<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________TO_____________________
COMMISSION FILE NUMBER 1-5601
AMERICAN PRECISION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1284388
(State of incorporation) (I.R.S. Employer Identification No.)
2777 WALDEN AVENUE, BUFFALO, NEW YORK 14225
(Address of principal executive offices) (Zip Code)
(716) 684-9700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.66-2/3 PAR VALUE NEW YORK STOCK EXCHANGE
(Title of each class) (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 23, 1998 was approximately $130,225,828.
The number of shares of Registrant's Common Stock outstanding on
March 23, 1998 was 7,444,618.
The Company's definitive Proxy Statement dated March 25, 1998 is
incorporated by reference in Part III of this Form 10-K.
Exhibit Index can be found on page 57 of this document.
<PAGE> 2
AMERICAN PRECISION INDUSTRIES INC.
FORM 10-K ANNUAL REPORT
For the year ended December 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I.
- -------
<S> <C>
ITEM 1. BUSINESS
Products and Marketing 3-6
Competition 6
Backlog 6
Suppliers 7
Patents and Licenses 7
Customers 7
Research and Development 7
Environmental Matters 8-9
Employees 9
Lines of Business and Industry Segment Information 9-10
Foreign Operations 11
ITEM 2. PROPERTIES 11-12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 13
SECURITY HOLDERS
PART II.
- --------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND 14
RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 16-20
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 21-47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 48
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III.
- ---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 49
ITEM 11. EXECUTIVE COMPENSATION 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 49
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
PART IV.
- --------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 50-54
REPORTS ON FORM 8-K
SIGNATURES 55-56
</TABLE>
2
<PAGE> 3
PART I
------
ITEM 1. BUSINESS
--------
a. PRODUCTS AND MARKETING
The registrant and its subsidiaries (the "Company" or "API")
conduct operations in three major industrial segments, namely,
Heat Transfer, Motion Technologies, and Electronic Components.
The Company directs its marketing efforts towards major sales
drives for current products in its served markets and target
markets. In addition, the Company 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, API
AIRTECH, API KETEMA, and API Schmidt-Bretten, engineers and
manufactures a broad range of industrial heat transfer
equipment. API Heat Transfer 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 air-cooled
aluminum heat exchangers. Its' operations are based in a new
82,000 square foot facility which will accommodate future growth
needs. Both API Basco and API Airtech are ISO 9001 certified, an
important element in the Company's plans for international
growth.
API KETEMA INC. 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, 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 plate-type heat exchanger products offer
flexible design, high efficiencies and easy disassembly for
cleaning or plate replacement. The addition of API
Schmidt-Bretten, which is located in Germany, 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. Further, it allows API to distribute heat transfer
products manufactured at various U.S. locations into European
markets.
3
<PAGE> 4
API MOTION INC
--------------
API Motion Inc., comprised of API CONTROLS, API DELTRAN, API
GETTYS, API HAROWE, API PORTESCAP AND API POSITRAN, 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. During
1997 an extensive effort was expended on the development of
network communications capabilities for the recently introduced
Intelligent Servo, MicroStepper and Centennial Digital drives.
API DELTRAN INC. designs and manufactures high quality,
precision electromagnetic clutches, brakes and clutch/brake
assemblies used in sophisticated rotary motion control
applications. One focus of API Deltran during 1997 was directed
on custom miniature electromagnetic clutches and brakes designed
for volume opportunities. A new line of permanent magnet brakes
will be introduced in mid-1998 for penetration of European motor
markets.
API GETTYS INC. 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. By
year-end 1997, the new high-performance Turbo series of step and
servo motors were delivered to customers for testing. The Turbo
series motors include several frame sizes and a variety of
mechanical interface options with over 100 different electrical
variations.
API HAROWE INC. designs and manufactures high performance
resolvers, encoders, brushless motors, gearmotors and other
specialty rotating electromagnetic components for industrial,
medical, military and commercial aerospace applications. API
Harowe also offers a line of small frame brushless DC motors
that can be provided in over 4,500 different model variations,
allowing it to respond to a wide variety of markets such as
medical instrumentation. The Digital Resolver electronics
package was fully released in 1997. This feedback package, which
sends signals back to the controller of a motor, provides an
ideal feedback solution for rugged operations such as welding,
machine tools, and industrial applications where a digital
signal is needed, but the durability of a standard analog
resolver is better suited.
4
<PAGE> 5
API PORTESCAP INC., acquired on July 8, 1997, participates in
the market for high performance electromechanical drive systems.
It develops, manufactures and markets ironless DC motors,
brushless DC motors, disc magnet stepper motors, reduction
gearboxes, DC tachogenerators, and integrated optical magnetic
encoders. In addition, Portescap markets high power range
motors, iron core DC motors, hybrid steppers and electronic
drive circuits.
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 which feature: (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 lives.
The assimilation of Portescap's products, sales channels and
technology within API Motion has been accomplished through
various actions including the redesign of product lines and the
establishment of "EuroSales", an initiative to train the
European sales force on API's U.S. products and to develop the
marketing tools necessary to meet the demands of European
markets.
API POSITRAN LIMITED offers high quality gearboxes designed and
manufactured to ISO 9001 criteria. The gearboxes are available
in offset, in-line, right-angle and linear geometric choices,
utilizing three technology alternatives - spur, bevel, and worm
and wheel. The gearboxes provide an efficient match of high
speed motors to lower speed loads, thus enabling the drive and
control electronics to operate at lower currents. This results
in less heat loss and improved efficiencies.
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 and advancements in alternative
circuitry technologies continue to push the market towards
improved product quality with lower product costs. These
competitive forces are being neutralized through major
improvements in the group's manufacturing capabilities.
The electronic component industry is comprised of a few major
players who serve primarily the very large retail and commercial
consumables markets. API's markets are the higher-grade
industrial applications such as avionics, aerospace and medical
equipment.
5
<PAGE> 6
API Electronic Components' products were part of the Mars
Sojourner Rover space program and several other aerospace
applications. Both API Delevan and API SMD continue to receive
high product quality and service grades from their wide customer
and distribution base.
Sales growth is oriented toward specialty niche markets and
custom components to augment the large offering of catalog
products. API Electronic Components is building a broader base
of international sales through an expanded force of agents and
representatives around the world.
b. COMPETITION
-----------
In each of its segments the Company 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 our 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. The
Company relies primarily on the quality of its products and
service to meet competition. Although the Company is not aware
of definitive industry statistics by manufacturer for the
products it makes, in the opinion of management, the Company is
a significant competitive factor in the high quality
micro-miniature electronic coil, electro-magnetic components,
and compressor cooler markets.
c. BACKLOG
-------
The Company's backlog of unfilled orders believed to be firm at
December 31, 1997 was approximately $75,584,000. 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:
<TABLE>
<CAPTION>
API Heat API Electronic
Transfer API Motion Components Total
--------------------- --------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
1997 $27,716,000 $44,282,000 $ 3,586,000 $75,584,000
1996 $20,639,000 $15,924,000 $ 2,653,000 $39,216,000
</TABLE>
6
<PAGE> 7
Backlog has increased for the Heat Transfer segment primarily
due to the Schmidt-Bretten acquisition and increases in orders
for air-cooled and shell and tube heat exchangers. The increase
in backlog in the Motion Technologies segment is principally due
to the Portescap acquisition and also increased orders for
brakes, clutches and motors. The backlog for Electronic
Components has increased in part based on the timing of
scheduled order releases with a number of large customers.
d. SUPPLIERS
---------
The Company 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.
e. PATENTS AND LICENSES
--------------------
The Company has patents in multiple jurisdictions covering the
design of certain Portescap products including, in particular,
the disc magnet motor. Also Portescap's escap(R) tradename is
registered in multiple jurisdictions. The disc magnet motor
patent expires on July 21, 2004. The Company recently registered
the tradename Turbo Servo, and the tradename Turbo Stepper has
been allowed and registration is expected shortly. These
tradenames will be utilized for a new line of precision motors.
The Company 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. None of these patents expire
prior to the year 2006.
The Company has numerous other patents and trademarks. No single
patent or trademark or group of patents or trademarks is
material to the operations of any industry segment or to the
business as a whole.
f. CUSTOMERS
---------
During 1997, no single customer accounted for more than 10% of
consolidated sales.
g. RESEARCH AND PRODUCT DEVELOPMENT
--------------------------------
The Company charges earnings directly for research and product
development expenses. Costs for Company-sponsored programs,
excluding capital expenditures, were approximately $3,667,000,
$1,759,000, and $1,111,000, in 1997, 1996, and 1995,
respectively.
7
<PAGE> 8
h. ENVIRONMENTAL MATTERS
---------------------
In 1987, Transicoil Inc., which was formerly owned by Portescap
U.S. Inc., a subsidiary of the Company acquired in 1997, was
notified that the North Penn site in Pennsylvania on which its
operations had been located was nominated for inclusion on the
U.S. Environmental Protection Agency's ("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 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
8
<PAGE> 9
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.
Inter Scan Holding Ltd. from whom API acquired Portescap has
agreed to indemnify API, Portescap and its subsidiaries for any
Losses, as defined, which arise out of any violation of
environmental laws or disposal of hazardous waste at the North
Penn Site up to a maximum of 2,000,000 CHF (approximately
$1,350,000), and, to the extent any such claims are asserted
after October 8, 1998, 1,000,000 CHF (approximately $675,000).
i. EMPLOYEES
---------
At December 31, 1997, 2,043 persons were employed by the
Company.
j. LINES OF BUSINESS AND INDUSTRY SEGMENT INFORMATION
--------------------------------------------------
API's manufacturing operations in 1997 were carried on through
subsidiaries. Operations are classified into three industry
segments based upon the characteristics of manufacturing
processes and the nature of markets served. The manufacturing
units which currently comprise the segments and their principal
products are as follows:
9
<PAGE> 10
<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 Positran Limited Gearboxes and actuators
API ELECTRONIC COMPONENTS:
API Delevan Inc. Axial-leaded inductors
API SMD Inc. Surface mounted inductors
</TABLE>
Amounts of revenue from sales to unaffiliated customers,
operating profit or loss, and identifiable assets for the three
years ended December 31, 1997, are included in Note K of the
notes to consolidated financial statements on pages 43 and 44 of
this document.
10
<PAGE> 11
k. FOREIGN OPERATIONS
------------------
Export sales, principally to Europe, Canada, and Mexico, were
approximately 29%, 16%, and 14%, of consolidated sales for 1997,
1996, and 1995, 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. Additional information relating to geographic
operating data is included in Note K of the notes to
consolidated financial statements on page 45 of this document.
ITEM 2. PROPERTIES
----------
The location of API's manufacturing facilities and their
approximate size in terms of floor area are as follows:
<TABLE>
<CAPTION>
Floor Area
Location (Sq. Ft.)
------------------------------------------------------------------------------- ----------------
<S> <C>
API HEAT TRANSFER INC.
API Basco Inc., Buffalo, New York 115,600
(Walden Avenue)
API Airtech Inc. and API Schmidt-Bretten Inc. 82,000
Arcade, New York (North Street)
API Ketema Inc., Grand Prairie, Texas 150,000
(West Marshall Drive)
API Schmidt-Bretten GmbH, Bretten, Germany 100,000
(Pforzheim Strasse)
API MOTION INC.
API Controls Inc. and API Deltran Inc., 43,700
Amherst, New York (Hazelwood Drive)
API Gettys Inc., Racine Wisconsin 88,000
(North Green Bay Road)
API Harowe Inc. and API Portescap U.S. Inc., 34,500
West Chester, Pennsylvania
(Westtown Road)
API Harowe (St. Kitts) Ltd. and 8,500
API Deltran (St. Kitts.) Ltd., St. Kitts, West Indies
(Bourkes Road)
API Portescap Inc., La Chaux-de-Fonds, Switzerland 126,500
(157, rue Jardiniere) and
Marly, Switzerland (Route de Chesalles 1) 20,800
API Positran Limited., Ringwood, England 28,000
(Headlands Business Park)
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>
11
<PAGE> 12
Of the facilities listed above, the API Basco Inc., API Airtech
Inc., API Schmidt-Bretten Inc., API Ketema Inc., API Gettys
Inc., API Portescap Inc., API Positran Inc., API Delevan Inc.,
and API SMD Inc. facilities are owned by API.
The facilities occupied by API Airtech Inc. and API
Schmidt-Bretten Inc., API Ketema Inc., and API SMD Inc.
constitute collateral for three industrial revenue bond
financings. The land and buildings owned by API Portescap Inc.
in Switzerland and by API Positran Inc. in England have been
pledged as security for certain mortgage loans.
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
</TABLE>
In addition, subsidiaries of API Portescap Inc. lease office
space in Pforzheim, Germany, Creteil, France, Tokyo, Japan, and
Stockholm, Sweden. A sales subsidiary of API Schmidt-Bretten
GmbH leases office space in Leeuwarden, The Netherlands. API
Schmidt-Bretten Inc. leases a sales office in Bohemia, New York.
The approximate aggregate annual rentals for these sales offices
is $229,000. The lease terms range from 1998 to 2002, and the
aggregate square footage is approximately 17,500.
The Company 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.
ITEM 3. LEGAL PROCEEDINGS
-----------------
See Item 1(h).
12
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
At a Special Meeting of Shareholders held on November 14, 1997,
the following two proposals were approved:
1. To issue up to 1,538,603 common shares of the Company upon
the conversion of preferred shares which have been or may be
issued under the Amended and Restated Stock Purchase
Agreement dated July 3, 1997, pursuant to which the Company
acquired all of Inter Scan Holding Ltd.'s shares of
Portescap, a European manufacturer of motors.
2. 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.
The voting results on these two proposals were:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstaining
------------------- ------------------- -------------------
<S> <C> <C> <C>
Proposal 1 5,058,424 193,894 1,302,324
Proposal 2 4,570,990 679,853 1,303,799
</TABLE>
13
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PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
-------------------------------------
AND RELATED SHAREHOLDER MATTERS
-------------------------------
COMMON STOCK PRICES
American Precision Industries common stock is listed on the New
York Stock Exchange and traded principally in that market. The
following table shows the Company's high and low prices on the
New York Stock Exchange, as reported in the Wall Street Journal.
<TABLE>
<CAPTION>
QUARTER
1 2 3 4
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1997 High $20.38 $20.19 $23.81 $26.00
Low $16.75 $16.25 $19.00 $20.50
1996 High $13.13 $13.75 $13.13 $20.25
Low $10.75 $11.50 $11.38 $12.25
</TABLE>
As of December 31, 1997, there were 948 shareholders of record.
During 1996 the Company declared cash dividends on its commmon
stock of $.26 per share. The Company decided to eliminate its
quarterly cash dividend, effective in the first quarter of
1997, and to retain the cash for expansion and acquisitions.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Net sales $184,070 $116,783 $ 82,403 $ 64,896 $ 50,858
Gross profit $ 56,863 $ 39,131 $ 27,114 $ 21,626 $ 16,454
Interest and debt expense $ 2,914 $ 1,295 $ 238 $ 220 $ 244
Depreciation and amortization $ 7,434 $ 3,785 $ 2,594 $ 2,275 $ 1,712
Net earnings $ 8,291 $ 6,525 $ 4,731 $ 3,431 $ 2,050
Capital expenditures $ 8,737 $ 8,319 $ 4,585 $ 1,857 $ 1,814
Balance Sheet
Working capital $ 36,296 $ 24,192 $ 18,463 $ 14,197 $ 15,985
Current ratio 1.8 2.4 2.4 2.3 4.0
Property, plant and equipment, net $ 52,647 $ 27,206 $ 12,269 $ 10,202 $ 8,353
Total assets $162,670 $ 82,012 $ 57,791 $ 45,344 $ 38,081
Long-term liabilities $ 40,298 $ 24,674 $ 10,292 $ 3,523 $ 3,507
Shareholders' equity $ 76,600 $ 40,544 $ 34,347 $ 30,905 $ 29,212
Ratio Analysis
Gross margin (% of sales) 30.9% 33.5% 32.9% 33.3% 32.4%
Net earnings (% of sales) 4.5% 5.6% 5.7% 5.3% 4.0%
Long-term liabilities to equity 52.6% 60.9% 30.0% 11.4% 12.0%
Per Common Share
Market price range:
High $ 26.00 $ 20.25 $ 14.75 $ 8.25 $ 8.00
Low $ 16.25 $ 10.75 $ 7.63 $ 6.25 $ 5.75
Close $ 20.81 $ 20.00 $ 11.13 $ 7.75 $ 6.50
Earnings:
- basic $ 1.12 $ 0.91 $ 0.67 $ 0.49 $ 0.29
- diluted $ 0.97 $ 0.88 $ 0.65 $ 0.49 $ 0.29
Book value $ 6.78 $ 5.56 $ 4.82 $ 4.38 $ 4.14
Other
Number of shares outstanding
at year-end 7,438 7,292 7,128 7,064 7,058
Weighted average shares outstanding:
- basic 7,381 7,190 7,090 7,062 7,057
- diluted 8,537 7,452 7,292 7,069 7,063
Effective tax rate 32.0% 34.7% 34.5% 35.3% 34.9%
Registered Shareholders 948 1,015 1,076 1,074 976
Employees 2,043 1,309 1,033 847 613
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
FINANCIAL REVIEW - OPERATIONS
REVENUES
Consolidated revenues in 1997 were $184.2 million versus $117.1
million in 1996. Included in 1997 revenue is $161 thousand of
investment income, which is down $166 thousand from $327
thousand of investment income in 1996. This is a result of the
lower average investment balances of funds raised in late 1995
for the construction of the new production facility for
air-cooled products (Airtech) which were expended primarily in
1996.
Consolidated net sales for 1997 were $184.1 million, up 57.6% as
compared to the prior year. The increase in net sales in 1997 is
discussed by business group.
MOTION GROUP
In fiscal 1997, net sales of $76.5 million were 91.6% ($36.6
million) higher than 1996 net sales. API's July 8, 1997
acquisition of Portescap, a Swiss producer of micromotors,
accounted for 83.5% of the increase in net sales dollars.
Increases in demand for motors, feedback devices, brakes and
clutches, and the ownership of Gettys (acquired in April 1996)
for a full 12 months account for the rest of the increase.
HEAT TRANSFER GROUP
In 1997, net sales of $93.0 million grew 46.4% ($29.5 million)
from 1996 levels. API's acquisition on January 31, 1997 of
Schmidt-Bretten, a German producer of plate and frame heat
exchangers, increased 1997 sales by $25.7 million. Increased
sales for air-cooled products and the ownership of Ketema
(acquired in April 1996) for a full 12 months offset by lower
exports of shell and tube heat exchangers due to a stronger U.S.
dollar accounted for the balance of the increase.
ELECTRONIC COMPONENTS GROUP
Net sales in 1997 were $14.6 million, an increase of 10% versus
1996. The increase reflects successful introduction of new
products for niche applications.
In 1996, consolidated revenues increased 41.7% compared with
1995 revenues. Investment income, which is included in revenues,
increased $70 thousand in 1996 compared with 1995, reflecting
income on undisbursed proceeds of an industrial revenue bond
issued in late 1995. Net sales in 1996 were $116.8 million, a
41.7% increase as compared with 1995. A 39.9% increase in Motion
16
<PAGE> 17
Group sales was the result of higher sales to new and existing
customers of clutches, brakes and motors and the April 1996
acquisition of Gettys. A 55.7% increase in Heat Transfer Group
sales in 1996 came from the acquisition of Ketema in April 1996,
and higher sales of air-cooled and shell and tube products to
new and existing customers. Electronic Components Group net
sales for 1996 were up 1.9% from increased sales to existing
customers.
API's consolidated backlog of firm orders at December 31, 1997
was $75.6 million, up 92.7% from the prior year. A 178.1%
increase in backlog for the Motion Group was due to the
acquisition of Portescap and increased orders for brakes,
clutches and motors. A 34.3% increase in the Heat Transfer Group
backlog was due to the acquisition of Schmidt-Bretten and
increases in orders for air-cooled and shell and tube heat
exchangers.
COST OF PRODUCTS SOLD
In 1997, cost of products sold was $127.2 million versus $77.7
million in 1996, a 63.7% increase. The 1997 acquisitions of
Schmidt-Bretten and Portescap and the ownership of Ketema and
Gettys for a full 12 months in 1997 accounted for 90% of the
$49.5 million increase in cost of products sold. Costs
associated with the additional sales volume from other units,
higher costs resulting from production inefficiencies in the
Heat Transfer Group and unfavorable inventory adjustments of
$816 thousand in the third quarter of 1997 account for the
remainder of the increase.
In 1996, cost of products sold increased by 40.4% compared with
1995. The acquisitions of Ketema and Gettys account for 75.9% of
the increase. The remainder is due to the sales volume increase
of other Heat Transfer Group and Motion Group products.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $11.6 million, or
44.1%, in 1997 compared with 1996. The two 1997 acquisitions and
the ownership of Ketema and Gettys for a full 12 months
accounted for most of the increase. Expressed as a percent of
sales, selling and administrative expenses decreased to 20.6% of
sales in 1997 from 22.6% in 1996.
Fiscal 1996 selling and administrative expenses increased 40.5%
compared with 1995 due to the acquisitions of Ketema and Gettys,
increased commissions resulting from sales volume increases, and
increased compensation expense.
RESEARCH AND PRODUCT DEVELOPMENT
1997 research and product development expenses increased by $1.9
million, or 108.5%, compared with 1996. The 1997 acquisitions
and ownership of Gettys for 12 months in 1997 accounted for 70%
of the increase. Investment in new product
17
<PAGE> 18
development for motion control and heat transfer products
accounted for the remaining increase.
The 58.3% increase in research and product development costs in
1996 compared with 1995 reflects the acquisition of Gettys and
increased activities for motion control products.
INTEREST AND DEBT EXPENSE
Interest and debt expense in fiscal 1997 was $2.9 million, a
125% increase over 1996. Of the $1.6 million increase from 1996,
88.5% was interest on debt incurred for, or acquired with, the
acquisitions of Schmidt-Bretten and Portescap. The balance was
from interest expense for a full twelve-month period on debt
incurred for the April 1996 acquisitions of Ketema and Gettys.
Interest and debt expense in 1996 increased by $1.1 million, or
444%, when compared to 1995. Interest on debt incurred for the
expansion of the Airtech facility and for the acquisitions of
Ketema and Gettys accounted for the increase.
OTHER EXPENSE
Other expense in 1997 of $210 thousand includes the cost related
to a settlement agreement with the United States Government
which totaled $331 thousand in the third quarter of 1997. The
settlement was on issues related to government subcontract work
performed between 1987 and 1995 by a unit of the company which
was closed in 1995. Offsetting this cost was a gain of $121
thousand from the sale of a non-operating investment.
INCOME TAXES
Income taxes expressed as a percent of earnings before taxes
were 32.0%, 34.7% and 34.5% in 1997, 1996 and 1995,
respectively. The lower rate in 1997 is attributed to
nonrecurring adjustments to prior year provisions following the
completion of audits.
NET EARNINGS
Net earnings in 1997 were $8.3 million, a 27.1% increase over
1996. The increase is primarily attributed to the earnings from
the acquisitions of Portescap and Schmidt-Bretten during the
year and the net results of Ketema and Gettys for a full
twelve-month period. These gains were somewhat offset by Heat
Transfer production cost difficulties and the inventory
adjustments in the third quarter of fiscal 1997.
Net earnings in 1996 were $6.5 million, a 37.9% increase over
1995. The increase is primarily attributed to the April 1996
acquisitions of Ketema and Gettys and the profitability from the
revenue growth of API's other business units.
18
<PAGE> 19
YEAR 2000 INITIATIVES
In 1997, the Company began a formal process to assess the status
of its computer systems with regard to their Year 2000
compliance. Almost all of the Company's key operating and
administrative systems are software packages purchased from
third party suppliers. The majority of these packages are
currently compliant or are expected to become compliant through
supplier developed upgrades. Two existing systems will require
replacement to become compliant. Projects to replace these
systems are underway and completion in a timely fashion is
expected. The cost associated with the software upgrades and
systems replacements are not considered to be material. The
Company has begun a review of its products which contain date
sensitive logic. To date, no compliance problems have been
identified.
A program to assess the Y2K compliance status of the Company's
key suppliers will be undertaken in 1998.
FINANCIAL POSITION
The Company's liquidity is primarily generated from operations.
In addition, short-term lines of credit totaling $8,262 thousand
and revolving credit of $2,700 thousand were available at
December 31, 1997. Information on the Company's liquidity
position for the past three years is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net working capital $36,296 $24,192 $18,463
Current ratio 1.8 2.4 2.4
Cash flow from Operating Activities $ 6,336 $ 7,755 $ 3,786
Cash, cash equivalents and marketable securities $ 2,313 $ 2,412 $ 5,979
Capital expenditures $ 8,737 $ 8,319 $ 4,585
</TABLE>
The lower 1997 current ratio as compared to 1996 is the result
of the Company's use of borrowed funds for the January 1997
acquisition of Schmidt-Bretten.
The decrease in cash flow from operating activities in 1997
compared with 1996 is the result of prepaid U.S. income taxes
resulting from lower than expected 4th quarter earnings,
payments for Portescap liabilities from the first half of 1997
that were accrued but unpaid at July 8, 1997, and increased
payments in 1997 for EVA(R)-based incentive compensation
programs. These items more than offset the increase in 1997
earnings adjusted for depreciation and amortization.
The increase in cash flow from operations in 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 Ketema and Gettys.
19
<PAGE> 20
Capital expenditures in 1997 reflect expenditures at
Schmidt-Bretten and Portescap following their acquisition,
expenditures supporting the implementation of Demand Flow
Technology, ("DFT"), investment in cost and productivity
improving equipment at other locations and the completion of the
new production facility for air-cooled heat transfer products.
As compared to 1996, the 1997 increase was the net result of
spending by the acquisitions and for DFT implementation, offset
by lower spending on the new production facility which was
placed in operation in early 1997.
The increase in capital expenditures in 1996 as compared to 1995
reflects 1996 spending on the new production facility for
air-cooled products, as well as significant investments in new
machinery and equipment. Also reflected in capital expenditures
are investments in new machinery and equipment acquired by
Ketema and Gettys since their respective dates of acquisition.
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
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 December 31, 1997 and
January 3, 1997, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Buffalo, New York
February 16, 1998
21
<PAGE> 22
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,313 $ 2,412
Accounts receivable less allowance for
doubtful accounts of $1,124 and $487 32,163 17,912
Inventories - net 38,510 17,431
Prepaid expenses 4,744 1,137
Deferred income taxes 4,338 2,094
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 82,068 40,986
- --------------------------------------------------------------------------------------------------------------
Investments 686 3,279
Other Assets
Cost in excess of net assets acquired - net 19,853 4,472
Prepaid pension cost 1,669 2,104
Net cash value of life insurance 3,199 2,655
Other 2,251 1,310
- --------------------------------------------------------------------------------------------------------------
Total Other Assets 26,972 10,541
- --------------------------------------------------------------------------------------------------------------
Deferred Income Taxes 297 -
Property, Plant and Equipment
Land 3,409 665
Buildings and improvements 20,327 13,549
Machinery, equipment and furniture 51,427 32,589
Construction in process 2,689 1,502
- --------------------------------------------------------------------------------------------------------------
77,852 48,305
Less accumulated depreciation 25,205 21,099
- --------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 52,647 27,206
- --------------------------------------------------------------------------------------------------------------
Total Assets $ 162,670 $ 82,012
</TABLE>
See notes to consolidated financial statements
22
<PAGE> 23
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 14,086 $ --
Accounts payable 15,792 8,511
Accrued compensation and payroll taxes 6,585 5,167
Other liabilities and accrued expenses 7,980 1,353
Dividends payable -- 471
Current portion of long-term obligations 1,329 1,292
- --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 45,772 16,794
- --------------------------------------------------------------------------------------------------------------
Deferred Income Taxes 1,926 1,417
Other Noncurrent Liabilities 3,488 1,046
Long-Term Obligations, less current portion 34,884 22,211
Shareholders' Equity
Series B seven percent (7%) convertible
preferred stock par value $1.00 a share
1,236,337 shares issued and outstanding 26,156 --
Common stock, par value $.0006 2/3 a share
Authorized - 30,000,000 shares
Issued - 7,812,215 and 7,666,011 shares 5,207 5,110
Additional paid-in capital 13,107 11,065
Retained earnings 35,572 27,281
Equity adjustment from foreign currency translation (526) --
Minimum pension liability, net of tax (78) (74)
- --------------------------------------------------------------------------------------------------------------
79,438 43,382
Less cost of 374,262 treasury shares 2,838 2,838
- --------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 76,600 40,544
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 162,670 $ 82,012
</TABLE>
See notes to consolidated financial statements
23
<PAGE> 24
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 184,070 $ 116,783 $ 82,403
Investment Income 161 327 257
- ------------------------------------------------------------------------------------------------------------------
Revenues 184,231 117,110 82,660
- ------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of products sold 127,207 77,652 55,289
Selling and administrative 38,047 26,410 18,801
Research and product development 3,667 1,759 1,111
Interest and debt expense 2,914 1,295 238
Other expense 210 - -
- ------------------------------------------------------------------------------------------------------------------
172,045 107,116 75,439
- ------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 12,186 9,994 7,221
Income Taxes 3,895 3,469 2,490
- ------------------------------------------------------------------------------------------------------------------
Net Earnings $ 8,291 $ 6,525 $ 4,731
- ------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share
Basic $ 1.12 $ .91 $ .67
Diluted $ .97 $ .88 $ .65
</TABLE>
See notes to consolidated financial statements
24
<PAGE> 25
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
(In thousands, ----------------------------------------------------------- PAID-IN
except per share data) SHARES AMOUNT SHARES AMOUNT CAPITAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 30, 1994 - $ - 7,442 $ 4,961 $ 9,098
Net earnings - 1995 - - - - -
Stock options
exercised, net - - 60 40 422
Treasury shares
issued as bonus - - - - 12
Cash dividends declared,
$.2575 per share - - - - -
Net unrealized gain on
marketable securities - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at
December 29, 1995 - - 7,502 5,001 9,532
Net earnings - 1996 - - - - -
Stock options
exercised, net - - 164 109 1,533
Cash dividends declared,
$.26 per share - - - - -
Minimum pension
liability, net of tax - - - - -
Net unrealized loss on
marketable securities - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at
January 3, 1997 - - 7,666 $ 5,110 $ 11,065
Net earnings - 1997 - - - - -
Stock options
exercised, net - - 146 97 1,518
Securities issued in
Portescap acquisition:
Series B preferred stock 1,236 26,156 - - -
Warrants - - - - 524
Pension plan liability - - - - -
Equity adjustment from foreign
currency translation - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 1,236 $ 26,156 7,812 $ 5,207 $ 13,107
<CAPTION>
EQUITY
ADJUSTMENT
FROM NET UNREALIZED MINIMUM
FOREIGN GAIN (LOSS) ON PENSION TREASURY STOCK
(In thousands, RETAINED CURRENCY MARKETABLE LIABILITY -------------------------
except per share data) EARNINGS TRANSLATION SECURITIES CHANGE SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 30, 1994 $ 19,726 $ - $ (18) $ - 378 $ 2,862
Net earnings - 1995 4,731 - - - - -
Stock options
exercised, net - - - - - -
Treasury shares
issued as bonus - - - - (4) (24)
Cash dividends declared,
$.2575 per share (1,828) - - - - -
Net unrealized gain on
marketable securities - - 41 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 29, 1995 22,629 - 23 - 374 2,838
Net earnings - 1996 6,525 - - - - -
Stock options
exercised, net - - - - - -
Cash dividends declared,
$.26 per share (1,873) - - - - -
Minimum pension
liability, net of tax - - - (74) - -
Net unrealized loss on
marketable securities - - (23) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
January 3, 1997 27,281 - - (74) 374 2,838
Net earnings - 1997 8,291 - - - - -
Stock options
exercised, net - - - - - -
Securities issued in
Portescap acquisition:
Series B preferred stock - - - - - -
Warrants - - - - - -
Pension plan liability - - - (4) - -
Equity adjustment from foreign
currency translation - (526) - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 $ 35,572 $ (526) $ - $ (78) 374 $ 2,838
</TABLE>
See notes to consolidated financial statements
25
<PAGE> 26
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 8,291 $ 6,525 $ 4,731
Adjustments to reconcile net income to cash and
cash equivalents provided by operating activities:
Depreciation and amortization 7,434 3,785 2,594
Recognition of pension expense (income) under SFAS 87 36 36 (136)
Stock compensation programs 196 582 202
Change in various allowance accounts (614) (639) (95)
Other 134 146 203
(Increase) Decrease in:
Accounts receivable (2,537) (472) (2,028)
Inventories (389) (2,006) (1,785)
Prepaid expenses (1,904) (109) (75)
Deferred income tax assets 1,086 (691) (386)
Net cash value of life insurance (543) (433) (571)
Other assets, net 341 (459) (475)
Increase (Decrease) in:
Accounts payable 1,466 1,613 373
Accrued expenses (5,496) (385) 902
Deferred income tax liabilities (1,277) 199 376
Other noncurrent liabilities 112 63 (44)
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,336 7,755 3,786
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investment in API Schmidt-Bretten & API Portescap,
net of cash & cash equivalents acquired (9,286) - -
Investments in API Gettys & API Ketema,
net of cash & cash equivalents acquired - (17,359) -
Purchases of investments and marketable securities (68) (127) (6,233)
Additions to property, plant and equipment (8,737) (8,319) (4,585)
Proceeds from investments & marketable securities 2,660 6,609 1,797
Proceeds from sale of fixed assets 289 46 36
- ----------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (15,142) (19,150) (8,985)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Exercise of stock options 1,615 1,642 462
Payment of long-term obligations, including current maturities (1,292) (1,785) (368)
Dividends paid (471) (1,865) (1,806)
Increase in long-term obligations 4,423 15,931 6,660
Increase (Decrease) in short-term borrowings 5,018 (2,602) 602
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by Financing Activities 9,293 11,321 5,550
- ----------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes (586) - -
Net Increase (Decrease) in Cash and Cash Equivalents (99) (74) 351
Cash and Cash Equivalents at Beginning of Year 2,412 2,486 2,135
- ----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,313 $ 2,412 $ 2,486
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,424 $ 1,038 $ 225
Income taxes net of tax refunds $ 3,037 $ 3,598 $ 2,513
See notes to consolidated financial statements
</TABLE>
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1997, JANUARY 3, 1997 AND
DECEMBER 29, 1995
A. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(1) Nature of Operations American Precision Industries Inc. ("API" or the
"Company") is a multi-domestic, diversified manufacturing company whose
principal lines of business include the production and sale of motion control
devices, heat transfer products and electronic components. The Company's
principal markets are in North America and Europe.
(2) Fiscal Year During 1997 API converted its fiscal year to a calendar year
ending on December 31. Prior to 1997, the fiscal years consisted of 52 weeks,
except for 1996 which included 53 weeks.
(3) Basis of Presentation The accompanying consolidated financial statements
include the accounts of all subsidiaries. All material intercompany accounts and
transactions have been eliminated. The Statement of Earnings and Statement of
Cash Flows include the results of API Schmidt-Bretten and API Portescap, since
January 31, 1997 and July 8, 1997, the dates of their respective acquisitions.
The financial statements also include the results of API Ketema and API Gettys
since April 1, 1996 and April 19, 1996, respectively, the dates of acquisition.
(4) 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 resulting translation
adjustments are included in equity as "foreign currency translation adjustment",
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.
27
<PAGE> 28
As of December 31, 1997 and January 3, 1997 foreign exchange contracts
outstanding were not significant.
(5) Inventories Inventories are valued at the lower of cost or market, net of
progress payments. At December 31, 1997 and January 3, 1997 inventories
comprising approximately 25% and 61%, respectively, of consolidated inventories
were valued using the last-in, first-out (LIFO) method. Other inventories are
priced using the first-in, first-out (FIFO) method.
(6) Property, Plant and Equipment These assets are stated at cost and are
depreciated for financial reporting purposes principally by use of the
straight-line method 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.
(7) 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 25-30 years on a
straight-line basis. Amortization expense amounted to $455 in 1997 and $163 in
1996.
Accumulated amortization of goodwill at December 31, 1997 was $764.
(8) Income Taxes The Company follows the asset and liability approach to account
for income taxes. This approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. No provision has been made for United States income taxes
applicable to undistributed earnings of foreign subsidiaries as it is the
intention of the Company to indefinitely reinvest those earnings in the
operations of those entities.
(9) 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 plans and final pay for the supplemental benefit plan.
28
<PAGE> 29
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.
Benefits under the hourly defined benefit plan of API Harowe are based upon
years of service, not to exceed 35, multiplied by a fixed rate specified in the
union contract. Benefits under this plan are funded annually based upon funding
recommendations of the plan actuaries.
Other union employees are covered under defined contribution plans. The
Company's contributions to these plans are set forth under the provisions of the
specific contracts.
The Company's principal foreign subsidiaries also maintain defined benefit
pension plans covering substantially all employees of those subsidiaries.
(10) 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.
(11) Advertising The Company expenses the production costs of advertising in the
year in which the advertising occurs. Total advertising expense in 1997, 1996
and 1995 was $1,661, $879, and $874, respectively.
(12) Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
B. BUSINESS ACQUISITIONS
On January 31, 1997, API Schmidt-Bretten Beteiligungs GmbH, a wholly-owned
subsidiary of the Company, acquired all the outstanding capital stock of
Schmidt-Bretten GmbH ("SBG") for approximately $6,100 in cash and a note for
$1,800. SBG manufactures plate and frame heat exchangers in Bretten, Germany.
On July 8, 1997, the Company acquired all the outstanding capital stock of
Portescap, a Swiss manufacturer of micromotors. The purchase price consisted of
Series A convertible preferred stock of the Company with a liquidation value of
$21,156, an exchangeable note for $5,000, and cash of approximately $3,800.
29
<PAGE> 30
The Series A convertible preferred stock and the exchangeable note were
exchanged for 1,236,337 shares of Series B convertible preferred stock, which,
in turn is convertible at $17.00 per share into 1,538,603 shares of the
Company's common stock.
In connection with the 1997 acquisitions, a liability of approximately $2,100
was established for redundancy and relocation costs. As of December 31, 1997
actual costs incurred against this reserve were approximately $700. It is
anticipated that the remainder of the costs related to this liability will be
primarily incurred during 1998.
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. 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. Gettys
manufactures AC and DC servo motors, amplifiers, and control electronics.
The aforementioned acquisitions have been accounted for as purchase transactions
in accordance with APB No.16, "Business Combinations".
The following table presents unaudited pro forma results of operations as if the
acquisitions of HTD and Gettys had occurred on January 1, 1996 and 1995,
respectively, and the acquisitions of SBG and Portescap had occurred on January
1, 1997 and 1996, respectively, after giving effect to certain adjustments,
including amortization of goodwill, adjusted depreciation of fair value of
assets acquired, interest expense on additional debt incurred 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 taken place at the beginning of
1997 and 1996 for SBG and Portescap and 1996 and 1995 for HTD and Gettys 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 entities because precise estimates of such benefits cannot be
quantified.
30
<PAGE> 31
<TABLE>
<CAPTION>
(In thousands,
except per share data) 1997 1996 1995
- ----------------------------- --------------- --------------- -----------------
(unaudited)
<S> <C> <C> <C>
Revenues $ 215,735 $ 222,883 $ 116,762
Net earnings $ 5,619 $ 8,624 $ 2,972
Earnings Per
Common Share
Basic $ .76 $ 1.20 $ .42
Diluted $ .60 $ .96 $ .41
</TABLE>
During the six months ended June 30, 1997, prior to the acquisition, Portescap
incurred a loss in Switzerland which did not generate a current tax benefit.
Therefore on a consolidated pro forma basis, the Company had a 71% effective tax
rate for this six-month period. This loss and the high tax rate significantly
impaired the pro forma results for 1997.
The decline in pro forma revenues in 1997 reflects the impact of approximately
$21,000 from the lower exchange rates for the German mark and the Swiss franc in
1997 as compared with 1996.
C. CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents consist of money market funds, commercial paper, and
certificates of deposit with original maturities of three months or less.
Investments primarily consist of marketable municipal bonds, which are carried
at market. Investments in 1997 and 1996 consisted of funds obtained under an
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.
31
<PAGE> 32
D. INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -------------------------------------------------------
<S> <C> <C>
Finished goods $ 9,133 $ 3,867
Work in process 10,807 3,834
Raw Materials 18,570 9,730
- -------------------------------------------------------
$38,510 $17,431
</TABLE>
Had the cost of all inventories at December 31, 1997 and January 3, 1997 been
determined by the FIFO method, these amounts would have been greater by $1,052
and $1,147, respectively.
E. OTHER NONCURRENT LIABILITIES
In 1997 and 1996, other noncurrent liabilities consist of the noncurrent portion
of bonus obligations under the Company's incentive plan, deferred compensation
associated with the stock appreciation rights granted to the Chief Executive
Officer in 1992, and the discount on stock options granted to certain members of
the Board of Directors of the Company in lieu of directors' fees. In 1997 this
liability also includes the accrued pension cost for Schmidt-Bretten.
F. SHORT AND LONG-TERM OBLIGATIONS
(1) Short-Term Obligations At December 31, 1997, short-term bank borrowings
consisted of:
<TABLE>
<CAPTION>
(in thousands) 1997
- -------------------------------------------------------
<S> <C>
Portescap (primarily Switzerland) $ 6,326
Schmidt-Bretten 7,230
API 530
- -------------------------------------------------------
$14,086
</TABLE>
There was no outstanding short-term debt at January 3, 1997.
The weighted average interest rate on the outstanding short-term debt at
December 31, 1997 was 4.0%. The Schmidt-Bretten short-term debt was incurred
primarily in connection with API's acquisition of that company and matures on
December 31, 1998. The Company expects to renew or refinance the credit at
maturity. Other short-term lines of credit are on a demand basis.
32
<PAGE> 33
The short-term credit facilities available at December 31, 1997 and January 3,
1997 consisted of:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -------------------------------------------
<S> <C> <C>
Portescap $2,149 $ --
Schmidt-Bretten 2,781 --
API 3,332 4,232
- -------------------------------------------
$8,262 $ 4,232
</TABLE>
(2) Long-Term Obligations consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -----------------------------------------------------------
<S> <C> <C>
Industrial Revenue Bonds $12,294 $13,405
Revolving Credit Debt 17,300 9,000
Portescap Debt:
Mortgage loans 3,765 --
Other long-term loans 1,820 --
Supplemental benefit program 1,034 1,098
- -----------------------------------------------------------
36,213 23,503
Less current obligations 1,329 1,292
- -----------------------------------------------------------
Long-term obligations $34,884 $22,211
</TABLE>
During the fourth quarter of 1997, the Company increased its unsecured Revolving
Credit facility to $20,000. 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, under the LIBOR Rate Option in the Credit Agreement, averaged
6.8% as of December 31, 1997 and 6.3% as of January 3, 1997.
The Company has outstanding obligations under three industrial revenue bond
("IRB") financings relating to the acquisition or construction of production
facilities. The bonds are subject to mandatory sinking fund repayment schedules
with maturities extending through 2015. The bonds are collateralized by assets
with a depreciated value of $12,359 at December 31, 1997 and $11,300 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.
Unexpended revenue bond proceeds of $686 and $3,272 were held and invested by a
trustee at the end of 1997 and 1996, respectively, 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 following are the weighted average interest and debt expense rates
for 1997 and 1996:
33
<PAGE> 34
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------
<S> <C> <C>
Industrial Revenue Bonds 5.5% 5.5%
Revolving Credit Debt 6.5% 6.1%
Portescap Debt 5.9% --
</TABLE>
The Revolving Credit and each of the IRB's 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 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 $114 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 contracts on certain lives of the participants, the cash surrender
values of which are recorded in Other Assets.
Over the next five years, the Company will make long-term obligation payments of
approximately $1,405 in 1998, $1,620 in 1999, $2,976 in 2000, $1,545 in 2001,
and $4,234 in 2002. 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 with an initial term in excess of
one year are payable as follows: 1998 - $901; 1999 - $997; 2000 - $875; 2001 -
$689; 2002 - $103; 2003 and beyond - $3. Total rental expense for 1997, 1996,
and 1995 was $1,554, $730, and $587, respectively.
34
<PAGE> 35
H. EMPLOYEE BENEFITS
In addition to the aforementioned supplemental benefit program, the Company has
a defined benefit retirement plan covering all nonunion employees in the United
States ("Salaried Plan"). API Harowe has a defined benefit retirement plan
covering all hourly employees in its West Chester, Pennsylvania location
("Harowe Hourly Plan"). The Company also makes contributions to union-sponsored
plans.
The Company's principal subsidiaries in Switzerland (Portescap) and Germany
(SBG) also maintain defined benefit pension plans covering substantially all
employees of those subsidiaries.
The following summarizes the funded status of certain defined benefit
retirement plans:
<TABLE>
<CAPTION>
1997 | 1996
-----------------------------------------------------|--------------------------
HAROWE | HAROWE
SALARIED HOURLY PORTESCAP SBG | SALARIED HOURLY
(In thousands) PLAN PLAN PLAN PLAN | PLAN PLAN
- -----------------------------------------------------------------------------------------------------|--------------------------
<S> <C> <C> <C> <C> | <C> <C>
Actuarial present value of |
benefit obligations: |
Vested benefits $ 5,975 $ 764 $ (A) $ 2,695 | $ 5,401 $ 724
Nonvested benefits 298 16 (A) - | 106 10
- -----------------------------------------------------------------------------------------------------|-------------------------
Accumulated benefit obligations 6,273 780 (A) 2,695 | 5,507 734
- -----------------------------------------------------------------------------------------------------|--------------------------
Projected benefit obligations 7,672 780 48,419 2,695 | 6,556 724
Plan assets at fair value 11,749 499 55,015 427 | 10,396 385
- -----------------------------------------------------------------------------------------------------|--------------------------
Assets in excess of (less than) 4,077 (281) 6,596 (2,268) | 3,840 (339)
projected benefit obligation | 187 30
Unrecognized prior service cost 339 20 2,224 - | - -
Less: |
Accumulated unrecognized net loss - - - (39) | - -
Unrecognized net gain (loss) at |
transition being recognized over 14-15 years 368 (111) (1,093) - | 491 (77)
Additional minimum liability - 131 - - | - 107
Unrecognized net gain arising |
since transition 2,146 - 9,338 - | 1,492 -
- -----------------------------------------------------------------------------------------------------|--------------------------
(Accrued) prepaid pension cost $ 1,902 $ (281) $ 575 $(2,229) | $ 2,044 $(339)
</TABLE>
(A) Data not available
35
<PAGE> 36
The following factors have been assumed in determining the actuarial present
value of projected benefit obligations shown in the previous table:
<TABLE>
<CAPTION>
1997 | 1996
-----------------------------------------------------|-----------------------
HAROWE | HAROWE
SALARIED HOURLY PORTESCAP SBG | SALARIED HOURLY
PLAN PLAN PLAN PLAN | PLAN PLAN
- -----------------------------------------------------------------------------------------------|------------------------
|
<S> <C> <C> <C> <C> | <C> <C>
Discount rate 7.75% 7.75% 4.5% 6.0% | 7.75% 7.5%
Rate of increase in compensation 4.0% N/A 2.5 - 3.5 N/A | 4.0% N/A
Annual increase in pensions N/A N/A 1.5% 2.0% | N/A N/A
Expected long-term rate of return 9.0% 6.5% 5.0% 6.0% | 9.0% 7.5%
|
<FN>
N/A - not applicable
</TABLE>
Net periodic pension cost associated with the plans reflected in the table on
the previous page for 1997 and 1996 included the following components:
<TABLE>
<CAPTION>
1997 | 1996
------------------------------------------------|------------------------
HAROWE | HAROWE
SALARIED HOURLY PORTESCAP SBG | SALARIED HOURLY
(In thousands) PLAN PLAN PLAN PLAN | PLAN PLAN
- -------------------------------------------------------------------------------------------------------|-------------------------
<S> <C> <C> <C> <C> | <C> <C>
Service costs - benefits earned during the period $ 691 $ 24 $ 2,072 $ - | $ 577 $ 21
Interest on projected benefit obligations 512 53 2,063 156 | 440 51
Actual return on assets (1,601) (16) (2,411) (27) | (831) (14)
Amortization of transition assets and deferrals 539 - 272 - | (113) (7)
Employee contributions N/A N/A (863) N/A | N/A N/A
- -------------------------------------------------------------------------------------------------------|-------------------------
Net periodic pension cost $ 141 $ 61 $ 1,133 $ 129 | $ 73 $ 51
|
</TABLE>
The data included in the above table for the Portescap and SBG plans are for the
full year of 1997.
The total expense for all retirement plans was $1,247, $392, and $227,
in 1997, 1996, and 1995, respectively.
36
<PAGE> 37
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 December 31, 1997 and
January 3, 1997, management believes the carrying amounts of its financial
instruments approximate fair value.
J. SHAREHOLDERS' EQUITY
(1) Preferred Stock - On November 14, 1997, the shareholders of the Company
authorized 1,250,000 shares of Series B Seven Percent (7%) Cumulative
Convertible Preferred Stock ("Series B Preferred"), 1,236,337 shares of which
were issued to the seller of Portescap in exchange for the 20,000 shares of
Series A Seven Percent (7%) Cumulative Convertible Preferred Stock and the
$5,000 exchangeable note issued on July 8, 1997 in connection with the Portescap
acquisition. The Series B Preferred has a liquidation value of $26,156, and is
convertible in whole or in part at the option of the holder at any time into
1,538,603 shares of the Company's common stock at $17.00 per share. The Series B
Preferred may be redeemed at the option of the Company upon 45 days notice to
the holder. Dividends will begin to accrue on the Series B Preferred on January
1, 1999. On all matters presented to API's shareholders for a vote, except the
election of directors and ratification of independent auditors, the holder of
the Series B Preferred is entitled to cast votes for that number of common
shares into which the Series B Preferred is convertible, currently 1,538,603
shares. The Company also has authorized 20,000 shares of preferred stock (par
value $50 a share), none of which is issued or outstanding.
(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 domestic 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.
37
<PAGE> 38
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 1997, 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 expenses for options granted
in 1997, 1996, and 1995 would have reduced the Company's net earnings and
earnings per share to the pro forma amounts shown below:
<TABLE>
<CAPTION>
(In thousands,
except per share data) 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $8,291 $6,525 $4,731
Pro forma $7,653 $6,217 $4,636
Earnings per common share
As reported - basic $ 1.12 $ .91 $ .67
As reported - diluted $ .97 $ .88 $ .65
Pro forma - basic $ 1.03 $ .86 $ .65
Pro forma - diluted $ .90 $ .83 $ .64
</TABLE>
The fair value of each option granted in 1997, 1996, and 1995 was estimated
using the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.9% 6.6% 7.1%
Dividends $ - $ - $.19
Expected term in years 9.1 9.2 9.2
Annual standard
deviation (volatility) 26% 25% 24%
</TABLE>
The weighted average fair value of options granted in 1997, 1996, and 1995 was
$9.35, $6.32 and $4.67, respectively.
38
<PAGE> 39
A summary of the status of options granted under all employee plans, including
the options granted to the Company's Chief Executive Officer in 1992, is
presented below.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES SUBJECT EXERCISE
TO OPTIONS PRICE($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding Dec. 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 Dec. 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 Jan. 3, 1997 1,001,957 9.15
Granted in 1997 254,150 17.83
Exercised in 1997 (156,279) 8.92
Forfeited in 1997 (54,888) 12.45
- --------------------------------------------------------------------------------------------------------
Outstanding Dec. 31, 1997 1,044,940 11.12
</TABLE>
The number of shares subject to options exercisable at the end of 1997, 1996,
and 1995 were 504,215, 488,087, and 470,970, respectively.
The following tables summarize information about options outstanding at December
31, 1997:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED-
RANGE OF REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES ($) OUTSTANDING LIFE PRICE ($)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6.625-9.28 575,068 5.4 years 7.87
10.50-13.00 229,572 7.2 years 12.09
17.00-23.44 240,300 9.3 years 17.97
</TABLE>
39
<PAGE> 40
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE
EXERCISABLE EXERCISE PRICE ($)
- ---------------------------------- ----------------------------------
<S> <C> <C>
419,643 7.75
82,922 11.61
1,650 17.63
</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 became 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
$53 and $452 in 1997 and 1996, respectively, in connection with the increase in
value of the SARs.
On April 25, 1997, the Board of Directors adopted the 1997 Officers Stock Option
Plan ("1997 Plan") and granted an option for 200,000 shares of common stock,
exercisable at $17.50 per share, to the Company's Chief Executive Officer under
the 1997 Plan. The 1997 Plan is subject to approval by the shareholders at the
Annual Shareholders Meeting to be held in April 1998. Two years from the date of
grant, 40,000 shares become exercisable and 40,000 additional shares become
exercisable annually thereafter. If the shareholders approve the 1997 Plan, the
excess of the market value of the Company's common stock on the date of such
approval over the exercise price of $17.50 per share, if any, multiplied by
200,000 shares will become a charge against the Company's earnings over the
vesting period ending in April 2003. The 200,000 shares subject to this option
are not included in the tables above.
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 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 at December 31, 1997
totaled 30,603 shares, of which 25,721 were exercisable on that date, and 18,398
shares were available for future grants of options under the plan.
40
<PAGE> 41
As part of the compensation for services in connection with the Portescap
acquisition, API's financial advisor was issued a warrant for the purchase of
50,000 shares of the Company's common stock. The warrant is exercisable at
$12.95 per share and expires on July 8, 2002. The value of the warrant,
calculated to be $524 under the Black-Scholes formula, has been included in the
Portescap acquisition costs and added to the Company's paid-in capital.
K. INCOME TAXES
Earnings before provision for income taxes consisted of:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 6,945 $ 9,603 $ 6,759
Foreign 5,241 391 462
- -----------------------------------------------------------------------------
$12,186 $ 9,994 $ 7,221
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision:
U.S. Federal $ 1,757 $ 3,432 $ 2,111
State 481 527 368
Foreign 409 2 3
- ----------------------------------------------------------------------------
Total current tax provision $ 2,647 $ 3,961 $ 2,482
- ----------------------------------------------------------------------------
Deferred tax provision (benefit):
U.S. Federal 5 (421) 4
State (219) (71) 4
Foreign 1,462 -- --
- ----------------------------------------------------------------------------
Total deferred tax provision (benefit) 1,248 (492) 8
- ----------------------------------------------------------------------------
Total provision for income taxes $ 3,895 $ 3,469 $ 2,490
- ----------------------------------------------------------------------------
</TABLE>
The provision for income taxes does not include the tax benefits of $440 and
$346 for 1997 and 1996, respectively, associated with the exercise of stock
options which have been credited to paid-in capital.
41
<PAGE> 42
The provision for income tax differs from the federal statutory rate of 34% due
to the following:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes,
less federal effect 1.4 2.9 3.3
Unremitted earnings and tax rate
differences of foreign subsidiaries 0.7 (1.3) (2.2)
Adjustment of prior years' taxes (1.8) -- --
Other (2.3) (0.9) (0.6)
- --------------------------------------------------------------------------------
Effective tax rate 32.0% 34.7% 34.5%
</TABLE>
Deferred tax assets (liabilities) at December 31, 1997 and January 3, 1997
consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Retirement & death benefits $ 571 $ 153
Deferred compensation 495 650
Inventories 2,200 753
Accrued vacation pay 584 422
Various reserves 826 472
Accrued pension cost 602 --
Net operating loss carryforwards 870 --
Other 363 9
- --------------------------------------------------------------------------------
Total deferred tax assets 6,511 2,459
- --------------------------------------------------------------------------------
Property, plant & equipment (2,545) (662)
Prepaid pension cost (737) (780)
Goodwill (347) (306)
Other (173) (34)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (3,802) (1,782)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 2,709 $ 677
</TABLE>
The Company has not recorded income taxes applicable to undistributed earnings
of foreign subsidiaries that are indefinitely reinvested in foreign operations.
Undistributed earnings amounted to approximately $5,880 at December 31, 1997. If
earnings of such foreign subsidiaries were not reinvested, a deferred tax
liability, before applicable foreign tax credits, of approximately $1,999 would
have been required. In addition, foreign withholding taxes would be imposed on
actual distributions.
42
<PAGE> 43
K. BUSINESS SEGMENT DATA
The Company conducts operations in three major industrial classifications:
Motion Technologies, Heat Transfer Technology and Electronic Components.
Operations of the Motion Technologies segment is focused on the precision motion
control market with product lines that include servo and stepper motors, drives,
clutches, brakes and feedback devices. The operations of the Heat Transfer
Technology segment include the production and sale of shell and tube, plate-type
and air-cooled aluminum heat exchangers, and refrigeration condensers.
Operations of the Electronic Components segment involve production and sale of
axial-leaded and surface mounted inductors.
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 and other assets.
43
<PAGE> 44
<TABLE>
<CAPTION>
BUSINESS SEGMENT DATA (continued)
Information about the Company's operations in different industries are as
follows:
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C>
Heat Transfer $ 93,007 $ 63,536 $ 40,819
Motion 76,543 40,016 28,599
Electronic Components 14,550 13,231 12,985
General Corporate 131 327 257
- ------------------------------------------------------------------------------------------------
Consolidated $ 184,231 $ 117,110 $ 82,660
- ------------------------------------------------------------------------------------------------
OPERATING PROFIT
Heat Transfer $ 8,253 $ 8,230 $ 5,542
Motion 8,122 3,908 2,466
Electronic Components 2,748 2,300 2,058
- ------------------------------------------------------------------------------------------------
Combined 19,123 14,438 10,066
General Corporate expense, net (4,023) (3,149) (2,607)
Interest and debt expense (2,914) (1,295) (238)
- ------------------------------------------------------------------------------------------------
Earnings Before Income Taxes $ 12,186 $ 9,994 $ 7,221
- ------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Heat Transfer $ 61,303 $ 42,357 $ 23,673
Motion 85,706 22,274 15,179
Electronic Components 8,883 6,488 6,821
General Corporate 6,778 10,893 12,118
- ------------------------------------------------------------------------------------------------
Total Assets $ 162,670 $ 82,012 $ 57,791
- ------------------------------------------------------------------------------------------------
DEPRECIATION
Heat Transfer $ 3,134 $ 1,378 $ 877
Motion 2,966 1,593 964
Electronic Components 462 534 558
General Corporate 59 58 61
- ------------------------------------------------------------------------------------------------
Total Depreciation $ 6,621 $ 3,563 $ 2,460
- ------------------------------------------------------------------------------------------------
NET CAPITAL EXPENDITURES
Heat Transfer $ 4,278 $ 5,878 $ 1,789
Motion 3,432 842 2,218
Electronic Components 357 575 449
General Corporate 303 77 33
- ------------------------------------------------------------------------------------------------
Total Net Capital Expenditures $ 8,370 $ 7,372 $ 4,489
- ------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 45
Geographic operating data is as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS
North America $130,672 $114,746 $ 81,047
Europe 48,008 -- --
Other 5,551 2,364 1,613
- -----------------------------------------------------------------------------------------------------
Total Revenues from Unaffiliated Customers $184,231 $117,110 $ 82,660
- -----------------------------------------------------------------------------------------------------
EXPORT SALES
North America $ 9,462 $ 5,131 $ 4,547
Europe 33,340 7,772 4,083
Other 9,814 5,784 2,615
- -----------------------------------------------------------------------------------------------------
Total Export Sales $ 52,616 $ 18,687 $ 11,245
- -----------------------------------------------------------------------------------------------------
OPERATING PROFIT
North America $ 6,754 $ 9,603 $ 6,759
Europe 4,786 -- --
Other 646 391 462
- -----------------------------------------------------------------------------------------------------
Total Operating Profit $ 12,186 $ 9,994 $ 7,221
- -----------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
North America $ 87,155 $ 80,614 $ 56,964
Europe 70,152 -- --
Other 5,363 1,398 827
- -----------------------------------------------------------------------------------------------------
Total Identifiable Assets $162,670 $ 82,012 $ 57,791
- -----------------------------------------------------------------------------------------------------
</TABLE>
Export sales from North America are primarily to Europe and to other countries
within North America. Export sales from Europe are principally to countries
within their geographic segment.
The Company's international operations may be affected by exchange controls,
currency fluctuations and laws or polices of particular countries, as well as
the laws or policies of the United States affecting foreign trade and
investment. The Company does not consider that its international businesses are
exposed to significant political or economic risks which are disproportionate to
ordinary risks of doing business, whether domestic or international.
45
<PAGE> 46
L. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, FISCAL
except per share data) FIRST SECOND THIRD FOURTH YEAR
- ------------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C> <C>
Revenues $ 35,871 $ 39,608 $ 55,042 $ 53,710 $ 184,231
Gross profit 11,325 12,221 16,422 16,895 56,863
Net earnings 1,885 1,970 2,258 2,178 8,291
Earnings per common share:
Basic 0.26 0.27 0.30 0.29 1.12
Diluted 0.25 0.26 0.24 0.23 0.97
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
Earnings per common share:
Basic 0.20 0.22 0.24 0.25 0.91
Diluted 0.19 0.21 0.23 0.24 0.88
Cash dividends declared per share 0.065 0.065 0.065 0.065 0.26
</TABLE>
46
<PAGE> 47
M. EARNINGS PER SHARE
All earnings per share amounts reflect the implementation of Statement of
Financial Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS 128
established new standards for computing and presenting earnings per share and
requires all prior period earnings per share data be restated to conform with
the provisions of the statement. Basic earnings per share is computed by
dividing net earnings by the weighted average number of shares outstanding
during the period. Diluted earnings per share is computed using the weighted
average number of shares determined for the basic computations plus the number
of shares of common stock that would be issued assuming all contingently
issuable shares having a dilutive effect on earnings per share were outstanding
for the period.
<TABLE>
<CAPTION>
(In thousands, except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $8,291 $6,525 $4,731
Weighted average common shares outstanding (basic) 7,381 7,190 7,090
Incremental shares from assumed conversions:
Stock options and warrants 395 262 172
Series B convertible preferred stock 761 - -
-------------------------------
Weighted average common shares outstanding (diluted) 8,537 7,452 7,262
Earnings per share:
Basic $ 1.12 $ 91 $ .67
Diluted $ .97 $ .88 $ .65
</TABLE>
47
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements with Price
Waterhouse on accounting or financial disclosure.
48
<PAGE> 49
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the directors and
executive officers of the Company, appearing in the Company's
definitive Proxy Statement, which has been filed with the Commission
pursuant to Regulation 14A, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item concerning executive
compensation appearing in the Company's definitive Proxy Statement,
which has been filed with the Commission pursuant to Regulation 14A,
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
a) & b) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appearing in the Company's
definitive Proxy Statement which has been filed with the Commission
pursuant to Regulation 14A, is incorporated herein by reference.
c) CHANGES IN CONTROL
The Company knows of no contractual arrangements which may, at a
subsequent date, result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
a) TRANSACTIONS WITH MANAGEMENT AND OTHERS
None.
b) CERTAIN BUSINESS RELATIONSHIPS
None.
c) INDEBTEDNESS OF MANAGEMENT
None.
d) TRANSACTIONS WITH PROMOTERS
None.
49
<PAGE> 50
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
PAGE IN
a) 1. FINANCIAL STATEMENTS FORM 10-K
Report of Independent Accountants 21
Consolidated Balance Sheet 22-23
Consolidated Statement of Earnings 24
Consolidated Statement of Shareholders' Equity 25
Consolidated Statement of Cash Flows 26
Notes to Consolidated Financial Statements 27-47
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are inapplicable,
immaterial, or not required under the instructions, or the
information is included in the financial statements or notes
thereto.
b) REPORTS ON FORM 8-K
During the three months ended December 31, 1997, the Company
filed a Form 8-K on October 24, 1997 under Item 8 Change in
Fiscal Year to report a change in the Company's fiscal year-end
to December 31. Also during this period, the Company filed a
Form 8-K/A on November 18, 1997 under Item 7 Financial
Statements and Exhibits to amend certain pro forma financial
information included in the Form 8-K filed on July 23, 1997 to
conform to the pro forma financial information set forth in the
definitive proxy statement dated October 9, 1997 for the special
meeting of shareholders held on November 14, 1997.
C) EXHIBITS
Exhibit No.
2-A Credit Agreement between American
American Precision Industries Inc.
and Marine Midland Bank dated
March 29, 1996 i.
2-B Amendment No. 2 to Credit Agreement dated
March 29, 1996, as amended between
American Precision Industries Inc. and
Marine Midland Bank dated October 6, 1997 l.
50
<PAGE> 51
C) EXHIBITS (CONTINUED)
EXHIBIT NO.
3(i)-A Restated Certificate of Incorporation dated October
29, 1986 and filed with the Secretary of State of
Delaware on November 6, 1986 c.
3(i)-B Certificate of Amendment to the Restated Certificate
of Incorporation dated April 26, 1991 d.
3(i)-C Certificate of Designation, Preferences and Rights of
Series A Seven Percent (7%) Cumulative Convertible
Preferred Stock filed in Delaware on July 2, 1997 *
3(i)-D Certificate of Amendment to the Certificate of
Incorporation of American Precision Industries Inc.
filed in Delaware on November 14, 1997 *
3(ii) Restated By-Laws, as amended on June 16, 1992 f.
10-A Form of Agreement relating to the Directors
Supplemental Death Benefit and Fee Continuation Plan,
as amended March 11, 1991 b.
10-B Form of Agreement relating to the Executive
Supplemental Death Benefit and Retirement Plan, as
amended on March 11, 1991 b.
10-C Form of Indemnification Agreement with directors dated
February 25, 1991 b.
10-D Form of Indemnification Agreement with officers dated
February 25, 1991 b.
10-E 1989 Stock Option Plan c.
10-F Amendment to the American Precision Industries Inc.
1989 Stock Option Plan h.
51
<PAGE> 52
c) EXHIBITS (CONTINUED)
EXHIBIT NO.
10-G Stock Option and Tandem Stock Appreciation Rights
Agreement dated June 16, 1992 between Kurt Wiedenhaupt
and American Precision Industries Inc. e.
10-H Agreement dated April 24, 1992 between Robert J.
Fierle and American Precision Industries Inc. e.
10-I 1993 Employees Stock Option Plan g.
10-J Amendment to the American Precision Industries Inc.
1993 Employees Stock Option Plan h.
10-K 1995 Directors Stock Option Plan h.
10-L 1995 Employees Stock Option Plan h.
10-M Form of Change in Control Agreement between American
Precision Industries Inc. and James W. Bingel, Bruce
McH. Kirchner, John M. Murray, Craig J. VanTine, and
Richard S. Warzala dated October 21, 1996 j.
10-N Change in Control in Agreement between American
Precision Industries Inc. and Kurt Wiedenhaupt dated
July 1, 1996 j.
10-O First Amendment to American Precision Industries Inc.
Grant of Restricted Stock and Bonus to Kurt
Wiedenhaupt dated July 1, 1996 j.
10-P Executive Supplemental Retirement Plan (as restated)
between American Precision Industries Inc. and Kurt
Wiedenhaupt dated July 1, 1996 j.
10-Q Life Insurance Split-Dollar (as restated) between
American Precision Industries Inc. and Kurt
Wiedenhaupt dated July 1, 1996 j.
52
<PAGE> 53
c) EXHIBITS (CONTINUED)
EXHIBIT NO.
10-R Executive Employment Agreement effective as of July 1,
1997 between Kurt Wiedenhaupt and American Precision
Industries Inc. m.
21 List of Subsidiaries *
23 Consent of independent accountants *
27 Financial Data Schedule *
99 Warrant Agreement dated July 8, 1997 k.
* Documents filed herewith.
a. Incorporated by reference to Exhibit 3 in the Annual
Report on Form 10-K for the fiscal year ended January
2, 1987.
b. Incorporated by reference to Exhibits 10A-D in the
Annual Report on Form 10-K for the fiscal year ended
December 28, 1990.
c. Incorporated by reference to Exhibit 4(a) in the
Registration Statement on Form S-8 (#33-31315) filed
September 28, 1989.
d. Incorporated by reference to Exhibit A in the
definitive Proxy Statement dated March 22, 1991.
e. Incorporated by reference to Exhibits 10(ii) and (iii)
in the Quarterly Report on Form 10-Q for the fiscal
quarter ended July 3, 1992.
f. Incorporated by reference to Exhibits B(i) - (ii) in
the Quarterly Report on Form 10-Q for the fiscal
quarter ended October 1, 1993.
g. Incorporated by reference to Exhibit A in the
definitive Proxy Statement dated March 22, 1993.
h. Incorporated by reference to Exhibits A-C in the
definitive Proxy Statement dated March 24, 1995.
i. Incorporated by reference to Exhibit 2(iii) in the
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 29, 1996.
j. Incorporated by reference to Exhibits 10(i, ii, iv, v,
and vii) in the Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 1996.
k. Incorporated by reference to Exhibit 99 in the
Quarterly Report on Form 10-Q for the fiscal quarter
ended July 4, 1997.
53
<PAGE> 54
l. Incorporated by reference to Exhibit 10(i) in the
Quarterly Report on Form 10-Q for the fiscal quarter
ended October, 1997.
m. Incorporated by reference to Exhibit 10(ii) in the
Quarterly Report on Form 10-Q for the fiscal quarter
ended October, 1997.
54
<PAGE> 55
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN PRECISION INDUSTRIES INC.
March 26, 1998 By: /s/ Kurt Wiedenhaupt
--------------------
Kurt Wiedenhaupt
President and Director
March 26, 1998 By: /s/ Bruce McH. Kirchner
-----------------------
Bruce McH. Kirchner
Chief Financial Officer
March 26, 1998 By: /s/ Mark E. Wood
----------------
Mark E. Wood
Corporate Controller
55
<PAGE> 56
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Kurt Wiedenhaupt February 20, 1998
- -------------------------------------------------------- --------------------
Kurt Wiedenhaupt President, CEO and
Chairman of the Board
/s/ John M. Albertine February 20, 1998
- -------------------------------------------------------- --------------------
John M. Albertine Director
- -------------------------------------------------------- --------------------
Holger Hjelm Director
/s/ Bernard J. Kennedy February 20, 1998
- -------------------------------------------------------- --------------------
Bernard J. Kennedy Director
/s/ Douglas J. MacMaster, Jr. February 20, 1998
- -------------------------------------------------------- --------------------
Douglas J. MacMaster, Jr. Director
/s/ Klaus Oertel February 20, 1998
- -------------------------------------------------------- --------------------
Klaus Oertel Director
/s/ William P. Panny February 20, 1998
- -------------------------------------------------------- --------------------
William P. Panny Director
- -------------------------------------------------------- --------------------
Victor Rice Director
/s/ Jerre Stead February 20, 1998
- -------------------------------------------------------- --------------------
Jerre Stead Director
56
<PAGE> 57
EXHIBIT INDEX
-------------
3(i)-C Certificate of Designation, Preferences and Rights
of Series A Seven Percent (7%) Cumulative
Convertible Preferred Stock filed in Delaware on
July 2, 1997
3(i)-D Certificate of Amendment to the Certificate of
Incorporation of American Precision Industries
Inc. filed in Delaware on November 14, 1997
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
57
<PAGE> 1
CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS OF
SERIES A SEVEN PERCENT (7%) CUMULATIVE
CONVERTIBLE PREFERRED STOCK
OF
AMERICAN PRECISION INDUSTRIES INC.
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW
OF THE
STATE OF DELAWARE
We, John M. Murray, Vice President-Finance and Treasurer, and
James J. Tanous, Secretary, of American Precision Industries Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), in accordance with the provisions of Section 103
thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of
Directors by the Restated Certificate of Incorporation of the Corporation, the
Board of Directors on July 2, 1997, adopted the following resolution creating a
series of 20,000 shares of Preferred Stock designated as Series A Seven Percent
(7%) Cumulative Convertible Preferred Stock:
RESOLVED, that as required by Section 151(g) of the Delaware
General Corporation Law and as authorized by Article IV of the Corporation's
Restated Certificate of Incorporation, this Board of Directors hereby designates
all shares, $50.00 par value per share, of the preferred stock authorized in
Article IV of the Corporation's Restated Certificate of Incorporation as "Series
A Seven Percent (7%) Cumulative Convertible Preferred Stock, $50.00 par value"
(hereinafter referred to as the "Series A Preferred Stock"); and this Board of
Directors hereby fixes the number of shares in that Series at 20,000, and the
dividend rate per annum, the redemption features, the terms and conditions on
which those shares may be converted, and the other rights, preferences and
limitations pertaining to those shares as set forth in this Certificate of
Designation; and the officers of the Corporation are hereby authorized and
directed to file this Certificate of Designation with the Secretary of State of
Delaware.
The terms of the Series A Preferred Stock are as follows:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Seven Percent (7%) Cumulative Convertible
Preferred Stock" and the number of shares constituting such series shall be
20,000.
Section 2. Liquidation Value. The liquidation value of the
Series A Preferred Stock shall be $1,057.8125 per share ("Series A Liquidation
Value").
Section 3. Exchange Rights and Obligations. The holders of the
Series A Preferred Stock shall have the right and obligation to promptly
exchange all of such shares
<PAGE> 2
for one million (1,000,000) shares of Series B Seven Percent (7%) Cumulative
Convertible Preferred Stock, $50.00 par value per share, upon receipt of written
notification from the Corporation that the Corporation's Restated Certificate of
Incorporation has been duly amended, with the approval of the Corporation's
Board of Directors and shareholders, to authorize such Series B Seven Percent
(7%) Cumulative Convertible Preferred Stock and that the certificate of
amendment of the Corporation's Restated Certificate of Incorporation authorizing
such Series B Seven (7%) Cumulative Convertible Preferred Stock has been duly
filed with the Secretary of State of the State of Delaware. Such written
notification that the Restated Certificate of Incorporation has been so amended
and filed is hereinafter referred to as the "Notification of Amendment of
Certificate of Incorporation."
Section 4. Redemption of Series A Preferred Stock.
(A) Optional Redemption. After the holders of the
Series A 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 Series A 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 and an amount computed at the
annual rate of seven percent (7%) of the Series A 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 holders of Series A Preferred Stock shall have
the right to convert their shares of Series A Preferred Stock as set forth in
Section 7 below.
(B) Notice of Redemption. Notice of any redemption
("Redemption Notice") of Series A 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 Series A 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 5. Dividends and Distributions. The holders of the
Series A Preferred Stock shall be entitled to receive cumulative cash dividends
at the rate of seven percent (7%) of the Series A 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
- 2 -
<PAGE> 3
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 6. Voting Rights.
(A) Subject to the limitations contained below, the
holders of Series A Preferred Stock shall vote as a class on the following
transactions that shall be submitted to the holders of Series A Preferred Stock
for their approval:
(i) the merger or consolidation of the
Corporation with or into another corporation
or a partnership, trust or other entity;
(ii) the sale of all or substantially all of the
assets of the Corporation;
(iii) the dissolution of the Corporation;
(iv) 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 A Preferred Stock; and
(v) any other proposal or transaction that
requires the approval of the holders of
Series A Preferred Stock, voting as a class,
under Delaware's General Corporation Law.
In each instance set forth in subsections (i) through
(v) above, the holders of Series A 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 A Preferred Stock issued and outstanding and
entitled to vote shall be required to adopt such proposal.
Notwithstanding the foregoing, the holders of Series
A 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 A Preferred Stock is
less than twenty five percent (25%) of: (i) the number of shares of the Series A
Preferred Stock initially issued; or (ii) if the Series A Preferred Stock is
subsequently converted into Series B Seven Percent (7%) Cumulative Convertible
Preferred Stock, the number of shares of Series B Seven Percent (7%) Cumulative
Convertible Preferred Stock that would have been issued if such Series B stock
had been initially issued in lieu of the Series A stock.
- 3 -
<PAGE> 4
(B) In addition to the voting rights granted above,
the holders of Series A 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, par value $0.66-2/3 per
share, of the Corporation (the "Common Stock"), and in that instance each holder
of Series A 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 A 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 A 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 A 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
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 7. Conversion of Series A Preferred Stock.
(A) Optional Conversion. Holders of Series A
Preferred Stock shall have the right, at their option, to convert as many shares
of Series A Preferred Stock as they choose into the shares of the Corporation's
Common Stock, at any time after such shares of Common Stock are authorized and
on the terms and conditions set forth below.
(B) Terms of Conversion. The conversion of the Series
A Preferred Stock shall be upon the following terms and conditions:
(i) Conversion Ratio. The Series A 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 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
- 4 -
<PAGE> 5
Series A 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:
(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
holder of Series A 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 A 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 Corporation issuable upon the conversion
of his or her Series A 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 A 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 A Preferred Stock into shares of Common Stock, the holder of
Series A Preferred Stock shall surrender at any office mentioned above the
certificate or certificates therefor,
- 5 -
<PAGE> 6
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 A 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 A 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 A 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 A Preferred Stock elect to convert only a part
of their shares, the Corporation shall deliver new certificates to the holders
of the Series A Preferred Stock in an amount equal to the unconverted amount of
shares held by the holder of Series A Preferred Stock.
(ix) Issuance of Certificates. The issuance of
new certificates for shares of Common Stock or Series A Preferred Stock to the
holder of Series A Preferred Stock upon conversion shall be without any charge
or tax.
Section 8. 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 A 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 A Liquidation Value of the stock plus a sum computed at the
dividend rate of seven percent (7%) per annum from and after
- 6 -
<PAGE> 7
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 8, 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.
Section 9. 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 A Preferred Stock.
Section 10. 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 A 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 A 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.
IN WITNESS WHEREOF, we have executed and subscribed this
Certificate and do affirm the foregoing as true under the penalties of perjury
this 2nd day of July 1997.
/s/ JOHN M. MURRAY
--------------------------
Name: John M. Murray
Title: Vice President-Finance and
Treasurer
[Corporate Seal]
ATTEST:
/s/ JAMES J. TANOUS
---------------------
Name: James J. Tanous
Title: Secretary
- 7 -
<PAGE> 1
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.
<PAGE> 2
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
2
<PAGE> 3
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.
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
3
<PAGE> 4
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 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
4
<PAGE> 5
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.
5
<PAGE> 6
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
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
6
<PAGE> 7
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 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:
(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
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
7
<PAGE> 8
consolidation if he or she had been a holder of the number of shares of Common
Stock of the 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
8
<PAGE> 9
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.
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
9
<PAGE> 10
adopted by all of the members of the Board of Directors 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 14th day of November 1997.
IN WITNESS WHEREOF, the undersigned have subscribed this
certificate this 14th day of November 1997 and affirm that the statements made
herein are true and correct under the penalties of perjury.
/s/ JOHN M. MURRAY
------------------
Name: John M. Murray
Title: Vice President - Finance
and Treasurer
[CORPORATE SEAL]
ATTEST:
/s/ JAMES J. TANOUS
-------------------
Name: James J. Tanous
Title: Secretary
10
<PAGE> 1
EXHIBIT 21
----------
LIST OF SUBSIDIARIES
--------------------
AMERICAN PRECISION INDUSTRIES INC. (Delaware)
API Heat Transfer Inc. (New York)
API Airtech Inc. (New York)
API Basco Inc. (New York)
API Ketema Inc. (Texas)
API Schmidt-Bretten Inc. (New York)
API Schmidt-Bretten Beteiligungs GmbH (Germany)
API Schmidt-Bretten Verwaltung GmbH (Germany)
API Schmidt-Bretten GmbH & Co. KG (Germany)
Schmidt-Bretten Nederland B.V. (Netherlands)
API Motion Inc. (New York)
API Controls Inc. (New York)
API Deltran Inc. (New York)
API Deltran (St. Kitts) Ltd.
API Gettys Inc. (Wisconsin)
API Harowe Inc. (Delaware)
API Harowe (St. Kitts) Ltd.
API Portescap Inc. (New York)
Portescap SA (Switzerland)
Portescap International SA (Switzerland)
Portescap Deutschland GmbH (Germany)
Portescap Scandinavia AB (Sweden)
Portescap Polska Sp.zo.o (Poland)
Portescap France SA (France)
Portescap Japan Ltd. (Japan)
API Positran Limited (England)
API Portescap (UK) Limited (England)
API Portescap U.S. Inc. (Pennsylvania)
API Electronic Components Inc. (New York)
API Delevan Inc. (New York)
API SMD Inc. (New York)
Note: API AF Corp. , API-FS Corp., API of Canada Inc. , API UK Ltd. ,
API Development Corp., Portescap U.S. Inc., and Nitta Apitron Co.
Ltd. are omitted because in the aggregate they do not constitute a
"significant subsidiary". Schmidt-Bretten GmbH & Co. KG is a
partnership owned by API Schmidt-Bretten Beteiligungs GmbH (99.9%)
and API Schmidt-Bretten Verwaltung GmbH (.1%).
<PAGE> 1
EXHIBIT 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-31315, 33-61734, and 33-71839) of American
Precision Industries Inc. of our report dated February 16, 1998 appearing on
page 21 of this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Buffalo, New York
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-04-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,313
<SECURITIES> 0
<RECEIVABLES> 32,163
<ALLOWANCES> 1,124
<INVENTORY> 38,510
<CURRENT-ASSETS> 82,068
<PP&E> 77,852
<DEPRECIATION> 25,205
<TOTAL-ASSETS> 162,670
<CURRENT-LIABILITIES> 45,772
<BONDS> 34,884
0
26,156
<COMMON> 5,207
<OTHER-SE> 45,237
<TOTAL-LIABILITY-AND-EQUITY> 162,670
<SALES> 184,070
<TOTAL-REVENUES> 184,231
<CGS> 127,207
<TOTAL-COSTS> 127,207
<OTHER-EXPENSES> 3,667
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,914
<INCOME-PRETAX> 12,186
<INCOME-TAX> 3,895
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,291
<EPS-PRIMARY> 1.12
<EPS-DILUTED> .97
</TABLE>
