing by API which waivers will be obtained prior to Closing),
or (iii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority,
domestic or foreign, or any person or entity not a party to this Agreement
(except for such filings as may be required under the Securities Exchange
Act of 1934 and applicable requirements if any, arising under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder, collectively the "HSR Act",
in connection with any conversion of the Preferred Stock into shares of API
common stock).
(e) Financial Statements. API has furnished or will furnish Inter
Scan with: (i) API's income tax returns for the fiscal years ended December
31, 1993, December 30, 1994 and December 29, 1995; (ii) API's consolidated
financial statements as at December 31, 1993, December 30, 1994, December
29, 1995 and January 3, 1997 and for the years then ended audited by Price
Waterhouse LLP (collectively referred to as the "API Financial
Statements"). The API Financial Statements have been prepared in accordance
with U.S. generally accepted accounting principles consistently applied
throughout the periods indicated. The API Financial Statements fairly
present the consolidated results of the operations of API and the API
Subsidiaries and the consolidated financial position of such entities for
the periods indicated.
(f) API Subsidiaries' Corporate Standing and Authority; Binding
Agreement. Each of the API Subsidiaries is a corporation duly organized
and validly existing under the laws of the jurisdiction identified on
Exhibit 2.3(f) hereto, has full corporate power to own all of its
properties and assets and to conduct its business as it is now being
conducted. The execution of this Agreement and consummation of the
transactions contemplated herein will not violate any provision of any API
Subsidiary's Certificate of Incorporation or By-Laws. Complete and correct
copies of the Certificate of Incorporation and ByLaws of each API
Subsidiary have been made available to Inter Scan.
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(g) Title to API Subsidiaries' Stock. API has good and marketable
title (either directly or through a wholly owned subsidiary) to all
outstanding shares of the capital stock of the API Subsidiaries referenced
on Exhibit 2.3(b).
(h) Corporate Records. API's and each API Subsidiary's corporate
record books are complete, accurate and up to date with all necessary
signatures and set forth all meetings and actions taken by its shareholders
and directors. API's and each API Subsidiary's stock transfer books and
stock ledgers are each complete, accurate and up to date with all necessary
signatures and set forth all stock and securities issued, transferred or
surrendered, together with evidence of any required stock transfer tax
information in conformity with all applicable requirements. API and each
API Subsidiary makes and keeps accurate books and records reflecting its
assets and maintains internal accounting controls that provide reasonable
assurance that (i) transactions are executed with management's
authorization, (ii) transactions are recorded as necessary to permit
preparation of API's and each API Subsidiary's financial statements and to
maintain accountability for its assets, (iii) access to its assets is
permitted only in accordance with management's authorization, and (iv) the
recorded accountability of its assets other than property, plant or
equipment is compared with existing assets at reasonable intervals.
(i) Liabilities. There are no liabilities or obligations of API or
any API Subsidiary of any kind, whether accrued, absolute, contingent or
otherwise, except (i) as indicated in the API Financial Statements and (ii)
liabilities or obligations arising since the date of the most recent
Financial Statement which (A) were incurred in the ordinary and usual
course of API's or API Subsidiary's business and (B) are in types and
amounts consistent with API's or API Subsidiary's past practices and
experience.
(j) Taxes. API and each API Subsidiary has filed all tax returns and
reports which are required by law to be filed and has paid or set up an
adequate reserve for the payment of all Taxes (as defined in Section 8.1(c)
below) required to be paid in respect of the periods covered by those
returns and reports and Taxes which have or may become due pursuant to
those returns and reports, and all assessments made and all other accrued
Taxes whether or not the returns, reports or payments are yet due. Exhibit
2.3(j) sets forth the most recent years during the past five years for
which income, sales and use, value added, employment and any other material
tax returns of API and API Subsidiaries have been examined by any taxing
authority. All filed tax returns and reports of API and each API Subsidiary
are correct and true in all material respects and, except as disclosed in
Exhibit 2.3(j), there is no outstanding claimed deficiency with respect to
any tax period, no formal or informal notice of a proposed deficiency, no
notification of any pending audit of tax returns and reports and no waiver
or extension granted to API or any API Subsidiary with respect to any
period of limitations affecting assessment of any Taxes.
(k) Inventories. API's and each API Subsidiary's inventory: (i)
complies with all applicable laws and regulations (including all applicable
laws and regulations of the United States and each of the states of the
United States into which any such inventory may be shipped); (ii) complies
with all legal requirements applicable to any Hazardous Substance or any
substance which was the subject of a pre-manufacturing notice filed with
the United States Environmental Protection Agency under the Toxic Substance
Control Act, as amended, 15 U.S.C. sec.sec.2601 et seq., and (iii) does not
consist of any damaged or obsolete items which API considers obsolete
(except to the extent that a reserve therefor is included in such party's
regularly prepared financial statements). The inventories reflected in such
financial statements have been or will be acquired in the ordinary course
of business of API or an API Subsidiary, as applicable, in accordance with
its normal inventory practices and are or will be stated in accordance with
U.S. generally accepted accounting principles consistently applied.
(l) Non-Infringement of Patents, Trademarks and Other Intellectual
Property. Exhibit 2.3(l) contains a complete and correct list of all of
the patents, copyrights, trademarks, trade names, service marks and domain
names owned or used by API and the API Subsidiaries (such items, along with
any trade secrets, industrial designs and technical know-how owned or used
by API and the API Subsidiaries, is hereinafter referred to collectively as
the "API Intellectual Property"). Exhibit 2.3(l) also contains a list of
API's and the API Subsidiaries' applications and registrations in any
governmental office or registry with respect to any API Intellectual
Property. Except as disclosed in Exhibit 2.3(l), the API
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Intellectual Property is owned by API and is free and clear of any license,
sublicense, lien, charge or encumbrance. The API Intellectual Property
owned by API and the API Subsidiaries immediately following the Closing,
will constitute all intellectual property rights necessary to conduct API's
and the API Subsidiaries' business as it is currently conducted. None of
the API Intellectual Property has a material defect or been misappropriated
from any third party. API and each API Subsidiary is not infringing upon or
otherwise violating any intellectual property rights of any third party,
and API's and each API Subsidiary's continued use of any and all of the API
Intellectual Property after the Closing in a manner consistent with API's
and each API Subsidiary's past practices shall not result in any such
infringement or violation. API and each API Subsidiary is not in default
under any license or sublicense agreement with a third party. Each of API
and the API Subsidiaries does not know of (1) any claim by a third party
that the use of the API Intellectual Property infringes or violates the
intellectual property rights of said third party, (2) any infringement or
violation by a third party of API's and each API Subsidiary's rights in the
API Intellectual Property or any default by a third party under a license
or sublicense agreement with API or (3) any claim for cancellation on the
basis of non-use of any API Intellectual Property.
(m) Operations and Use of Properties. API's and each API Subsidiary's
operations, business and properties, including leased properties, are in
conformity in all material respects with all applicable laws, ordinances,
regulations or orders (including without limitation zoning, land use and
building codes and motor vehicle registration, permitting, inspection and
operation). API's and each API Subsidiary's assets are reasonably
sufficient for the conduct of API's and such API Subsidiary's business as
it currently is conducted. API and the API Subsidiaries do not own or
lease, directly or indirectly, any real property other than the real
property listed on Exhibit 2.3(m). With respect to such real property,
there are no (i) buildings of historic interest included therein, (ii)
public restrictions on the disposition thereof, (iii) obligations regarding
the construction, maintenance or adoption of any highway or conduit or
stipulated by public law or (iv) options or rights of pre-emption.
(n) Licenses. API and each API Subsidiary has all material licenses,
permits, approvals and other governmental authorizations necessary to own
all of its properties and assets and carry on its business as now being
conducted (collectively, the "API Licenses"). Except as disclosed on
Exhibit 2.3(n), each API License is valid and in full force and effect. The
continuation, validity and effectiveness of each API License will in no way
be affected by the consummation of the transactions contemplated by this
Agreement. API and each API Subsidiary has not breached any material
provision of, is not in default under the material terms of, and has not
engaged in any activity that would cause revocation or suspension of, any
material API License and no action or proceeding looking to or
contemplating the revocation or suspension of any such API License is
pending or, to API's or API Subsidiaries' knowledge, threatened.
(o) Insurance. API and each API Subsidiary is covered by valid and
currently effective insurance policies issued in favor of the API or such
API Subsidiary in amounts which are, in the API's best judgment after
advice from its insurance advisers, appropriate to its situation and
operations. API and each API Subsidiary has been insured for products
liability continuously since January 1, 1987, or, with respect to each API
Subsidiary, the date of formation or acquisition of such API Subsidiary, if
later.
(p) Environmental Matters. API and each API Subsidiary has been, and
currently is, in full compliance in all material respects with all
applicable Environmental Laws (i) at all property or facilities owned or
leased by API and the API Subsidiaries (collectively, "API's Facilities")
and (ii) in connection with all operations of API and the API Subsidiaries
regardless of whether conducted at API's Facilities. There has not been any
disposal, release or threatened release of any Hazardous Substance or
Hazardous Waste at any of the API's Facilities that was not in compliance
with Environmental Laws. To its knowledge, no asbestos, urea-formaldehyde
foam or other forms of urea formaldehyde have been installed or are
included in the furnishing or construction of any building or other
improvement at API's Facilities that violates applicable Environmental
Laws. Each of API and the API Subsidiaries has made no disposal of any
Hazardous Waste or Hazardous Substance at any site currently listed
pursuant to 42 U.S.C. sec.9605(a)(8)(B) (or pursuant to any similar law or
regulation identifying hazardous sites) or, to
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the best knowledge of the API Subsidiaries, any site currently being
investigated for such listing pursuant to any such law or regulation. There
are no pending or threatened claims with respect to Hazardous Substances or
Hazardous Waste relating to any of the API's Facilities or relating to any
operations of API or the API Subsidiaries regardless of whether conducted
at the API's Facilities, and no API Subsidiary knows of any basis for a
claim being made against API or the API Subsidiaries with respect to any
Hazardous Substance or Hazardous Waste or under any law or regulation for
the protection of the environment.
(q) Receivables. All accounts receivable, notes receivable and other
receivables reflected in the API Financial Statements (the "API Accounts
Receivable") of API and the API Subsidiaries have been properly recorded on
API's and the API Subsidiaries' books and arose in connection with the sale
of goods and services in the ordinary course of business. The reserve which
will be established in the audited consolidated balance sheet of API for
fiscal year 1996 for doubtful API Accounts Receivable will be determined in
accordance with U.S. generally accepted accounting principles consistently
applied.
(r) Employees and Labor Laws. In last five years, there have been no
strikes, lockouts or other material labor disputes or demands for
recognition of a union as collective bargaining agent for all or any part
of API's or the API Subsidiaries' employees, and each of API and the API
Subsidiaries is not a party to any collective bargaining or other labor
agreement except for those described in Exhibit 2.3(r). Except as disclosed
in Exhibit 2.3(r), each of API and the API Subsidiaries has no written
agreements of employment and no oral agreements or understandings with any
employee as to any specific period of employment. API and each API
Subsidiary is in compliance in all material respects with all applicable
laws and regulations relating to the employment of labor, including
provisions relating to wages, fringe benefits, hours, working conditions,
occupational safety and health, safety of the premises, collective
bargaining, payment of social security and unemployment taxes, civil rights
and discrimination in hiring, retention, promotion, pay and other
conditions of employment; and API and each API Subsidiary is not liable for
arrears on wages or any tax or penalties for failure to comply with those
laws or regulations. There are no oral agreements or understandings with
employees except as to current salary or wage rates and no other oral
agreements or understandings which will affect API's or any API
Subsidiary's employment practices or operations.
(s) Product Labeling and Product Liability. API and each API
Subsidiary is in compliance in all material respects with all applicable
laws and regulations relating to product labeling, product safety and
public health and safety. Except as disclosed in Exhibit 2.3(s), API and
each API Subsidiary has not received any notice of any claim that any
product now or heretofore offered for sale or sold by it or distributed by
it in connection with product sales is injurious to the health and safety
of any person or is not in conformity with its specifications or not
suitable for any purpose or application for which it is offered for sale,
sold or distributed.
(t) Validity and Existence of Agreements. Exhibit 2.3(t) sets forth
and briefly describes all the following with respect to API and each API
Subsidiary (collectively referred to as the "API Contracts"):
(1) Each written agreement, contract, arrangement, commitment,
understanding or obligation to which any of API or the API Subsidiaries
is a party or by which it or its properties is or may be bound
(including without limitation quotations by API or API Subsidiary to
current or potential customers which purport to be binding on API or any
API Subsidiary for a certain time period) which (A) was entered into in
the ordinary course of business and (i) involves the payment of
consideration or delivery of goods or services by API or any API
Subsidiary with a value in excess of $1,000,000 or (ii) has a remaining
term of more than one year which cannot be terminated by API or any API
Subsidiary without penalty upon one year's (or less) notice and involves
the payment of consideration or delivery of goods or services by API or
any API Subsidiary with a value in excess of $400,000 or (B) was entered
into out of the ordinary course of business and involves the payment of
consideration or delivery of goods or services by API or any API
Subsidiary with a value in excess of $50,000;
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(2) Each instrument (i) evidencing any liability of API or any API
Subsidiary for borrowed money or for the obligations of any third party,
(ii) defining the terms on which any other debt of API or any API
Subsidiary has been or may be issued or incurred; or (iii) evidencing
any liability of any third party for the obligations of API or any API
Subsidiary.
(3) All agreements, contracts, arrangements, commitments,
understandings or obligations, oral or written, limiting in any respect
the freedom of API or any API Subsidiary or any of its key employees to
compete in any line of business or with any person or to do business
with any particular customers or class of customers or to carry on
business in any geographic area;
(4) All agreements, contracts, arrangements, commitments,
understandings, or obligations, oral or written, relating to API or any
API Subsidiary, its business, operations, prospects, properties, assets
or condition (financial or otherwise) in which API has any interest,
direct or indirect, including a description of any transactions between
any API Subsidiary and API or any entity in which API has any interest;
and
(5) All agreements, contracts, arrangements, commitments,
understandings or obligations, oral or written, between API or any API
Subsidiary and not covered in (4) above.
API has delivered or made available to Inter Scan a true and
complete copy of each written API Contract, which copies accurately
reflect the understanding of API with respect to the API Contracts. API
has delivered or made available to Inter Scan a fair and accurate
summary of each oral API Contract listed on Exhibit 2.3(t). Each of the
API Contracts listed on Exhibit 2.3(t) is a valid and binding obligation
of the parties thereto in accordance with its respective terms (except
with respect to quotations by API or any API Subsidiary which have not
been accepted by the recipient thereof), and API or the applicable API
Subsidiary has performed and complied in all material respects with all
the provisions of, and no party is in default or would be in default
with the lapse of time or notice under the terms of, any of the API
Contracts. The execution of this Agreement and the consummation of the
transactions contemplated hereby will not violate any provision of any
of the API Contracts and will not result in or create a right of
termination, cancellation or adverse modification of any of the API
Contracts.
(u) Employee Benefit Plans.
(1) Exhibit 2.3(u) lists all employee pension benefit plans, all
employee welfare benefit plans , all fringe benefit plans, and all
executive compensation, retirement, supplemental retirement, deferred
compensation, incentive, bonus, severance, compensation associated with
change in control, perquisite, health care, death benefit, medical,
disability, life insurance, vacation pay, sick pay or other plans,
programs, and arrangements, whether or not government-mandated, to which
API or any API Subsidiary is or has been a party, with respect to which
API or any API Subsidiary has an obligation, that have been or are
maintained, contributed to, or sponsored by API or any API Subsidiary
for the benefit of any current or former employee, officer, or director
or that relate to API or any API Subsidiary, and are in effect or in
connection with which any obligation remains on the date of this
Agreement or that by their present terms will become effective after the
date of this Agreement (such plans, programs, and arrangements to be
referred to collectively as "API Employee Benefit Plans").
(2) API has delivered or made available to Inter Scan a complete
and accurate copy of each API Employee Benefit Plan document (including
all amendments) and a complete and accurate copy of all documents
relating to such API Employee Benefit Plan, including, if applicable:
(A) each trust agreement, insurance or annuity contract, investment
management agreement, custodial agreement, and other agreement relating
to the funding of the API Employee Benefit Plan, and all amendments to
them; (B) the most recent summary plan description and any subsequent
summary of material modifications or other material disclosure
information furnished to participants; (C) the three most recently
prepared or filed annual returns or reports, including all applicable
schedules; (D) if the API Employee Benefit Plan is intended to qualify
under or satisfy
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requirements of the tax law of the relevant jurisdiction, the most
recent determination letter or other notice of qualification or approval
issued by the relevant government authority, the application submitted
for it, any correspondence with the relevant government authority in
connection with the determination letter or other notice of
qualification or approval, and any pending application for a
determination letter or other notice of qualification or approval; (E)
the three most recent financial statements; and (F) the three most
recent actuarial valuation reports.
(3) Each API Employee Benefit Plan is now and always has been
operated in all material respects in accordance with its terms and the
requirements of all applicable laws. For the purposes of Section 2.3(u),
(v), and (w), the term "law" includes, without limitation, those
particular laws to which the following provisions of Section 2.3(u),
(v), and (w) refer, laws relating to, regulating, or mandating the
provision of social welfare, pension, or other benefits for employees,
all provisions of the relevant tax law applicable to secure intended tax
consequences, securities law, and all regulations and authoritative
court and administrative rulings under such laws. All persons who
participate in the operation of the API Employee Benefit Plans and all
API Employee Benefit Plan fiduciaries have always acted in all material
respects in accordance with the provisions of all applicable law of the
relevant jurisdiction. API and the API Subsidiaries have performed all
obligations required to be performed by them under, are not in any
material respect in default under or in violation of, and have no
knowledge of any material default or violation by any party to, any API
Employee Benefit Plan. No legal action, suit, claim, or governmental
proceeding or investigation is pending or, to the knowledge of API or
any API Subsidiary, threatened or imminent with respect to any API
Employee Benefit Plan (other than claims for benefits in the ordinary
course) and, to the knowledge of API or any API Subsidiary, no fact or
event exists that could give rise to any such action, suit, claim, or
governmental proceeding or investigation which is meritorious.
(4) The administrator of each API Employee Benefit Plan has
complied with all applicable laws of the relevant jurisdiction regarding
reporting to the relevant government authority and disclosure to
participants and beneficiaries. Each summary plan description, summary
of material modifications, and other material disclosure information
furnished to participants and beneficiaries with respect to each API
Employee Benefit Plan describes the plan accurately and comprehensively
in accordance with any applicable requirements of the law of the
relevant jurisdiction, and each annual report or return prepared or
filed with respect to each such plan, including all schedules and
attachments, is correct and accurate as of the date of filing.
(5) With respect to any API Employee Benefit Plan that provides
pension or retirement or other post-employment compensation ("Pension
Plan") and that is intended to qualify under or satisfy applicable
requirements of the tax law of the relevant jurisdiction (in the case of
any plan covering U.S. employees, section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code")), each such Pension Plan qualifies
under or satisfies the applicable requirements of the tax law of the
relevant jurisdiction, and any trust through which such Pension Plan is
funded is exempt, to the extent intended, from tax; if a determination
letter or other notice of qualification or approval would be available
from a government authority to indicate that such a plan does qualify
under or satisfies the applicable requirements of the tax law of the
relevant jurisdiction, the Pension Plan as amended through the date of
this Agreement has obtained such a letter or other notice. Nothing has
occurred that could adversely affect the qualified or satisfactory or
approved status of such Pension Plan or trust under the tax law of the
relevant jurisdiction.
(6) No person has acted or failed to act in connection with any API
Employee Benefit Plan in a manner that would subject API or any API
Subsidiary to direct or indirect liability, by indemnity or otherwise,
for a breach of any fiduciary duty.
(7) Neither API nor any API Subsidiary has incurred liability for
any excise tax arising under section 4971, 4972, 4980, or 4980B of the
Code, and no fact or event exists that could give rise to any such
liability.
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(8) Neither API nor any API Subsidiary has incurred liability under
Title IV of the Employee Retirement Income Security Act of 1974, as
amended, ("ERISA") (other than liability for premiums to the Pension
Benefit Guaranty Corporation ("PBGC") arising in the ordinary course),
and, to the knowledge of API and each API Subsidiary, no fact or event
exists that could give rise to such liability. No complete or partial
termination has occurred within the past five years with respect to any
Pension Plan subject to Title IV of ERISA or that is intended to be
qualified under section 401(a) of the Code. No reportable event (within
the meaning of section 4043 of ERISA) or event described in section
4063(a) of ERISA has occurred or is expected to occur with respect to
any Pension Plan subject to Title IV of ERISA. No proceeding has been
instituted by the PBGC to terminate any Pension Plan, nor has any notice
of intent to terminate any Pension Plan been filed with the PBGC. All
premiums due the PBGC have been paid in full on a timely basis.
(9) No Pension Plan subject to section 302 of ERISA or section 412
of the Code has had an accumulated funding deficiency (within the
meaning of section 302 of ERISA or section 412 of the Code), whether or
not waived. No asset of API or any API Subsidiary is the subject of a
lien arising under section 302(f) of ERISA or section 412(n) of the
Code. Neither API nor any API Subsidiary has been required to post
security under section 307 of ERISA or section 401(a)(29) of the Code,
and no fact or event exists that could give rise to such a lien or
requirement to post any such security.
(10) All contributions, insurance premiums, and payments required
to be made with respect to each API Employee Benefit Plan, whether by
the terms of the plan, applicable law of the relevant jurisdiction, or
agreement with employees, have been made by their due dates. Each API
Employee Benefit Plan has assets sufficient to satisfy any applicable
laws of the relevant jurisdiction regarding the level of funding
required in relation to the plan's obligation to pay benefits.
(11) As to each Pension Plan subject to U.S. law that is a defined
benefit plan (as defined in section 3(35) of ERISA) and that is subject
to section 302 of ERISA or section 412 of the Code, and as to each other
Pension Plan for which the applicable law of the relevant jurisdiction
requires an actuarial valuation, the most recent actuarial valuation
report accurately reflects the value of the plan assets and liabilities
as of the date of such valuation based on the funding method and
actuarial assumptions specified in the report, all employee census data
furnished to the plan's actuary in connection with such valuation and
prior valuations has been accurate and complete in all material
respects, and nothing has occurred since the date of such valuation that
would have a materially adverse effect on the funding condition of the
Pension Plan.
(12) Except as disclosed on Exhibit 2.3(u), no API Employee Benefit
Plan, and no other commitment or agreement, provides for the payment of
separation, severance, or similar benefits to any person solely as a
result of any transaction contemplated by this Agreement or as a result
of a "change in control", however defined, and the consummation of the
transaction contemplated by this Agreement will not accelerate the time
of payment or vesting of, or increase the amount of, any compensation or
benefit due to any current or former employee.
(13) Except as indicated in the API financial statements or Exhibit
2.3(u), neither API nor any API Subsidiary has any liability with
respect to any employee, officer, director or former officer, director
or employee for post-employment benefits, other than those associated
with the Pension Plans, and other than as required by section 4980B of
the Code and Part 6 of Title I of ERISA or by applicable law of the
relevant jurisdiction.
(14) There has been no representation made to or communication with
any employee that is not in accordance with the existing terms and
limitations of the API Employee Benefit Plans. Neither API nor any API
Subsidiary has made any commitment to modify any, or create any other,
API Employee Benefit Plan.
(v) Related Entities. To the best of API Portescap's knowledge,
neither API nor any API Subsidiary is or could become subject to any
obligation or liability with respect to an API Related Entity Benefit Plan
(as defined below), whether under Title IV of ERISA, section 4980B of the
Code, the
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provisions of any applicable law of any relevant jurisdiction, or the terms
of any API Related Entity Benefit Plan. "API Related Entity Benefit Plan"
means any employee pension benefit plan, employee welfare benefit plan,
fringe benefit plan, or executive compensation, retirement, supplemental
retirement, deferred compensation, incentive, bonus, severance,
compensation associated with change in control, perquisite, health care,
death benefit, medical, disability, life insurance, vacation pay, sick pay
or other plan, program, or arrangement, whether or not government-mandated,
to which an API Related Entity (as defined in the next sentence) is or has
been a party, with respect to which an API Related Entity has an
obligation, or that has been or is maintained, contributed to, or sponsored
by an API Related Entity for the benefit of any current or former employee,
officer, or director, that relates to an API Related Entity and is in
effect or in connection with which any obligation remains on the date of
this Agreement or that by its present terms will become effective after the
date of this Agreement. For the purposes of Section 2.3(v) and (w), an "API
Related Entity" means (i) a current or former member of a controlled group
including API or any API Subsidiary (within the meaning of section 414(b)
or (c) of the Code), (ii) a current or former member of an affiliated
service group including API or any API Subsidiary (within the meaning of
section 414(m) or (o) of the Code), or (iii) any other entity that is or
was related, directly or indirectly, by common ownership or control, with
API or any API Subsidiary, provided, however, that the term an "API Related
Entity" does not include API or the API Subsidiaries.
(w) Multiemployer Plans. Except as disclosed on Exhibit 2.3(w), (i)
neither API, nor any API Subsidiary, nor any API Related Entity has ever
had any obligation to contribute to any multiemployer plan within the
meaning of section 4001(a)(3) of ERISA that is subject to Title IV of ERISA
with respect to any of its employees, (ii) each of API and the API
Subsidiaries is not and could not become subject to any withdrawal
liability within the meaning of section 4201 of ERISA with respect to any
multiemployer plan and (iii) neither API, nor any API Subsidiary, nor any
API Related Entity has ever been a substantial employer within the meaning
of section 4001(a)(2) of ERISA with respect to any single-employer plan
within the meaning of section 4001(a)(15) of ERISA that is subject to Title
IV of ERISA.
(x) Capitalized Leases. Except as disclosed on Exhibit 2.3(x), API
and the API Subsidiaries have no capital leases.
(y) Guaranties. Except as disclosed in Exhibit 2.3(y), API and the
API Subsidiaries are not a party to any guaranty, repurchase agreements or
other credit accommodations which accommodate the credit of another person.
(z) Litigation. Except as disclosed in Exhibit 2.3(z), there are no
(i) claims, suits, actions, citations, administrative or arbitration or
other proceedings or governmental investigations pending or, to the best
knowledge of API or the API Subsidiaries threatened against API or API
Subsidiaries or to which any of API or API Subsidiaries is a party or
relating to any of the properties, businesses or business practices of API
or API Subsidiaries or the transactions contemplated by this Agreement
(including but not limited to proceedings and investigations related to
Environmental Laws, civil rights, discrimination in employment and
occupational safety and health) or (ii) judgments, orders, writs,
injunctions or decrees of any court or administrative agency involving any
of API or API Subsidiaries or affecting its assets or business.
(aa) Management Personnel. To the best of API's and the API
Subsidiaries' knowledge, none of the management personnel of API and the
API Subsidiaries has been convicted of a criminal act (other than a traffic
violation) during the ten-year period immediately preceding the date of
this Agreement.
(bb) Absence of Changes. Since January 3, 1997, there has not been
(i) any material adverse change in the financial condition, assets,
liabilities, business or properties of API or the API Subsidiaries, (ii)
any damage to, destruction of or loss of property, whether or not covered
by insurance, materially adversely affecting the property or business of
API or the API Subsidiaries, (iii) any material changes in compensation or
bonus payments or arrangements for any employees of API or the API
Subsidiaries, (iv) any sale or transfer of any assets of API or the API
Subsidiaries other than in the ordinary course of its business and
consistent with past practice, (v) any cancellation or compromise of any
debts or claims
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owed to API or the API Subsidiaries other than in the ordinary course of
its business and consistent with past practice, (vi) any transaction not in
the ordinary course of API's or the API Subsidiaries' business and
consistent with past practice, or (vii) any amendment or termination of any
contract or agreement which materially adversely affects the assets or
business of API or the API Subsidiaries.
(cc) Delivery of Exhibits. All exhibits referred to in this Section
2.3 were prepared and delivered pursuant to the Initial Agreement and shall
be deemed to have been prepared and delivered pursuant to this Agreement.
(dd) No Side Agreements. Except for this Agreement and the items
listed in the exhibits hereto, API and the API Subsidiaries are not a party
to any agreement calling for any action by API or the API Subsidiaries
outside of the ordinary course of business; no agreement or understanding
exists calling for any payment or consideration from a customer or supplier
of API or the API Subsidiaries to an officer, director or shareholder of
API or the API Subsidiaries respecting any transaction between API or the
API Subsidiaries and such supplier or customer; and, except as disclosed in
Exhibit 2.3(t), no affiliate of API or the API Subsidiaries, directly or
through any business concern affiliated with such affiliate, transacts any
business with API or the API Subsidiaries except for employment disclosed
pursuant to Section 2.3(r) hereof.
(ee) Customers. Except as set forth on Exhibit 2.3(ee) hereto, no
single customer or group of affiliated customers has accounted for more
than ten percent of API's consolidated gross sales during any of API's last
two fiscal years.
(ff) Suppliers. No single supplier or group of affiliated suppliers
has supplied API with products which would account for more than ten
percent of API's consolidated gross purchases during any of API's or such
API Subsidiary's last two fiscal years.
(gg) Title to Assets. Except as disclosed on Exhibit 2.3(gg), there
are no liens, claims, security interests, mortgages, easements,
restrictions, charges or encumbrances affecting any of API or the API
Subsidiaries' assets or the API's Facilities owned by API or an API
Subsidiary and, at the Closing, each of API and the API Subsidiaries will
have good and marketable title to or a valid leasehold interest in its
assets and the API's Facilities.
(hh) Machinery and Equipment. All of API's and the API Subsidiaries'
machinery and equipment is in good operating condition and repair, ordinary
wear and tear excepted. The machinery and equipment owned by API and each
API Subsidiary at the Closing will be sufficient for the conduct of API's
and such API Subsidiary's business as now conducted and will constitute all
machinery and equipment used by API and such API Subsidiary in its business
as of December 31, 1996, except for items which have been replaced with
newer items of equal or greater value.
(ii) Truth of Representations. On the date of this Agreement and on
the date of the Closing, no representation or warranty of API Portescap in
this Agreement, nor any written statement or certificate executed by API
Portescap and furnished or to be furnished to Inter Scan pursuant to this
Agreement or in connection with the transactions contemplated hereby
contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary to make the statements
contained therein not misleading.
(jj) Securities Law Compliance. API Portescap acknowledges that none
of the Shares have been registered under the Securities Act or under any
state or foreign securities laws. API Portescap is purchasing the Shares
solely for investment, with no present intention to distribute any of the
Shares to any person. API Portescap will not sell or otherwise dispose of
any of the Shares except in compliance with the registration requirements
or exemption provisions under the Securities Act and the rules and
regulations promulgated thereunder and any other applicable securities
laws.
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ARTICLE III.
CERTAIN COVENANTS OF INTER SCAN, THE COMPANY AND SUBSIDIARIES
3.1 Negative Covenants of Inter Scan, the Company and
Subsidiaries. Between the date hereof and the date of the Closing, the Company
and Subsidiaries will not, and Inter Scan will take all action legally permitted
to assure that the Company and Subsidiaries will not, do any of the following
without API Portescap's prior written consent:
(a) Make any change in the compensation, bonuses, or benefits payable
to any employee of the Company or any Subsidiary except non-material
changes in the compensation of non-supervisory employees;
(b) Pay or discharge any claim, lien, encumbrance or liability
(whether absolute, accrued, contingent or otherwise and whether or not due
or to become due) other than in the ordinary course of business;
(c) Enter into any contract or commitment other than in the ordinary
course of business;
(d) Enter into any collective bargaining agreement or create, enter
into or amend any Employee Benefit Plan (unless required to do so by any
applicable law governing labor management relations or Employee Benefit
Plans);
(e) Create, assume or incur any encumbrance on any of the Company's or
any Subsidiary's assets other than in the ordinary course of business;
(f) Sell, assign, lease, exchange or otherwise transfer or dispose of
any of the Company's or any Subsidiary's assets other than in the ordinary
course of business;
(g) Merge or consolidate with or into any other entity or enter into
any agreements relating thereto;
(h) Accelerate the collection of accounts receivable or decelerate the
payment of accounts payable;
(i) Issue any capital stock or profit sharing certificates of the
Company or any Subsidiary of any class, any options, warrants, calls,
commitments or rights of any character to purchase capital stock or profit
sharing certificates of the Company or any Subsidiary, or any securities
convertible into shares of capital stock of the Company or any Subsidiary
or into options, warrants, calls, commitments or rights of any character to
purchase capital stock or profit sharing certificates of the Company or any
Subsidiary;
(j) Declare or pay any dividends in cash or in kind upon any capital
stock of the Company or any Subsidiary, return any capital to the
shareholders of the Company or any Subsidiary in the form of cash or
property other than cash, or pay or make any distribution of cash or
property other than cash to the shareholders of the Company or any
Subsidiary;
(k) Guarantee or otherwise accommodate the obligation of any person
except as results from the endorsement of negotiable instruments in the
ordinary course of business;
(l) Enter into any agreement or commitment to (i) purchase goods or
services in any single transaction having a purchase price exceeding CHF
100,000, (ii) make any capital expenditure in excess of CHF 100,000 or
other than in the normal and usual course of the Company's or any
Subsidiary's business or (iii) incur any material obligation or liability
other than in the normal and usual course of the Company's or any
Subsidiary's business;
(m) Amend the Articles of Incorporation, By-Laws or other corporate
documents of the Company or any Subsidiary;
(n) Incur or guarantee any obligation or liability for borrowed money
except for borrowings under existing credit facilities in the ordinary
course of business consistent with past practice;
(o) Cancel any debts owed to it or waive any material claim or right
of substantial value, except for compromises of trade debt in the ordinary
course of business;
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(p) Make any changes in its accounting methods, principles or
practices except as required by changes in the Accounting Principles;
(q) Pay, discharge or satisfy any claim, liability or obligation,
other than liabilities or obligations reflected or reserved against in the
Company's or any Subsidiary's accounts or incurred in the ordinary course
of business or consistent with past practice;
(r) Enter into or renew any lease for real property; or
(s) Take any action or agree, in writing or otherwise, to take any of
the foregoing actions or any action which would make any representation or
warranty in Sections 2.1 or 2.2 hereof untrue or incorrect.
3.2 Affirmative Covenants of Inter Scan, the Company and
Subsidiaries. Between the date hereof and the date of the Closing, except as
otherwise consented to or approved by API Portescap in writing, the Company and
Subsidiaries will, and Inter Scan will take such steps as are permitted by law
to cause the Company and Subsidiaries to:
(a) Make available to API and its counsel, accountants and other
representatives for examination all corporate and financial books and
records of the Company and Subsidiaries, the Company's Facilities, the
Company's and Subsidiaries' customers and all other matters reasonably
considered by API to be relevant to the business and affairs of the Company
and Subsidiaries (such examinations to take place during normal business
hours in a manner so as not to interfere with the Company's and
Subsidiaries' normal business operations);
(b) Operate the business of the Company and Subsidiaries substantially
as currently operated and only in the usual and ordinary course, and
consistent with that operation Inter Scan, the Company and Subsidiaries
will use their best efforts to preserve intact the Company's and
Subsidiaries' present business organization and goodwill of the Company's
and Subsidiaries' employees, customers, suppliers and others having
business relations with the Company, Subsidiaries and the Intellectual
Property;
(c) Maintain the Company's and Subsidiaries' books of account, records
and files substantially in the same manner as they are maintained as of the
date of this Agreement;
(d) Maintain the Company's and Subsidiaries' assets in customary
repair, order and condition, normal wear and tear excepted, replace all
items of machinery and equipment at time intervals consistent with past
practice and repair or replace, consistent with past practice, any of the
Company's and Subsidiaries' assets that may be damaged or destroyed;
(e) Maintain in force existing policies of insurance or substitute
policies providing reasonably comparable insurance coverage in amounts not
less than those in effect on the date of this Agreement;
(f) Pay obligations under all contracts, agreements, leases,
commitments, understandings, franchises, licenses or similar arrangements
as and when they become due; and
(g) Take all required corporate action to effectuate the transactions
contemplated by this Agreement.
ARTICLE IV.
COVENANTS OF API
4.1 Affirmative Covenants of API. Between the date hereof and the date of
the Closing, API will:
(a) Make available to Inter Scan and its counsel, accountants and
other representatives for examination all corporate and financial books and
records of API and the API Subsidiaries, API's and the API Subsidiaries'
facilities, API's and the API Subsidiaries' customers, and all other
matters reasonably considered by Inter Scan to be relevant to the business
and affairs of API and the API Subsidiaries (such examinations to take
place during normal business hours in a manner so as not to interfere with
API's and the API Subsidiaries' normal business operations);
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(b) Take all required action to authorize and issue the Series A
Preferred Stock as provided for in Exhibit 1.2(a)(i) and the Note as
provided for in Exhibit 1.2(a)(ii), the payment of the 5,500,000 CHF cash
portion of the Purchase Price, and the reservation for issuance of all
required shares of API's common stock issuable upon the conversion of
Series A Preferred Stock which shares of common stock shall be deemed to be
fully paid and nonassessable upon such conversion; and
(c) Exclude as a "triggering event" under any so called "take-over
defenses" or "shareholders' rights" plans which may be implemented by API
prior to the Closing Date, the acquisition or ownership by Inter Scan of
the Preferred Stock or the exercise by Inter Scan of its right to convert
the Preferred Stock into shares of API common stock or its ownership of
such shares of common stock; and, in the event of the occurrence of a
"triggering event", API will treat Inter Scan like its other shareholders
(other than any person, shareholder or group whose acquisition of API
securities is deemed to be a "triggering event") with respect to the
Preferred Stock and the shares of API common stock issuable upon the
conversion thereof.
4.2 Additional Covenants of API. If a Closing occurs under Article V, API
will:
(a) Use its best efforts to accomplish each of the following by April
30, 1998, (i) have its Board of Directors and shareholders adopt an
amendment to its certificate of incorporation authorizing 1,250,000 shares
of Series B Preferred Stock and increasing the common stock of API by at
least 1,000,000 shares, (ii) have that amendment duly filed with the
Secretary of State of the State of Delaware, (iii) have its shareholders
approve the issuance of all shares of common stock issuable upon the
conversion of all shares of Series B Preferred Stock issued to Inter Scan
pursuant to this Agreement, and (iv) have its shareholders elect the
nominee of Inter Scan, who shall be acceptable to API's Board of Directors,
to API's nine-person Board of Directors for a term expiring at the annual
meeting of shareholders in 2000.
(b) Make such payments, conversions, redemptions and exchanges as are
provided for in Exhibit 1.2(a)(i), Exhibit 1.2(a)(ii)and Exhibit 5.1(d)(1)
without delay and without asserting any claim, defense, counterclaim, set
off or the like which API or any of its affiliates may have against Inter
Scan to such payments, conversions, redemptions and exchanges;
(c) Ensure that any API common stock issued upon the conversion of the
Series A and Series B Preferred Stock will be duly authorized, validly
issued and outstanding, fully paid and non-assessable; and
(d) Exclude as a "triggering event" under any so called "take-over
defenses" or "shareholders' rights" plans which may be implemented by API
on or after the Closing Date, the acquisition or ownership by Inter Scan of
the Series A and Series B Preferred Stock or the exercise by Inter Scan of
its right to convert the Series A and Series B Preferred Stock into shares
of API common stock or its ownership of such shares of common stock; and,
in the event of the occurrence of a "triggering event", API will treat
Inter Scan like its other shareholders (other than any person, shareholder
or group whose acquisition of API securities is deemed to be a "triggering
event") with respect to the Series A and Series B Preferred Stock and the
shares of API common stock issuable upon the conversion thereof.
ARTICLE V.
CLOSING
5.1 Conditions to Inter Scan's Obligation to Close. The obligations of
Inter Scan to Close shall be subject to satisfaction of the following
conditions:
(a) Representations, Warranties and Covenants. The representations
and warranties of API Portescap set forth in Section 2.3 hereof shall be
true and correct as of the date of this Agreement and as of the Closing as
though those representations and warranties have been made at and as of
that time (except that such representations and warranties may be untrue or
incorrect to the extent that such untruths and inaccuracies do not have a
material adverse effect on (i) the financial condition, assets,
liabilities, or business of API and the API Subsidiaries taken as a whole
or (ii) the ability of API to issue the Series A Preferred Stock, the Note
and the cash payment of 5,500,000 CHF to Inter Scan in
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accordance with the terms hereof), and the covenants contained in Section
4.1 shall have been performed in all material respects.
(b) No Litigation. There shall not have been instituted or threatened
on or before the Closing any action or proceeding to restrict or prohibit
the transactions contemplated by this Agreement.
(c) Purchase Price and Payment of Debt to Affiliates. The
considerations required to be paid at the Closing pursuant to Section 1.2
shall have been paid; and at API Portescap's option either (i) the Company
shall repay indebtedness owing by it to Societe Privee de Gerance S.A. and
to STC Scandinavian Trading Company Interfinans AB which indebtedness shall
not exceed 1,750,000 CHF in principal plus interest accrued and unpaid
through the Closing Date (the "Debt to Affiliates") or (ii) API Portescap
or an affiliate thereof shall purchase the Debt to Affiliates from such
creditors for a purchase price equal to the outstanding principal and
interest owing thereunder.
(d) Shareholder and Registration Agreements. API shall have executed
and delivered to Inter Scan a Shareholder Agreement (the "Shareholder
Agreement") and Registration Agreement (the "Registration Agreement") in
the forms annexed hereto as Exhibit 5.1(d)(1) and (2) respectively.
(e) Appointment of Inter Scan's Representative to API's
Board. Effective at the Closing, the Board of Directors of API shall
appoint to the nine-person Board of Directors of API a nominee selected by
Inter Scan, who shall be acceptable to API's Board of Directors, in
accordance with Paragraph 2(a) of the Shareholder Agreement. The nominee
shall also be appointed to the Nominating Committee of API's Board of
Directors.
5.2 Conditions to API Portescap's Obligation to Close. The obligations of
API Portescap to Close shall be subject to satisfaction of the following
conditions:
(a) Representations, Warranties and Covenants. The representations
and warranties of Inter Scan and the Company set forth in Sections 2.1 and
2.2 hereof shall be true and correct as of the date of this Agreement and
as of the Closing as though those representations and warranties had been
made at and as of that time (except that such representations and
warranties may be untrue or incorrect to the extent that such untruths and
inaccuracies do not have a material adverse effect on (i) the financial
condition, assets, liabilities or business of the Company and Subsidiaries
taken as a whole or (ii) the ability of Inter Scan to transfer the Shares
to API Portescap in accordance with the terms hereof), and the covenants
contained in Sections 3.1 and 3.2 hereof shall have been performed in all
material respects.
(b) No Litigation. There shall not have been instituted or threatened
any action or proceeding to restrict or prohibit the transactions
contemplated by this Agreement.
(c) Conveyances. Inter Scan shall have delivered to API Portescap the
stock certificates for the Shares and instruments reasonably satisfactory
in form and substance to API Portescap and its counsel conveying good title
to all of the Shares, free and clear of all liens, encumbrances and
security interests.
(d) Resignations and Releases. API Portescap shall have received from
each current officer and director of the Company and Subsidiaries listed on
Exhibit 5.2(d) a letter by which he or she shall resign his or her
positions with the Company or Subsidiaries, as applicable, and Inter Scan
shall use its best efforts to obtain and, to the extent obtained, shall
deliver to API Portescap at Closing a letter from each such party which
grants the Company and Subsidiaries a general release. In addition, each
such officer and director shall assign to the Company or applicable
Subsidiary any shares of the capital stock of such entity held by such
party.
(e) Shareholder and Registration Agreements. Inter Scan shall have
executed and delivered to API the Registration Agreement and the
Shareholder Agreement.
5.3 Time and Place. The closing hereunder (the "Closing") shall, unless
the parties agree to another date or time, take place at 9:00 a.m. on July 8,
1997, (the "Closing Date") at a place to be agreed upon by the parties.
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5.4 Best Efforts to Satisfy Conditions. Each party shall use its best
efforts to secure promptly the satisfaction of the conditions to Closing.
5.5 Waiver of Conditions. Inter Scan and API Portescap may, at their
respective options, waive any conditions to their respective obligations to
Closing.
5.6 Termination of Agreement. This Agreement may be terminated at any time
prior to the Closing:
(a) by written agreement of all of the parties hereto;
(b) by API Portescap, if there has been (A) a material violation or
breach by Inter Scan or the Company of any of their respective agreements
or covenants contained in this Agreement or (B) a violation or breach by
Inter Scan or the Company of any of their respective representations or
warranties contained in this Agreement which violation or breach has a
material adverse effect on (i) the financial condition, assets, liabilities
or business of the Company and Subsidiaries taken as a whole or (ii) the
ability of Inter Scan to transfer the Shares to API Portescap in accordance
with the terms hereof, and (C) any such violation or breach described in
clauses (A) and (B) above has not been waived by API Portescap in writing;
or if there has been any event or occurrence which has rendered the
satisfaction of a condition to the obligations of API Portescap impossible
and the failure to satisfy such condition has a material adverse effect on
(A) (i) the financial condition, assets, liabilities or business of the
Company and Subsidiaries taken as a whole or (ii) the ability of Inter Scan
to transfer the Shares to API Portescap in accordance with the terms hereof
and (B) has not been waived by API Portescap in writing;
(c) by Inter Scan, if there has been (A) a material violation or
breach by API Portescap or API of any of its agreements or covenants
contained in this Agreement or (B) a violation or breach by API Portescap
or API of any of its representations or warranties which violation or
breach has a material adverse effect on (i) the financial condition,
assets, liabilities or business of API and the API Subsidiaries taken as a
whole or (ii) the ability of API to issue the Series A Preferred Stock and
the Note or to make the cash payment of 5,500,000 CHF to Inter Scan in
accordance with the terms hereof, and (C) any such violation or breach
described in clauses (A) and (B) above has not been waived by Inter Scan in
writing; or if there has been any event or occurrence which has rendered
the satisfaction of a condition to the obligations of Inter Scan impossible
and the failure to satisfy such condition has a material adverse effect on
(A) (i) the financial condition, assets, liabilities or business of API and
the API Subsidiaries taken as a whole or (ii) the ability of API to issue
the Series A Preferred Stock and the Note or to make the cash payment of
5,500,000 CHF to Inter Scan in accordance with the terms hereof and (B) has
not been waived by Inter Scan in writing; and
(d) by any party hereto if the Closing shall not have occurred on or
before July 31, 1997.
5.7 Procedure Upon Termination. In the event of termination by API
Portescap or by Inter Scan pursuant to Section 5.6 hereof, written notice
thereof shall forthwith be given to the other parties and the transactions
contemplated by this Agreement shall be terminated without further action by the
parties hereto. If the transactions contemplated by this Agreement are
terminated as provided herein:
(a) Each party, if requested, will redeliver all documents, work
papers and other material of any other party relating to the transactions
contemplated hereby, whether so obtained before or after the execution
hereof, to the party furnishing the same;
(b) All confidential information received by any party hereto with
respect to the business of any other party shall not be used or disclosed
to another person to the detriment of any other party; and
(c) No party hereto and none of their respective directors, officers,
stockholders, affiliates or controlling persons shall have any liability or
further obligation to any other party to this Agreement, except that each
party hereto shall remain liable for any claims arising as a result of any
breach of covenant by such party under this Agreement which occurs prior to
the date of termination of this Agreement.
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ARTICLE VI.
ACTIONS AFTER THE CLOSING
The parties covenant to take the following actions after the Closing Date:
6.1 Further Assurances. Each party shall cooperate with the other, and
execute and deliver, or cause to be executed and delivered, all such other
instruments, including, without limitation, instruments of conveyance,
assignment and transfer, and take all such other actions as may reasonably be
requested by the other party hereto from time to time, consistent with the terms
of this Agreement, in order to effectuate the provisions and purposes of this
Agreement.
6.2 HSR Act. Inter Scan agrees to make required filings, if any, arising
under the HSR Act in connection with any conversion of the Preferred Stock into
shares of API common stock. Inter Scan shall also be responsible for payment of
any fees payable in connection with any such filings. API agrees to cooperate
with Inter Scan as reasonably requested by Inter Scan in connection with any
such filings.
ARTICLE VII.
NON-COMPETITION AGREEMENTS
7.1 Non-Competition.
(a) The parties recognize that the value of the business being
purchased by API Portescap is dependent upon the particular method in which
each of the Company and Subsidiaries, has conducted the business and the
contacts of each of the Company and Subsidiaries with its customers and
that API Portescap is entering into this transaction with a view toward
that value. Accordingly, Inter Scan hereby agrees that, for a period of
three years and six months following Closing, it, and its Affiliates (as
defined below) shall not directly or indirectly:
(1) Have any interest (financial or otherwise) in, or accept
employment from, or serve in any capacity (such as owner, investor,
principal, agent, consultant, partner or otherwise) with, any person or
entity (other than API Portescap) which is engaged in the business of
selling or distributing anywhere in the world any of the types of
products or services that were manufactured or distributed by the
Company or any Subsidiary at any time during the one year period prior
to the Closing Date (collectively, the "Products"), or
(2) Sell Products to or solicit purchases of Products by customers
who were customers of the Company or any Subsidiary at the time of the
Closing or during the five-year period prior thereto.
The provisions of this Section 7.1(a) shall not be deemed to prohibit
or restrict (i) Inter Scan or any of its Affiliates from passive ownership,
in the aggregate beneficially or of record, of less than 5% of any class of
outstanding securities of any company the securities of which are listed on
a national securities exchange or are publicly traded on the Nasdaq
National Market or (ii) Mr. Holger Hjelm from maintaining his existing
investment in Feintechnik Bertsch GmbH & Co.
(b) Inter Scan acknowledges that the identity of the customers of the
Company and Subsidiaries, the engineering drawings and know-how of the
Company and Subsidiaries and the pricing policies, sales and marketing
strategies, employee training practices and other operating practices of
the Company and Subsidiaries are confidential and valuable proprietary
information of the Company and Subsidiaries. Inter Scan will not disclose
the identity of the customers, the engineering drawings and know-how of the
Company and Subsidiaries, or the Company's and Subsidiaries' sales
policies, strategies and employee training and operating practices to any
person or entity unless permitted in writing to do so by API Portescap or
required to do so by legal process. Inter Scan will transfer to API
Portescap at the Closing, and will not retain, any of its copies,
documents, manuals, summaries, memos, notes, computer programs, disks, and
database information, if any, in any form containing any of the above
described customer identities, engineering drawings and know-how, policies,
strategies and employee training and operating practices.
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(c) Inter Scan agrees that any court having jurisdiction may enter a
preliminary or permanent restraining order or injunction against Inter Scan
(without requiring API Portescap or the Company or any Subsidiary to (i)
prove any damages, irreparable harm or that money damages are insufficient
to compensate API Portescap, the Company or Subsidiaries, or (ii) post any
bond) in the event of actual or threatened breach of any of the provisions
of this Section. Any such relief shall not preclude API Portescap or the
Company or any Subsidiary from seeking any other relief at law or equity
with respect to any such claim.
(d) If any provision of this Section is deemed to be in violation of
law or unenforceable for any reason, the remainder of this Section shall
remain in full force and effect and shall continue to be binding upon Inter
Scan, and the parties agree that the court shall substitute a reasonable,
judicially enforceable limitation in place of the unenforceable provision
in order to serve the intent of the parties as expressed herein and the
reasonable business needs and expectations of API Portescap in purchasing
the Shares.
(e) Inter Scan agrees to exercise whatever right it has to cause the
officers, directors and employees of the Company and Subsidiaries who
resign their positions from the Company at, or prior to, the Closing
(collectively, the "Former Officers and Directors"), as well as all
Affiliates (as defined below) of Inter Scan, to comply with the provisions
of this Section. For purposes of this Agreement, "Affiliates" shall mean
any person, company or entity that controls, is controlled by or is under
common control with Inter Scan and, in any event, shall include Mr. Holger
Hjelm.
ARTICLE VIII.
TAXES
8.1 Liability for Taxes.
(a) Taxable Periods Ending on or Before the Closing Date. Inter Scan
shall be liable for, and shall indemnify and hold API and its subsidiaries,
and the Company and the Subsidiaries, harmless against, all Taxes due or
payable by the Company or any Subsidiary, either on its own account or by
reason of any tax sharing agreement or arising out of its inclusion in a
group of corporations filing on a consolidated basis, for any taxable year
or taxable period ending on or before the Closing Date, but only to the
extent that the amount of such Taxes exceeds the amount reserved therefor
in the Financial Statements. For the purposes of this Section 8.1(a), any
Taxes described in the parenthetical contained in Section 8.1(c) below
shall be deemed to be attributable to taxable periods ending on or before
the Closing Date, even if such Taxes are actually incurred with regard to a
tax period ending after the Closing Date.
(b) Taxable Periods Commencing on or After the Closing Date. API
Portescap shall be liable for, and shall indemnify and hold Inter Scan and
its subsidiaries harmless against any and all Taxes due or payable by the
Company, any Subsidiary or API Portescap with respect to the Company or any
Subsidiary for any taxable year or taxable period commencing after the
Closing Date.
(c) Definition of "Taxes." "Taxes" shall mean all taxes, levies,
assessments, charges or fees of any kind or character, including without
limitation U.S. federal, state, local and foreign income, profits, capital
gains, franchise, sales, use, value added, service, gross receipts,
occupation, property, property transfer, lease, capital stock, premium,
excise, payroll, withholding, estimated taxes, sanctions, and other
governmental charges imposed by the United States or any state, county,
local or foreign government or subdivision or agency thereof for any reason
whatsoever (including all such items and all Losses, as defined in Section
9.2, arising out of or resulting from the failure, beginning before the
Closing Date, of any Pension Plan to qualify under Section 401(a) of the
Code, where applicable, or the failure, beginning before the Closing Date,
of any trust through which any such Pension Plan is funded to be exempt
from income tax), including any interest, additions to tax and penalties
thereon.
8.2 Refunds or Credits.
(a) Except as otherwise set forth in this Agreement, any refunds or
credits of Taxes, to the extent that such refunds or credits are
attributable to taxable periods ending on or before the Closing Date and
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are not reflected on the Financial Statements, shall be for the account of
Inter Scan, and, to the extent that such refunds or credits are
attributable to taxable periods ending after the Closing Date, such refunds
or credits shall be for the account of API Portescap. API Portescap shall
cause the Company promptly to forward to Inter Scan or to reimburse Inter
Scan for any such refunds or credits due Inter Scan after receipt thereof
by API Portescap, the Company or any Subsidiary, and Inter Scan shall
promptly forward to API Portescap any such refunds or credits due API
Portescap after the receipt thereof by Inter Scan.
(b) If the examination of any federal, state, local, foreign or other
tax return of Inter Scan, the Company or any Subsidiary shall result (by
settlement or otherwise) in any adjustment that decreases deductions,
losses or tax credits or increases income, gains or recapture of tax
credits for any period ending on or before or including the Closing Date,
and that will permit API or a subsidiary thereof to increase deductions,
losses or tax credits or decrease the income, gains or recapture of tax
credits that would otherwise (but for such adjustments) have been taken or
reported with respect to API, a subsidiary of API, the Company or any
Subsidiary for one or more periods ending after the Closing Date, Inter
Scan will notify API, and provide it with adequate information so that it
can reflect on tax returns of API, a subsidiary of API, the Company or any
Subsidiary such increases in deductions, losses or tax credits or decreases
in income, gains or recapture of tax credits. With respect to such
increases or decreases on tax returns of API, a subsidiary of API, the
Company or any Subsidiary, API shall pay to Inter Scan the amounts by which
the aggregate of all Tax Benefits (as hereinafter defined) which result
therefrom exceeds $10,000, such amounts to be paid when and as such Tax
Benefits in excess of $10,000 are realized.
(c) If the examination of any federal, state, local, foreign or other
tax return of API, a subsidiary of API, the Company or any Subsidiary shall
result (by settlement or otherwise) in any adjustment that decreases
deductions, losses or other tax credits for any period ending after the
Closing Date, and that will permit Inter Scan or the Company or any
Subsidiary to increase deductions, losses or tax credits or decrease the
income, gains or recapture of tax credits that would otherwise (but for
such adjustment) have been taken or reported with respect to Inter Scan,
the Company or any Subsidiary for one or more periods before the Closing
Date, API will notify Inter Scan and provide it with adequate information
so that it can reflect on its return such increases in deductions, losses
or tax credits or decreases in income, gains or recapture of tax credits.
Inter Scan shall pay to API the amounts by which the aggregate of all Tax
Benefits which result therefrom exceeds $10,000, such amounts to be paid
when and as such Tax Benefits inn excess of $10,000 are realized.
(d) The term "Tax Benefits" shall mean in the case of a separate
state, local, foreign or other tax return, the sum of the amount by which
the tax liability of such corporation to the appropriate government or
jurisdiction is reduced (including by refund) and any interest from such
government or jurisdiction is reduced (including by refund) and any
interest from such government or jurisdiction relating to such tax
liability, and in the case of a consolidated federal income tax return or
similar state, local, foreign or other tax return, the sum of the amount by
which the tax liability of the affiliated group of corporations to the
appropriate government or jurisdiction is reduced (including tax refund)
and any interest from such government or jurisdiction relating to such tax
liability.
8.3 Contests. Whenever any taxing authority sends a notice of an audit,
initiates an examination of the Company or any Subsidiary, or otherwise asserts
a claim, makes an assessment, or disputes the amount of Taxes (i) for any
taxable period for which Inter Scan is or may be liable under this Agreement, or
(ii) for any taxable period that involves an issue that could potentially affect
a taxable period for which Inter Scan is or may be liable under this Agreement,
API shall promptly inform Inter Scan, and Inter Scan shall have the right to
control any resulting proceedings and to determine whether and when to settle
any such claim, assessment or dispute except to the extent such proceedings or
determinations affect the amount of Taxes for which API or a subsidiary of API
is liable under this Agreement. Whenever any taxing authority sends a notice of
an audit, initiates an examination of the Company or any Subsidiary, or
otherwise asserts a claim, makes an assessment or disputes the amount of Taxes
(i) for any taxable period for which API Portescap or API may be liable under
this Agreement, or (ii) for any taxable period that involves an issue that could
potentially affect a taxable period for which API Portescap or API is or may be
liable under this Agreement,
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Inter Scan shall promptly inform API, and API shall have the right to control
any resulting proceedings and to determine whether and when to settle any such
claim, assessment or dispute, except to the extent such proceedings affect the
amount of Taxes for which Inter Scan is liable under this Agreement.
8.4 Mutual Cooperation. Each of API and Inter Scan will provide the other
with such assistance as may reasonably be requested by either of them in
connection with the preparation of any tax return, any audit or other
examination by any taxing authority, or any judicial or administrative
proceedings relating to liability for Taxes, and each will retain and provide
the other with any records or information which may be relevant to such return,
audit or examination, proceedings or determination. Such assistance shall
include making employees available on a mutually convenient basis to provide
additional information and explanation of any material provided hereunder and
shall include providing copies of any relevant tax return and supporting work
schedules. The party requesting assistance hereunder shall reimburse the other
for reasonable expenses incurred in providing such assistance. Without limiting
in any way the foregoing provisions of this Section 8.4, API hereby agrees that
it will retain, for a period of five years after Closing, copies of all tax
returns, supporting work schedules and other records or information which may be
relevant to such returns of the Company for all taxable periods which include
the dates from January 1, 1992, to and including the Closing Date.
8.5 Covenants and Agreements.
(a) Company's Obligation to File Returns. The Company shall timely
file, or cause to be timely filed, with the appropriate taxing authorities
all returns and reports with respect to Taxes that are required to be filed
on or prior to the Closing Date by or with respect to the Company and the
Subsidiaries, and the Company shall pay or cause to be paid all Taxes shown
as due thereon.
(b) API's Obligation to File Returns. API shall timely file or cause
to be timely filed all other returns and reports with respect to Taxes that
are required to be filed with respect to each of the Company and the
Subsidiaries, or any successor(s) to its business, after the Closing Date.
API shall pay or cause to be paid all Taxes shown as due on such returns,
to the extent provided in Section 8.1(b). Inter Scan shall pay or cause to
be paid all Taxes shown on such returns to the extent provided in Section
8.1(a). To the extent reasonably requested by Inter Scan, API shall
participate in the filing of and shall file any required returns, reports,
statements or forms with respect to any period that ends on or before
Closing. API shall prepare or cause to be prepared and shall file or cause
to be filed all other tax returns, reports, statements and forms required
of the Company, or in respect of its activities, for any period ending
after Closing that includes the operations of the Company prior to Closing.
To the extent reasonably requested by API, Inter Scan shall participate in
the filing of and shall file any required returns, reports, statutes, or
forms with respect to any period that includes the operation of the Company
and the Subsidiaries prior to the Closing Date. Any such tax returns,
reports, statements, forms or schedules that include or relate to tax
periods ending on or before Closing or that include the operations of the
Company and the Subsidiaries prior to Closing shall be subject to the
mutual agreement of Inter Scan and API on a basis consistent with the last
previous such returns, reports, statements, forms or schedules filed or
prepared in respect of the Company and the Subsidiaries, unless Inter Scan
or API as the case may be, concludes that there is no reasonable basis for
such position.
8.6 Tax Sharing Agreement. All tax sharing agreements or practices among
or between the Company or any Subsidiary and Inter Scan or any Affiliates
thereof shall be terminated as of Closing.
ARTICLE IX.
INDEMNIFICATION
9.1 Expiration of Representations and Warranties. Each of the
representations and warranties made by Inter Scan, the Company, API Portescap
and API in this Agreement (including the Exhibits, insofar as they relate to
such representations and warranties) shall survive until the Closing and shall
expire immediately upon the consummation of the Closing, and no action for
indemnification or otherwise with respect to a breach of any such representation
or warranty may be brought, and no litigation with respect thereto commenced,
and
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the party making such representation or warranty shall have no obligation with
respect thereto, after the Closing.
9.2 Indemnification by Inter Scan. Inter Scan hereby indemnifies and
agrees to hold harmless API Portescap, API and the Company and Subsidiaries from
any and all liabilities, losses, claims, demands, damages, out of pocket costs
and expenses (including without limitation court costs and reasonable
attorneys', consultants' and accountants' fees necessarily incurred in
connection with litigation and administrative proceedings) (collectively,
"Losses") arising out of or resulting from: (a) any breach or violation of any
covenant or agreement by Inter Scan or the Company contained in this Agreement;
(b) any violation of any Environmental Laws or any disposal or release of
Hazardous Substances or Hazardous Wastes occurring in connection with the
operations of Portescap U.S. Inc. or Transicoil Inc. at or from any facilities
or sites owned, leased or used by such entities located at or around the North
Penn Area 12 Site in Worcester Township, Montgomery County, Pennsylvania; and
(c) the Company's and any of its Subsidiaries' failure to properly obtain any
required licenses for computer software programs or systems.
9.3 Indemnification by API Portescap. API Portescap hereby indemnifies and
agrees to hold harmless Inter Scan from any and all Losses arising out of or
resulting from any breach or violation of any covenant or agreement by API
Portescap or API contained in this Agreement.
9.4 Claims. In addition to any limitations set forth above, any party
seeking indemnification (the "Indemnified Party") will notify the party from
whom indemnification is requested (the "Indemnifying Party") as soon as
practicable after they have concluded that they have a claim for indemnification
against the Indemnifying Party under this Agreement, which notice shall include
a description of the nature and basis of such claim. Upon receipt of a notice
from Indemnified Party of such claim, Indemnifying Party may assume the defense
thereof with counsel reasonably satisfactory to Indemnified Party. Indemnified
Party shall have the right to employ separate counsel in any such action or
claim and to participate in the defense thereof, provided that the fees and
expenses of counsel employed by Indemnified Party shall be at the expense of
Indemnifying Party only if either (i) Indemnifying Party shall have failed,
within 20 days after having been notified of the existence of the claim, to
assume the defense thereof or (ii) the employment of such counsel has been
specifically authorized by Indemnifying Party. So long as Indemnifying Party is
reasonably contesting such claim in good faith, Indemnified Party shall not pay
or settle any such claim. Notwithstanding the foregoing, Indemnified Party shall
have the right to pay or settle any such claim, provided that in such event it
shall waive any right to indemnification therefor by Indemnifying Party. If
Indemnifying Party does not notify Indemnified Party within 20 days after
receipt of Indemnified Party's notice of a claim of indemnification hereunder
that Indemnifying Party elects to undertake the defense thereof, Indemnified
Party shall have the right to contest, settle or compromise the claim at the
expense of Indemnifying Party, subject to the consent of Indemnifying Party
which consent shall not be unreasonably, withheld, conditioned or delayed.
9.5 Limitations on Indemnification. Notwithstanding anything contained in
Sections 9.2 and 9.3 to the contrary:
(a) The Indemnifying Party shall be required to indemnify and hold
harmless the Indemnified Party under this Article IX only to the extent the
aggregate amount of all Losses incurred by the Indemnified Party shall
exceed a deductible of CHF 100,000 (it being understood that the Company,
Subsidiaries, API Portescap or API may assert indemnification rights under
Article IX if the combined Losses of such parties exceed such deductible);
provided, however, that the foregoing deductible shall not be applicable to
any amounts to which any party may be or become entitled under Article
VIII, Section 9.2(c) or Section 11.8 hereof.
(b) Inter Scan's liability under Section 9.2 to provide
indemnification for Losses incurred in connection with (i) all claims
asserted pursuant to clauses (b) and (c) of the first sentence of Section
9.2 hereof, shall be limited to an aggregate amount of 2,000,000 CHF and,
in any event, shall not exceed an aggregate amount of 1,000,000 CHF in
connection with any such claims asserted after the date which is one year
and three months after the Closing Date and (ii) all claims asserted
pursuant to clause (c) of the first sentence of Section 9.2 hereof, shall
be limited to an aggregate amount of 300,000 CHF (subject to the limits and
requirements set forth in Section 9.5(d) below.
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(c) Except to the extent otherwise provided in Section 9.4 above,
Losses which are recoverable in connection with a claim asserted pursuant
to clause (b) of the first sentence of Section 9.2 hereof shall be limited
to amounts payable as a result of the settlement (in accordance with the
terms of Section 9.4) of, or any judgments, orders or other similar relief
rendered in connection with, any claims asserted with regard to the matters
referenced in such clause (b).
(d) Notwithstanding the 100,000 CHF deductible referenced in Section
9.5(a) above, any claim by the Company, its Subsidiaries, API Portescap or
API for indemnification from Inter Scan for Losses related to computer
software licenses referred to in Section 9.2(c) and Section 9.5(b)(ii)
shall be subject to a deductible of 150,000 CHF, and with respect to such
claim Inter Scan's maximum liability of 300,000 CHF shall not arise unless
and until the Company and/or its Subsidiaries have expended a total of
150,000 CHF to acquire valid computer software licenses.
(e) Any litigation initiated by an Indemnified Party seeking to
enforce the indemnification obligations of an Indemnifying Party hereunder
shall be brought in a court of appropriate jurisdiction located in (i) Erie
County, New York State, U.S.A. with regard to any such litigation initiated
against API or API Portescap and (ii) in Zurich, Switzerland with regard to
any such litigation initiated against Inter Scan.
ARTICLE X.
MANAGEMENT OF THE COMPANY AND SUBSIDIARIES.
10.1 Appointment of API as Manager.
(a) Subject to the provisions of Section 10.2 below, Inter Scan and
the Company have appointed API as the exclusive manager for the day-to-day
operations of the Company and Subsidiaries and API has accepted such
appointment, for the period from the date of the Initial Agreement through
the earlier of (i) the Closing Date or (ii) the date of the termination of
this Agreement pursuant to the provisions of Section 5.6 above (the
"Management Period") on the terms and conditions hereinafter set forth.
(b) During the Management Period, API shall have full and exclusive
management responsibility for the day-to-day operations of the Company and
Subsidiaries, except for those decisions that must be approved by a
representative of Inter Scan (the "Inter Scan Representative") in
accordance with the provisions of Section 10.2 below. API shall manage the
businesses of the Company and Subsidiaries with the same degree of care and
prudence that it uses in managing its own operations, and shall incur no
liability to Inter Scan, the Company or Subsidiaries as a result of its
management activities as long as API exercises such care and prudence and
acts in accordance with the provisions of Section 10.2 below. The
responsibilities of API as manager of the Company and Subsidiaries shall
consist of the management of the following functions utilizing the assets
and personnel of the Company and Subsidiaries:
(1) the planning, scheduling and conducting of all business
incidental to the operation of the Company and Subsidiaries including,
but not limited to, purchasing of all supplies, materials and services
required for the operation of their respective businesses and planning
and conducting all research and development activities of the Company
and Subsidiaries;
(2) the selling and marketing of all products produced and services
rendered by the Company and Subsidiaries; and
(3) all other general management, supervisory and administrative
services incidental to the operation of the businesses of the Company
and Subsidiaries including, but not limited to, management information
systems, accounting, invoicing, payment of all uncontested liabilities
arising in the ordinary course of business as such liabilities become
due and payable, data processing, cash management, insurance, leasing,
legal, employee benefits, engineering, industrial relations and public
relations.
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10.2 Major Decisions. API shall be permitted to manage the day-to-day
operation of the Company and Subsidiaries without interference from Inter Scan
or their Boards of Directors; provided, however, that API must obtain the
approval of an Inter Scan Representative before implementing any Major Decision
as defined below. For the purposes of this Article X, Major Decisions shall
mean: the sale of assets other than in the ordinary course of business; the
grant of any options or rights to acquire any or all of the assets of the
Company or any Subsidiary; the execution by the Company or any Subsidiary of an
employment, collective bargaining or similar agreement; the adoption of,
termination of or material modification or amendment to any Company Employee
Benefit Plan; the issuance by the Company or any Subsidiary of notes or other
evidences of indebtedness; the grant by the Company or any Subsidiary of any
guaranties; the initiation of any voluntary bankruptcy or similar proceeding by
the Company or any Subsidiary; the entering into any contract by the Company or
any Subsidiary which is not in the ordinary course of business; the termination
of employees other than as disclosed by API to Inter Scan at an April 9, 1997
meeting between such parties; any other actions the approval of which is
customarily obtained by the Board of Directors of a U.S. corporation; and any
other actions which Swiss law requires be approved by the Company's or any
Subsidiary's Board of Directors or shareholders.
ARTICLE XI.
MISCELLANEOUS
11.1 Expenses. API Portescap and Inter Scan shall each bear their
respective fees, commissions and other expenses incurred by each of them in
connection with the negotiation and preparation of this Agreement and in
preparing to consummate the transactions contemplated hereby, including, without
limitation, the fees and expenses of their respective counsel. Transfer taxes,
if any, payable under Swiss law on the transfer of (i) the Shares by Inter Scan
to API Portescap and (ii) the issuance to Inter Scan of the Series A and Series
B Preferred Stock and Note shall be paid by Inter Scan. API shall be responsible
for payment of any fees or taxes (other than income or similar taxes) payable
under the laws of any states of the United States in connection with the
issuance of the Series A and Series B Preferred Stock and the transfer of the
Shares contemplated hereunder.
11.2 Execution in Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same instrument,
and shall become a binding agreement when one or more counterparts have been
signed by and delivered to each party.
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11.3 Notices. All notices, consents, demands, requests, waivers, appeals
and other communications required or permitted under this Agreement shall be in
writing and shall be deemed to have been duly given: (a) upon delivery if
delivered personally; (b) three (3) days following deposit in the United States
mail by registered airmail, postage prepaid; or (c) on the date of delivery, if
sent by Federal Express or other international overnight delivery service; and
in any case, addressed as follows:
If to Inter Scan:
Inter Scan Holding, Ltd.
Schifflande 5
CH -- 8001 Zurich
Switzerland
with a copy via same means to:
Stanley Weiss, Esq.
80 Main Street
West Orange, New Jersey 07052
If to API Portescap or API:
American Precision Industries Inc.
2777 Walden Avenue
Buffalo, New York 14225
Attn: President
with a copy via same means to:
Jaeckle Fleischmann & Mugel, LLP
800 Fleet Bank Building
12 Fountain Plaza
Buffalo, New York 14202
Attn: James J. Tanous, Esq. and
Tim C. Loftis, Esq.
No change in any of such addresses shall be effective insofar as such notices,
consents, demands, requests, waivers, appeals and other communications are
concerned, unless notice of such change shall have been given to the other party
hereto as provided in this Section 11.3.
11.4 Severability. The terms and provisions of this Agreement shall be
deemed to be severable, and if any provision hereof shall be held invalid or
unenforceable by a court of competent jurisdiction or as a result of future
legislative action, such holding or action shall be strictly construed and shall
not affect the validity or effect of any other provision hereof, and the parties
shall use all reasonable efforts to amend this Agreement in order to effect the
parties' original intent with respect to such provision, to the extent
practicable.
11.5 Titles and Headings. The titles and headings to the Articles,
Sections and Table of Contents contained in this Agreement are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
11.6 Successors and Assigns; No Third Party Beneficiaries. This Agreement
shall be binding upon and shall inure to the benefit of the successors and
assigns of the parties hereto; no party hereto shall assign or delegate any of
the obligations created under this Agreement without the prior written consent
of the other parties hereto, provided, however, that Inter Scan hereby agrees
that any or all of API Portescap's rights and obligations under this Agreement
may be assigned to, and if so assigned shall be assumed by, API. Except to the
extent otherwise provided in this Agreement, no person not a party hereto shall
derive any rights hereunder or be construed to be a third party beneficiary
hereof.
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11.7 Incorporation of Exhibits. The Exhibits attached hereto are
incorporated into this Agreement and shall be deemed a part hereof as if set
forth herein in full.
11.8 Brokers and Finders.
(a) API Portescap represents and warrants to Inter Scan that neither
API Portescap nor API has employed the services of a broker or finder in
connection with this Agreement or any of the transactions contemplated
hereby, except that API has retained the services of Patricof & Co. Capital
Corp.
(b) Inter Scan represents and warrants to API Portescap that neither
Inter Scan nor the Company has employed the services of a broker or finder
in connection with this Agreement or any of the transactions contemplated
hereby.
(c) Inter Scan will indemnify API Portescap, API and the Company and
will hold them harmless from and against any claims by any broker, finder
or consultant deemed to be engaged by Inter Scan or the Company. API
Portescap will indemnify Inter Scan and will hold it harmless from and
against any claims by any broker, finder or consultant deemed to be engaged
by API Portescap or API.
11.9 Entire Agreement; Waivers and Amendments. This Agreement and the
Exhibits attached hereto set forth the entire agreement among the parties hereto
with respect to the transactions contemplated herein. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach, whether or not similar. This
Agreement may be amended, modified or supplemented only by a written instrument
executed by the parties hereto.
11.10 Announcements. No press releases, announcements, or other disclosure
related to this Agreement or the transactions contemplated herein will be issued
or made to the press, employees, customers, suppliers or any other person
without the joint approval of API and Inter Scan, except for any public
disclosure which either API or Inter Scan in good faith believes is required by
law (in which event, the party hereto proposing to make such announcement shall
use all reasonable efforts to consult with the other party hereto before making
any such public announcement).
11.11 Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any
provision of this Agreement.
11.12 Governing Law. The parties agree that the United Nations Convention
on the International Sale of Goods shall not be applicable to this Agreement.
11.13 References. All references to Section or Article numbers refer to
Section or Article numbers in this Agreement unless otherwise specifically
indicated. The words "hereby," "hereof," "hereunder" and words of similar
import, refer to this Agreement as a whole and not to any particular Sections or
subdivisions thereof.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
AMERICAN PRECISION INDUSTRIES INC.
By: /s/ KURT WIEDENHAUPT
-------------------------------------
Name: KURT WIEDENHAUPT
Title: President
API PORTESCAP INC.
By: /s/ BRUCE MCH. KIRCHNER
-------------------------------------
Name: BRUCE McH. KIRCHNER
Title: Vice President
INTER SCAN HOLDING LTD.
By: /s/ HOLGER HJELM
-------------------------------------
Name: HOLGER HJELM
By: /s/ MAX HUBER
-------------------------------------
Name: MAX HUBER
PORTESCAP
By: /s/ MAX ENDRE
-------------------------------------
Name: MAX ENDRE
By: /s/ RUDOLPH HEIZ
-------------------------------------
Name: RUDOLPH HEIZ
By execution above, American Precision Industries Inc.:
(a) agrees to be bound by the provisions of Sections 2.3(a) through (e),
2.3(jj), 4.1, 4.2, 6.1, 6.2 and Articles VIII, IX and X, and Section 11.1 of
this Agreement; (b) agrees to guaranty the payment of and performance by API
Portescap Inc. of its obligations arising under this Agreement; and (c)
represents and warrants to Inter Scan that (i) API is not aware of any untrue
statement of a material fact in the representations and warranties set forth in
Section 2.3 above, and it is not aware of any omission to state any material
fact necessary to make the statements contained in Section 2.3 not misleading,
and (ii) on the date of this Agreement and on the date of the Closing, no
representation or warranty of API in this Agreement, nor any written statement
or certificate executed by API and furnished or to be furnished to Inter Scan
pursuant to this Agreement or in connection with the transactions contemplated
hereby contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary to make the statements contained
therein not misleading.
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EXHIBIT 1.2(a)(i)
TERMS OF CONVERTIBLE PREFERRED STOCK
<PAGE> 143
TERMS OF CONVERTIBLE PREFERRED STOCK
The 20,000 shares of authorized preferred stock, $50 par value per share,
shall be designated as the Series A Seven Percent (7%) Cumulative Convertible
Preferred Stock, $50 par value ("Convertible Preferred Stock"), and shall have
the rights, preferences and limitations set forth in the following paragraphs.
1. Liquidation Value. The face and liquidation value of the Convertible
Preferred Stock shall be $1,057.8125 per share ("Series A Liquidation Value").
2. Exchange Rights. The holders of the 20,000 shares of the Convertible
Preferred Stock shall have the right and obligation to promptly exchange all of
such shares for one million (1,000,000) shares of Series B Seven Percent (7%)
Cumulative Convertible Preferred Stock, $21.15625 face value and liquidation
value per share (also referred to as Convertible Preferred Stock) upon receipt
of written notification from the Corporation that the Corporation's Certificate
of Incorporation has been duly amended, with the approval of the Corporation's
Board of Directors and shareholders, to authorize such Series B Convertible
Preferred Stock and that the certificate of amendment of the Corporation's
Certificate of Incorporation authorizing such Series B Convertible Preferred
Stock has been duly filed with the Secretary of State of the State of Delaware.
Such written notification that the Certificate of Incorporation has been so
amended and filed is hereinafter referred to as the "Notification of Amendment
of Certificate of Incorporation." The Series B Convertible Preferred Stock shall
have a face and liquidation value of $21.15625 per share ("Series B Liquidation
Value") and shall have the additional rights, preferences and limitations set
forth in the following paragraphs.
3. Dividends. The holders of the Convertible Preferred Stock ("Preferred
Shareholder(s)") shall be entitled to receive cumulative cash dividends at the
rate of seven percent (7%) of the Series A Liquidation Value per share (or of
the Series B Liquidation Value per share, if applicable) per annum, and no more,
with such dividends accruing and becoming cumulative on and after January 1,
1999 and payable on the first days of January, April, July and October,
commencing April 1, 1999. The cumulative cash dividends shall be paid when and
as declared by the Board of Directors of the Corporation, but only out of
surplus legally available for the payment of dividends. Such dividends shall be
payable before any dividends (other than a stock dividend in shares of the same
class of stock) on any class of common stock shall be paid or set apart for
payment. Dividends shall be cumulative from and after January 1, 1999, and any
arrearages in payment shall not bear interest.
4. Redemption of Convertible Preferred Stock.
(A) Optional Redemption. After the holders of the Convertible Preferred
Stock have received the Notification of Amendment of Certificate of
Incorporation, the Corporation, at the option of the Board of Directors, may
redeem all or any part of the Convertible Preferred Stock at any time
outstanding, at any time or from time to time, upon written notice duly given
pursuant to subsection 4(B), for an amount per share to be redeemed equal to the
sum of the Series A Liquidation Value (or Series B Liquidation Value, if
applicable) and an amount computed at the annual rate of seven percent (7%) of
the applicable Liquidation Value per annum per share from and after the date on
which dividends on such share became cumulative to and including the date fixed
for such redemption, less the aggregate of the dividends paid during the same
period, but computed without interest ("Redemption Price"). Notwithstanding the
receipt of any notice pursuant to subsection 4(B), the Preferred Shareholders
shall have the right to convert their shares of Convertible Preferred Stock as
set forth in Section 5 herein.
(B) Notice of Redemption. Notice of any redemption ("Redemption Notice")
of Convertible Preferred Stock shall be mailed at least forty-five (45) calendar
days prior to the date fixed for such redemption to the holders of record of
shares so to be redeemed at their respective addresses as the same shall appear
on the books of the Corporation. In case of redemption of only a part of the
Convertible Preferred Stock at the time outstanding, the shares to be redeemed
shall be selected in such manner as the Board of Directors may determine,
whether by lot or by pro rata redemption or by selection of particular shares,
and the proceedings and actions of the Board of Directors in making such
selection shall not be subject to attack except for fraud. The Redemption Notice
shall state the (i) date of redemption; (ii) the Redemption Price; and (iii) the
place of payment.
<PAGE> 144
5. Conversion of Convertible Preferred Stock.
(A) Optional Conversion. Preferred Shareholders shall have the right,
at their option, to convert as many shares of Convertible Preferred Stock
as they choose into the shares of the Corporation's common stock $.66 2/3
par value ("Common Stock") at any time after such shares of Common Stock
are authorized and on the terms and conditions set forth in subsection
5(B).
(B) Terms of Conversion. The conversion of the Convertible Preferred
Stock shall be upon the following terms and conditions:
(i) Conversion Ratio. The Convertible Preferred Stock shall be
convertible, at the principal office of the Corporation and at such
other office or offices, if any, as the Board of Directors of the
Corporation may designate, into fully paid and non-assessable shares of
Common Stock. The number of shares of Common Stock to be delivered upon
conversion shall be determined by the following calculation:
The sum of the LV and UD per share times CPS = NCS
--------------------------------------------
CP
where LV equals the Series A Liquidation Value (or the Series B
Liquidation Value, if applicable) per share; UD equals seven percent
(7%) of the per share LV per annum from and after the date on which
dividends on such share became cumulative to and including the date of
conversion less the aggregate of the dividends paid during the same
period, computed without interest; CPS equals the number of shares of
Convertible Preferred Stock to be converted; CP equals the conversion
price for a share of Common Stock which shall be $17.00 per share as
adjusted pursuant to subsection 5(B)(ii) or (iii) below; and NCS equals
the number of shares of Common Stock to be delivered upon conversion.
(ii) Adjustment of Conversion Price on Various Events. In case the
Corporation at any time shall change its outstanding shares of Common
Stock (which, for purposes of this subsection, shall include any other
class of common stock) into a greater number of shares or pay in shares
of Common Stock a dividend on then outstanding shares of Common Stock or
combine or subdivide its outstanding shares of Common Stock into a
smaller number of shares or issue or sell shares of Common Stock for
less than $17.00 per share (plus or minus previous adjustments), (except
for shares reserved or issued pursuant to a bona fide stock option or
benefit plan for directors, officers and/or employees of the
Corporation); then the Conversion Price for a share of Common Stock
shall be adjusted in accordance with the following equation:
(A X B) + C = NCP
-----------
D
where A equals the number of shares of Common Stock outstanding
immediately before the event requiring adjustment; B equals $17.00 per
share (plus or minus all previous adjustments); C equals the value of
the consideration received by the Corporation for the issuance or sale,
requiring adjustments, of shares of Common Stock for less than B; D
equals the number of shares of Common Stock outstanding after such
event; and NCP equals the new conversion price.
(iii) Adjustments for Reorganizations, Reclassifications, Mergers
and Consolidations. If any reorganization or reclassification of the
capital stock of the Corporation, or any merger or consolidation of the
Corporation with another corporation, shall be effected, a Preferred
Shareholder shall thereafter be entitled upon the exercise of conversion
rights to receive the number and kind of shares of stock, securities or
assets which the Preferred Shareholder would have been entitled to
receive in connection with such reorganization, reclassification, merger
or consolidation if he had been a holder of the number of shares of
Common Stock of the Corporation issuable upon the
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conversion of his Convertible Preferred Stock immediately prior to the
time such reorganization, reclassification, merger or consolidation
became effective.
(iv) Notice of Adjustment. Whenever any adjustments are required
pursuant to subsections 5(B)(ii) and (iii) above, the Corporation shall
give the Preferred Shareholder written notice detailing the method of
calculation of such adjustment and the facts requiring the adjustment
and upon which the calculation is based.
(v) Method of Conversion. In order to convert shares of
Convertible Preferred Stock into shares of Common Stock, the Preferred
Shareholder shall surrender at any office mentioned above the
certificate or certificates therefor, duly endorsed to the Corporation
or in blank, and give written notice at such office that he elects to
convert such shares of Convertible Preferred Stock which shall be deemed
to have been converted as of the date ("Conversion Date") of the
surrender of such shares for conversion as provided above, and Preferred
Shareholder shall be treated for all purposes as the record holder or
holders of such Common Stock on such date. As soon as practicable on or
after the Conversion Date, the Corporation will deliver at such office a
certificate or certificates for the number of full shares of Common
Stock issuable on such conversion, together with cash in lieu of any
fraction of a share, as hereinafter provided, to the persons entitled to
receive the same. In case shares of Convertible Preferred Stock are
called for redemption, the right to convert such shares shall cease and
terminate at the close of business on the date fixed for redemption,
unless exercised prior thereto or unless default shall have been made in
the payment of the Redemption Price.
(vi) Fractional Shares. No fractional shares of Common Stock shall
be issued upon conversion, but the Corporation shall pay a cash
adjustment in respect of any fraction of a share which would otherwise
be issuable, in an amount equal to the same fraction of the Market Price
per share of Common Stock at the close of business on the Conversion
Date.
(vii) Market Price. The market price per share shall be (a) if
traded on the over-the-counter market, the mean between the closing bid
and asked quotations on the Conversion Date, or if no such bid or
quotation was made on the Conversion Date, then such bid and quotation
on the first date preceding the Conversion Date that such bid and
quotation was published, or (b) if traded on a national securities
exchange, the closing sale price on the Conversion Date, or if no such
sale was made on the Conversion Date, then the closing sale price on the
first date preceding the Conversion Date that such sale took place, or
(c) if traded on both the over-the-counter market and an exchange, the
mean between the prices determined in accordance with clauses (a) and
(b) of this sentence.
(viii) Partial Conversion of Shares. In the event the holders of
the Convertible Preferred Stock elect to convert only a part of their
shares, the Corporation shall deliver new certificates to the holders of
the Convertible Preferred Stock in an amount equal to the unconverted
amount of shares held by the Preferred Shareholder.
(ix) Issuance of Certificates. The issuance of new certificates
for shares of Common Stock or Convertible Preferred Stock to the
Preferred Shareholder upon conversion shall be without any charge or
tax.
6. Voting Rights.
(A) Subject to the limitations contained below, the holders of
Convertible Preferred Stock shall vote as a class on the following
transactions that shall be submitted to the holders of Convertible
Preferred Stock for their approval:
(i) the holders of the Series A Seven Percent (7%) Cumulative
Convertible Preferred Stock, $50 par value, shall vote as a class on
proposals relating to the merger or consolidation of the Corporation
with or into another corporation or a partnership, trust or other
entity;
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<PAGE> 146
(ii) the holders of the Series A Seven Percent (7%) Cumulative
Convertible Preferred Stock, $50 par value, shall vote as a class on
proposals relating to the sale of all or substantially all of the assets
of the Corporation;
(iii) the holders of the Series A Seven Percent (7%) Cumulative
Convertible Preferred Stock, $50 par value, shall vote as a class on
proposals relating to the dissolution of the Corporation;
(iv) the holders of both the Series A Seven Percent (7%) Cumulative
Convertible Preferred Stock, $50 par value, and the Series B Seven
Percent (7%) Cumulative Convertible Preferred Stock, $21.15625 face
value and liquidation value per share shall each vote as a class on any
amendment to the Corporation's Certificate of Incorporation that would
amend, change, modify or revoke the rights, preference or limitations
applicable to the Convertible Preferred Stock; and
(v) the holders of both the Series A Seven Percent (7%) Cumulative
Convertible Preferred Stock, $50 par value, and the Series B Seven
Percent (7%) Cumulative Convertible Preferred Stock, $21.15625 face
value and liquidation value per share shall each vote as a class on any
other proposal or transaction that requires the approval of the holders
of Convertible Preferred Stock, voting as a class, under Delaware's
General Corporation Law.
In each instance set forth above, the holders of Convertible Preferred Stock, as
the case may be, shall be entitled to one vote for each share of such stock
owned of record and the approval of the holders of a majority of the shares of
Convertible Preferred Stock issued and outstanding and entitled to vote shall be
required to adopt such proposal.
Notwithstanding the foregoing, the holders of Convertible Preferred Stock
shall lose any and all right to vote as a class (except to the extent, if any,
that such holders thereafter have the right to vote as a class pursuant to the
provisions of Delaware's General Corporation Law) if at any time the total
number of issued and outstanding shares of Convertible Preferred Stock is less
than twenty five percent (25%) of: (i) the number of shares of either the Series
A Convertible Preferred Stock initially issued to the Preferred Shareholders; or
(ii) if the Series A Convertible Preferred Stock is subsequently converted into
Series B Convertible Preferred Stock, the number of shares of Series B
Convertible Preferred Stock that would have been issued to the Preferred
Shareholders if such Series B stock had been initially issued to the Preferred
Stockholders in lieu of the Series A stock.
(B) In addition to the voting rights granted in subsection 6(A) above, the
holders of Convertible Preferred Stock shall be entitled to vote on all matters
(except the election of directors and the ratification of the independent public
accountants retained by the Corporation to audit its financial statements)
submitted for a vote to the holders of the Corporation's Common Stock, and in
that instance each holder of Convertible Preferred Stock shall have a number of
votes equal to the number of shares of Common Stock into which his shares of
Convertible Preferred Stock would be convertible as of the record date for the
meeting of shareholders at which such matter will be voted on.
(C) If the Corporation shall breach any of its obligations hereunder or
fail to make any exchange, conversion, or payment to which the Preferred
Shareholder is entitled hereunder, or fail to maintain its corporate existence
in good standing or continue its normal business operations, or if any
bankruptcy, reorganization, insolvency, receivership or other credit proceedings
is instituted by or against the Corporation and is not dismissed within sixty
(60) calendar days, or if the Corporation makes an assignment for the benefit of
creditors, then the Preferred Shareholders, in addition to all other rights they
may have at law or in equity, shall have the right to vote for the election of
directors and to exercise all the rights any holder of the Common Stock may have
to call a special meeting of the shareholders of the Corporation and to
participate in such special meeting and any annual meeting of the shareholders.
7. Payment on Liquidation, Dissolution or Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the Preferred Shareholders shall be entitled to receive out of the
assets of the Corporation, before any distribution or payment shall be made to
the holders of any class of common stock, an amount equal to the Series A
Liquidation Value (or Series B Liquidation Value, if applicable) of the stock
plus a sum computed at the dividend rate of seven percent (7%) per annum
4
<PAGE> 147
from and after the date on which dividends on such shares became cumulative to
and including the date fixed for such payment, less the aggregate of the
dividends theretofore paid thereon, during the same period, but computed without
interest. For the purpose of this Section 7, a consolidation or merger of the
Corporation with one or more other corporations shall not be deemed to be a
liquidation, dissolution or winding up of the Corporation.
8. No Impairment. The Corporation, whether by amendment of its Certificate
of Incorporation, or through any reorganization, transfer of its assets, merger,
dissolution, issue or sale of securities or any other voluntary actions, will
not avoid or seek to avoid the observance or performance of any of the terms to
be observed hereunder by the Corporation, but at all times in good faith will
assist in the carrying out of all such action as may be necessary or appropriate
in order to protect the rights of the Preferred Shareholders.
9. Reservation of Stock. The Corporation will at all times keep available
out of its authorized but unissued shares of Common Stock a sufficient number of
shares of Common Stock for the purposes of effectuating the conversion of the
Convertible Preferred Stock. If at any time the number of authorized but
unissued shares of Common Stock are not sufficient to effect the conversion of
all of the outstanding Convertible Preferred Stock, then the Corporation shall
take such actions as is necessary to increase the authorized but unissued shares
of Common Stock to be equal to the number needed for the conversion.
5
<PAGE> 148
EXHIBIT 1.2(a)(ii)
FORM OF EXCHANGEABLE PROMISSORY NOTE
<PAGE> 149
EXCHANGEABLE PROMISSORY NOTE
U.S. $5,000,000 Buffalo, New York
Dated July 8, 1997
This Note and the shares of Series B Seven Percent (7%) Cumulative
Convertible Preferred Stock for which this Note may be exchanged are
subject to restrictions on disposition pursuant to a Shareholder Agreement
between Inter Scan Holding Ltd. and American Precision Industries Inc.
dated the date of this Note. A copy of that agreement may be obtained from
American Precision Industries Inc.
This Note and the shares of Series B Seven Percent (7%) Cumulative
Preferred Stock for which this Note may be exchanged have not been
registered with the Securities and Exchange Commission ("SEC") under the
Securities Act of 1933, as amended (the "1933 Act"), or under any
applicable state laws ("State Laws"), in reliance upon applicable
exemptions under the 1933 Act and State Laws. This Note and such shares of
Series B Seven Percent (7%) Cumulative Convertible Preferred Stock may not
be sold, assigned, transferred, pledged, hypothecated or otherwise disposed
of without (i) registration under the 1933 Act and any applicable State Law
or (ii) an opinion of counsel reasonably satisfactory to American Precision
Industries Inc. or a "no-action" letter from the SEC that registration
under the 1933 Act and any applicable State Laws is not necessary for such
sale, assignment, transfer, pledge, hypothecation or disposition.
FOR VALUE RECEIVED, AMERICAN PRECISION INDUSTRIES INC., a Delaware
corporation with an address at 2777 Walden Avenue, Buffalo, New York 14225
("Issuer"), promises to pay to the order of INTER SCAN HOLDING LTD., a Swiss
corporation with an address at Schifflande 5, CH-8001 Zurich, Switzerland
("Holder"), the sum of Five Million U.S. Dollars ($5,000,000), together with
interest thereon accruing and payable in accordance with the terms described
below.
If at any time from the date of this Note through and including April 30,
1998, Issuer's Board of Directors and shareholders approve an amendment to
Issuer's certificate of incorporation authorizing at least 1,200,000 shares of
Series B Seven Percent (7%) Cumulative Convertible Preferred Stock, and
increasing the Common Stock, $.66 2/3 par value per share, of Issuer by at least
1,000,000 shares and such amendment is duly filed with the Secretary of State of
the State of Delaware (the "Amendment"), the principal amount of this Note (i.e.
$5,000,000) shall be automatically exchanged for 236,337 shares of Issuer's
Series B Seven Percent (7%) Cumulative Convertible Preferred Stock, with a face
and liquidation value of $21.15625 per share, which shall be convertible into
shares of Issuer's Common Stock at the initial conversion price of $17.00 per
share, subject to adjustment under certain circumstances as specified in Exhibit
1.2(a)(i) to the Amended and Restated Stock Purchase Agreement dated July 3,
1997 by and among Inter Scan Holding Ltd., Portescap and API Portescap Inc. and
American Precision Industries Inc. Upon such exchange, Issuer's obligation to
pay any amounts of principal and accrued interest owing under this Note shall be
discharged in full.
No interest shall accrue on the principal balance of this Note prior to
April 30, 1998, if the Amendment is duly filed with the Secretary of State of
the State of Delaware by April 30, 1998 and if no "Event of Default" (as
hereinafter identified) has occurred and not been remedied prior to that date.
If the Amendment is not so filed by April 30, 1998, then interest shall accrue
on the unpaid principal balance of this Note from the date of this Note and
thereafter at a per annum rate of fifteen percent (15%), calculated on the basis
of a 365-day year for the actual number of days elapsed.
If the Amendment is not duly filed with the Secretary of State of the State
of Delaware by April 30, 1998, all indebtedness evidenced by this Note shall be
immediately due and payable, without notice, in which event Issuer will pay to
Holder on May 1, 1998 an amount equal to the greatest of:
<PAGE> 150
(i) Five million U.S. dollars (U.S. $5,000,000) plus interest thereon at
the annual rate of fifteen percent (15%) on the principal amount from
the date of this Note through April 30, 1998 (i.e. interest at the
rate of $2,054.80 per day);
or
(ii) an amount in U.S. dollars equal to (A) the number of shares of the
Issuer's Common Stock this Note would represent the right to acquire
on April 30, 1998 assuming it were exchanged for shares of Series B
Seven Percent (7%) Cumulative Convertible Preferred Stock of Issuer
(e.g. 294,118 shares of Common Stock at the initial conversion price
of $17.00 per share), multiplied by (B) the average closing price of
the Issuer's Common Stock on the New York Stock Exchange ("NYSE") for
the ten trading days prior to April 30, 1998 that such stock was
actually traded on the NYSE;
or
(iii) an amount in U.S. dollars equal to (A) the number of shares of the
Issuer's Common Stock this Note would represent the right to acquire
on April 30, 1998 assuming it were exchanged for shares of Series B
Seven Percent (7%) Cumulative Convertible Preferred Stock of Issuer
(e.g. 294,118 shares of Common Stock at the initial conversion price
of $17.00 per share), multiplied by (B) the actual closing price of
the Issuer's Common Stock on the NYSE on the last day prior to the
date of this Note that the stock actually traded on the NYSE.
If the Amendment is not so duly filed by April 30, 1998, then in addition to any
amount payable under clauses (ii) or (iii) above, if Holder elects to purchase
any shares of Issuer's Common Stock during the two-month period from May 1, 1998
through and including June 30, 1998, Issuer shall reimburse Holder for any costs
Holder incurs in acquiring such shares in excess of the market price of Issuer's
Common Stock on the relevant date or dates used in calculating the applicable
amount payable under clause (ii) or clause (iii), multiplied by the number of
shares actually purchased by Holder during that two-month period, subject to a
maximum number of shares equal to the number of shares calculated under (A) in
clause (ii) or clause (iii), whichever is applicable (e.g. a maximum of 294,118
shares at the initial conversion price of $17.00 per share).
Upon Issuer's payment to Holder of the amount payable under the provisions
of the immediately preceding paragraph, all of Issuer's obligations under this
Note (including any obligation to pay interest on the unpaid principal balance
hereof) shall be discharged in full.
Upon the occurrence of any of the following specified events prior to May
1, 1998, (each sometimes hereinafter referred to as an "Event of Default"), the
entire unpaid principal balance of this Note, together with interest thereon
accrued at the annual rate of fifteen percent (15%) from the date of this Note
through the date of payment, shall become immediately due and payable at the
option of Holder:
(1) Failure of Issuer to maintain its corporate existence in good
standing; or
(2) The liquidation of Issuer, or the discontinuance of the normal
operations of Issuer; or
(3) The merger or consolidation of Issuer with or into any other
corporation unless (i) Issuer is the surviving entity, or (ii) the
surviving entity, which shall be reasonably acceptable to Holder, agrees in
writing to assume all of the Issuer's obligations under this Note; or
(4) The sale, lease or conveyance by Issuer of all or substantially
all of its property, assets or business to any other party, unless the
other party, which shall be reasonably acceptable to Holder, agrees in
writing to assume all of the Issuer's obligations under this Note; or
(5) The making of a general assignment by Issuer for the benefit of
creditors, or the institution by Issuer of any type of bankruptcy,
reorganization or insolvency proceeding under any state or federal law or
of any formal or informal proceeding for the dissolution or liquidation of,
settlement of claims against or winding up of affairs of Issuer; or
(6) The appointment of a receiver or trustee for Issuer or for any
assets of Issuer or the institution against Issuer of any type of
bankruptcy, reorganization or insolvency proceeding for the liquidation or
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winding up of the affairs of Issuer and the failure to have such
appointment vacated, or such proceeding dismissed within forty-five (45)
days.
If Holder exercises its option to accelerate the payment of principal and
interest upon the occurrence of an Event of Default prior to May 1, 1998, then
Holder's right and obligation to exchange this Note for shares of the Issuer's
Series B Seven Percent (7%) Cumulative Convertible Preferred Stock shall
terminate upon Issuer's payment in full of all principal and interest due
hereunder upon such acceleration.
This Note may not be prepaid at any time in full or in part without
Holder's written consent. Any permitted partial prepayment will first be applied
to principal and then to accrued and unpaid interest to the date of prepayment.
No omission or delay by Holder or other holder hereof in exercising any
right or power under this Note will impair such right or power or be construed
to be a waiver of or acquiescence in any default hereunder, and no waiver by
Holder or other holder hereof of any breach or default hereunder shall be deemed
to be a waiver of any right or power upon the later occurrence or recurrence of
any such breach or default.
Issuer agrees to pay to Holder the reasonable expenses incurred by Holder
in connection with the enforcement of Holder's rights hereunder, including,
without limitation, the reasonable fees and disbursements of legal counsel.
Any notice or demand hereunder shall be duly given if mailed by registered
or certified mail, if to Holder, at Schifflande 5, CH-8001 Zurich, Switzerland,
or if to Issuer, at 2777 Walden Avenue, Buffalo, New York 14225, Attention:
President. Any such notice shall be effective on the date of mailing.
Holder's right to sell this Note or any interest in this Note in a "Private
Offer" is subject to Issuer's "Right" as set forth in the Shareholder Agreement
between Issuer and Holder dated the same date as this Note; the terms "Private
Offer" and "Right" have the same meanings as given to them in the Shareholder
Agreement.
This Note shall be governed by the internal laws of the State of Delaware
without regard to principles of conflict of laws.
AMERICAN PRECISION INDUSTRIES INC.
By: /s/ KURT WIEDENHAUPT
------------------------------------
Kurt Wiedenhaupt, President
and Chief Executive Officer
STATE OF NEW YORK
ss.:
COUNTY OF ERIE
On this 3rd day of July 1997 before me personally came KURT WIEDENHAUPT, to me
known, who, being by me duly sworn, did depose and say that he resides at 280
Carnoustie Road, East Aurora, New York; that he is the President and Chief
Executive Officer of AMERICAN PRECISION INDUSTRIES INC., the Issuer described in
and which executed the above instrument; and that he signed his name thereto by
order of the Board of Directors of said Issuer.
/s/ SUSAN E. SZUCS
--------------------------------------
Notary Public
SUSAN E. SZUCS
NOTARY PUBLIC, STATE OF NEW YORK
NO. 01SZ5058503
QUALIFIED IN WYOM. COUNTY
MY COMMISSION EXPIRES 04/08/98
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EXHIBIT 5.1(d)(1)
SHAREHOLDER AGREEMENT
<PAGE> 153
SHAREHOLDER AGREEMENT
This AGREEMENT, dated the 8th day of July 1997, is by and between AMERICAN
PRECISION INDUSTRIES INC., a Delaware corporation with its principal office at
2777 Walden Avenue, Buffalo, New York 14225 ("API"), and INTER SCAN HOLDING
LTD., a Swiss corporation with its principal office at Schifflande 5
CH-8001-Zurich, Switzerland which, with all of its affiliates (which include all
of its officers, directors, shareholders and Holger Hjelm) are referred to
herein as "Inter Scan" and/or "Shareholders" and/or individually as
"Shareholder."
R E C I T A L S:
WHEREAS, API and a subsidiary of API, and Inter Scan and Portescap are
parties to an Amended and Restated Stock Purchase Agreement dated July 3, 1997
("Stock Purchase Agreement"), to which a copy of this Shareholder Agreement is
an Exhibit, pursuant to which API's subsidiary acquired from Inter Scan all of
the outstanding stock of Portescap SA in exchange for, inter alia, (a) 20,000
shares of Series A Seven Percent (7%) Cumulative Convertible Preferred Stock of
API ("Series A Preferred Stock") which are convertible into shares of API's
Common Stock, $.66 2/3 par value per share ("Common Stock") and which are also
exchangeable for shares of API's Series B Seven Percent (7%) Cumulative
Convertible Preferred Stock ("Series B Preferred Stock"), which are also
convertible into shares of Common Stock; and (b) an Exchangeable Promissory Note
("Note") which is exchangeable for shares of Series B Preferred Stock; the
Series A Preferred Stock and Series B Preferred Stock (including both the Series
B Preferred Stock issued upon exchange of Series A Preferred Stock and under the
Note) are jointly referred to herein as the "Preferred Stock"; and
WHEREAS, API and the Shareholders desire to set forth the agreement between
them concerning certain rights and obligations of Shareholders relating to Inter
Scan's status as a holder of the Preferred Stock, the Note and shares of Common
Stock which may be issued to Inter Scan upon conversion of the Preferred Stock.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Term of this Agreement. This Agreement and each party's respective
rights and obligations hereunder shall terminate at 5:00 p.m. Buffalo, New York
time three (3) years after the date of this Agreement ("Termination Date").
2. Board Representation.
(a) Immediately after API's subsidiary's acquisition of Inter Scan's shares
of Portescap SA pursuant to the Stock Purchase Agreement, the Board of Directors
of API shall elect to the nine-person Board of Directors of API a nominee
selected by Inter Scan, who shall be acceptable to API's Board of Directors.
That individual, or such other nominee selected by Inter Scan who is acceptable
to API's Board of Directors, shall be nominated by API's Board of Directors to a
term as a Director of API's Board of Directors expiring at the annual meeting of
API's shareholders in the year 2000, subject to shareholder approval at the next
annual meeting of API's shareholders, and shall be entitled to hold that
position for the balance of such term, provided that throughout that period
Inter Scan continues to own shares of Preferred Stock and/or Common Stock which
represent at least ten percent (10%) of the shares of API entitled to vote on
matters submitted to API's shareholders for their approval, other than election
of directors and ratification of appointment of auditors.
(b) The nominee of Inter Scan on the Board of Directors shall be appointed
to the Nominating Committee of the Board of Directors.
3. Voting Agreement. On all matters submitted to API's shareholders for a
vote, the Shareholders agree to vote any and all shares of Common Stock and
Preferred Stock which they own in accordance with the recommendations of API's
Board of Directors as set forth in any proxy statement distributed by API to its
shareholders in connection with any meetings held to consider the matters to be
voted on. In this regard, the
<PAGE> 154
Shareholders shall give their irrevocable proxy to API's Board of Directors
prior to any shareholder meetings held on or prior to the Termination Date.
4. Grant of Right of First Refusal to API.
(a) The Shareholders hereby grant to API an exclusive, irrevocable right of
first refusal ("Right") to match any offer to purchase in a private offering any
or all of their shares of Preferred Stock, the Note or shares of Common Stock
acquired by Shareholders upon the conversion of any of their Preferred Stock
(hereinafter collectively referred to as "Company Securities"), whether such
offer is solicited or unsolicited by Shareholders, received by Shareholders at
any time on or prior to the Termination Date (a "Private Offer"). Prior to
committing to sell any of their Company Securities pursuant to a Private Offer,
the Shareholders shall notify API of that Offer, the identity of the person or
persons making the Private Offer, the number of Company Securities covered by
the Private Offer, and the financial terms of that Offer, including the price
per share or the price for all or a portion of the Note and the terms and timing
of payment. API shall have twenty (20) calendar days after its receipt of the
notice of the Private Offer to exercise its Right by paying to Shareholders the
price that the third party has offered, on the terms offered by that party. If
API fails to purchase the Company Securities covered by the Private Offer within
this 20-day period, then the Shareholders shall be entitled to sell those
Company Securities covered by the Private Offer to the third party pursuant to
that Offer, on the condition that the Private Offer is a bona fide offer made by
a person who is not an affiliate of the Shareholders. If the Shareholders fail
to sell their Company Securities to the third party within twenty (20) calendar
days after the close of API's 20-day period to match the Private Offer, their
Company Securities shall once again be subject to all of the terms of this
Paragraph 4(a). The Company Securities covered by the Right granted in this
Paragraph 4(a) shall include all of the shares of Preferred Stock, the Note and
Common Stock issuable upon conversion of the Preferred Stock owned, of record or
beneficially, by the Shareholders as of the date hereof and any shares into
which those securities may be converted or exchanged and any shares issued with
respect to those securities as a stock dividend or in the form of a stock split.
(b) Prior to proposing to sell any of their Company Securities pursuant to
a public offering (a "Public Offering"), the Shareholders shall notify API of
that proposal, the identity of the proposed underwriter for the Public Offering,
the number of Company Securities which Shareholders propose to sell in a Public
Offering and the proposed plan of distribution. API shall have twenty (20)
calendar days after its receipt of the notice of the Public Offering to purchase
the shares from Shareholders on terms and conditions, including the price per
share, acceptable to Shareholders. If API fails to purchase the Company
Securities covered by the proposed Public Offering within this 20-day period,
then the Shareholders shall be entitled to sell those Company Securities in the
proposed Public Offering pursuant to that Offering. If the Shareholders fail to
sell their Company Securities pursuant to the proposed Public Offering within
nine (9) months after the close of API's 20-day period referred to above, their
Company Securities shall once again be subject to all of the terms of this
Paragraph 4(b). The Company Securities covered by this Paragraph 4(b) shall
include all of the shares of Preferred Stock, the Note and Common Stock issuable
upon conversion of the Preferred Stock owned, of record or beneficially, by the
Shareholders as of the date hereof and any shares into which those securities
may be converted or exchanged and any shares issued with respect to those
securities as a stock dividend or in the form of a stock split.
5. Grant of Right to Inter Scan to Participate in Private Placements. If
at any time on or prior to the Termination Date API shall offer to sell in a
private placement or other offering not registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (a "Private
Placement"), any shares of its Common Stock or other securities convertible into
Common Stock (collectively, the "Offered Securities"), it shall notify Inter
Scan in writing of the Private Placement, the terms of the Offered Securities,
the number of shares of Offered Securities to be sold, and the financial terms
of the Private Placement, including the price per share and the terms and timing
of payment. Inter Scan shall have twenty (20) calendar days after its receipt of
the notice of the Private Placement to give API its written irrevocable, binding
commitment to purchase up to that number of shares of Offered Securities to be
offered in the Private Placement which are necessary to maintain Inter Scan's
percentage of outstanding voting securities immediately after the Private
Placement is concluded at the percentage immediately prior to the sale of the
2
<PAGE> 155
shares of Offered Securities in the Private Placement. If the Private Placement
is concluded within thirty (30) calendar days after API's receipt of Inter
Scan's commitment, Inter Scan shall be obligated to purchase that number of
Offered Securities indicated in its commitment but not more than that number of
shares of Offered Securities as are required to allow Inter Scan to avoid a
dilution in its percentage of voting securities.
6. API's Obligation on a Shareholder's Sales of Series A Preferred
Stock. API shall use its best efforts to have its Board of Directors and
shareholders adopt an amendment to API's certificate of incorporation
authorizing 1,250,000 shares of Series B Preferred Stock and increasing the
Common Stock of API by at least 1,000,000 shares, and to have that amendment
duly filed with the Secretary of State of the State of Delaware by April 30,
1998. If such an amendment is not filed with the Secretary of State of the State
of Delaware by April 30, 1998, and if a Shareholder elects to sell some or all
of the 20,000 shares of Series A Preferred Stock, or some or all of the shares
of Common Stock issued to Shareholder upon its conversion of some or all of its
shares of Series A Preferred Stock, at any time between May 1, 1998 and a date
ten (10) years after the date of this Shareholder Agreement to a purchaser who
is not an affiliate of a Shareholder, in a bona fide arms-length transaction,
then API shall pay to such selling Shareholder the difference, if any, between
the net proceeds per share received by such selling Shareholder in such bona
fide arms-length transaction and 115% of the liquidation value per share of
Series A Preferred Stock so sold, plus any accrued unpaid dividends on each
share sold, or 115% of the conversion price of any Common Stock issued to
Shareholder upon its conversion of Series A Preferred Stock which shares of
Common Stock are so sold, as the case may be. Net proceeds shall equal the gross
selling price less any brokerage commissions paid by the selling Shareholder;
gross selling price shall not be reduced, for purposes of this Paragraph 6, by
any discount paid by Shareholder to an underwriter if such sale is by or through
an underwriter in a public offering. API's obligation under this Paragraph 6
shall be limited to a total of 20,000 shares of Series A Preferred Stock, if
Series A Preferred Stock is sold, and 1,244,485 shares of Common Stock, if
Common Stock issued on conversion of Series A Preferred Stock is sold.
7. Restrictions on Shareholders. Inter Scan hereby agrees, on its own
behalf and on behalf of each of its affiliates, that at no time prior to the
Termination Date will that Shareholder or any such affiliate directly or
indirectly:
(a) make, or in any way participate, directly or indirectly, in any
solicitation of proxies or votes or written consents with respect to the
election of Directors of API or any other matter submitted to a vote or the
written consent of API's shareholders;
(b) acquire, offer to acquire, or agree to acquire, directly or
indirectly, by purchase or otherwise, any voting securities or direct or
indirect rights to acquire any voting securities of API or any subsidiary
thereof, or of any successor to or person in control of API, or any assets
of API or any subsidiary or division thereof or of any such successor or
controlling person, except that during each 12-month period after the date
of this Agreement Shareholders may acquire in the aggregate through open
market or privately negotiated purchases up to 2% of API's then outstanding
Common Stock; provided, however, that at no time prior to the Termination
Date may the Shareholders or any of their affiliates, individually, jointly
or in the aggregate, own directly or indirectly, of record or beneficially,
more than 25% of API's then outstanding Common Stock unless specifically
authorized in writing to do so by API;
(c) make, or in any way participate, directly or indirectly, in any
"solicitation" of "proxies" (as such terms are used in the rules of the
Securities and Exchange Commission) to vote, or seek to advise or influence
any person or entity with respect to the voting, of any voting securities
of API;
(d) make any public announcement with respect to, or submit a proposal
for, or offer of (with or without conditions) any extraordinary transaction
(including but not limited to any tender or exchange offer, merger,
recapitalization or other business combination) involving API or its
securities or assets;
(e) submit any shareholder proposal to API; or
(f) form, join or in any way participate in a "group" as such term is
used in Section 13(d) of the Securities Exchange Act of 1934, as amended,
in connection with any of the foregoing.
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Each Shareholder shall promptly advise API of any inquiry or proposal made
to it or any of its affiliates with respect to any of the foregoing.
8. Covenants; Legends.
(a) Shareholders acknowledge that the Company Securities have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"), or
under any state or foreign securities laws. Shareholders are acquiring the
Company Securities, solely for investment, with no present intention to
distribute any of such securities to any person. Shareholders will not sell or
otherwise dispose of any of the Company Securities except in compliance with the
registration requirements or exemption provisions under the 1933 Act and the
rules and regulations promulgated thereunder and any other applicable securities
laws, or unless Shareholders provide API with an opinion of counsel reasonably
satisfactory to API or with a "no-action" letter from the Securities and
Exchange Commission that registration of the Company Securities is not
necessary.
(b) Shareholders hereby covenant and agree that for so long as they own,
directly or indirectly, any Company Securities covered by this Agreement they
will not sell, transfer, assign, pledge, hypothecate, gift, encumber or
otherwise dispose of those Company Securities or any interest in such Company
Securities except in compliance with the terms of this Agreement. Unless
specifically authorized by API in writing, any Company Securities so sold,
transferred, assigned, pledged, hypothecated, gifted, encumbered or otherwise
disposed of in a private offering shall remain subject to all of the terms of
this Agreement, and the owner, holder or recipient of any Company Securities so
sold, transferred, assigned, pledged, hypothecated, gifted, encumbered or
otherwise disposed of shall be subject to all of the restrictions imposed on
Shareholders under this Agreement.
(c) The stock certificates and note representing all of the Company
Securities covered by this Agreement shall bear the following legends, as
applicable:
"The shares represented by this certificate are subject to restrictions on
disposition pursuant to an agreement between the owner of these shares and
American Precision Industries Inc. dated July 8, 1997. A copy of that agreement
may be obtained from American Precision Industries Inc.
The shares represented by this certificate have not been registered with the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as
amended (the "1933 Act"), or under any applicable state laws ("State Laws"), in
reliance upon applicable exemptions under the 1933 Act and State Laws. The
shares represented by this certificate may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of without (i) registration under
the 1933 Act and any applicable State Laws or (ii) an opinion of counsel
reasonably satisfactory to American Precision Industries Inc. or a "no-action"
letter from the SEC that registration under the 1933 Act and any applicable
State Laws is not necessary for such sale, assignment, transfer, pledge,
hypothecation or disposition."
* * * *
"This Note and the shares of Series B Seven Percent (7%) Cumulative Convertible
Preferred Stock for which this Note may be exchanged are subject to restrictions
on disposition pursuant to an agreement between the owner of this Note and
American Precision Industries Inc. dated July 8, 1997. A copy of that agreement
may be obtained from American Precision Industries Inc.
This Note and the shares of Series B Seven Percent (7%) Cumulative Convertible
Preferred Stock for which this Note may be exchanged have not been registered
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933, as amended (the "1933 Act"), or under any applicable state laws ("State
Laws"), in reliance upon applicable exemptions under the 1933 Act and State
Laws. This Note and such shares of Series B Seven Percent (7%) Cumulative
Convertible Preferred Stock may not be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of without (i) registration under the 1933
Act and any applicable State Laws or
4
<PAGE> 157
(ii) an opinion of counsel reasonably satisfactory to American Precision
Industries Inc. or a "no-action" letter from the SEC that registration under the
1933 Act and any applicable State Laws is not necessary for such sale,
assignment, transfer, pledge, hypothecation or disposition."
In addition, similar legends shall be affixed to the stock transfer records and
corporate records of indebtedness, and API's stock transfer agent shall be
advised of the terms of this Agreement.
9. Binding Effect. This Agreement and the Right granted hereunder shall
inure to the benefit of and be binding upon API and its successors and assigns,
and shall be binding upon Shareholders and their successors, assigns, heirs,
legatees, devisees, beneficiaries, legal representatives, executors and estate,
and any of their assigns, transferees and donees permitted pursuant to
subparagraph 8(b) above.
10. Dispute Resolution Procedure. API and the Shareholders shall attempt
to resolve between them any dispute which arises under this Agreement. If they
cannot agree within ten (10) calendar days after either party submits a demand
for arbitration to the other party, then the dispute, except for any dispute
which arises under Paragraph 6 of this Agreement which shall not be subject to
arbitration, shall be submitted to binding arbitration with each party having
the right to appoint one (1) arbitrator and those two (2) arbitrators mutually
selecting a third arbitrator. The rules of the American Arbitration Association
for the arbitration of commercial disputes shall apply and the decision of two
(2) of the three (3) arbitrators shall be final and binding. The arbitration
shall take place in New York, New York. The arbitrators shall apply Delaware
law, but shall not be allowed to award punitive damages. Any dispute which
arises under Paragraph 6 of this Agreement which is not resolved between the
parties shall be submitted to a court of appropriate jurisdiction located in
Erie County, New York State, U.S.A. with regard to any litigation initiated by a
Shareholder against API and in Zurich, Switzerland with regard to any litigation
initiated by API against any Shareholder.
11. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without reference to principles of conflict
of laws. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors or legal representatives.
(b) The term "affiliate" as used in this Agreement shall mean any person
that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with any Shareholder or any other
affiliate of any Shareholder.
(c) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, to the address for each party
as first written above or to such other address as either party shall have
furnished to the other in writing in accordance herewith. Notices and
communications shall be effective when actually received by the addressee.
(d) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(e) Each party hereto shall be responsible for the fees and expenses they
incur (including, but not limited to, fees of their attorneys, accountants and
advisors) in connection with this Agreement and all transactions contemplated
herein.
5
<PAGE> 158
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
executed as of the day and year first above written.
AMERICAN PRECISION INDUSTRIES INC.
By: /s/ KURT WIEDENHAUPT
-------------------------------------
Kurt Wiedenhaupt, President
and Chief Executive Officer
INTER SCAN HOLDING LTD.
By: /s/ HOLGER B. HJELM
-------------------------------------
HOLGER B. HJELM
By: /s/ MAX E. HUBER
-------------------------------------
MAX E. HUBER
6
<PAGE> 159
EXHIBIT 5.1(d)(2)
REGISTRATION AGREEMENT
<PAGE> 160
REGISTRATION AGREEMENT
This Agreement, made as of the 8th day of July, 1997, by and between
AMERICAN PRECISION INDUSTRIES INC., a Delaware corporation, having an office at
2777 Walden Avenue, Buffalo, New York 14225 (the "Company"), and INTER SCAN
HOLDING LTD., a Swiss company, having an office at Schifflande 5 CH-8001-Zurich,
Switzerland ("Shareholder").
W I T N E S S E T H :
WHEREAS, the Company and Shareholder are parties to an Amended and Restated
Stock Purchase Agreement dated July 3, 1997 (the "Stock Purchase Agreement") to
which a copy of this Registration Agreement is an Exhibit; and
WHEREAS, pursuant to the Stock Purchase Agreement the Company has issued to
Shareholder shares of Convertible Preferred Stock ("Preferred Stock") and an
Exchangeable Promissory Note ("Note") which is exchangeable for shares of
Preferred Stock; and
WHEREAS, the Preferred Stock is convertible into shares of the Company's
Common Stock, $.66 2/3 par value per share (the "Common Stock"); and
WHEREAS, the Shareholder may from time to time wish to have a public
offering of all or part of the Preferred Stock or the Common Stock issuable upon
conversion of the Preferred Stock and to require the Company to file a
registration statement with respect to such offerings with the Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act"), upon the terms and subject to the conditions stated in this
Agreement; and
WHEREAS, the Company, as an additional part of the consideration for the
Stock Purchase Agreement, has agreed to provide the Shareholder with certain
rights provided for in this Agreement.
NOW, THEREFORE, in consideration of the terms, conditions, agreements and
covenants set forth in this Agreement, the Company and Shareholder agree:
Section 1. The Shareholder shall have registration rights, at any time
within the ten (10) year period following the initial issuance of the Preferred
Stock and Note pursuant to the Stock Purchase Agreement, with respect to two (2)
separate public offerings of its Preferred Stock and/or Common Stock, provided
that there shall be an interval of at least one (1) year between each such
public offering. For purposes of this Agreement, the words "registration rights"
shall mean the right of the Shareholder to have the Company (a) file a
registration statement on an appropriate form with the SEC covering a proposed
public offering, (b) use its best efforts to have the registration statement
declared effective and kept current and in compliance with the 1933 Act until
completion of the public offering, and (c) use its best efforts to effect
qualification and compliance with the securities laws of such states as the
Shareholder may reasonably designate in which the public offering is to be made
(the "Registration Rights").
Section 2. Each time the Shareholder exercises its Registration Rights, it
shall:
(a) furnish to the Company such information regarding Shareholder, the
contemplated distribution of such shares held by Shareholder and such other
information regarding the proposed sale as the Company may request in
writing and as shall be required in connection with the registration. The
information shall be furnished to the Company in writing and signed by the
Shareholder stating that the information is specifically for use in the
related registration statement, prospectus, offering circular or other
document incident to the registration;
(b) except as indicated in Sections 5 and 6 below, pay the expenses of
the registration directly related to the proposed sale of the Common Stock
or Preferred Stock owned by Shareholder which shall include, without
limitation, all registration and filing fees related to the shares of
Common Stock or Preferred Stock to be sold by Shareholder, the reasonable
fees and disbursements of counsel and auditors for the Shareholder and any
selling commissions, expenses or taxes incident to the sale of the
Shareholder's shares; and
<PAGE> 161
(c) defer the sale of any shares for a period not to exceed ninety
(90) days if (i) a registration statement is filed with respect to a
pending offering by the Company other than pursuant to this Section, and
(ii) the Company so requests that the shares not be sold for such a period;
but in such event, and if a registration statement filed under this Section
has become effective, the Company shall use its best efforts to keep such
registration statement covering the shares of the Shareholder current and
in compliance with the Act for ninety (90) days following the expiration of
such period.
Section 3. On each occasion, if any, during the four (4) year period after
the initial issuance of the Preferred Stock and Note pursuant to the Stock
Purchase Agreement, the Company proposes to register under the 1933 Act any
equity securities of the Company for sale by the Company to the public pursuant
to a registration statement on Forms S-1, S-2 or S-3, the Company agrees:
(a) it will give written notice to Shareholder at least forty-five
(45) days prior to the filing of each registration statement of such
proposal and intention to do so;
(b) Shareholder shall have the right to include, in addition to its
rights under Section 1 above, any or all of its shares of Preferred Stock
or Common Stock in the registration statement;
(c) if Shareholder requests inclusion of any of the shares of
Preferred Stock or Common Stock in such proposed registration within
twenty-five (25) days after the Company gives Shareholder such notice, the
Company will include those shares of Preferred Stock or Common Stock in
such registration statement; provided, however, if the proposed
registration is underwritten and the managing underwriter advises the
Company in writing that the number of shares of Preferred Stock or Common
Stock sought to be included in such offering cannot be sold, the Company
will include in the offering only the number of shares of Preferred Stock
or Common Stock which the underwriter believes can be sold, allocated pro
rata among the Company, Shareholder and any other holder of the Company's
securities possessing registration rights who has elected to include such
securities in the proposed registration;
(d) the Company shall not be required to include any of the shares of
Preferred Stock or Common Stock in any registration statement provided for
in this Section 3 unless Shareholder agrees, if so required by the Company,
to offer and sell Shareholder's shares of Preferred Stock or Common Stock
which Shareholder desires to sell to or through an underwriter selected by
the Company and, to the extent possible, under substantially the same terms
(except as to expenses other than underwriting discounts) as those under
which the other securities included in such registration statement are to
be offered and sold, and to comply with any arrangements with respect to
the offer and sale of the securities to be registered thereunder to which
the holders thereof will be reasonably required to agree as a condition to
the inclusion of such securities in such registration statement; and
(e) the Company shall not be required under this Section 3 to include
Shareholder's shares of Preferred Stock or Common Stock in the registration
statement or prospectus to be used in any state which (i) refuses to permit
the shares of Preferred Stock or Common Stock to be offered or (ii) imposes
additional requirements upon the Company in order for the shares of
Preferred Stock or Common Stock to be included in the registration
statement and prospectus, if such requirements would unreasonably inhibit
or delay the offering by the Company.
Section 4. The Shareholder and the Company will cooperate with each other
in the preparation and filing of any registration statement contemplated in the
above Sections or, as the case may be, in their efforts to establish that the
proposed transaction is exempt from the registration provisions of the 1933 Act,
including any efforts of the Company or Shareholder to obtain a "no action" or
interpretive letter from the SEC.
Section 5. Subject to the provisions of Section 6 and except as otherwise
provided in Section 2(b), the Company will pay the following costs and expenses
incidental to the performance of its obligations under Section 3 of this
Agreement:
(a) the fees and expenses of the Company's counsel, the fees and
expenses of the Company's accountants and all other costs and expenses
incident to the preparation, printing and filing under the
2
<PAGE> 162
1933 Act of any such registration statement, each prospectus and all
amendments and supplements thereto;
(b) the costs incurred in connection with the registration or
qualification of the shares of Preferred Stock or Common Stock under the
laws of various jurisdictions, including fees and disbursements of
Company's counsel;
(c) the costs of furnishing to Shareholder or its designees such
number of copies of any such registration statement, each preliminary
prospectus, the final prospectus and each amendment thereof and supplement
thereto as Shareholder shall reasonably request; and
(d) notwithstanding anything in the foregoing provisions of this
Section 5, the Company shall not be required to pay any expenses of any
underwriter, any commissions and/or discounts to any underwriter or any
expenses with respect to the sale of the Preferred Stock or Common Stock,
such as, but not limited to, transfer taxes incident to transfer of the
Preferred Stock or the Common Stock to any underwriter or underwriters.
Section 6. Notwithstanding anything in the foregoing provisions of this
Agreement, the Company will bear the costs set out in Section 5 only in
connection with the registration of all or part of the Preferred Stock or Common
Stock under Section 3 in connection with a public offering pursuant to which the
Company offers equity securities for sale. In the event of a registration
pursuant to Section 3, each holder of the shares included in the registration
statement will pay its own direct out-of-pocket costs incurred in connection
with the registration statement (e.g. each such holder's own attorney's and
accountant's fees, travel expenses, expert's fees, etc., if any).
Section 7. The Company will:
(a) exonerate, indemnify and hold harmless Shareholder, its directors,
officers who have signed any registration statement and any underwriter (as
defined in the 1933 Act) for Shareholder in connection with any registration
statement filed pursuant to this Agreement (but, in the case of any underwriter
or a controlling person of an underwriter, only if such underwriter indemnifies
the persons indemnified in Section 8 in the manner set forth in that Section)
and each person, if any, who controls Shareholder or its underwriter within the
meaning of the 1933 Act, against any losses, claims, damages or liabilities,
joint or several, to which Shareholder, or any such director, officer, or
underwriter or any such controlling person may become subject, whether under the
1933 Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof):
(1) are caused by any untrue statement or alleged untrue statement of
any material fact contained, on the effective date thereof, in any
registration statement under which any of the Preferred Stock or Common
Stock were, pursuant to any of the provisions of this Agreement, registered
under the 1933 Act, any prospectus contained therein, or any amendment
thereof or supplement thereto; or
(2) arise out of, or are based upon, any omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements contained therein not misleading; and
(b) reimburse Shareholder, each such director, officer and underwriter, and
each such controlling person, for any legal or other expenses reasonably
incurred by Shareholder, and each such director, and officer or by such
underwriter, or by such controlling person, in connection with investigating or
defending any such loss, claim, damage, liability or action arising under
subparagraph (a) of this Section 7;
provided, however, that the Company will not be liable in any such case to
the extent that any such loss, claim, damage, expense or liability arises out
of, or is based upon, an untrue statement or alleged untrue statement or
omission or alleged omission so made as a result of written information
furnished by Shareholder, or any such director, or officer or such underwriter
or controlling person specifically for use in preparation of such registration
statement or prospectus contained therein or amendment thereof or supplement
thereto.
3
<PAGE> 163
Section 8. Shareholder will:
(a) exonerate, indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed any registration statement, and
each person, if any, who controls the Company within the meaning of the 1933
Act, against any losses, claims, damages or liabilities, joint or several, to
which the Company or any such director, officer or controlling person may become
subject, whether under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof):
(1) are caused by any untrue statement or alleged untrue statement of
any material fact contained, on the effective date thereof, in any
registration statement under which any of the Preferred Stock or Common
Stock were, pursuant to any of the provisions of this Agreement, registered
under the 1933 Act, any prospectus contained therein, or any amendment
thereof or supplement thereto; or
(2) arise out of, or are based upon, any omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements contained therein not misleading; and
(b) reimburse the Company, each such director, officer or controlling
person for any legal or other expenses reasonable incurred by any of them in
connection with investigating or defending any such loss, claim, damage,
liability or action arising under subparagraph (a) of this Section 8;
provided, however, that any obligation or liability of Shareholder shall be
limited in each case and only be to the extent, such untrue statement, or
alleged untrue statement, or omission, or alleged omission, was so made in
reliance upon, and as a result of, written information furnished by Shareholder
specifically for use in the preparation of such registration statement or
prospectus contained therein or amendment thereof or supplement thereto.
Section 9. Within sixty (60) days after receipt by a party to be
indemnified (the "indemnified party") pursuant to the provisions of Section 7 or
8 hereof of notice of the assertion of any claim or the commencement of any
action or proceeding, such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of Section 7,
hereof or, as the case may be, of Section 8 hereof, notify the indemnifying
party of the assertion or commencement thereof. The failure so to notify the
indemnifying party will relieve it from any liability which it has to any
indemnified party under such provisions, but the failure so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under such provisions. In the event that
any such claim is asserted or action or proceeding is brought against any
indemnified party, and it duly notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense of such claim, action or proceeding
with counsel reasonably satisfactory to such indemnified party, provided that in
the case of a claim in the form of an administrative or disciplinary action or
an action only for injunctive relief with no claim for monetary damages, the
indemnified party may elect to retain its own counsel or appoint co-counsel.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense of such claim, action or proceeding, the
indemnifying party will not be liable to such indemnified party for any legal or
other expenses incurred by such indemnified party after the election so to
assume the defense of such claim, action or proceeding, other than reasonable
costs of investigation. The indemnified party shall cooperate with the
indemnifying party in the defense of any claim, action or proceeding the defense
of which has been assumed by the indemnifying party. Failure of the indemnified
party to reasonably cooperate with the indemnifying party shall relieve the
indemnifying party of any obligations under Section 7 or 8, as the case may be,
and under this Section 9.
Section 10. In the event that Shareholder acquires any additional
Preferred Stock or Common Stock issued by the Company (or any successor to all
or a substantial part of the business or assets of the Company) by reason of any
stock split of such Preferred Stock or Common Stock, or the payment of any stock
dividend on such Preferred Stock or Common Stock, or if any of such Preferred
Stock or Common Stock are exchanged for or converted into any other equity
securities, then, in any such event, such additional Preferred Stock or Common
Stock or other equity securities shall, for the purposes of all of the foregoing
provisions of this Agreement, be deemed to be, and shall be treated as though
they were, shares forming part of the
4
<PAGE> 164
Preferred Stock or Common Stock. As used in this Agreement the term "equity
securities" shall include any shares of Common Stock or Preferred Stock, any
securities convertible into Common Stock or Preferred Stock, or any option,
warrant or agreement which grants the right to the holders thereof to purchase
Common Stock or Preferred Stock.
Section 11.
(a) The Company agrees that, in any case where:
(1) it has notified Shareholder in writing in connection with a
proposed public disposition of any of the Preferred Stock or Common
Stock, in reliance on a "no action" letter or in the opinion of counsel
reasonably satisfactory to the Company (which counsel may be counsel to
Shareholder), no registration under the 1933 Act is required with
respect to such disposition and the Preferred Stock or Common Stock may
be transferred free of any restrictive legend; or
(2) the Company has received from Shareholder a "no action" letter
or an opinion of counsel reasonably satisfactory to the Company (which
counsel may be counsel to Shareholder) to the effect that all
restrictive legends may be removed from certificates evidencing
Preferred Stock or Common Stock owned by Shareholder; or
(3) a registration statement has been declared effective in
relation to any of the Preferred Stock or Common Stock;
then, in any such case, Shareholder shall be entitled, at no cost to
it, to have certificates or other appropriate instruments issued to it
evidencing the Preferred Stock or Common Stock referred to in this Section
11, without any restrictive legend whatsoever upon surrender to the Company
of the certificates or other appropriate instruments evidencing such
Preferred Stock or Common Stock which may bear such a legend.
(b) Shareholder agrees that in the event of a stop order being issued
in respect of a registration statement relating to the Preferred Stock or
Common Stock, or in the event of a withdrawal of any such registration
statement, it will, without prejudice to its rights under this Section 11,
surrender to the Company those certificates or other appropriate
instruments evidencing such Preferred Stock or Common Stock (if any)
bearing no legend which it has received in exchange for certificates or
other appropriate instruments evidencing such Preferred Stock or Common
Stock bearing a legend and will accept in exchange therefor, certificates
or other appropriate instruments evidencing such Preferred Stock or Common
Stock bearing such a legend.
Section 12. All of the terms and provisions of this Agreement shall bind
and inure to the benefit of the parties to this Agreement and their successors
and assigns; provided, however, that Shareholder may not assign its rights under
this Agreement without the Company's prior written consent.
Section 13. Any notice, statement, demand, consent or request to be given
or furnished to a party to this Agreement shall be deemed to have been
sufficiently given or furnished by being sent by registered or certified mail,
postage prepaid, to the following addresses:
<TABLE>
<S> <C>
Company: American Precision Industries Inc.
2777 Walden Avenue
Buffalo, New York 14225
Attention: President
Shareholder: Inter Scan Holding Ltd.
Schifflande 5
CH-8001 Zurich
Switzerland
Attention: President
</TABLE>
5
<PAGE> 165
Section 14. This instrument, and the documents referred to here, including
the Stock Purchase Agreement, contain the entire agreement between the Company
and Shareholder with respect to the transactions contemplated herein. Neither
party shall be bound by, or shall be deemed to have made, any representations
and/or warranties, except those contained in this instrument or in such
documents to which such party is also a party.
Section 15. If any provision of this Agreement is held by a court of
competent jurisdiction for any reason to be unenforceable, the remainder of this
Agreement shall, nevertheless, remain in full force and effect in such
jurisdiction.
Section 16. This Agreement or any provisions hereof cannot be changed,
terminated or waived orally, but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification or discharge
is sought.
Section 17. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware. The Company and
Shareholder shall attempt to resolve between them any dispute which arises under
this Agreement. If they cannot agree within ten (10) calendar days after either
party submits a demand for arbitration to the other party, then the issue shall
be submitted to binding arbitration with each party having the right to appoint
one (1) arbitrator and those two (2) arbitrators mutually selecting a third
arbitrator. The rules of the American Arbitration Association for the
arbitration of commercial disputes shall apply and the decision of two (2) of
the three (3) arbitrators shall be final and binding. The arbitration shall take
place in New York, New York. The arbitrators shall apply Delaware law, but shall
not be allowed to award punitive damages.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed the day and year first above written.
AMERICAN PRECISION INDUSTRIES INC.
By: /s/ KURT WIEDENHAUPT
------------------------------------
Kurt Wiedenhaupt, President
and Chief Executive Officer
INTER SCAN HOLDING LTD.
By: /s/ HOLGER B. HJELM
------------------------------------
HOLGER B. HJELM
By: /s/ MAX E. HUBER
------------------------------------
MAX E. HUBER
6
<PAGE> 166
APPENDIX B
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
AMERICAN PRECISION INDUSTRIES INC.
------------------------
Pursuant to Section 242 of the
Delaware General Corporation Law
------------------------
We, John M. Murray, Vice President -- Finance and Treasurer, and James J.
Tanous, Secretary, of AMERICAN PRECISION INDUSTRIES INC. (the "Corporation") in
accordance with Section 242 of the Delaware General Corporation Law, do hereby
certify as follows:
1. The name of the Corporation is American Precision Industries Inc.
2. The Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on the 22nd day of August 1986.
3. The Restated Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on the 6th day of November
1986.
4. An Amendment to the Restated Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on the 26th day of
April 1991.
5. A Certificate of Designation, setting forth the preferences and
rights of the Corporation's Series A Seven Percent (7%) Cumulative
Convertible Preferred Stock, Fifty Dollars ($50.00) par value per share,
was filed with the Secretary of State of the State of Delaware on July 2,
1997.
6. The Restated Certificate of Incorporation, as amended by the
Certificate of Designation filed July 2, 1997, is hereby further amended as
authorized by Section 242 to:
(a) increase the authorized common shares of the Corporation by
Twenty Million (20,000,000) shares from Ten Million (10,000,000) to
Thirty Million (30,000,000) shares;
(b) increase the authorized preferred stock of the Corporation by
One Million Two Hundred and Fifty Thousand (1,250,000) shares from
Twenty Thousand (20,000) shares to One Million Two Hundred and Seventy
Thousand (1,270,000) shares;
(c) designate the One Million Two Hundred and Fifty Thousand
(1,250,000) newly authorized shares of preferred stock as "Series B
Seven Percent (7%) Cumulative Convertible Preferred Stock, One Dollar
($1.00) par value per share," with such rights, preferences and
limitations as set forth below in the amended Article IV of the Restated
Certificate of Incorporation; and
(d) as authorized by Section 242(a)(3) of the Delaware General
Corporation Law, reclassify the existing Twenty Thousand (20,000) shares
of Series A Seven Percent (7%) Cumulative Convertible Preferred Stock,
Fifty Dollars ($50.00) par value per share, all of which shall be
reacquired by the Corporation upon the filing of the Certificate of
Amendment pursuant to Section 3 of the Certificate of Designation for
the Series A Seven Percent (7%) Cumulative Convertible Preferred Stock
and shall be reclassified as 20,000 shares of preferred shares whose
rights, preferences and limitations shall be fixed by the Corporation's
Board of Directors in accordance with Section 151 of the Delaware
General Corporation Law and in accordance with Article IV paragraph (a)
of the Restated Certificate of Incorporation as amended below.
B-1
<PAGE> 167
7. To effect the foregoing, Article IV of the Restated Certificate of
Incorporation is stricken in its entirety and there is substituted in lieu
thereof a new Article IV reading as follows:
ARTICLE IV
The aggregate number of shares which the Corporation shall
be authorized to issue is Thirty One Million Two Hundred Seventy
Thousand (31,270,000) which shall consist of Twenty Thousand
(20,000) preferred shares having a par value of Fifty Dollars
($50.00) each (hereinafter the "$50.00 par value Preferred
Shares"), One Million Two Hundred Fifty Thousand (1,250,000)
shares having a par value of One Dollar ($1.00) each of
preferred shares Series B Seven Percent (7%) Cumulative
Convertible Preferred Stock (hereinafter the "Series B Preferred
Stock"), and Thirty Million (30,000,000) shares, having a par
value of sixty-six and two-thirds cents ($.66 2/3) each of
common shares (hereinafter the "Common Stock").
The relative rights, preferences and limitations of the
shares of each class are as follows:
(a) The 20,000 shares of $50.00 par value Preferred
Shares may be issued in series, and each series shall be so
designated as to distinguish the shares thereof from the
shares of all other series. All shares of $50.00 par value
Preferred Shares shall be identical except as to the relative
rights, preferences and limitations below enumerated.
Authorization is hereby expressly granted to the board of
directors to fix, before the issuance of any shares of a
particular series, the number of shares to be included in
such series, the dividend rate per annum, the redemption
price or prices, if any, and the terms and conditions of
redemption or purchase of the shares of the series, the terms
and conditions on which the shares are convertible, if they
are convertible, the voting rights, if any, including rights
to vote as a class or series, and any other rights,
preferences and limitations pertaining to such series.
(b) Each issued and outstanding share of Common Stock
shall be entitled to one vote.
(c) The terms of the Series B Preferred Stock are as
follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series B Seven Percent (7%) Cumulative Convertible Preferred
Stock" and the number of shares constituting such series shall be 1,250,000.
Section 2. Face and Liquidation Value. The face and liquidation value of
the Series B Preferred Stock shall be $21.15625 per share ("Series B Liquidation
Value").
Section 3. Redemption of Series B Preferred Stock.
(A) Optional Redemption. The Corporation, at the option of the Board
of Directors, may redeem all or any part of the Series B Preferred Stock at
any time outstanding, at any time or from time to time, upon written notice
duly given pursuant to subsection 3(B), for an amount per share to be
redeemed equal to the sum of the Series B Liquidation Value and an amount
computed at the annual rate of seven percent (7%) of the Series B
Liquidation Value per annum per share from and after the date on which
dividends on such share became cumulative to and including the date fixed
for such redemption, less the aggregate of the dividends paid during the
same period, but computed without interest ("Redemption Price").
Notwithstanding the receipt of any notice pursuant to subsection 3(B), the
holders of Series B Preferred Stock shall have the right to convert their
shares of Series B Preferred Stock as set forth in Section 6 below.
(B) Notice of Redemption. Notice of any redemption ("Redemption
Notice") of Series B Preferred Stock shall be mailed at least forty-five
(45) calendar days prior to the date fixed for such
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<PAGE> 168
redemption to the holders of record of shares so to be redeemed at their
respective addresses as the same shall appear on the books of the
Corporation. In case of redemption of only a part of the Series B Preferred
Stock at the time outstanding, the shares to be redeemed shall be selected
in such manner as the Board of Directors may determine, whether by lot or
by pro rata redemption or by selection of particular shares, and the
proceedings and actions of the Board of Directors in making such selection
shall not be subject to attack except for fraud. The Redemption Notice
shall state (i) the date of redemption; (ii) the Redemption Price; and
(iii) the place of payment.
Section 4. Dividends and Distributions. The holders of the Series B
Preferred Stock shall be entitled to receive cumulative cash dividends at the
rate of seven percent (7%) of the Series B Liquidation Value (as defined above
in Section 2) per share per annum, and no more, with such dividends accruing and
becoming cumulative on and after January 1, 1999 and payable on the first days
of January, April, July and October, commencing April 1, 1999. The cumulative
cash dividends shall be paid when and as declared by the Board of Directors of
the Corporation, but only out of surplus legally available for the payment of
dividends. Such dividends shall be payable before any dividends (other than a
stock dividend in shares of the same class of stock) on any class of common
stock shall be paid or set apart for payment. Dividends shall be cumulative from
and after January 1, 1999, and any arrearages in payment shall not bear
interest.
Section 5. Voting Rights.
(A) Subject to the limitations contained below, the holders of Series
B Preferred Stock shall vote as a class on the following transactions that
shall be submitted to the holders of Series B Preferred Stock for their
approval:
(i) any amendment to the Corporation's Restated Certificate of
Incorporation that would amend, change, modify or revoke the rights,
preference or limitations applicable to the Series B Preferred Stock;
and
(ii) any other proposal or transaction that requires the approval
of the holders of Series B Preferred Stock, voting as a class, under
Delaware's General Corporation Law.
In each instance set forth in subsections (i) and (ii) above, the
holders of Series B Preferred Stock shall be entitled to one vote for each
share of such stock owned of record and the approval of the holders of a
majority of the shares of Series B Preferred Stock issued and outstanding
and entitled to vote shall be required to adopt such proposal.
Notwithstanding the foregoing, the holders of Series B Preferred Stock
shall lose any and all right to vote as a class (except to the extent, if
any, that such holders thereafter have the right to vote as a class
pursuant to the provisions of Delaware's General Corporation Law) if at any
time the total number of issued and outstanding shares of Series B
Preferred Stock is less than twenty five percent (25%) of the number of
shares of Series B Preferred Stock initially issued by the Corporation.
(B) In addition to the voting rights granted above, the holders of
Series B Preferred Stock shall be entitled to vote on all matters (except
the election of directors and the ratification of the independent public
accountants retained by the Corporation to audit its financial statements)
submitted for a vote to the holders of the Common Stock and in that
instance each holder of Series B Preferred Stock shall have a number of
votes equal to the number of shares of Common Stock into which his or her
shares of Series B Preferred Stock would be convertible as of the record
date for the meeting of shareholders at which such matter will be voted on.
(C) If the Corporation shall breach any of its obligations hereunder
or fail to make any exchange, conversion, or payment to which the holder of
Series B Preferred Stock is entitled hereunder, or fail to maintain its
corporate existence in good standing or continue its normal business
operations, or if any bankruptcy, reorganization, insolvency, receivership
or other credit proceeding is instituted by or against the Corporation and
is not dismissed within sixty (60) calendar days, or if the Corporation
makes an assignment for the benefit of creditors, then the holders of
Series B Preferred Stock, in addition to all other rights they may have at
law or in equity, shall have the right to vote for the election of
directors and
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to exercise all the rights any holder of the Common Stock may have to call
a special meeting of the shareholders of the Corporation and to participate
in such special meeting and any annual meeting of the shareholders.
Section 6. Conversion of Series B Preferred Stock.
(A) Optional Conversion. Holders of Series B Preferred Stock shall
have the right, at their option, to convert as many shares of Series B
Preferred Stock as they choose into the shares of the Corporation's Common
Stock, on the terms and conditions set forth below.
(B) Terms of Conversion. The conversion of the Series B Preferred
Stock shall be upon the following terms and conditions:
(i) Conversion Ratio. The Series B Preferred Stock shall be
convertible, at the principal office of the Corporation and at such
other office or offices, if any, as the Board of Directors of the
Corporation may designate, into fully paid and non-assessable shares of
Common Stock. The number of shares of Common Stock to be delivered upon
conversion shall be determined by the following calculation:
<TABLE>
<S> <C> <C>
The sum of the LV and UD per share times CPS = NCS
---------------------------------------------
CP
</TABLE>
where LV equals the Series B Liquidation Value per share; UD equals
seven percent (7%) of the per share LV per annum from and after the date
on which dividends on such share became cumulative to and including the
date of conversion less the aggregate of the dividends paid during the
same period, computed without interest; CPS equals the number of shares
of Series B Preferred Stock to be converted; CP equals the conversion
price for a share of Common Stock which shall be $17.00 per share as
adjusted pursuant to subsection (ii) or (iii) below; and NCS equals the
number of shares of Common Stock to be delivered upon conversion.
(ii) Adjustment of Conversion Price on Various Events. In case
the Corporation at any time shall change its outstanding shares of
Common Stock (which, for purposes of this subsection, shall include any
other class of common stock) into a greater number of shares or pay in
shares of Common Stock a dividend on then outstanding shares of Common
Stock or combine or subdivide its outstanding shares of Common Stock
into a smaller number of shares or issue or sell shares of Common Stock
for less than $17.00 per share (plus or minus previous adjustments),
(except for shares reserved or issued pursuant to a bona fide stock
option or benefit plan for directors, officers and/or employees of the
Corporation); then the Conversion Price for a share of Common Stock
shall be adjusted in accordance with the following equation:
<TABLE>
<S> <C> <C>
(A X B) + C = NCP
------------
D
</TABLE>
where A equals the number of shares of Common Stock outstanding
immediately before the event requiring adjustment; B equals $17.00 per
share (plus or minus all previous adjustments); C equals the value of
the consideration received by the Corporation for the issuance or sale,
requiring adjustments, of shares of Common Stock for less than B; D
equals the number of shares of Common Stock outstanding after such
event; and NCP equals the new conversion price.
(iii) Adjustments for Reorganizations, Reclassifications, Mergers
and Consolidations. If any reorganization or reclassification of the
capital stock of the Corporation, or any merger or consolidation of the
Corporation with another corporation, shall be effected, a holder of
Series B Preferred Stock shall thereafter be entitled upon the exercise
of conversion rights to receive the number and kind of shares of stock,
securities or assets which the holder of Series B Preferred Stock would
have been entitled to receive in connection with such reorganization,
reclassification, merger or consolidation if he or she had been a holder
of the number of shares of Common Stock of the
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<PAGE> 170
Corporation issuable upon the conversion of his or her Series B
Preferred Stock immediately prior to the time such reorganization,
reclassification, merger or consolidation became effective.
(iv) Notice of Adjustment. Whenever any adjustments are required
pursuant to subsections (ii) and (iii) above, the Corporation shall give
the holder of Series B Preferred Stock written notice detailing the
method of calculation of such adjustment and the facts requiring the
adjustment and upon which the calculation is based.
(v) Method of Conversion. In order to convert shares of Series B
Preferred Stock into shares of Common Stock, the holder of Series B
Preferred Stock shall surrender at any office mentioned above the
certificate or certificates therefor, duly endorsed to the Corporation
or in blank, and give written notice at such office that he or she
elects to convert such shares of Series B Preferred Stock which shall be
deemed to have been converted as of the date ("Conversion Date") of the
surrender of such shares for conversion as provided above, and the
holder of Series B Preferred Stock shall be treated for all purposes as
the record holder or holders of such Common Stock on such date. As soon
as practicable on or after the Conversion Date, the Corporation will
deliver at such office a certificate or certificates for the number of
full shares of Common Stock issuable on such conversion, together with
cash in lieu of any fraction of a share, as hereinafter provided, to the
persons entitled to receive the same. In case shares of Series B
Preferred Stock are called for redemption, the right to convert such
shares shall cease and terminate at the close of business on the date
fixed for redemption, unless exercised prior thereto or unless default
shall have been made in the payment of the Redemption Price.
(vi) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion, but the Corporation shall pay a cash
adjustment in respect of any fraction of a share which would otherwise
be issuable, in an amount equal to the same fraction of the Market
Price, as defined below, per share of Common Stock at the close of
business on the Conversion Date.
(vii) Market Price. The Market Price per share shall be (a) if
traded on the over-the-counter market, the mean between the closing bid
and asked quotations on the Conversion Date, or if no such bid or
quotation was made on the Conversion Date, then such bid and quotation
on the first date preceding the Conversion Date that such bid and
quotation was published, or (b) if traded on a national securities
exchange, the closing sale price on the Conversion Date, or if no such
sale was made on the Conversion Date, then the closing sale price on the
first date preceding the Conversion Date that such sale took place, or
(c) if traded on both the over-the-counter market and an exchange, the
mean between the prices determined in accordance with clauses (a) and
(b) of this sentence.
(viii) Partial Conversion of Shares. In the event the holders of
the Series B Preferred Stock elect to convert only a part of their
shares, the Corporation shall deliver new certificates to the holders of
the Series B Preferred Stock in an amount equal to the unconverted
amount of shares held by the holder of Series B Preferred Stock.
(ix) Issuance of Certificates. The issuance of new certificates
for shares of Common Stock or Series B Preferred Stock to the holder of
Series B Preferred Stock upon conversion shall be without any charge or
tax.
Section 7. Payment on Liquidation, Dissolution or Winding Up. In the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series B Preferred Stock shall be entitled to
receive out of the assets of the Corporation, before any distribution or payment
shall be made to the holders of any class of common stock, an amount equal to
the Series B Liquidation Value of the stock plus a sum computed at the dividend
rate of seven percent (7%) per annum from and after the date on which dividends
on such shares became cumulative to and including the date fixed for such
payment, less the aggregate of the dividends theretofore paid thereon, during
the same period, but computed without interest. For the purpose of this Section
7, a consolidation or merger of the Corporation with one or more other
corporations shall not be deemed to be a liquidation, dissolution or winding up
of the Corporation.
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<PAGE> 171
Section 8. No Impairment. The Corporation, whether by amendment of its
Certificate of Incorporation, or through any reorganization, transfer of its
assets, merger, dissolution, issue or sale of securities or any other voluntary
actions, will not avoid or seek to avoid the observance or performance of any of
the terms to be observed hereunder by the Corporation, but at all times in good
faith will assist in the carrying out of all such action as may be necessary or
appropriate in order to protect the rights of the holders of Series B Preferred
Stock.
Section 9. Reservation of Stock. The Corporation will at all times keep
available out of its authorized but unissued shares of Common Stock a sufficient
number of shares of Common Stock for the purposes of effectuating the conversion
of the Series B Preferred Stock. If at any time the number of authorized but
unissued shares of Common Stock are not sufficient to effect the conversion of
all of the outstanding Series B Preferred Stock, then the Corporation shall take
such actions as is necessary to increase the authorized but unissued shares of
Common Stock to be equal to the number needed for the conversion.
8. The above amendment to the Restated Certificate of Incorporation was
recommended and approved by a resolution duly adopted by all of the members of
the Board of Directors of the Corporation and was authorized by a vote of the
holders of a majority of all outstanding shares entitled to vote at a special
meeting of shareholders of the Corporation held on the day of September 1997.
IN WITNESS WHEREOF, the undersigned have subscribed this certificate this
day of September 1997 and affirm that the statements made herein are true and
correct under the penalties of perjury.
--------------------------------------
Name: John M. Murray
Title: Vice President -- Finance and
Treasurer
[Corporate Seal]
ATTEST:
- ---------------------------------------------------------
Name: James J. Tanous
Title: Secretary
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<PAGE> 172
AMERICAN PRECISION INDUSTRIES INC. PROXY
2777 Walden Avenue
Buffalo, New York 14225
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Kurt Wiedenhaupt and John M.
Murray, and each or either of them, proxies for the undersigned, with full power
of substitution, to vote all common shares ("Common Shares") of American
Precision Industries Inc. (the "Company") which the undersigned would be
entitled to vote at the Special Meeting of Shareholders to be held on October
30, 1997, and at any adjournment thereof, and directs that the Common Shares
represented by this proxy shall be voted as indicated below:
1. A proposal to approve the issuance of up to 1,538,603 Common Shares upon the
conversion of preferred shares of the Company which have been and may be
issued under the Amended and Restated Stock Purchase Agreement dated July 3,
1997, pursuant to which the Company has acquired all of Inter Scan Holding
Ltd.'s shares of Portescap, a European manufacturer of motors.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. A proposal to amend the Company's Restated Certificate of Incorporation (i)
to increase the number of authorized Common Shares from 10,000,000 to
30,000,000; and (ii) to authorize 1,250,000 shares of Series B Seven Percent
(7%) Cumulative Convertible Preferred Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued on other side)
(Continued from other side)
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
SHAREHOLDER. THE BOARD OF DIRECTORS FAVORS A VOTE FOR PROPOSALS 1 AND 2. IF NO
DIRECTION IS MADE, THE PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2. YOU NEED NOT
MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS'
RECOMMENDATIONS. THE PROXIES CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN
THIS CARD.
Dated: , 1997
---------------------
PLEASE SIGN EXACTLY AS NAME(S)
APPEARS HEREON. JOINT OWNERS
SHOULD BOTH SIGN. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE
FULL TITLE AS SUCH.
----------------------------------
----------------------------------
(Signature of Shareholder(s))
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD IN THE ENCLOSED ENVELOPE,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
